As filed with the Securities and Exchange Commission on August 19,October 14, 1997

Registration No. 333-29893
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------

AMENDMENT NO. 13

TO
FORM S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
GROUP 1 AUTOMOTIVE, INC.
(Name of Registrant as specified in its charter)

DELAWARE 5511 76-0506313
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)

950 ECHO LANE, SUITE 350
HOUSTON, TEXAS 77024
(713) 467-6268
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)

B. B. HOLLINGSWORTH, JR.
950 ECHO LANE, SUITE 350
HOUSTON, TEXAS 77024
(713)467-6268
(Name, address, including zip code, and telephone number,
including area code, of agent for service)

Copies to:

JOHN S. WATSON PATRICIA A. CERUZZI
VINSON & ELKINS L.L.P. SULLIVAN & CROMWELL
1001 FANNIN STREET, 36TH FLOOR 125 BROAD STREET
HOUSTON, TEXAS 77002 NEW YORK, NEW YORK 10004
(713) 758-2222 (212) 558-4000

---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.

If any of the securities registered on this Form are being offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.

================================================================================
2

Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.

SUBJECT TO COMPLETION, DATED AUGUST 19,OCTOBER 14, 1997

4,800,000 SHARES

[LOGO]

GROUP 1 AUTOMOTIVE, INC.

COMMON STOCK
(PAR VALUE $.01 PER SHARE)
---------------------

Of the 4,800,000 shares of Common Stock offered hereby, 4,428,136 shares
are being sold by the Company and 371,864 shares are being sold by the Selling
Stockholder. See "Principal and Selling Stockholders". The Company will not
receive any of the proceeds from the sale of the shares being sold by the
Selling Stockholder. Each share of Common Stock includes one right to purchase
one one-thousandth of a share of Junior Participating Preferred Stock, which
rights become exercisable upon the occurrence of certain events. See
"Description of Capital Stock -- Stockholder Rights Plan".

Prior to this offering, there has been no public market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price per share will be between $$10.00 and $ .$12.00. For factors to be considered
in determining the initial public offering price, see "Underwriting".

SEE "RISK FACTORS" BEGINNING ON PAGE 1213 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE COMMON STOCK.

ApplicationThe Common Stock has been madeapproved for listing, subject to list the Common Stocknotice of
issuance, on the New York Stock Exchange under the symbol "GPI".
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------

INITIAL PUBLIC UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
OFFERING PRICE DISCOUNT(1) COMPANY(2) STOCKHOLDERS(2)STOCKHOLDER(2)
-------------- ------------ ----------- -------------------

Per Share........................ $ $ $ $
Total(3)......................... $ $ $ $

- ---------------

(1) The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.

(2) Before deducting estimated expenses of $$5.0 million payable by the Company and
$ payable by the Selling Stockholder.Company.

(3) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional 720,000 shares at the initial public offering price per
share, less the underwriting discount, solely to cover over-allotments. If
such option is exercised in full, the total initial public offering price,
underwriting discount and proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting".
---------------------

The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that certificates
for the shares will be ready for delivery in New York, New York on or about
October , 1997, against payment therefor in immediately available funds.

GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.

NATIONSBANC MONTGOMERY SECURITIES, INC.

---------------------
The date of this Prospectus is October , 1997.
3

[GRAPHICS]

This Prospectus includes statistical data regarding the automotive
retailing industry. Unless otherwise indicated, such data is taken or derived
from information published by (i) the Industry Analysis Division of the National
Automobile Dealers AssociationTHIS PROSPECTUS INCLUDES STATISTICAL DATA REGARDING THE AUTOMOTIVE
RETAILING INDUSTRY. UNLESS OTHERWISE INDICATED, SUCH DATA IS TAKEN OR DERIVED
FROM INFORMATION PUBLISHED BY (I) THE INDUSTRY ANALYSIS DIVISION OF THE NATIONAL
AUTOMOBILE DEALERS ASSOCIATION ("NADA") in itsIN ITS NADA DataDATA 1996, (ii) Crain
Communications Inc. in its Automotive News 100-Year Almanac,(II) CRAIN
COMMUNICATIONS INC. IN ITS AUTOMOTIVE NEWS 100-YEAR ALMANAC, 1996 Market Data
Book andMARKET DATA
BOOK AND 1997 Market Data Book or (iii)MARKET DATA BOOK, (III) ADT Automotive, Inc. in itsAUTOMOTIVE, INC. IN ITS 1997 Used
Car Market Report or (iv) the Bureau of the Census in theUSED CAR
MARKET REPORT OR (IV) THE BUREAU OF THE CENSUS IN THE U.S. Department of
Commerce in its Statistical Abstract of the United StatesDEPARTMENT OF
COMMERCE IN ITS STATISTICAL ABSTRACT OF THE UNITED STATES 1996 from the National
Data Book.FROM THE NATIONAL
DATA BOOK.

NO MANUFACTURER (AS DEFINED UNDER "RISK FACTORS -- MANUFACTURERSMANUFACTURERS' CONTROL
OVER DEALERSHIPS" ON PAGE 1213 OF THIS PROSPECTUS) HAS BEEN INVOLVED, DIRECTLY OR
INDIRECTLY, IN THE PREPARATION OF THIS PROSPECTUS OR IN THE OFFERING BEING MADE
HEREBY. NO MANUFACTURER HAS MADE ANY STATEMENTS OR REPRESENTATIONS IN CONNECTION
WITH THE OFFERING OR PROVIDED ANY INFORMATION OR MATERIALS THAT WERE USED IN
CONNECTION WITH THE OFFERING, AND NO MANUFACTURER HAS ANY RESPONSIBILITY FOR THE
ACCURACY OR COMPLETENESS OF THIS PROSPECTUS. THE COMPANY HAS AGREED TO INDEMNIFY
EACH MANUFACTURER WITH WHICH IT HAS A FRANCHISE AGREEMENT AGAINST CERTAIN
LIABILITIES THAT MAY BE INCURRED IN CONNECTION WITH THE OFFERING, INCLUDING
LIABILITIES UNDER THE SECURITIES ACT OF 1933.

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVERALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN THE
COMMON STOCK, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".

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PROSPECTUS SUMMARY

Group 1 Automotive, Inc. was formed in December 1995 to acquire automobile
dealerships and related operations and has conducted limited operations to date.
Immediately prior to the closing of the offering made hereby (the "Offering"),
Group 1 Automotive, Inc. will acquire, in separate simultaneous transactions
(collectively, the "Acquisitions") in exchange for cash$5.4 million and 9,079,084
shares of its Common Stock, par value $.01 per share ("Common Stock"), 13
corporations (each a "Founding Company" and, collectively, the "Founding
Companies") that own automobile dealerships and related operations that are
currently part of four separate dealership groups (the "Founding Groups"). The
Offering is conditioned on the consummation of the Acquisitions. Unless
otherwise indicated, all references to "Group 1 Automotive" herein mean Group 1
Automotive, Inc. prior to consummation of the Acquisitions, and all references
to the "Company" or"Combined Company" and the "Combined Company""Company" herein mean Group 1 Automotive,
Inc., as consolidated with the Founding Groups following consummation of the
Acquisitions.

The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise indicated, all share, per share
and financial information set forth herein (i) have been adjusted retroactively
to give effect to (a) the Acquisitions and (b) a 900-for-one split of the
outstanding shares of Common Stock of Group 1 Automotive effected on December
13, 1996, and (ii) assume no exercise of the Underwriters' over-allotment
option. See "Underwriting". Investors should carefully consider the information
set forth in "Risk Factors".

THE COMBINED COMPANY

The Combined Company was founded to become a leading operator and
consolidator in the highly fragmented automotive retailing industry. The
Combined Company owns 30 automobile dealershipsdealership franchises ("dealerships") and
five collision service centers located in Texas and Oklahoma, and sells new and
used cars and light trucks, provides maintenance and repair services, sells
replacement parts and provides related financing, insurance and service
contracts. The Combined Company represents 21 American and Asian brands
including Acura, Chevrolet, Chrysler, Dodge, Eagle, GMC, Honda, Isuzu, Jeep,
Kia, Lexus, Lincoln, Mazda, Mercury, Mitsubishi, Nissan, Oldsmobile, Plymouth,
Pontiac, Suzuki and Toyota. The Combined Company's dealerships include the
second largest Toyota dealership in the United States as measured by 1996 new
retail unit sales and one of the largest dealership groups in Oklahoma. The Combined Company is experiencing significant
momentum in its financial results. From 1994 to 1996, the Combined Company's
revenues increased by $172.1 million, or 26.4%, to $824.8 million from $652.7
million. During this period gross profit increased $27.0 million, or 32.1%, to
$111.0 million from $84.0 million, or to 13.5% from 12.9% of revenues.

The principals of the Founding Groups have over 90 years of combined
experience in the automotive retailing industry with family ownership dating
back as far as 1917. In addition, the principals of the Founding Groups have
been recognized as leaders in the automotive retailing industry, serving at
various times in leadership positions in state and national industry
organizations. The Combined Company's dealerships have also received numerous
awards based on various performance measures. The principals of the Founding
Groups will continue to manage their businesses and play a significant role in
the Combined Company's operating and acquisition strategies.

The Combined Company believes that its structural, managerial and
operational strengths include (i) brand and geographic diversity; (ii) the
ability to capitalize on regional economies of scale; (iii) cost savings derived
from nationally centralized financing and administrative functions; (iv) the
experience of the Combined Company's senior management in successfully
consolidating and operating in highly fragmented industries; (v) the
reputations, experience and performance of the Combined Company's management and
principals as leaders in the automotive retailing industry; (vi) the established
customer base and local name recognition of the Combined Company's dealerships;
(vii) the Combined Company's proven ability to source high quality used vehicles
cost-effectively through trade-ins and off-lease programs; and (viii) access to
equity incentives to attract and retain high quality personnel.

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the automotive retailing industry, but also in consolidating a major national
industry, having served in various senior management capacities, including
President, of Service Corporation International during its early growth period
as the world's leading consolidator of the funeral industry. In addition, John
T. Turner, Senior Vice President -- Corporate Development, has ledbeen actively
involved in the acquisition efforts of several companies involved in industry
consolidations.consolidations, including Service Corporation International, The Loewen Group,
Inc. and Paragon Family Services, Inc. See "Management".

The U.S. automotive retailing industry is estimated to have annual sales in
excess of $600 billion, with the 100 largest dealer groups generating less than
10% of total sales revenue and controlling approximately 5% of the 22,000
existing franchised dealerships.dealership locations (representing approximately 53,000
dealerships). It is estimated that sales by franchised automobile dealers
account for one-fifth of the nation's total retail sales of all products and
merchandise. The Combined Company believes that the enormous size and the
fragmentation of the industry, together with increasing capital costs of
operating automobile dealerships, lack of a viable exit strategy (especially for
larger dealerships) and the aging of dealership owners provide an attractive
environment for consolidation opportunities. In addition, many successful and
entrepreneurial, private "megadealers" have expressed interest in expanding their
operations, but have been restrained by a lack of capital. The Combined Company
believes that it provides an attractive opportunity for these megadealers due to
the Combined Company's formation by a consolidation of similar megadealers, its
access to the public capital markets, and its position as a vehicle for growth.

BUSINESS STRATEGY

The Combined Company plans to achieve its goal of becoming a leading
consolidator, while maintaining its high operating standards in the automotive
retailing industry, by (i) enhancing growth through acquisitions and (ii)
implementing an operating strategy that focuses on decentralized dealership
operations, nationally centralized administrative functions, the expansion of
higher margin businesses, a commitment to customer service and the
implementation of new technology initiatives. By complementing the Combined
Company's industry leaders, management talent and proven operating capabilities
with its corporate management team which is experienced in achieving and
managing long-term growth in a consolidation environment, the Combined Company
believes that it is in a strong position to execute this strategy.

GROWTH THROUGH ACQUISITIONS

The Combined Company intends to implement an aggressive, yet disciplined,
acquisition program by pursuing (i) large, profitable and well managed
"platform" acquisitions in large metropolitan and high-growth suburban
geographic markets that the Combined Company does not currently serve and (ii)
smaller "add-on" acquisitions that will allow the Combined Company to increase
brand diversity, capitalize on regional economies of scale and offer a greater
breadth of products and services in each of the markets in which it operates. In
this regard, the Combined Company is currently negotiatinghas negotiated and executed an arrangement
letter with Chase Securities Inc. and Comerica Bank for a $100$125 million credit
facility with a major bank(the "Credit Facility"), of which a portion will be used, in
combination with the Combined Company's common stock, for acquisitions. See
"Risk Factors"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Dependence on Acquisitions for Growth; Manufacturers'
Restrictions on Acquisitions" for a discussion of Manufacturers' restrictions on
acquisitions of franchised dealerships.Combined Founding Groups' Commitments -- Credit Facility".

ENTERING NEW GEOGRAPHIC MARKETS. The Combined Company intends to expand
into geographic markets it does not currently serve by acquiring large,
profitable and well established megadealers ("platforms") that, like the
Founding Groups, are leaders in their regional markets. The Combined Company
will target new platform megadealers having superior operational and financial
management personnel which the Combined Company will seek to retain. The
Combined Company believes that retaining existing high quality management will
enable acquired megadealers to continue to operate effectively with management
personnel who understand the local market, while allowing the Combined Company
to source future acquisitions more effectively and expand its operations without
having to 4
6

employ and train untested new personnel. Moreover, the Combined
Company believes that it is well
4
6

positioned to pursue larger, well established acquisition candidates as a result
of its depth of management, the Combined Company's capital structure and the
reputation of the principals of the Founding Groups as leaders in the automotive
retailing industry.

EXPANDING WITHIN EXISTING MARKETS. The Combined Company plans to acquire
additional dealerships in each of the markets in which it operates ("add-ons"),
including acquisitions that increase the brands, products or services offered in
that market. The Combined Company believes that these acquisitions will
facilitate operating efficiencies and cost savings on a regional level in areas
such as facility and personnel utilization, vendor consolidation and
advertising. The Combined Company has recently entered into definitive
agreements to acquire, subject to manufacturer approval and a due diligence
investigation, two dealerships in Texas for aggregate payments of $9.0 million
in cash. These two acquisitions, if consummated, would also require the Combined
Company to incur approximately $13.0 million of floorplan indebtedness in
connection with the purchase of vehicle inventories of the dealerships.

MANUFACTURERS' LIMITATIONS ON ACQUISITIONS. The Combined Company's
acquisition program may be limited to some extent by the Manufacturers. Under
the limitations currently imposed by the Manufacturers (as defined herein), the
Combined Company could acquire no more than five additional Toyota dealerships,
two additional Lexus dealerships, four additional Honda dealerships, one
additional Acura dealership, approximately 400 additional Ford and Lincoln
Mercury dealerships and 10 additional GM dealership locations (within the next
two years, subject to being increased). The Combined Company currently owns two
Toyota, one Lexus, three Honda, two Acura, one Lincoln and one Mercury franchise
and three GM dealership locations. The other Manufacturers, which have no such
limitations, accounted for the following approximate number of dealerships in
the United States, as of December 31, 1996: Chrysler Corporation, 13,000 (at
4,600 locations); Nissan, 1,200; Mitsubishi, 500; Isuzu, 500; Suzuki, 300; and
Kia, 200. In addition, all of the Manufacturers, whether or not they have
numerical limitations on the number of dealerships that may be acquired, require
the Combined Company to obtain the consent of the applicable Manufacturer prior
to the acquisition of any dealership franchises of such Manufacturer. In
addition, the Combined Company has not yet entered into any agreement with
American Honda with respect to the approval of the proposed acquisitions of the
Honda and Acura dealerships by the Combined Company and with respect to future
acquisitions of such dealerships. See "Risk Factors -- Manufacturers' Control
over Dealerships", "Risk Factors -- No Agreement with American Honda Motor Co.,
Inc.", "Risk Factors -- Risks Relating to Failure to Meet Manufacturer CSI
Scores" and "Risk Factors -- Dependence on Acquisitions for Growth;
Manufacturers' Restrictions on Acquisitions".

Of the approximately 15 million new vehicles sold in the United States in
1996, approximately 31.3% were manufactured by General Motors Corporation
("GM"), 25.4% were manufactured by Ford Motor Company, 16.2% were manufactured
by Chrysler Corporation, 7.7% were manufactured by Toyota Motor Corp., 5.6% were
manufactured by Honda Motor Co., Ltd, 5.0% were manufactured by Nissan Motor
Co., Ltd and 8.8% were manufactured by other manufacturers.

OPERATING STRATEGY

The Combined Company intends to implement an operating strategy that
focuses on decentralized dealership operations, nationally centralized
administrative functions, expansion of higher margin businesses, commitment to
customer service and new technology initiatives.

The Combined Company has formed an operations committee comprised of the
chief operating officers of the Founding Groups and the general managers of the
dealerships in order to identify and share best practices. The Combined Company
intends to incorporate the key officers and management of future acquisitions
into this operations committee. The Combined Company believes that this
operations committee will promote the widespread application of the Combined
Company's broad strategic initiatives, facilitate the integration of the
Founding Groups and future acquisitions and improve operating efficiency and
overall customer satisfaction.
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DECENTRALIZED DEALERSHIP OPERATIONS. The Combined Company believes that
decentralizing its dealership operations on a regional, or platform, basis will
enable it to 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 internally-driven market share growth. By coordinating
certain operations on a platform basis, the Combined Company believes that it
will achieve cost savings in such areas as vendor consolidation, facility and
personnel utilization and advertising. In addition, the Combined Company
believes that significant cost savings will be achieved by consolidating certain
administrative functions on a regional basis that would not be efficient on a
national basis such as accounting, information systems, title work, credit and
collection. The Combined Company intends to create
incentives for entrepreneurial management teams and sales forces at the regional
level through the use of stock options and/or cash bonus programs.

NATIONALLY CENTRALIZED ADMINISTRATIVE FUNCTIONS. The consolidation of
purchasing power on a centralized basis in the area of financing should result
in significant cost savings. For example, in anticipationconnection with the Offering, all
of the Offering,
severalCombined Company's floorplan lenders have reduced thefinancing will benefit from interest rate
on certainreductions. Rate reductions have already become effective with respect to
approximately 75% of the Combined Company's floorplan financing.debt. The current
reductions range between 25 and 225 basis points. The
Combined Company is continuing to negotiate with certain other lenders and
expects additional rate reductions will result fromAdditionally, the Combined
Company's enhanced credit quality. In addition,Credit Facility, once closed, will result in further rate reductions.
Subsequent to the Offering, the Combined Company intends to refinance
approximately $50 million in floorplan financing with the Credit Facility. The
impact of these changes is expected to reduce the Combined Company's annual
interest expense by more than $1.0 million. Furthermore, the Combined Company
expects that significant cost savings can be achieved through the consolidation
of administrative functions such as risk management, employee benefits and
employee training. For example, the Founding Groups each currently purchase insurance
from separate sources. The Combined Company is working with a national insurance
firm to develop an overall risk management strategy to protect the Combined
Company's assets. By utilizing the Combined Company's purchasing power,
financial strength and providing the insurance underwriters a diversified risk
pool the Combined Company has negotiated insurance
coverage that is expected to result in annual cost savings of approximately 25
to 30 percent.

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7 these higher margin businesses to enhance
profitability and stimulate internal growth. With a competitive advantage in
sourcing, the ability to provide manufacturer-backed extended service contracts,
and attractive lease financing, new vehicle franchises are especially well
positioned to capitalize on industry growth in used vehicle sales. In addition,
each of the Combined Company's dealerships offers an integrated service and
parts department, which provides an important source of recurring higher margin
revenues. The Combined Company also has the opportunity on each new or used
vehicle sold to generate incremental revenues from the sale of extended service
contracts, credit insurance policies and finance and lease contracts. Each of
these business areas will be a focus of internal growth.

FOUNDING GROUPS

The Combined Company was formed by a consolidation of the businesses of the
following previously separate dealership groups:

HOWARD GROUP. This group is one of the largest dealership groups in
Oklahoma, consisting of Acura, Chevrolet, Chrysler, Dodge, Eagle, GMC, Honda,
Isuzu, Jeep, Mazda, Plymouth, Pontiac and Toyota dealerships located in Oklahoma
City (the "Howard Group"). Additionally, the Howard Group expects to enterhas entered into an
agreement to purchase a Chevrolet dealership in Tulsa, Oklahoma for the
assumption of all of its liabilities.liabilities, which are currently approximately $2.5
million. See "The Acquisitions". Robert E. Howard II, the principal owner, has
been involved in the automotive retailing industry for over 28 years. In 1996,
the Howard Group sold 8,181 new vehicles. From 1994 to 1996, the Howard Group's
revenues increased by $54.7 million, or 24.1%, to $282.0 million from $227.3
million. During this period, gross profit increased $9.3 million, or 32.9%, to
$37.6 million from $28.3 million.
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MCCALL GROUP. This group consists of the second largest Toyota dealership
in the United States, as ranked by 1996 new retail unit sales, and a Lexus
dealership, both located in Houston, Texas (the "McCall Group"). Sterling B.
McCall, Jr., the principal owner, has been involved in the automotive retailing
industry for more than 27 years, having been granted the first stand-alone
exclusive Toyota dealership in Houston. In 1996, the McCall Group sold 6,458 new
vehicles. From 1994 to 1996, the McCall Group's revenues increased by $111.2
million, or 62.7%, to $288.5 million from $177.3 million. During this period,
gross profit increased $14.3 million, or 57.9%, to $39.0 million from $24.7
million.

SMITH GROUP. This group consists of an Acura dealership in Houston, Texas,
Honda, GMC, Oldsmobile, Mitsubishi, Lincoln, Mercury and Kia dealerships in
Beaumont, Texas, a Nissan dealership in Richardson, Texas (a suburb of Dallas)
and two Nissan dealerships, one Mitsubishi dealership and one Suzuki dealership
in the Austin, Texas area (the "Smith Group"). The Smith family has been in the
automotive retailing business since 1917. In 1996, the Smith Group sold 5,983
new vehicles. From 1994 to 1996, the Smith Group's revenues increased by $1.2
million, or 0.6%, to $218.3 million from $217.1 million. During this period,
gross profit increased $1.9 million, or 7.0%, to $29.1 million from $27.2
million.

KINGWOOD GROUP. This group consists of one Honda and one Isuzu dealership
in Kingwood, Texas, a suburb of Houston (the "Kingwood Group"). The Honda
dealership was established in 1989 and the Isuzu dealership was established in
1996. Mr. Hollingsworth, and John H. Duncan, a director of the Combined Company,
own interests in these dealerships. In 1996, the Kingwood Group sold 756 new
vehicles. From 1994 to 1996, the Kingwood Group's revenues increased by $4.9
million, or 15.8%, to $35.9 million from $31.0 million. During this period,
gross profit increased $1.5 million, or 39.5%, to $5.3 million from $3.8
million.

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CONSIDERATION PAID IN THE ACQUISITIONS

The following table sets forth the consideration being paid for each
Founding Group:

CONSIDERATION
-------------------------
COMMON
TOTAL
STOCK CASH VALUE(1)
--------- ---------- ---------------------

Howard Group............................. 3,619,278Group........................... 3,574,472(2) $2,300,000 $$27,857,475
McCall Group.............................Group........................... 2,318,826 -- 16,579,606
Smith Group..............................Group............................ 2,725,933 -- 20,922,097
Kingwood Group...........................Group......................... 459,853 $3,100,000 6,387,949
--------- ---------- ----------
Total.......................... 9,123,890-----------
Total........................ 9,079,084 $5,400,000 $$71,747,127
========= ========== ===========

- ---------------

(1) The cash value of the shares of Common Stock issued as consideration forin connection with the
Acquisitions is based upon an(other than the Common Stock to be sold by the Selling
Stockholder) was discounted by 35% from the assumed initial public offering
price of
$ per share discounted to give effect to the two year lock-up that each stockholder of the
Founding Companies entered into in connection with the Acquisitions. This
discount was based on an independent valuation study as to the impact of the
restrictions on the value of the Common Stock. If the shares of Common Stock
issued in the Acquisitions were valued at an assumed initial public offering
price of $11.00 per share, the value of the consideration paid in the
Acquisitions would be: Howard Group -- $41,619,192; McCall
Group -- $25,507,086; Smith Group -- $29,985,263 and Kingwood
Group -- $8,158,383.

(2) Includes 592,303 shares of Common Stock issued to Mr. Howard in the
Acquisitions as payment for a Chevrolet Dealership in Tulsa, Oklahoma (the
"Tulsa Dealership"). These shares will be held in escrow pending the
consummation of the Combined Company's acquisition of the Tulsa Dealership.
GM has denied its approval of this acquisition due to the Howard Group's
failure to meet GM's required CSI score levels. The Combined Company's
acquisition of the Tulsa Dealership will be consummated upon receipt of GM
approval for such acquisition. Upon consummation of this

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acquisition, the escrowed shares will be released to Mr. Howard. However, if
such acquisition is not consummated with GM's approval within two years of the
Acquisitions, the escrowed shares will be distributed pro rata to the
stockholders of the Founding Companies and Mr. Howard will retain the right
to acquire the Tulsa Dealership. This pro rata distribution will be
allocated among the Founding Groups as follows: the McCall Group, 161,834
shares; the Smith Group, 190,246 shares; the Howard Group, 208,129 shares;
and the Kingwood Group, 32,094 shares. Thus, the escrowed shares will
remain outstanding regardless of whether the Combined Company's acquisition
of the Tulsa dealership is consummated, and the Combined Company will
receive no additional consideration or assets if the acquisition of the
Tulsa Dealership is not consummated. See "The Acquisitions" for a
description of the consideration to be paid in connection with the
acquisition of the Tulsa Dealership. See also "Risk Factors -- Risks
Relating to Failure to Meet Manufacturer CSI Scores".

The consideration to be paid by Group 1 Automotive for each of the Founding
Companies was determined by negotiations among the principals of the Founding
Companies as to the relative value of each of the Founding Companies. As such,
no one individual determined the consideration to be paid in connection with the
Acquisitions. Group 1 Automotive and the Founding Companies did not use an
independent third party to determine the relative values of each of the Founding
Companies but agreed among themselves on the values attributable to each of the
Founding Companies based on an evaluation of each of the Founding Companies'
operating results and prospects for growth.

CONSIDERATION RECEIVED BY RELATED PARTIES

In connection with the Acquisitions, the following directors, officers and
stockholders owning more than 5% of the Common Stock together with their spouses
and affiliates will receive shares of Common Stock as follows: Mr.
Hollingsworth -- 196,368 shares of Common Stock (excluding the 350,000 shares of
Common Stock that Mr. Hollingsworth currently owns); Mr. Howard -- 3,145,5202,910,374
shares of Common Stock; Mr. McCall -- 1,461,031 shares of Common Stock; Mr.
Smith -- 679,181 shares of Common Stock; Mr. Duncan -- 196,368 shares of Common
Stock; Mr. Whalen -- 774,040 shares of Common Stock. In addition, Mr. Howard
will receive $2,300,000$2.3 million in cash in the Acquisitions.

See "PrincipalThe following directors, officers and Selling Stockholders". For a description5% stockholders together with their
affiliates have guaranteed, as of June 30, 1997, aggregate indebtedness of
certain transactions between directors,of the Founding Companies as follows: Mr. Hollingsworth -- $2.7 million;
Mr. Howard -- $37.8 million; Mr. McCall -- $30.6 million; Mr. Smith -- $5.2
million; Mr. Duncan -- $2.7 million. In connection with the Acquisitions, the
Combined Company has agreed to take all commercially reasonable efforts to
obtain the release of guarantees by certain of the Founding Company stockholders
of certain secured debt of the Founding Companies.

Directors, officers and 5% stockholders, or affiliates of such persons, who
have incurred indebtedness that is secured by guarantees of certain Founding
Companies and the amounts of such indebtedness, as of June 30, 1997, are as
follows: Mr. Howard, approximately $7.8 million; Mr. McCall and affiliates,
approximately $8.0 million; and Mr. Smith and affiliates, approximately $4.6
million. With the exception of the Round Rock guarantee described below, all
applicable lenders have agreed to release such guarantees upon consummation of
the Offering. One of the Founding Companies (Round Rock Nissan) will continue to
guarantee approximately $2.4 million of indebtedness of SKLR Round Rock, L.C., a
limited liability company in which Mr. Smith owns a 22% interest. If such
guarantee is not released within 90 days of consummation of the Acquisitions,
the Combined Company will have the option to acquire certain property securing
such indebtedness. See "Certain Transactions -- Loans".

In connection with the Acquisitions, all related party receivables and
payables are being settled. Such transactions will result in a net payment of
$19,720, as of June 30, 1997, by the McCall Group to Mr. McCall. Additionally,
as part of the Acquisitions, certain of the Founding Companies will distribute
pre-acquisition S corporation accumulated adjustment accounts to their
stockholders. Such distributions will result in the payment of approximately
$97,104 to Mr. Hollingsworth, $3.4 million to Mr. Howard, $337,500 to Mr. Smith
and $97,104 to Mr. Duncan

8
10

Certain of the properties leased by the Founding Companies are owned by
officers, directors or 5% stockholders of the Combined Company or their
affiliates. As part of the Acquisitions, the Founding Companies will replace
each of these related party leases (with the exception of one related party
lease described in "Certain Transactions -- Leases") with a standard lease
agreement. The rent on each of these properties will initially be the same as
the rent on the properties prior to consummation of the Acquisitions subject to
adjustment every five years based on the Consumer Price Index. For a detailed
description of these leases, see "Certain Transactions -- Leases".

Messrs. McCall and Whalen own 18% and 11%, respectively, of Dealer
Solutions, L.L.C. ("DSL"), which provides management information systems,
software and related services to certain dealerships of the Combined Company and
receives certain fees in connection therewith. For a detailed description of the
agreement between DSL and the Combined Company, in connection withsee "Certain
Transactions -- Other".

Upon the Acquisitionscompletion of the Offering, options to purchase 325,000 shares of
Common Stock at the initial public offering price will be granted to officers
and related party transactions that will survivedirectors of the Acquisitions, see "The
Acquisitions"Company as compensation for future services to be rendered
to the Combined Company as follows: Mr. Hollingsworth -- 100,000; Mr.
Turner -- 125,000; Mr. Thompson -- 80,000; Mr. Duncan -- 10,000 and "Certain Transactions".Mr. Bidwell
- -- 10,000.

Group 1 Automotive was incorporated in Delaware in December 1995, and its
principal executive offices are located at 950 Echo Lane, Suite 350, Houston,
Texas. Its telephone number is (713) 467-6268.
7
9

THE OFFERING (1)

Common Stock offered by the Combined Company.......... 4,428,136 shares
Common Stock offered by the Selling Stockholder....... 371,864 shares
Total............................................ 4,800,000 shares
Common Stock to be outstanding after the
Offering(2)......................................... 14,002,02613,957,220 shares
Proposed NYSE Symbol.................................. GPI
Use of Proceeds....................................... The estimated net proceeds to the Combined
Company of the Offering will be $$41.0
million, of which approximately $5.4 million
will be used to pay the cash portion of the
Acquisitions and approximately $$31.4 million
will be used to repay outstanding
indebtedness. The balance will be used for
working capital and general corporate
purposes, including potential acquisitions.
See "Certain Transactions" and "Use of
Proceeds".

- ---------------

(1) Assumes that the Underwriters' over-allotment option is not exercised.

(2) Includes 9,123,8909,079,084 shares of Common Stock to be issued in connection with
the Acquisitions. Excludes 565,000 shares of Common Stock subject to options
granted under the Combined Company's 1996 Stock Incentive Plan, 750,950
shares of Common Stock subject to options to be granted under the Combined
Company's 1996 Stock Incentive Plan uponprior to completion of the Offering and
an additional 684,050 shares of Common Stock reserved for issuance under the
1996 Stock Incentive Plan. See "Management -- 1996 Stock Incentive Plan".
Of theAlso excludes 200,000 shares of Common Stock subject to options towhich may be granted upon completion ofissued under the
Offering, options to purchase 305,000 shares
of Common1998 Employee Stock at the initial public offering price will be granted to its
executive officers as follows: 100,000 shares to Mr. Hollingsworth, 125,000
shares to Mr. Turner and 80,000 shares to Mr. Thompson.Purchase Plan. See "Management -- 1998 Employee Stock
Purchase Plan".

RISK FACTORS

See "Risk Factors" beginning on page 1213 for a description of certain risks
relevant to an investment in the Common Stock.

89
1011

SUMMARY FINANCIAL DATA

Group 1 Automotive will acquire the Founding Groups immediately prior to
the consummation of the Offering. For financial statement purposes, however, the
Howard Group has been identified as the accounting acquiror. The following
summary financial data presents, for the year ended December 31, 1996, and as of
and for the six months ended June 30, 1997, certain historical and pro forma
data for the Founding Groups. See "Selected Financial Data" and the Pro Forma
Financial Statements and the notes thereto included elsewhere in this
Prospectus.

FOR THE YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------------
HOWARD MCCALL SMITH KINGWOOD PRO FORMA(1)
-------- -------- -------- -------- ------------
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)

INCOME STATEMENT DATA(2):
Revenues
New vehicle sales............... $164,979 $166,382 $124,174 $13,784 $469,318
Used vehicle sales.............. 88,477 90,895 60,579 18,075 258,027
Parts & service sales........... 21,173 24,454 28,631 2,925 77,184
Other dealership revenues,
net.......................... 7,387 6,811 4,895 1,165 21,117
-------- -------- -------- ------- --------
Total revenues............... 282,016 288,542 218,279 35,949 825,646
Cost of sales..................... 244,396 249,560 189,169 30,640 712,772
-------- -------- -------- ------- --------
Gross profit................. 37,620 38,982 29,110 5,309 112,874
Goodwill amortization............. 37 -- 67 -- 853761
Selling, general and
administrative expenses......... 30,731 35,072 23,644 3,997 93,56693,510
-------- -------- -------- ------- --------
Income from operations....... 6,852 3,910 5,399 1,312 18,45518,603
Other income and expense
Interest expense, net........... (1,194) (2,748) (1,710) (439) (3,337)(3,576)
Other income (expense), net..... (69) (45) 223 67 175
-------- -------- -------- ------- --------
Income before taxes.......... 5,589 1,117 3,912 940 15,29315,202
Provision for income taxes........ 382 178 678 41 6,3376,305
-------- -------- -------- ------- --------
Net income................... $ 5,207 $ 939 $ 3,234 $ 899 $ 8,9568,897
======== ======== ======== ======= ========
Earnings per share................ $ 0.640.62
Weighted average shares
outstanding..................... 14,00214,373
OTHER DATA:
Gross margin...................... 13.3% 13.5% 13.3% 14.8% 13.7%
Operating margin.................. 2.4% 1.4% 2.5% 3.6% 2.2%2.3%
Pre-tax margin.................... 2.0% 0.4% 1.8% 2.6% 1.9%1.8%

Retail new vehicles sold.......... 8,181 6,458 5,983 756 21,378
Retail used vehicles sold......... 7,779 4,496 3,844 1,101 17,220

910
1112

FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
--------------------------------------------------------
HOWARD MCCALL SMITH KINGWOOD PRO FORMA(1)
-------- -------- -------- -------- ------------
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)

INCOME STATEMENT DATA(2):
Revenues
New vehicle sales............... $ 84,922 $ 81,609 $ 75,203 $10,095 $251,830
Used vehicle sales.............. 54,354 49,796 35,153 9,264 148,567
Parts & service sales........... 10,763 12,305 14,082 1,251 38,400
Other dealership revenues,
net.......................... 4,006 3,243 3,021 634 11,546
-------- -------- -------- ------- --------
Total revenues............... 154,045 146,953 127,459 21,244 450,343
Cost of sales..................... 134,130 127,276 109,914 18,275 389,093
-------- -------- -------- ------- --------
Gross profit................. 19,915 19,677 17,545 2,969 61,250
Goodwill amortization............. 20 -- 28 4 399353
Selling, general and
administrative expenses......... 16,433 17,546 13,818 2,416 50,89350,865
-------- -------- -------- ------- --------
Income from operations....... 3,462 2,131 3,699 549 9,95810,032
Other income and expense
Interest expense, net........... (808) (504) (941) (93) (979)(1,113)
Other income (expense), net..... 34 (34) (19) -- (19)(18)
-------- -------- -------- ------- --------
Income before taxes.......... 2,688 1,593 2,739 456 8,9608,901
Provision for income taxes........ 166 637 531 21 3,6973,655
-------- -------- -------- ------- --------
Net income................... $ 2,522 $ 956 $ 2,208 $ 435 $ 5,2635,246
======== ======== ======== ======= ========
Earnings per share................ $ 0.370.36
Weighted average shares........... 14,30014,373
OTHER DATA:
Gross margin...................... 12.9% 13.4% 13.8% 14.0% 13.6%
Operating margin.................. 2.2% 1.5% 2.9% 2.6% 2.2%
Pre-tax margin.................... 1.7% 1.1% 2.1% 2.1% 2.0%
Retail new vehicles sold.......... 4,093 3,037 3,972 523 11,625
Retail used vehicles sold......... 4,312 2,149 2,181 561 9,203

AS OF JUNE 30, 1997
---------------------------------
PRO FORMA
PRO FORMA(3) AS ADJUSTED(4)(5)
------------ -----------------

BALANCE SHEET DATA:
Working capital (deficit)................................... $ (551) $ 43,927
Inventories................................................. 107,260 107,260
Total assets................................................ 210,422206,713 206,701
Total debt.................................................. 107,026 75,591
Stockholders' equity........................................ 47,49043,782 84,091

- ---------------

(1) Pro forma information gives effect to (i) the Acquisitions on an historical
basis, (ii) the consummation of the Offering and (iii) certain pro forma
adjustments to the historical financial statements. See Pro Forma Financial
Statements and the notes thereto beginning on page F-3 for a description of
the pro forma adjustments.

(2) The individual Founding Groups' Income Statement Data do not total to the
Pro Forma total since such individual Founding Groups' Income Statement Data
represent historical information before Pro Forma entries.

(3) Gives effect to the Acquisitions on an historical basis and certain pro
forma adjustments. See Pro Forma Financial Statements and the notes thereto
beginning on page F-3 for a description of the pro forma adjustments.

(4) Assumes that the Underwriters' over-allotment option is not exercised. See
"Underwriting".

(5) Gives effect to the sale of the shares offered by the Combined Company
hereby and the application of the net proceeds therefrom. See "Use of
Proceeds".
1011
1213

SUMMARY INDIVIDUAL FOUNDING GROUP FINANCIAL DATA

The following table presents certain summary financial data for each of the
Founding Groups.

SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
1994 1995(1) 1996(1) 1996 1997(1)
-------- -------- -------- -------- --------
(IN THOUSANDS) (UNAUDITED)

HOWARD GROUP:
Revenues........................ $227,259 $254,003 $282,016 $140,650 $154,045
Gross profit.................... 28,267 32,230 37,620 18,996 19,915
Selling, general and
administrative expenses...... 24,253 26,166 30,768 15,032 16,453
Income from operations.......... 4,014 6,064 6,852 3,964 3,462
MCCALL GROUP:
Revenues........................ $177,320 $218,888 $288,542 $137,216 $146,953
Gross profit.................... 24,747 30,157 38,982 18,939 19,677
Selling, general and
administrative expenses...... 22,477 27,752 35,072 16,959 17,546
Income from operations.......... 2,270 2,405 3,910 1,980 2,131
SMITH GROUP:
Revenues........................ $217,077 $221,258 $218,279 $108,173 $127,459
Gross profit.................... 27,157 28,593 29,110 14,343 17,545
Selling, general and
administrative expenses...... 21,727 22,824 23,711 11,575 13,846
Income from operations.......... 5,430 5,769 5,399 2,768 3,699
KINGWOOD GROUP:
Revenues........................ $ 31,036 $ 34,459 $ 35,949 $ 17,912 $ 21,244
Gross profit.................... 3,837 4,589 5,309 2,691 2,969
Selling, general and
administrative expenses...... 3,277 3,569 3,997 1,963 2,420
Income from operations.......... 560 1,020 1,312 728 549

- ---------------

(1) The Combined Company anticipates increases in revenues and decreases in cost
of sales and selling, general and administrative expenses. The owners of the
Founding Groups currently have agreements in place which decrease the fees
and commissions paid to the dealerships for sales of certain finance and
insurance products and increase the cost of certain aftermarket products.
Upon completion of the Acquisitions, such agreements will be terminated and
the dealerships will recognize an immediate increase in revenues and
decrease in cost of sales. Additionally, certain employees and owners of the
Founding Groups have agreed to reductions in compensation that will result
in a decrease in selling, general and administrative expenses and cost of sales and increases in other dealership
revenue from reductions in salary, benefits and other payments to the owners
of the Founding Groups to which the owners have agreed to upon
the
consummationcompletion of the Acquisitions. These reductionsThe items above are not reflected in the
financial data presented and would have resulted in a reductionan increase in expensesincome
from operations of the combined Founding Groups of approximately $4.3
million in 1995, and $5.0 million in 1996 and $2.1 million for the six months
ended June 30, 1997.
1112
1314

RISK FACTORS

Prospective purchasers should carefully consider the following factors, as
well as the other information and financial data contained in this Prospectus,
before purchasing the shares of Common Stock offered hereby.

ABSENCE OF COMBINED OPERATING HISTORY

Group 1 Automotive, which was incorporated in December 1995, has conducted
nolimited operations to date other than in connection with the Acquisitions and the Offering.
The Founding Groups have been operated and managed as separate independent
entities to date, and the Combined Company's future operating results will
depend in part on its ability to integrate the operations of these businesses
and manage the combined enterprise. The Combined Company's management group has
been assembled only recently, and there can be no assurance that the management
group will be able to effectively and profitably integrate the Founding Groups
and any future acquisitions, or to effectively manage the combined entity. The
inability of the Combined Company to do so could have a material adverse effect
on the Combined Company's business, financial condition and results of
operations.

MANUFACTURERS' CONTROL OVER DEALERSHIPS

Each of the Combined Company's dealerships sells automobiles pursuant to
franchise agreements with automobile manufacturers or authorized distributors of
the manufacturersmanufacturers. The term "Manufacturers" as used herein means Ford Motor
Company ("Manufacturers"Ford Motor")., General Motors Corporation ("GM"), Toyota Motor Corp.
and its United States affiliate, Toyota Motor Sales, U.S.A., Inc. (collectively,
"Toyota Motor"), Honda Motor Co., Ltd. ("Honda Motor") and its United States
affiliate, American Honda Motor Co., Inc. ("American Honda"), Nissan Motor Co.,
Ltd. ("Nissan Motor") and its United States affiliate, Nissan Motor North
America, Inc., ("Nissan North America"), Chrysler Corporation, Mitsubishi Motor
Sales of America, Inc., ("Mitsubishi Motor"), American Isuzu Motors, Inc.
("American Isuzu"), American Suzuki Motor Corporation and Kia Motors America,
Inc., but does not include Mazda Motor of America, Inc. since the sole Mazda
franchise owned by the Howard Group is in the process of being sold. Through the
terms and conditions of these franchise agreements, Manufacturers exert
considerable influence over the operations of the Combined Company's
dealerships. Each of the franchise agreements includes provisions for the
termination or non-renewal of the manufacturer-dealer relationship for a variety
of causes including any unapproved change of ownership or management and other
material breaches of the franchise agreement. Prior approval of the relevant
manufacturers is required with respect to acquisitions of automobile
dealerships, and a manufacturer may deny the Combined Company's application to
make an acquisition or seek to impose further restrictions on the Combined
Company as a condition to granting approval of an acquisition. See
"-- Dependence on Acquisitions for Growth; Manufacturers' Restrictions on
Acquisitions" and "-- No Agreement with American Honda Motor Co., Inc.". Certain
state laws, however, limit the ability of automobile manufacturers to reject
proposed transfers of dealerships, notwithstanding the terms of any dealer or
franchise agreement. See "-- No Agreement with American Honda Motor Co., Inc."
and "Business -- Franchise Agreements". The loss of one or more of the Combined
Company's franchise agreements could have a material adverse effect on the
Combined Company's business, financial condition and results of operations.

A number ofAs a condition to granting their consent to the Acquisitions, the
Manufacturers imposehave imposed restrictions on the Combined Company. These
restrictions include prohibitionsrestrictions on (i) the acquisition of 20% or more than a
specified percentage of the Common Stock (20% in the case of GM, Toyota Motor,
Nissan North America and American Isuzu and 50% in the case of Ford Motor and
Mitsubishi Motor) by any one person who in the opinion of the Manufacturer is
unqualified to own a dealership of such Manufacturer or has interests
incompatible with the Manufacturer, (ii) certain material changes in the
Combined Company or extraordinary corporate transactions such as a merger, sale
of a material amount of assets or change in the Board of Directors or management
of the Combined Company which could have a material adverse effect on the
Manufacturer's image or reputation or could be materially incompatible with the
Manufacturer's interests; (iii) the removal of a dealership general manager
without the consent of the

13
15

Manufacturer; and (iv) the use of dealership facilities to sell or service new
vehicles of other Manufacturers. If the Combined Company is unable to comply
with these restrictions, the Manufacturer may require the Combined Company generally mustto
(i) sell the assets of the dealerships to the Manufacturer or to a third party
acceptable to the Manufacturer, or (ii) terminate the dealership agreements with
the Manufacturer.

Unlike anyThe agreements with the Manufacturers generally provide for periodic
reporting and notice provisions as a means of the other Manufacturers, American Honda Motor Co., Inc.
("American Honda") has stated todetermining whether the Combined
Company thatis in compliance with the restrictions contained in those agreements. A
Manufacturer, upon its policy on public
ownership requires that (i) public ownershipdetermination of a violation of the Common Stock ofrestrictions, will
notify the Combined Company not exceed 49% of the outstanding Common Stock of the Combined Company;
(ii) more than 50% of the Common Stock ofviolation and the Combined Company be owned by
persons approved by American Honda and transfer of any of these shares be
subjectwill
generally have a period to American Honda's prior approval; (iii) American Honda hascure the right
to approve each stockholder of the Combined Company who owns 5% or more of the
Combined Company's Common Stock; and (iv) certain individuals must personally
indemnify American Honda for any stockholder litigation in connection with the
registration of the Combined Company's securities. Although the Combined Company
has notified American Honda that these restrictions impose an unreasonable
burden on the Combined Company and its principal stockholders, the Combined
Company and American Honda are continuing to negotiate with respect to these
matters. Except for the restrictions listed above, the Combined Company has
generally

12
14

agreed with the other requirements of American Honda's policy on public
ownership which are in line with the requirements of the other Manufacturers
described above.violation. If the Combined Company disputes
the Manufacturer's claim of a violation or is unwilling or unable to negotiate a satisfactory
agreement with American Honda, American Honda may withhold its consent tocure the
acquisition ofviolation, the Honda dealerships by the Combined Company. If the Combined
Company is required to dispose of its Honda dealerships or terminate its
franchise agreements with American Honda, any such requirement could have a
material adverse effect on the Combined Company.

Prior approval of the relevant Manufacturers is required with respect to
acquisitions of automobile dealerships, and a Manufacturer may denyenforce the Combined
Company's application to make an acquisition or seek to impose further
restrictions on the Combined Company as a condition to granting approval of an
acquisition. See "-- Dependence on Acquisitions for Growth; Manufacturers'
Restrictions on Acquisitions". Certain state laws, however, limit the ability of
the Manufacturers to reject proposed transfers of dealerships, notwithstanding
the terms of any dealer or franchise agreement. See "Business -- Franchise
Agreements".

RISKS RELATING TO FAILURE TO MEET MANUFACTURER CSI SCORES

Many Manufacturers attempt to measure customers' satisfaction with
automobile dealerships through systems generally known as the customer
satisfaction index ("CSI"). These Manufacturers may use a dealership's CSI
scores as a factor in evaluating applications for additional dealership
acquisitions and other matters, including the participation by a dealership in
incentive programs. Certain dealerships of the Combined Company have had
difficulty from time to time meeting their Manufacturers' CSI standards. The
components of the various Manufacturer CSI scores have been modified from time
to timeremedies specified in the past, and there is no assurance that such components will not be
further modifiedagreement
through judicial or replaced by different systemsregulatory proceedings or in the future. The Combined
Company's dealerships' CSI scores in the past have not had a material adverse
effect on these dealerships. However, failure of the Combined Company's
dealerships to comply with the CSI standards at any given time in the future may
have a material adverse effect on the Combined Company.

DEPENDENCE ON AUTOMOBILE MANUFACTURERS

The success of each of the Combined Company's dealerships is highly
dependent upon the overall success of the line of vehicles that each dealership
sells. New vehicles manufactured by Toyota Motor Corp. ("Toyota Motor"), General
Motors Corporation ("GM"), Honda Motor Co., Ltd. ("Honda Motor"), Nissan Motor
Co., Ltd. ("Nissan Motor"), and Chrysler Corporation accounted for approximately
34%, 17%, 16%, 14% and 9%, respectively, of the Combined Company's new vehicle
unit sales for 1996. No other Manufacturer accounted for more than 3% of new
vehicle unit sales of the Combined Company during 1996.

The Combined Company's business is affected to varying degrees by the
demand for its Manufacturers' vehicles, and by the financial condition,
management, marketing, production and distribution capabilities of such
Manufacturers. In addition, the timing, structure and amount of Manufacturer
incentives may impact the timing and profitability of the Combined Company's
sales transactions. Events such as labor disputes and other production
disruptions, that may adversely affect a Manufacturer may also adversely affect
the Combined Company. Similarly, the delivery of vehicles from Manufacturers
later than scheduled, which may occur particularly during periods of new product
introductions, can lead to reduced sales during such periods. Moreover, any
event that causes adverse publicity involving such Manufacturers may have an
adverse effect on the Combined Company regardless of whether such event involves
any of the Combined Company's dealerships.

The Combined Company also depends on its Manufacturers to provide it with a
desirable mix of new vehicles. The most popular vehicles generally produce the
highest profit margins and are frequently the most difficult to obtain from the
Manufacturers. In somecertain instances in order to obtain additional allocations of
these vehicles, the Combined Company may elect to purchase a larger number of
less desirable models than it would otherwise purchase. Sales of less desirable
models may result in lower profit

13
15

margins than sales of the more popular vehicles. If the Combined Company is
unable to obtain sufficient quantities of the most popular models its
profitability may be adversely affected.

The Combined Company's franchise agreements with its Manufacturers do not
give the Combined Company the exclusive right to sell a Manufacturer's product
within a given geographic area. Accordingly, a Manufacturer could grant another
dealer a franchise to start a new dealership in proximity to one or more of the
Combined Company's locations or an existing dealer could move its dealership to
a location which would compete directly with the Combined Company, although
certain state laws provide a mechanism for challenging such action in advance
through
administrative or legal proceedings. If the Combined Company cannot
prevent a Manufacturer from granting a new franchise near to one of the Combined
Company's dealerships, such grant could have a material adverse effect on the
Combined Company and its operations.arbitration.

DEPENDENCE ON ACQUISITIONS FOR GROWTH; MANUFACTURERS' RESTRICTIONS ON
ACQUISITIONS

Growth in the Combined Company's revenues and earnings will depend
significantly on the Combined Company's ability to acquire and consolidate
profitable dealerships. There can be no assurance that the Combined Company will
be able to identify, acquire or profitably manage and integrate additional
dealerships, if any, into the Combined Company, or that it will be able to do so
without substantial costs, delays or other operational or financial problems. In
addition, increased competition for acquisition candidates may develop, which
could result in fewer acquisition opportunities available to the Combined
Company and/or higher acquisition prices. Further, acquisitions involve a number
of special risks, including possible adverse effects on the Combined Company's
operating results, diversion of resources and management's attention, inability
to retain key acquired personnel, risks associated with unanticipated events or
liabilities and amortization of acquired intangible assets, some or all of which
could have a material adverse effect on the Combined Company's business,
financial condition and results of operations. Finally, the ability of the
Combined Company to grow through acquisitions could be significantly affected by
the price of the Common Stock since the Combined Company intends to grow
substantially through the issuance of its Common Stock in acquisitions. Any
substantial decline in the price of the Common Stock could, therefore, have a
material adverse effect on the Combined Company's growth strategy.

The Combined Company is required to obtain the consent of the applicable
Manufacturer prior to the acquisition of any dealership franchise.franchises. Obtaining
the consent of the Manufacturers for acquisitions of dealerships could take a
significant amount of time. Obtaining the approvals of the Manufacturers for the
Acquisitions has taken almost one year, although the Combined Company believes
that subsequent acquisitions by the Combined Company will take significantly
less time since the Combined Company has current completed applications and/or
agreements with all Manufacturers except American Honda. Nevertheless, if the
Combined Company experiences delays in obtaining, or fails to obtain, approvals
of the Manufacturers for acquisitions of dealerships, the Combined Company's
growth strategy could be materially adversely affected. In determining whether
to approve an acquisition, the Manufacturers may consider many factors,
including the moral character, business experience, financial condition,
ownership structure and CSI scores of the Combined Company. In addition,
Manufacturers may limit the number of such Manufacturers' dealerships that may
be owned by the Combined Company or the number that may be owned in a particular
geographic area. For example, Toyota Motor currently limits the number of
dealerships which may be owned by any one group to seven Toyota and three Lexus
dealerships nationally and restricts the number of dealerships that may be owned
within certainto (i) the greater of one dealership, or 20% of the Toyota dealer count in a
"Metro" market (multiple Toyota dealership markets as defined by

14
16

Toyota Motor), (ii) the lesser of five dealerships or 5% of the Toyota
dealerships in any Toyota region (currently 12 geographic regions), and (iii)
two Lexus dealerships in any one of the four Lexus geographic areas. Toyota
Motor further requires that at least nine months elapse between acquisitions.
Similarly, it is currently the policy of American Honda to restrict any company
from holding more than seven Honda or more than three Acura franchises
nationally and to restrict the number of franchises held within certainto (i) one Honda dealership
in a "Metro" market (a metropolitan market represented by two or more Honda
dealers) with two to 10 Honda dealership points, (b) two Honda dealerships in a
Metro market with 11 to 20 Honda dealership points, (iii) three Honda
dealerships in a Metro market with 21 or more Honda dealership points, (iv) no
more than 4% of the Honda dealerships in any one of the 10 Honda geographic
areas.zones, (v) one Acura dealership in a Metro market (a metropolitan market with
two or more Acura dealership points), and (vi) two Acura dealerships in any one
of the six Acura geographic zones. Toyota Motor and American Honda also prohibit
ownership of contiguous dealerships and the dualing of a franchise with any
other brand without their consent.consent, which the Combined Company believes will not
impose any significant limitation on its acquisitions of Toyota, Lexus, Honda or
Acura dealerships. Ford Motor Company ("Ford Motor") currently limits the number of dealerships to the
greater of (a) 15 Ford and 15 Lincoln Mercury dealerships, or (b) the number of
dealerships with total retail sales of new vehicles in the preceding calendar
year that would equal not more than 5% of total Ford and Lincoln Mercury
vehicles sold at retail in the United States during that year, which number may
not exceed 33 1/3% of the dealerships in any market area, as defined from time
to time by Ford Motor defined market area.
Chrysler Corporation currently limitsfor its dealership network, having more than three
authorized Ford dealerships in them (currently approximately 400 dealerships).
GM has limited the number of GM dealerships that may be
owned by the Combined Company may
acquire during the next two years to 10 additional GM dealership locations (any
one dealership, however, may include a totalnumber of tendifferent GM franchises, such
as a combination of GMC, Pontiac and Buick franchises), which number may be
increased on a case-by-case basis. In addition, GM limits the maximum number of
GM dealerships selling Chrysler
Corporation vehiclesthat the Combined Company may acquire to 50% of the GM
dealerships, by franchise line, in the United States, with no more than six dealerships in
the same sales zone and no more than two dealerships in the same metropolitana GM-defined geographic market provided that such two dealerships are different vehicle brands.area having
multiple GM dealers (currently approximately 10,000 dealerships). The Combined
Company currently owns two Toyota, one Lexus, three Honda, two Acura, one
Lincoln and one Mercury franchise and three GM dealership locations.

NO AGREEMENT WITH AMERICAN HONDA MOTOR CO., INC.

The Combined Company and American Honda have not entered into any agreement
with respect to the approval by American Honda of the proposed acquisitions of
the Honda and Acura dealerships by the Combined Company and the Combined Company
intends to acquire the Honda and Acura dealerships without the approval of
American Honda. Unlike any of the other Manufacturers, American Honda has stated
to the Combined Company that its policy on public ownership requires that (i)
public ownership of the Common Stock of the Combined Company not exceed 49% of
the outstanding Common Stock of the Combined Company; (ii) more than 50% of the
Common Stock of the Combined Company be owned by persons approved by American
Honda and transfer of any of the shares owned by these approved persons be
subject to American Honda's prior approval; and (iii) American Honda have the
right to approve each stockholder of the Combined Company who owns 5% or more of
the Combined Company's Common Stock other than institutional investors who may
own up to 10% of the Combined Company's Common Stock. Except for the
restrictions listed above, the Combined Company is prepared to agree with the
other requirements of American Honda's policy on public ownership, which include
the Combined Company's agreement to be bound by the terms of the Honda and Acura
Automobile Sales and Service Agreements, the requirement that the removal of the
Executive Manager and Dealer Manager of the Honda and Acura dealerships shall
require the prior approval of American Honda, the maintenance of separate,
freestanding, exclusive dealerships for the sales and service of Honda and Acura
vehicles, and sale of the assets of the dealerships or termination of the
franchise agreement as a remedy for violation of such requirements. See
"-- Manufacturers' Control Over Dealerships" and "-- Dependence on Acquisitions
for Growth; Manufacturers' Restrictions on Acquisitions." In addition the
Combined Company was willing to agree, in the context of the Combined Company's
overall proposal to American Honda, to the restrictions imposed by American
Honda on the number of dealerships that may be owned by the Combined Company as
described under "-- Dependence on Acquisitions for Growth; Manufac-

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17

turers' Restrictions on Acquisitions". American Honda has notified Group 1
Automotive that consummation of the acquisitions of the Honda and Acura
dealerships included in the Acquisitions without American Honda's consent would
be a material breach of its dealer agreements and policy on public ownership.
Moreover, American Honda notified Group 1 Automotive that such consent would not
be granted unless the Combined Company agreed to all of the provisions of
American Honda's dealer agreements and policy on public ownership, which
American Honda has stated it believes conform to the provisions of the Texas
Motor Vehicle Commission Code.

If the Combined Company and American Honda are unable to reach an agreement
prior to the closing of the Acquisitions, in the opinion of Vinson & Elkins
L.L.P., Texas counsel to the Combined Company, and Abowitz, Rhodes & Dahnke,
P.C., Oklahoma counsel to the Combined Company, a refusal by American Honda to
consent to the transfer to the Combined Company of the Honda and Acura
dealerships prior to the closing of the Acquisitions would not likely enable
American Honda either to prevent such transfers or terminate the transferred
franchises. Texas counsel to the Combined Company have opined that American
Honda's current position should not prevent the transfer of the Honda and Acura
dealerships in Texas to the Combined Company under the applicable provisions of
the Texas Motor Vehicle Commission Code, which legislation, among other things
prohibits an automobile manufacturer from rejecting a proposed transfer of a
dealership franchise if the transferee is of good moral character and meets the
manufacturer's written, reasonable, and uniformly applied standards or
qualifications relating to the transferee's business experience and financial
qualifications. In Texas counsel's opinion, American Honda would not likely
prevail on an opposition to the proposed franchise transfers even if American
Honda asserts an objection under the Texas Motor Vehicle Commission Code
because: the Combined Company's Honda and Acura dealerships will initially, and
are intended to continue to, be managed by management that American Honda
previously has approved, a majority of the Combined Company's Board of Directors
will initially, and is intended to continue to, consist of individuals whom
American Honda previously has approved to own Honda or Acura dealerships, and
American Honda previously has approved the Chief Executive Officer of the
Combined Company to own a Honda dealership. Similarly, Oklahoma counsel have
opined that, although Oklahoma does not have a specific statutory provision
regulating the transfer of automobile dealerships, the Oklahoma statutory
provisions regulating termination or cancellation of dealerships would likely
apply to any challenge to a refusal by American Honda to consent to the transfer
to the Combined Company of Honda or Acura dealerships. In the opinion of
Oklahoma counsel, in order to prevail on such a refusal, American Honda would be
required to establish that its refusal was reasonable, based upon factors that
are closely related to the proposed assignee's likelihood of successful
performance under the franchise agreement. In Oklahoma counsel's opinion,
considerations relevant to that determination include: (1) whether the proposed
dealer has adequate working capital; (2) the extent of prior experience of the
proposed dealer; (3) whether the proposed dealer has been profitable in the
past; (4) the location of the proposed dealer; (5) the prior sales performance
of the proposed dealer; (6) the business acumen of the proposed dealer; (7) the
suitability of combining the franchise in question with other franchisees at the
same location; and (8) whether the proposed dealer provides the manufacturer
sufficient information regarding its qualifications. In the opinion of Oklahoma
counsel, a refusal by American Honda to consent to the transfer to the Combined
Company of the Honda and Acura dealerships would likely be deemed unreasonable
under each of these factors inasmuch as American Honda previously approved each
of those dealerships and, thus, presumptively acknowledged that those
dealerships each have adequate working capital, and that their managements
possess sufficient experience, prior sales performance and business acumen to
qualify as Honda or Acura dealers. The opinions of Texas and Oklahoma counsel
each state that the respective statutes that they construe have not been
interpreted in any published judicial decision in the context of the issue
raised by the Acquisitions. Therefore, it is possible that a court applying
those provisions might decide to adopt a wholly different interpretation of the
law. Moreover, notwithstanding the foregoing, the matters addressed by Texas and
Oklahoma counsel are not free from doubt, and accordingly, there can be no
assurance that the Combined Company would prevail in any such proceedings. In
addition, there can be no assurance that American Honda will not institute
proceedings to attempt to prevent the Acquisitions or future acquisition of, or
challenge the ownership of, the Honda and

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18

Acura dealerships by the Combined Company. While the Combined Company believes
that it would prevail in any such proceedings, any such proceedings could occupy
significant time of the management of the Combined Company and adversely affect
the ability of the Combined Company to acquire additional Honda and Acura
dealerships. Further, there can be no assurance that any proceedings brought by
American Honda would be brought on grounds relating to the statutory schemes
described above. If American Honda were to prevail in any such proceedings
against the Combined Company, and if the Combined Company were required to
dispose of its Honda and Acura dealerships or terminate its franchise agreements
with American Honda, any such requirement could have a material adverse effect
on the Combined Company. See Note 2 to the Pro Forma Financial Information
included elsewhere in this Prospectus for a description of the amounts
attributable to the Honda and Acura dealerships in the Pro Forma Combined
Statement of Operations and the Pro Forma Combined Balance Sheet of the Combined
Company.

While the Combined Company hopes that it will be able to enter into a
satisfactory agreement with American Honda subsequent to the closing of the
Offering and intends to continue to pursue that goal, there can be no guarantee
that any such agreement will be reached. If the Combined Company is unable to
conclude an acceptable agreement with American Honda, future acquisitions of
Honda and Acura dealerships could be adversely affected. In that connection, one
Dodge, one Jeep, one Chrysler, one Plymouthof the future acquisitions described in "Use of Proceeds" includes an Acura
franchise. That franchise is not material to the proposed acquisition, and the
Combined Company has not determined whether such Acura franchise will be
acquired without American Honda's approval or whether such franchise will be
eliminated from the proposed acquisition if American Honda fails to approve its
acquisition by the Combined Company. Future acquisitions of Honda or Acura
franchises will be evaluated by the Combined Company on a case-by-case basis if
no agreement is reached with American Honda. The Combined Company currently does
not intend to acquire Honda and Acura dealerships that would violate the
restrictions imposed by American Honda on the number of Honda and Acura
dealerships that the Combined Company could acquire under American Honda's
current policy.

American Honda instituted litigation against Republic Industries, Inc.
("Republic"), a publicly held company, in the United States District Court in
Los Angeles, California in May 1997 to prevent Republic from acquiring Honda and
Acura dealerships without complying with American Honda's Dealer Agreements and
policy on public ownership. That case was dismissed on September 29, 1997. On
October 1, 1997, American Honda sued Republic in the United States District
Court in Memphis, Tennessee and in the United States District Court in Mobile,
Alabama asking the courts to determine that Honda's withholding of its consent
to Republic's proposed acquisition of three dealerships in Tennessee and one Eagle franchise.in
Alabama is a lawful enforcement of American Honda's Dealer Agreements and policy
on public ownership. American Honda has asserted claims for interference with
contractual relations and unfair competition and has sought monetary,
declaratory and injunctive relief in this litigation based on Republic's failure
to comply with American Honda's Dealer Agreements and policy on public
ownership, alleging that: (i) more than 49% of Republic's stock is held by
persons who have not been approved by American Honda; (ii) Republic has acquired
one Honda and one Acura dealership in Florida, has agreements to acquire seven
more Honda dealerships and has plans to acquire 50 Honda and 13 Acura
dealerships in the near term, which acquisitions violate the limitation on the
number of Honda and Acura dealerships contained in American Honda's policy on
public ownership; (iii) Republic has refused to provide all documentation and
information required by American Honda; (iv) Republic is emphasizing the sale of
used cars; (v) Republic has strong ties to and dealings with American Honda's
direct competitors through Republic's rental car operations; (vi) Republic is
attempting to develop "AutoNation USA" as a national brand to the detriment of
the Honda and Acura brand images; (vii) Republic and its senior management had
no history of operations in automotive retailing prior to August 1996; and
(viii) past conduct of the senior management of Republic raises doubts about
Republic's qualifications to own Honda and Acura dealerships.

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19

RISKS RELATING TO FAILURE TO MEET MANUFACTURER CSI SCORES

Many manufacturers attempt to measure customers' satisfaction with
automobile dealerships through systems generally known as the customer
satisfaction index ("CSI"). These manufacturers may use a dealership's CSI
scores as a factor in evaluating applications for additional dealership
acquisitions and participation by a dealership in incentive programs. Certain
dealerships of the Combined Company have had difficulty from time to time
meeting their Manufacturers' CSI standards. The components of the various
manufacturer CSI scores have been modified from time to time in the past, and
there is no assurance that such components will not be further modified or
replaced by different systems in the future. The Combined Company's dealerships'
CSI scores in the past have not had a material adverse effect on these
dealerships. However, the CSI scores of the Howard Group's GM dealerships are
currently below GM levels as required under the GM publication Policies for
Changes in GM Dealership Ownership/Management ("GM Policies"), and as a result,
the acquisition of a Chevrolet dealership in Tulsa, Oklahoma by the Howard Group
has been denied by GM. See "The Acquisitions". Under the GM Policies each GM
dealership must maintain CSI scores that are at or above its respective
zone/branch average for the overall dealership purchase/delivery category and
the overall dealership service visit category. Exceptions will be considered if
(i) the score in each category is no lower than 0.2 points below the applicable
zone/branch average or 0.12 points below national divisional 12 month averages;
and (ii) a business plan for the dealership is provided to improve CSI results
in the categories to zone/branch average within two years; and/or (iii) a
positive sustaining trend has been displayed in the dealership's CSI results in
the categories. The scores for the Howard Group's GMC, Pontiac and Chevrolet
dealerships for the purchase/delivery category for the twelve months ended April
1997 were 3.13, 3.09 and 3.18, respectively, while the respective zone average
were 3.45, 3.43 and 3.44. The scores for the Howard Group's GMC, Pontiac and
Chevrolet dealerships for the service category for the twelve months ended April
1997 were 2.71, 2.58 and 2.92, respectively, while the respective zone averages
were 3.09, 3.11 and 3.19. The scores for the Howard Group's GMC, Pontiac and
Chevrolet dealerships for the purchase/delivery category for the three months
ended June 1997 were 3.31, 3.33 and 3.18, respectively, while the respective
zone averages were 3.47, 3.42 and 3.44. The scores for the Howard Group's GMC,
Pontiac and Chevrolet dealerships for the service category for the three months
ended June 1997 were 2.84, 2.66 and 3.05, respectively, while the respective
zone averages were 3.12, 3.13 and 3.23. GM will not permit the Howard Group to
acquire the Chevrolet dealership in Tulsa, Oklahoma until the CSI scores attain
the required level, which could occur any time in the future. If, however, the
Howard Group fails to obtain GM's approval for the acquisition of the Chevrolet
dealership in Tulsa, Oklahoma within two years after the completion of the
Acquisitions, the Howard Group's agreement to acquire the Chevrolet dealership
in Tulsa, Oklahoma will be terminated. See "The Acquisitions". If such CSI
scores fail to reach required levels, the Combined Company's ability to obtain consentsacquire
GM dealerships could be adversely affected. Moreover, failure of the Combined
Company's dealerships to comply with the CSI standards of GM as well as other
Manufacturers at any given time in the future could adversely affect the growth
strategy of the Combined Company.

DEPENDENCE ON AUTOMOBILE MANUFACTURERS

The success of each of the Combined Company's dealerships is highly
dependent upon the overall success of the line of vehicles that each dealership
sells. New vehicles manufactured by Toyota Motor, GM, Honda Motor, Nissan Motor,
and Chrysler Corporation accounted for approximately 34%, 17%, 16%, 14% and 9%,
respectively, of the Combined Company's new vehicle unit sales for 1996. No
other Manufacturer accounted for more than 3% of new vehicle retail unit sales
of the Combined Company during 1996.

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20

also adversely affect the Combined Company. Similarly, the delivery of vehicles
from Manufacturers later than scheduled, which may occur particularly during
periods of new product introductions, can lead to acquire their franchises willreduced sales during such
periods. Moreover, any event that causes adverse publicity involving such
Manufacturers may have an adverse effect on the Combined Company regardless of
whether such event involves any of the Combined Company's dealerships.

The Combined Company also depends on its Manufacturers to provide it with a
desirable mix of new vehicles. The most popular vehicles generally produce the
highest profit margins and are frequently the most difficult to obtain from the
Manufacturers. If the Combined Company is unable to obtain sufficient quantities
of the most popular models its profitability may be adversely affected. In some
instances, in order to obtain additional allocations of these vehicles, the
Combined Company may elect to purchase a larger number of less desirable models
than it would otherwise purchase. Sales of less desirable models may result in
lower profit margins than sales of the more popular vehicles.

The Combined Company's franchise agreements with its Manufacturers do not
give the Combined Company the exclusive right to sell a Manufacturer's product
within a given geographic area. Accordingly, a Manufacturer could grant another
dealer a franchise to start a new dealership in proximity to one or more of the
Combined Company's locations or an existing dealer could move its dealership to
a location which would compete directly affectwith the Combined Company, although
certain state laws provide a mechanism for challenging such action in advance
through administrative or legal proceedings. If the Combined Company cannot
prevent a Manufacturer from granting a new franchise near to one of the Combined
Company's dealerships, such grant could have a material adverse effect on the
Combined Company and its ability to
implement its growth strategy.

14
16operations.

RISKS RELATED TO ACQUISITION FINANCING; FUTURE CAPITAL REQUIREMENTS

The Combined Company currently intends to finance future acquisitions by
issuing shares of its Common Stock as full or partial consideration for acquired
dealerships. The extent to which the Combined Company 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. Since the Combined Company will focus initially on large
"platform" acquisitions, it is possible that the Combined Company will issue a
significant number of additional shares of Common Stock in connection with such
acquisitions in the near future. Such additional shares of Common Stock could be
as much as, or more than, the number of outstanding shares of Common Stock after
giving effect to the Offering. To the extent that the Combined Company is unable
or unwilling to do so, the Combined Company may be required to use available
cash or other sources of debt or equity financings. The Combined Company is
currently negotiatinghas
negotiated and executed an arrangement letter for a bank credit facility (the "Credit Facility") with
a
major bank. It is anticipated that the facilityChase Securities, Inc and Comerica Bank. The Credit Facility will provide the
Combined Company with a secured revolving line of credit of up to $100$125 million
which may be used for general corporate purposes, acquisitions, capital
expenditures, working capital and floor plan financing. NoThe Combined Company
currently expects that the net proceeds from the Offering, other existing
resources and the Credit Facility will be sufficient to fund its acquisition
program and other cash needs for at least the next 12 months. However, no
assurance can be given that the net proceeds from the Offering, other existing
resources and the Credit Facility will be sufficient to fund its acquisition
program and other cash needs, or that the Combined Company will be able to
obtain adequate additional capital from other sources. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Combined Founding Groups"Groups' Commitments -- Credit Facility".

RELIANCE ON KEY PERSONNEL

The Combined Company depends to a large extent upon the abilities and
continued efforts of its executive officers and the senior management of the
Founding Groups, including B. B. Hollingsworth, Jr., Robert E. Howard, II,
Sterling B. McCall, Jr., Charles M. Smith, John T. Turner and Scott L. Thompson.
Furthermore, the Combined Company will likely be dependent on the senior
management of any

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21

businesses acquired in the future. If any of these persons becomes unavailable
to continue in such capacity, or if the Combined Company is unable to attract
and retain other qualified employees, the Combined Company's business or
prospects could be adversely affected. Although the Combined Company has entered
into an employment agreement with each of its executive officers, there can be
no assurance that any individual will continue in his present capacity with the
Combined Company for any particular period of time. The Combined Company
currently does not have key man insurance for any of its officers and senior
management. See "Management".

SUBSTANTIAL COMPETITION

The automotive retailing industry is highly competitive with respect to
price, service, location and selection. The Combined Company competes with
automobile dealerships (including public franchised dealership consolidators),
private market buyers and sellers of used vehicles, used vehicle dealerships,
other franchised dealerships, service center chains and independent service and repair shops. In the new
vehicle area, the Combined Company competes with other franchised dealers. The
Combined Company does not have any cost advantage in purchasing new vehicles
from the Manufacturers, and typically relies on advertising, merchandising,
sales expertise, service reputation and location of its dealerships to sell new
vehicles. In recent years, the Combined Company has also faced competition from
nontraditionalnon-traditional sources such as companies that sell automobiles on the Internet,
automobile rental agencies, independent leasing companies, used-car
"superstores" and price clubs associated with established consumer agencies such
as the American Automobile Association, some of which use non-traditional sales
techniques such as one-price shopping. In addition, Ford Motor has announced
that it is exploring the possibility of going into business with some of its
dealers to create automotive superstores in selected markets. Some of these
recent market entrants may have greater financial, marketing and personnel
resources than the Combined Company, and/or lower overhead or sales costs. In
the parts and service area, the Combined Company also competes with a number of
regional or national chains which offer

15
17 selected parts and services at prices
that may be lower than the Combined Company's prices. In addition, there can be
no assurance that the Combined Company's strategy will be more effective than
the strategies of its competitors.

CYCLICALITY

Sales of motor vehicles, particularly new vehicles, historically have been
subject to substantial cyclical variation. The Combined Company believes that
the industry is affected by many factors, including general economic conditions,
consumer confidence, the level of personal discretionary spending, interest
rates and credit availability. There can be no assurance that the industry will
not experience sustained periods of decline in vehicle sales, particularly new
vehicle sales, in the future. Any such decline could have a material adverse
effect on the Combined Company.

SEASONALITY

The automobile industry is subject to seasonal variations in revenues.
Demand for automobiles is generally lower during the winter months than in other
seasons, particularly in regions of the United States associated with harsh
winters. Accordingly, the Combined Company expects its revenues and operating
results generally to be lower in its first and fourth quarters than in its
second and third quarters.

IMPORTED PRODUCTS

A significant portion of the Combined Company's new vehicle business
involves the sale of vehicles, parts or vehicles composed of parts that are
manufactured outside the United States. As a result, the Combined Company's
operations are subject to customary risks of importing merchandise, including
fluctuations in the value of currencies, import duties, exchange controls, trade
restrictions, work stoppages and general political and economic conditions in
foreign countries. The United States or the countries from which the Combined
Company's products are imported may, from time to time, impose new quotas,
duties, tariffs or other restrictions, or adjust presently prevailing quotas,
duties or tariffs,

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22

which could affect the Combined Company's operations and its ability to purchase
imported vehicles and/or parts.

GOVERNMENTAL REGULATIONS AND ENVIRONMENTAL MATTERS

The Combined Company is subject to a wide range of federal, state and local
laws and regulations, such as local licensing requirements, consumer protection
laws and environmental requirements governing, among other things, discharges to
the air and water, the storage of petroleum substances and chemicals, the
handling and disposal of wastes, and the remediation of contamination arising
from spills and releases. The violation of these laws and regulations can result
in civil and criminal penalties being levied against the Combined Company or in
a cease and desist order against operations that are not in compliance. Future
acquisitions by the Combined Company may also be subject to governmental
regulation, including antitrust reviews. The Combined Company believes that it
substantially complies with all applicable laws and regulations relating to its
business, but future laws and regulations may be more stringent and require the
Combined Company to incur significant additional costs. See
"Business -- Governmental Regulations" and "Business -- Environmental Matters".

ANTI-TAKEOVER EFFECTS OF STOCKHOLDER RIGHTS PLAN AND THE COMBINED COMPANY'S
CHARTER AND BYLAWS

Prior to the Offering, the Combined Company intends to adopt a stockholder
rights plan. This plan and certain provisions of the Combined Company's
Certificate of Incorporation, as amended ("Charter"), and Bylaws ("Bylaws") may
have the effect of discouraging, delaying or preventing a change in control of
the Combined Company or unsolicited acquisition proposals that a stockholder
might consider favorable. These include provisions providing for a Board of
Directors with staggered, three-year terms, permitting the removal of a director
from office only for cause, allowing only the Board of Directors to set 16
18

the
number of directors, requiring super-majority or class voting to effect certain
amendments to the Charter and Bylaws, limiting the persons who may call special
stockholders' meetings, limiting stockholder action by written consent and
establishing advance notice requirements for nominations for election to the
Board of Directors or for proposing matters that can be acted upon at
stockholders' meetings. The Delaware General Corporation Law requires
super-majority voting thresholds to approve certain "business combinations"
between interested stockholders and the Combined Company which may render more
difficult or tend to discourage attempts to acquire the Combined Company. In
addition, the Combined Company's Board of Directors has the authority to issue
shares of preferred stock ("Preferred Stock") in one or more series and to fix
the rights and preferences of the shares of any such series without stockholder
approval. Any series of Preferred Stock is likely to be senior to the Common
Stock with respect to dividends, liquidation rights and, possibly, voting
rights. The ability to issue Preferred Stock could also have the effect of
discouraging unsolicited acquisition proposals, thus affecting the market price
of the Common Stock and preventing stockholders from obtaining any premium
offered by the potential buyer. In addition, certain of the Combined Company's
dealer agreements prohibit the acquisition of 20% or more than a specified percentage
of the Common Stock (20% in the case of GM, Toyota and Nissan and 50% in the
case of Ford) of the Combined Company without the consent of the relevant
Manufacturers. See "Management -- Executive Officers and Directors", "Principal
and Selling Stockholders" and "Description of Capital Stock".

POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK

Sales of substantial amounts of Common Stock in the public market
subsequent to the Offering could adversely affect the market price of the Common
Stock. Upon consummation of the Acquisitions and the Offering, the Combined
Company will have 14,002,02613,957,220 shares of Common Stock outstanding (14,722,026(14,677,220
shares if the Underwriters' overallotment option is exercised in full). Of these
shares, the 4,800,000 shares of Common Stock offered hereby (5,520,000 shares if
the Underwriters' overallotment option is exercised in full) will be freely
tradable without restriction or further registration under the Securities Act of
1933, as amended (the "Securities Act"), except for shares held by persons
deemed

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23

to be "affiliates" of the Combined Company or acting as "underwriters" as those
terms are defined in the Securities Act. The remaining 9,202,0269,157,220 shares of
Common Stock outstanding will be "restricted securities" within the meaning of
Rule 144 under the Securities Act and will be eligible for resale subject to the
volume, manner of sale, holding period and other limitations of Rule 144.
Currently, 565,000 shares of Common Stock are issuable under existing stock
options granted to certain executive officers and employees of the Combined
Company. Options exercisable for 750,950 shares of Common Stock will be granted
to directors and employees under the Combined Company's 1996 Stock Incentive
Plan uponprior to completion of the Offering. An additional 684,050 shares of Common
Stock are reserved for issuance to employees and directors of the Combined
Company under the Combined Company's 1996 Stock Incentive Plan. In addition,
200,000 shares of Common Stock are reserved for issuance to employees of the
Combined Company under the 1998 Employee Stock Purchase Plan. See
"Management -- 1996 Stock Incentive Plan", "Management -- 1998 Employee Stock
Purchase Plan", "Description of Capital Stock" and "Shares Eligible for Future
Sale".

Pursuant to the Stock Purchase Agreements entered into in connection with
the Acquisitions, each of the stockholders of the Founding Companies, other than
the Selling Stockholder with respect to the shares he is selling in the
Offering, has agreed with the Combined Company not to sell or otherwise dispose
of shares of Common Stock received in the Acquisitions for a period of two years
from the closing date of the Acquisitions. In addition, pursuant to an
Underwriting Agreement between the Combined Company, the Selling StockholdersStockholder and
the Underwriters, the Combined Company, the executive officers and directors of
the Combined Company and the Selling Stockholder have agreed not to offer, sell
or otherwise dispose of any shares of Common Stock for a period of 180 days from
the date of this Prospectus without the consent of the representatives of the
Underwriters, other than the
issuance of options(i) pursuant to purchase Common Stockemployee stock option plans existing,
or shares of Common Stock issuable upon the exercise thereof.conversion or exchange of convertible or exchangeable securities
outstanding, on the date of this Prospectus, or (ii) in connection with and as
consideration for acquisitions of automobile dealerships, provided that the
proposed transferee agrees in writing for the benefit of the Underwriters to be
bound by the foregoing provisions. See "Shares Eligible for Future Sale" and
"Underwriting".

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19

NO PRIOR PUBLIC MARKET AND DETERMINATION OF OFFERING PRICE

Prior to the Offering, there has been no public market for the Common
Stock. Application will be madeThe Common Stock has been approved for listing, subject to list the Common Stocknotice of
issuance, on the New York Stock Exchange. However, there can be no assurance
that an active trading market will develop subsequent to the Offering or, if
developed, that it will be sustained. The initial public offering price of the
Common Stock will be determined through negotiations between the Combined
Company and the representatives of the Underwriters and may bear no relationship
to the price at which the Common Stock will trade after the Offering. For
information relating to the factors to be considered in determining the initial
public offering price, see "Underwriting". Prices for the Common Stock after the
Offering may be influenced by a number of factors, including the liquidity of
the market for the Common Stock, investor perceptions of the Combined Company
and the automotive retailing industry and general economic and other conditions.
Sales of substantial amounts of Common Stock in the public market subsequent to
the Offering could adversely affect the market price of the Common Stock.

POSSIBLE VOLATILITY OF PRICE

The market price of the Common Stock could be subject to wide fluctuations
in response to a number of factors, including quarterly variations of operating
results, investor perceptions of the Combined Company and automotive retailing
industry and general economic and other conditions.

1822
2024

THE ACQUISITIONS

Group 1 Automotive will acquire all of the issued and outstanding stock of
the Founding Companies in the Acquisitions immediately prior to the consummation
of the Offering pursuant to 13 separate stock purchase agreements (the "Stock
Purchase Agreements"). The Founding Companies are each part of one of the four
separate and distinct Founding Groups.

The Stock Purchase Agreements, provide that acquisition of each Founding
Company is subject to certain conditions including, among others: (i) the
continuing accuracy on the closing date of the representations and warranties of
the applicable Founding Company, the stockholders of such Founding Company and
the Combined Company; (ii) the performance of each of the covenants by the
applicable Founding Company, the stockholders of such Founding Company and the
Combined Company, including the removal of certain related party agreements;
(iii) the expiration or termination of the applicable waiting period under the
HSR Act with respect to such acquisition;acquisition (which has been satisfied); (iv) the
obtainment of all permits, approvals and consents of securities or "blue sky"
commissions of each jurisdiction and of any other governmental agency or
authority, where failure to obtain such permit, approval or consent would have a
material adverse effect; and (v) the entering into an Underwriting Agreement by
the Combined Company and the Underwriters in connection with the Offering. The
Offering is conditioned upon, among other things, the consummation of the
acquisition of 100% of the Founding Companies.

The Stock Purchase Agreements provide that the parties thereto will not be
liable for the breach, after consummation of the Acquisitions, of any of the
representations, warranties or covenants contained in such agreements, except:
confidentiality obligations, non-competition provisions applicable to certain
stockholders, transfer restrictions on the Common Stock received in the
Acquisitions and termination of all dealership guarantees of stockholder debt.

As part of the Stock Purchase Agreements, certain stockholders of the
Founding Companies have agreed to enter into the employment agreements and/or
the lease agreements described elsewhere in this Prospectus. See
"Management -- Executive Compensation; Employment Agreements", and "Certain
Transactions -- Leases". In connection with their employment with the Company,
certain of such stockholders will receive options to purchase Common Stock. See
"Management -- 1996 Stock Incentive Plan". In addition, certain stockholders of
the Founding Companies, including Messrs. Howard, McCall, Smith and
Hollingsworth and certain of the general managers and key employees of the
Founding Companies, have agreed not to compete with the Combined Company for
five years from the closing of the Acquisitions. The aggregate valueSee "Management -- Executive
Compensation; Employment Agreements". For a discussion of the consideration to
be received by officers, directors and 5% stockholders in connection with the
Acquisitions, see "Summary -- Consideration Received by Related Parties".

The consideration to be paid by the Combined Company in the Acquisitions is
approximately $$5.4 million (basedof cash and 9,079,084 shares of Common Stock. The
Combined Company is recording approximately $26.8 million of goodwill in
connection with the Acquisitions. The consideration to be paid by Group 1
Automotive for each of the Founding Companies was determined by negotiations
among the principals of the Founding Companies as to the relative value of each
of the Founding Companies. As such, no one individual determined the
consideration to be paid in connection with the Acquisitions. Group 1 Automotive
and the Founding Companies did not use an independent third party to determine
the relative values of each of the Founding Companies but agreed among
themselves on the values attributable to each of the Founding Companies based on
an evaluation of each of the Founding Companies' operating results and prospects
for growth.

The Howard Group has entered into an agreement to purchase a Chevrolet
dealership in Tulsa, Oklahoma (the "Tulsa Dealership"). The consideration to be
paid by the Combined Company in connection with this acquisition is as follows:
(i) assumption of the Tulsa Dealership's liabilities, which consist of a $2.5
million loan made by Mr. Howard to such dealership bearing interest at the prime
rate plus 100 basis points and (ii) 592,303 shares of Common Stock (having a
value of approximately

23
25

$4.2 million based on the 35% discounted assumed initial public offering priceprice)
to be issued in the Acquisitions. See "Certain Transactions".

GM has denied its approval of $ per sharethis acquisition due to the Howard Group's
failure to meet GM's required CSI score levels. A portion of the shares of
Common Stock to be received by Mr. Howard in the Acquisitions is attributable to
the anticipated future value of the Tulsa Dealership. The 592,303 shares of
Common Stock to be issued to Mr. Howard in connection with the Acquisitions,
representing the consideration to be paid to Mr. Howard for the Combined
Company's acquisition of the Tulsa Dealership, will be held in escrow pending
consummation of the Combined Company's acquisition of the Tulsa Dealership.

The Howard Group's acquisition of the Tulsa Dealership will be consummated
upon receipt of GM approval for such acquisition. Upon consummation of this
acquisition, the escrowed shares will be released to Mr. Howard. However, if
such acquisition is not consummated with GM's approval within two years of the
Offering, the Combined Company's agreement to acquire the Tulsa Dealership will
terminate, the escrowed shares will be distributed pro rata to the stockholders
of the Founding Companies and Mr. Howard will retain the right to acquire the
Tulsa Dealership. This pro rata distribution will be allocated among the
Founding Groups as follows: the McCall Group, 161,834 shares; the Smith Group,
190,246 shares; the Howard Group, 208,129 shares; and the Kingwood Group, 32,094
shares. Thus, the escrowed shares will remain outstanding regardless of whether
the Combined Company's acquisition of the Tulsa Dealership is consummated, and
the Combined Company will receive no additional consideration or assets if the
acquisition of the Tulsa Dealership is not consummated.

The treatment of the escrowed shares and the terms and conditions upon
which such shares are to be released were the subject of negotiations among the
Founding Groups. The Board of Directors of the Combined Company considers the
potential pro rata distribution of the escrowed shares (triggered by the
Combined Company's failure to acquire the Tulsa Dealership) a fair reallocation
of the Common Stock issued in the Acquisitions based upon the relative value of
the contributions made by each Founding Group to the Combined Company.

24
26

The following table sets forth the consideration being paid for each
Founding Group:

CONSIDERATION
----------------------------
COMMON STOCK CASH VALUE(1)
------------ ---------- -----------

Howard Group........................... 3,574,472(2) $2,300,000 $27,857,475
McCall Group........................... 2,318,826 -- 16,579,606
Smith Group............................ 2,725,933 -- 20,922,097
Kingwood Group......................... 459,853 $3,100,000 6,387,949
--------- ---------- -----------
Total........................ 9,079,084 $5,400,000 71,747,127
========= ========== ===========

- ---------------

(1) The value of the shares of Common Stock issued in connection with the
Acquisitions (other than the Common Stock to be sold by the Selling
Stockholder) was discounted by 35% from the assumed initial public offering
price to give effect to the two year lock-up that each stockholder of the
Founding Companies entered into in connection with the Acquisitions, see "Group 1 Automotive, Inc. -- Pro
Forma Financial Information -- NotesAcquisitions. This
discount was based on an independent valuation study as to Pro Forma Financial Statements"),
payable in $5.4 millionthe impact of cash and 9,123,890 sharesthe
restrictions on the value of the Common Stock. The
Combined Company is recording approximately $30.5 million of goodwill in
connection with the Acquisitions. The consideration to be paid by the Combined
Company for the Founding Companies was determined by negotiations among the
Company and representatives of the Founding Companies and was based primarily
upon the net income of each Founding Company.

The following table sets forth the consideration being paid for each
Founding Group:

CONSIDERATION
----------------------------
COMMON STOCK CASH TOTAL VALUE(1)
------------ ---------- --------------

Howard Group........................... 3,619,278 $2,300,000 $
McCall Group........................... 2,318,826 --
Smith Group............................ 2,725,933 --
Kingwood Group......................... 459,853 $3,100,000
--------- ---------- ----------
Total........................ 9,123,890 $5,400,000 $
========= ========== ==========

19
21

- ---------------

(1) The cash value ofIf the shares of Common Stock
issued as consideration forin the Acquisitions is based uponwere valued at an assumed initial public offering
price of $$11.00 per share, discountedthe value of the consideration paid in the
Acquisitions would be: Howard Group -- $41,619,192; McCall
Group -- $25,507,086; Smith Group -- $29,985,263 and Kingwood
Group -- $8,158,383.

(2) Includes 592,303 shares of Common Stock issued to give effectMr. Howard in the
Acquisitions as payment for the Tulsa Dealership. These shares will be held
in escrow pending the consummation of the Combined Company's acquisition of
the Tulsa Dealership. GM has denied its approval of this acquisition due to
the Howard Group's failure to meet GM's required CSI score levels. The
Combined Company's acquisition of the Tulsa Dealership will be consummated
upon receipt of GM approval for such acquisition. Upon consummation of this
acquisition, the escrowed shares will be released to Mr. Howard. However, if
such acquisition is not consummated with GM's approval within two year lock-up that
each stockholderyears of
the Acquisitions, the escrowed shares will be distributed pro rata to the
stockholders of the Founding Companies entered into in connection withand Mr. Howard will retain the Acquisitions.right
to acquire the Tulsa Dealership. This pro rata distribution will be
allocated among the Founding Groups as follows: the McCall Group, 161,834
shares; the Smith Group, 190,246 shares; the Howard Group, 208,129 shares;
and the Kingwood Group, 32,094 shares. See also "Risk Factors -- Risks
Relating to Failure to Meet Manufacturer CSI Scores".

In connection with Acquisitions, all related party receivables and payables
are being settled. Such transactions will result in a net payment of $19,720, as
of June 30, 1997, by the McCall Group to Mr. McCall. Additionally, as part of
the Acquisitions, certain Founding Companies that are S corporations will distribute an aggregate of
approximately $6.2 million offrom pre-acquisition S corporation accumulated
earningsadjustment accounts to itstheir stockholders as follows: $4.5 million to the
stockholders of the Howard Group (including approximately $3.4 million to Mr.
Howard), $1.3 million to the stockholders of the Smith Group (including $337,500
to Mr. Smith) and $0.4 million to the stockholders of the Kingwood Group.Group
(including $97,104 to Mr. Hollingsworth and $97,104 to Mr. Duncan). In addition,
in connection with the Acquisitions, Mr. Howard intends to acquire certain
nonoperating assets (recreational vehicles and

25
27

properties) owned by the Howard Group for $2.0 million whichand pay the Combined Company approximately
$2.0 million. The Combined Company believes to
approximatethat $2.0 million approximates the
fair market value forof the assets. The Combined Company believes that these assets
approximate fair market value because the assets are being sold to Mr. Howard at
a price equal to their net book value and the majority of such assets were
acquired by the Howard Group within the last 18 months.

In connection with the Acquisitions, the Combined Company anticipates
reductionsincreases in selling, generalrevenues and administrative expenses anddecreases in cost of sales and increases in other dealership
revenue from reductions in salary, benefits and other paymentsrelated to certain third
party products sold by the ownersdealerships. Certain of the principals of the
Founding GroupsCompanies currently have agreements in place that decrease the fees and
commissions paid to which the owners have agreed to upondealerships for sales of certain finance and insurance
products and increase the consummationcost of the Acquisitions.certain aftermarket products. These
reductions would havearrangements resulted in a reduction in
expensesthe payment of $732,916 to Mr. McCall and $728,647 to
Mr. Whalen during the combined Founding Groups of approximately $5.0 million inyear ended December 31, 1996 and $2.1 million for$357,144 to Mr. McCall
and $404,020 to Mr. Whalen during the six months ended June 30, 1997. Upon
completion of the Acquisitions, such agreements will be terminated and the
Combined Company will recognize an immediate increase in revenues and decrease
in cost of sales related to the products sold.

26
28

The following is a description of each of the Founding Groups and the
dealerships that they each own.

THE HOWARD GROUP. The Howard Group is one of the largest dealership groups
inown:

FOUNDING GROUP FOUNDING COMPANY FRANCHISE LOCATION
- -------------- ---------------- --------- --------

Howard Group Howard Pontiac-GMC, Inc. Chrysler Oklahoma City,
("Bob Howard Automall") Eagle Oklahoma consisting of Acura, Chevrolet, Chrysler, Dodge, Eagle,
GMC
Isuzu
Jeep
Mazda
Plymouth
Pontiac

Bob Howard Chevrolet, Inc. Chevrolet Oklahoma City,
Oklahoma

Bob Howard Automotive-H, Inc. Honda Oklahoma City,
("Bob Howard Honda/Acura") Acura Oklahoma

Bob Howard Motors, Inc. Toyota Oklahoma City,
("Bob Howard Toyota") Oklahoma

Bob Howard Dodge, Inc. Dodge Oklahoma City,
Oklahoma

McCall Group Southwest Toyota, Inc. Toyota Houston, Texas
("Sterling McCall Toyota")

SMC Luxury Cars, Inc. Lexus Houston, Texas
("Sterling McCall Lexus")

Smith Group Mike Smith Autoplaza, Inc. GMC Beaumont, Texas
Honda
Kia
Lincoln
Mercury
Mitsubishi
Oldsmobile

Smith, Liu & Kutz, Inc. Mitsubishi Austin, Texas
("Town North") Nissan
Suzuki

Courtesy Nissan, Inc. Nissan Richardson, Texas

Smith, Liu & Corbin, Inc. Acura Houston, Texas
("Acura Southwest")

Round Rock Nissan, Inc. Nissan Round Rock, Texas

Kingwood Group Foyt Motors, Inc. Honda Kingwood, Texas
Isuzu
Jeep, Mazda, Plymouth, Pontiac and Toyota dealerships located in Oklahoma
City. Additionally, the Howard Group expects to enter into an agreement to
purchase a Chevrolet dealership in Tulsa, Oklahoma for the assumption of its
liabilities. Robert E. Howard II, the principal owner, has been involved in the
automotive retailing industry for over 28 years. The Howard Group consists of
Howard Pontiac-GMC, Inc., Bob Howard Chevrolet, Inc., Bob Howard Automotive-H,
Inc. (Honda/Acura), Bob Howard Motors, Inc. (Toyota) and Bob Howard Dodge, Inc.

MCCALL GROUP. The McCall Group consists of the second largest Toyota
dealership in the United States, as ranked by 1996 new retail unit sales, and
one Lexus dealership, both located in Houston, Texas. Mr. McCall, the principal
owner, has been involved in the automotive retailing industry for more than

27
years, having been granted the first stand-alone exclusive Toyota dealership in
Houston, Texas. The McCall Group consists of SMC Luxury Cars, Inc. (d.b.a.
Sterling McCall Lexus) and Southwest Toyota, Inc. (d.b.a. Sterling McCall
Toyota).

SMITH GROUP. The Smith Group consists of one Acura dealership in Houston,
Texas, Honda, GMC, Oldsmobile, Mitsubishi, Lincoln, Mercury and Kia dealerships
in Beaumont, Texas, a Nissan dealership in Richardson, Texas (a suburb of
Dallas) and two Nissan dealerships, one Mitsubishi dealership and one Suzuki
dealership in the Austin, Texas area. The Smith family has been in the
automotive retailing business since 1917. The Smith Group consists of Mike Smith
Autoplaza, Inc., Town North Nissan, Inc., Town North Suzuki, Inc., Town North
Mitsubishi, Inc., Courtesy Nissan, Inc., Smith Liu & Corbin, Inc. (d.b.a. Acura
Southwest) and Round Rock Nissan, Inc.

20
22

KINGWOOD GROUP. The Kingwood Group consists of one Honda and one Isuzu
dealership in Kingwood, Texas, a suburb of Houston. The Honda dealership was
established in 1989 and the Isuzu dealership was established in 1996. Mr.
Hollingsworth and John H. Duncan, a director of the Combined Company, own
interests in these dealerships. The Kingwood Group consists of Foyt Motors, Inc.

21
2329

USE OF PROCEEDS

The net proceeds to the Combined Company from the sale of 4,428,136 shares
of Common Stock offered hereby are estimated to be $$41.0 million ($48.4 million
if the Underwriters' over-allotment option is exercised in full) assuming an
initial public offering price of $$11.00 per share, the midpoint of the range of
the initial public offering price set forth on the cover page of this Prospectus
and after deducting the underwriting discount and estimated expenses of the
Offering. Of the net proceeds, approximately $5.4 million will be used to pay
the cash portion of the purchase price for the Acquisitions. In addition,
approximately $$31.4 million will be used to repay indebtedness with maturities
of less than one year with a weighted average interest rate of approximately
8.0%. The remainder of the net proceeds will be used for working capital and
general corporate purposes, including potential acquisitions.purposes.

The Combined Company intends to pursue acquisitions in the future which
will be financed with cash, Common Stock or a combination of both cash and
Common Stock. Although theThe Combined Company has identified and has held preliminary
discussions with severalnumerous potential acquisition candidates, at this
time,candidates. In addition, the
Combined Company has norecently entered into definitive agreements to effect any such acquisitions.acquire two
dealerships in Texas for aggregate payments to the sellers of approximately $9.0
million in cash. These two acquisitions, if consummated, would also require the
Combined Company to incur approximately $13.0 million of floorplan indebtedness
in connection with the purchase of the vehicle inventories of the dealerships.
The agreements are subject to a number of significant conditions, including
Manufacturer approval and completion of a due diligence review of the
dealerships. There can be no assurance that the conditions will be satisfied or
that the transactions will be consummated. The Combined Company is currently negotiatinghas negotiated
and executed an arrangement letter with Chase Securities, Inc. and Comerica Bank
for a $125 million credit facility. The Credit Facility with a major
bank. It is anticipated that the Credit Facility will be a revolving line of
credit of up to $100 million, which may be used for general
corporate purposes, acquisitions, capital expenditures, working capital and
floorplan financing. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources -- Combined Founding Groups"Groups'
Commitments -- Credit Facility".

DIVIDEND POLICY

The Combined Company intends to retain all of its earnings to finance the
growth and development of its business, including future acquisitions, and does
not anticipate paying any cash dividends on its Common Stock for the foreseeable
future. Any future change in the Combined Company's dividend policy will be made
at the discretion of the Board of Directors of the Combined Company and will
depend upon the Combined Company's operating results, financial condition,
capital requirements, general business conditions and such other factors as the
Board of Directors deems relevant. In addition, the Credit Facility will include
restrictions on the ability of the Combined Company to pay dividends without the
consent of the lender. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital
Resources -- Combined Founding Groups" and "Description of Capital Stock".

2228
2430

DILUTION

The pro forma net tangible book value of the Combined Company as of June
30, 1997 was $$1.63 per share of Common Stock. Pro forma net tangible book value
per share is determined by dividing the pro forma tangible net worth of the
Combined Company (pro forma tangible assets less pro forma total liabilities) by
the total number of outstanding shares of Common Stock. After giving effect to
the sale by the Company of the 4,428,136 shares offered hereby and the receipt
of an assumed $$41.0 million of net proceeds from the Offering (based on an
assumed initial public offering price of $$11.00 per share and net of the
underwriting discounts and estimated offering expenses), pro forma net tangible
book value of the Combined Company at June 30, 1997 would have been $$4.00 per
share. This represents an immediate increase in pro forma net tangible book
value of $$2.37 per share to existing stockholders and an immediate dilution of
$$7.00 per share to the new investors purchasing Common Stock in the Offering.
(If all outstanding stock options were exercised, pro forma tangible net book
value would be $3.89 per share.) The following table illustrates the per share
dilution:

Assumed initial public offering price per share............. $$11.00
Pro forma net tangible book value per share before giving
effect to the Offering.................................Offering and the related expenses........ $ 1.63
Increase in pro forma net tangible book value per share
attributable to the Offering........................... 2.37
Pro forma net tangible book value per share after giving
effect to the Offering.................................... 4.00
------
Dilution per share to new investors......................... $ 7.00
======

The following table sets forth, on a pro forma basis as of June 30, 1997,
the number of shares of Common Stock purchased from the Combined Company, the
total consideration paid to the Combined Company and the average price per share
paid to the Combined Company by existing stockholders and new investors
purchasing shares from the Combined Company in the Offering (before deducting
underwriting discounts and commissions and estimated offering expenses):

SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ ----------------------------------------- ---------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ----------- ------- -------- -------- ---------

Existing stockholders........... %stockholders...... 9,529,084 68.3% $15,563,092 24.2% $ % $1.63
New investors...................
Total.................investors.............. 4,428,136 31.7 48,709,496 75.8 11.00
---------- ----- ----------- -----
Total............ 13,957,220 100.0% $$64,272,588 100.0%
========== ===== =========== =====

The foregoing computations assume no exercise of outstanding stock options
granted under the Combined Company's 1996 Stock Incentive Plan. Options to
purchase 1,315,950 shares of Common Stock will have been granted under the 1996
Stock Incentive Plan as of the completion of the Offering, of which are750,950 will
be exercisable at the initial public offering price per share and 565,000 arewill
be exercisable at $2.90 per share. In addition, 684,050 additional shares of
Common Stock are reserved for future issuance under the 1996 Stock Incentive
Plan and 200,000 additional shares of Common Stock are reserved for future
issuance under the 1998 Employee Stock Purchase Plan. See "Management -- 1996
Stock Incentive Plan" and "Management -- 1998 Employee Stock Purchase Plan".

2329
2531

CAPITALIZATION

The following table sets forth, as of June 30, 1997, the historical
capitalization of the Howard Group (the accounting acquiror), the pro forma
capitalization of the Combined Company as of June 30, 1997 and the pro forma as adjusted
to givecapitalization of the Combined Company which gives effect to the issuance and
sale by the Company of the 4,428,136 shares of Common Stock offered hereby (at
an assumed initial public offering price of $$11.00 per share, the midpoint of
the range of the initial public offering price set forth on the cover page of
this Prospectus, and after deducting the underwriting discount and estimated
expenses of the Offering) and the application of a portion of the estimated net
proceeds therefrom to pay existing indebtedness. See "Use of Proceeds". This
table should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the unaudited Pro Forma
Financial Statements of the Combined Company and the related notes thereto
included elsewhere in this Prospectus.

AS OF JUNE 30, 1997
-----------------------------------------------------------------
PRO FORMA
HISTORICAL(1) PRO FORMA AS ADJUSTED
------------- --------- -----------
(IN THOUSANDS)

Short-term debt (including current portion of long-term
debt)....................................................................................................... $37,838 $ 98,806 $ 67,371
Long-term debt..............................................debt........................................... 154 8,220 8,220
------- -------- --------
Total debt........................................debt..................................... 37,992 107,026 75,591
Stockholders' equity:
Preferred Stock, par value $.01 per share, 1,000,000
shares authorized; no shares issued and
outstanding....outstanding......................................... -- -- --
Common Stock, par value $.01 per share, 50,000,000
shares authorized; 9,573,8909,529,084 shares issued and
outstanding, pro forma; 14,002,02613,957,220 shares issued and
outstanding, pro forma as adjusted(1)............................................ 96adjusted(2)............... 492 95 139
Additional paid-in capital................................ 51,449capital............................. 6,623 47,681 87,946
Treasury stock, at cost................................ (809) -- --
Retained deficit.......................................... (4,055)earnings (deficit)............................ 4,521 (3,994) (3,994)
------- -------- --------
Total stockholders' equity........................ 47,490equity..................... 10,827 43,782 84,091
------- -------- --------
Total capitalization.............................. $154,516capitalization........................... $48,819 $150,808 $159,682
======= ======== ========

- ---------------

(1) Reflects the historical capitalization of the Howard Group, the accounting
acquiror. Does not give effect to the distribution of $4.5 million from the
S Corporation accumulated adjustment account which is to be made in
connection with the Acquisitions.

(2) Excludes (i) an aggregate of 565,000 shares of Common Stock subject to
options granted pursuant to the Combined Company's 1996 Stock Incentive Plan
and (ii) 750,950 shares of Common Stock subject to options to be granted to
certain employees and directors of the Combined Company uponprior to completion
of the Offering under the Combined Company's 1996 Stock Incentive Plan. See
"Management -- 1996 Stock Incentive Plan."

24Plan".

30
2632

SELECTED FINANCIAL DATA

Group 1 Automotive will acquire the Founding Groups immediately prior to
the consummation of the Offering. For financial statement presentation purposes,
however, the Howard Group has been identified as the accounting acquiror. The
following selected historical financial data of the Howard Group as of December
31, 1995 and 1996 and for each of the three years in the period ended December
31, 1996, have been derived from the audited financial statements of the Howard
Group included elsewhere in this Prospectus. The following selected historical
financial data for the Howard Group as of December 31, 1992, 1993 and 1994 and
for each of the two years in the period ended December 31, 1993 and as of and
for the six months ended June 30, 1996 and June 30, 1997, have been derived from
the unaudited financial statements of the Howard Group, which have been prepared
on the same basis as the audited financial statements and, in the opinion of the
Howard Group, reflect all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of such data. See the Pro Forma
Financial Statements and the notes thereto included elsewhere in this
Prospectus.

YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------------- ------------------------------
PRO PRO
FORMA FORMA
1992 1993 1994 1995 1996 19961996(1) 1996 1997 1997(1)
-------- -------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

INCOME STATEMENT DATA:
Revenues................ $127,936 $167,252 $227,259 $254,003 $282,016 $825,646 $140,650 $154,045 $450,343
Cost of sales........... 110,303 146,943 198,992 221,773 244,396 712,772 121,654 134,130 389,093
-------- -------- -------- -------- -------- -------- -------- -------- --------
Gross profit.......... 17,633 20,309 28,267 32,230 37,620 112,874 18,996 19,915 61,250
Goodwill amortization... -- -- 21 27 37 853761 15 20 399353
Selling, general and
administrative
expenses.............. 13,931 16,610 24,232 26,139 30,731 93,56693,510 15,017 16,433 50,89350,865
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income from
operations.......... 3,702 3,699 4,014 6,064 6,852 18,45518,603 3,964 3,462 9,95810,032
Other income and expense
Interest expense,
net................. (847) (729) (1,102) (1,604) (1,194) (3,337)(3,576) (680) (808) (979)(1,113)
Other income
(expense), net...... 6 (28) 9 (81) (69) 175 (28) 34 (19)(18)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income before income
taxes............... 2,861 2,942 2,921 4,379 5,589 15,29315,202 3,256 2,688 8,9608,901
Provision for income
taxes................. 553 367 768 744 382 6,3376,305 307 166 3,6973,655
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net income............ $ 2,308 $ 2,575 $ 2,153 $ 3,635 $ 5,207 $ 8,9568,897 $ 2,949 $ 2,522 $ 5,2635,246
======== ======== ======== ======== ======== ======== ======== ======== ========
Earnings per share...... $ .64.62 $ .37.36
Weighted average shares
outstanding........... 14,002 14,30014,373 14,373

AS OF JUNE 30, 1997
AS OF DECEMBER 31, ----------------------------
------------------------------------------------ PRO PRO FORMA AS
1992 1993 1994 1995 1996 FORMA(2) ADJUSTED(2)(3)(4)
-------- ------- ------- ------- ------- -------- -----------------
(IN THOUSANDS)

BALANCE SHEET DATA:
Working capital................................. $ 2,600 $ 2,435 $ 2,356 $ 4,708 $ 6,436 $ (551) $ 43,927
Inventories..................................... 24,101 23,180 34,699 39,573 47,674 107,260 107,260
Total assets.................................... 32,938 32,955 51,124 61,641 72,874 210,422206,713 206,701
Total debt, including current portion........... 23,355 21,199 31,601 37,320 42,887 107,026 75,591
Stockholders' equity............................ 3,779 3,637 5,346 8,620 12,210 47,49043,782 84,091

- ---------------

(1) Gives effect to (i) the Acquisitions on an historical basis (ii) the
consummation of the Offering and (iii) certain pro forma adjustments to the
historical financial statements. See Pro Forma Financial Statements and the
notes thereto beginning on page F-3 for a description of the pro forma
adjustments.

(2) Gives effect to the Acquisitions on an historical basis and certain pro
forma adjustments. See Pro Forma Financial Statements and the notes thereto
beginning on page F-3 for a description of the pro forma adjustments.

(3) Assumes that the Underwriters' over-allotment option is not exercised. See
"Underwriting".

(4) Gives effect to the sale of the shares offered by the Combined Company
hereby and the application of the net proceeds therefrom. See "Use of
Proceeds".

2531
27

SUMMARY33

OTHER FINANCIAL DATA

Group 1 Automotive will acquire the Founding Groups immediately prior to
the consummation of the Offering. For financial statement purposes, however, the
Howard Group has been identified as the accounting acquiror. The following
summary financial data presents, for the year ended December 31, 1996, and as of and for
the six months ended June 30, 1997, certain historical and pro forma data for
the Founding Groups. See "Selected Financial Data" and the Pro Forma Financial
Statements and the notes thereto included elsewhere in this Prospectus.

FOR THE YEAR ENDED DECEMBER 31, 1996
------------------------------------------------------------
HOWARD MCCALL SMITH KINGWOOD PRO FORMA(1)
-------- -------- -------- -------- ------------
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)

INCOME STATEMENT DATA(2):
Revenues
New vehicle sales.................. $164,979 $166,382 $124,174 $13,784 $469,318
Used vehicle sales................. 88,477 90,895 60,579 18,075 258,027
Parts & service sales.............. 21,173 24,454 28,631 2,925 77,184
Other dealership revenues, net..... 7,387 6,811 4,895 1,165 21,117
-------- -------- -------- ------- --------
Total revenues.................. 282,016 288,542 218,279 35,949 825,646
Cost of sales........................ 244,396 249,560 189,169 30,640 712,772
-------- -------- -------- ------- --------
Gross profit.................... 37,620 38,982 29,110 5,309 112,874
Goodwill amortization................ 37 -- 67 -- 853761
Selling, general and administrative
expenses........................... 30,731 35,072 23,644 3,997 93,56693,510
-------- -------- -------- ------- --------
Income from operations.......... 6,852 3,910 5,399 1,312 18,45518,603
Other income and expense
Interest expense, net.............. (1,194) (2,748) (1,710) (439) (3,337)(3,576)
Other Income (expense), net........ (69) (45) 223 67 175
-------- -------- -------- ------- --------
Income before taxes............. 5,589 1,117 3,912 940 15,29315,202
Provision for income taxes........... 382 178 678 41 6,3376,305
-------- -------- -------- ------- --------
Net income...................... $ 5,207 $ 939 $ 3,234 $ 899 $ 8,9568,897
======== ======== ======== ======= ========
Earnings per share................... $ 0.640.62
Weighted average shares
outstanding........................ 14,00214,373
OTHER DATA:
Gross margin......................... 13.3% 13.5% 13.3% 14.8% 13.7%
Operating margin..................... 2.4% 1.4% 2.5% 3.6% 2.2%2.3%
Pre-tax margin....................... 2.0% 0.4% 1.8% 2.6% 1.9%1.8%
New vehicles sold.................... 8,181 6,458 5,983 756 21,378
Retail used vehicles sold............ 7,779 4,496 3,844 1,101 17,220

2632
2834

FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
----------------------------------------------------------
PRO
HOWARD MCCALL SMITH KINGWOOD FORMA(1)
--------- --------- --------- --------- ----------
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)

INCOME STATEMENT DATA(2):
Revenues
New vehicle sales................... $ 84,922 $ 81,609 $ 75,203 $10,095 $251,830
Used vehicle sales.................. 54,354 49,796 35,153 9,264 148,567
Parts & service sales............... 10,763 12,305 14,082 1,251 38,400
Other dealership revenues, net...... 4,006 3,243 3,021 634 11,546
-------- -------- -------- ------- --------
Total revenues................... 154,045 146,953 127,459 21,244 450,343
Cost of sales......................... 134,130 127,276 109,914 18,275 389,093
-------- -------- -------- ------- --------
Gross profit..................... 19,915 19,677 17,545 2,969 61,250
Goodwill amortization................. 20 -- 28 4 399353
Selling, general and administrative
expenses............................ 16,433 17,546 13,818 2,416 50,89350,865
-------- -------- -------- ------- --------
Income from operations........... 3,462 2,131 3,699 549 9,95810,032
Other income and expense
Interest expense, net............... (808) (504) (941) (93) (979)(1,113)
Other Income (expense), net......... 34 (34) (19) -- (19)(18)
-------- -------- -------- ------- --------
Income before taxes.............. 2,688 1,593 2,739 456 8,9608,901
Provision for income taxes............ 166 637 531 21 3,6973,655
-------- -------- -------- ------- --------
Net income....................... $ 2,522 $ 956 $ 2,208 $ 435 $ 5,2635,246
======== ======== ======== ======= ========
Earnings per share.................... $ 0.370.36
Weighted average shares............... 14,30014,373
OTHER DATA:
Gross margin.......................... 12.9% 13.4% 13.8% 14.0% 13.6%
Operating margin...................... 2.2% 1.5% 2.9% 2.6% 2.2%
Pre-tax margin........................ 1.7% 1.1% 2.1% 2.1% 2.0%

New vehicles sold..................... 4,093 3,037 3,972 523 11,625
Retail used vehicles sold............. 4,312 2,149 2,181 561 9,203

- ---------------

(1) Pro forma information gives effect to (i) the Acquisitions on an historical
basis, (ii) the consummation of the Offering, and (iii) certain pro forma
adjustments to the historical financial statements. See Pro Forma Financial
Statements and the notes thereto beginning on page F-3 for a description of
the pro forma adjustments.

2733
2935

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Founding
Groups' Financial Statements and related notes thereto and "Selected Financial
Data" appearing elsewhere in this Prospectus.

OVERVIEW

The Combined Company was founded to become a leading operator and
consolidator in the highly fragmented automotive industry. The Combined Company
owns 30 automobile dealerships located in Texas and Oklahoma. The Combined
Company represents 21 American and Asian brands including Acura, Chevrolet,
Chrysler, Dodge, Eagle, GMC, Honda, Isuzu, Jeep, Kia, Lexus, Lincoln, Mazda,
Mercury, Mitsubishi, Nissan, Oldsmobile, Plymouth, Pontiac, Suzuki and Toyota.
Additionally, the Combined Company provides maintenance and repair services at
its 30 dealerships and five collision service centers. The Combined Company
utilizes approximately 500 service bays in providing these services. The
Combined Company is experiencing significant momentum in its financial results.
From 1994 to 1996, the Combined Company's pro forma revenues increased by $172.1$172.5
million, or 26.4%, to $824.8$825.6 million from $652.7$653.1 million. During this period,
pro forma gross profit increased $27.0$27.5 million, or 32.1%32.2%, to $111.0$112.9 million from
$84.0$85.4 million, to 13.5%13.7% from 12.9%13.1% of revenues. The Combined Company expects
that a significant portion of its future growth will be derived from
acquisitions of additional dealerships.

The Combined Company plans to achieve its goal of becoming a leading
consolidator, while maintaining its high operating standards in the automotive
retailing industry, by (i) emphasizing growth through acquisitions and (ii)
implementing an operating strategy that focuses on decentralized dealership
operations, nationally centralized administrative functions, the expansion of
higher margin businesses, a commitment to customer service and the
implementation of new technology initiatives. By complementing the Combined
Company's industry leaders, management talent and proven operating capabilities
with its corporate management team which is experienced in achieving and
managing long-term growth in a consolidation environment, the Combined Company
believes that it is in a strong position to execute this strategy.

The Combined Company has 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, extended service contract sales,
documentary fees and after-market product sales. Sales revenues include sales to
retail customers, other dealers and wholesalers. Other dealership revenue
includes revenue from the sale of financing, insurance and extended service
contracts, net of a provision for anticipated chargebacks and documentary fees
charged to customers.

The Combined Company's gross profit will vary as the Combined Company's
merchandise mix (the mix between new vehicle sales, used vehicle sales, parts
and service sales, collision repair services and other dealership revenues)
changes. The gross margin realized by the Combined Company on the sale of its
products and services generally varies between approximately 6.5% and 60.0%,
with new vehicle sales generally resulting in the lowest gross margin and parts
and service sales generally resulting in the highest gross margin. Revenues from
other dealership revenues contribute a disproportionate share of gross,
operating and pre-tax margins. When the Combined Company's new vehicle sales
increase or decrease at a rate greater than the Combined Company's other revenue
sources, the Combined Company's gross margin will respond inversely. Factors
such as seasonality, weather, cyclicality and manufacturers' advertising and
incentives may impact the Combined Company's merchandise mix and, therefore
influence the Combined Company's 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

34
36

of interest credits received from certain manufacturers and interest income
earned. The Founding Groups have been managed throughout the periods presented
as independent private companies and their

28
30 results of operations reflect
different tax structures (S Corporations and C Corporations) which have
influenced, among other things, their historical levels of owners' compensation.
These owners and certain key employees have agreed to certain reductions in
their compensation and benefits in connection with the organization of the
Combined Company.

Group 1 Automotive, which has conducted nolimited operations to date other
than in connection with the Offering, intends to integrate certain functions
over a period of time and install practices that have been successful at other
franchises and in other retail segments ("best practices"). This integration 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 the Combined
Company's acquisition strategy. These various costs and possible cost-savings
and revenue enhancements may make historical operating results not comparable
to, or indicative of, future performance.

RESULTS OF OPERATIONS --PRO FORMA COMBINED FOUNDING GROUPSGROUPS' DATA

The pro forma combined Founding Groups' statements of operations data for 1994, 1995 and 1996 and
the six months ended June 30, 1996, and June 30, 1997, do not purport to present
the combined Founding Groups in accordance with generally accepted accounting
principles, but represent a summation of the revenues, cost
of sales, gross profit and selling, general and administrative expensescertain data of the individual Founding
Groups on an historical basis excludingincluding the effects of the pro forma
adjustments. This data will not be comparable to and may not be indicative of
the Combined Company's post-combination results of operations because (i) the
Founding Groups were not under common control of management and had different
tax structures (S Corporations and C Corporations) during the periods presented
and (ii) the Combined Company will use the purchase method to establish a new
basis of accounting to record the Acquisitions.

The following tabletables sets forth certain unaudited pro forma combined data
of the Founding Groups on an historical basis and excludes the effects of pro forma
adjustments for the periods indicated:

COMBINED FOUNDING GROUPS STATEMENTS OF OPERATIONS DATA (UNAUDITED)

YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1994 1995 1996
------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)

Revenues:
New vehicle sales.................. $391,709 60.0% $422,348 58.0%57.9% $469,318 56.9%56.8%
Used vehicle sales................. 184,179 28.2 222,373 30.5 258,027 31.3
Parts and service sales............ 61,024 9.49.3 65,599 9.0 77,184 9.3
Other dealership revenues, net..... 15,780 2.4 18,28816,228 2.5 20,258 2.519,033 2.6 21,117 2.6
-------- ------ -------- ------ -------- ------
Total revenues............... 652,692653,140 100.0 728,608729,353 100.0 824,787825,646 100.0
Cost of sales....................... 568,684 87.1 633,039567,729 86.9 713,765 86.5632,100 86.7 712,772 86.3
-------- ------ -------- ------ -------- ------
Gross profit........................ 84,008 12.9 95,569 13.1 111,022 13.5
Selling, general and administrative
expenses........................... $ 71,734 11.0%85,411 13.1% $ 80,311 11.0% $ 93,549 11.3%97,253 13.3% $112,874 13.7%
======== ====== ======== ====== ======== ======

SIX MONTHS ENDED JUNE 30,
---------------------------------------
1996 1997
------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- -------
(DOLLARS IN THOUSANDS)

Revenues:
New vehicle sales.................. $227,170 56.2% $251,830 56.0%55.9%
Used vehicle sales................. 129,602 32.132.0 148,567 33.0
Parts and service sales............ 36,667 9.1 38,400 8.68.5
Other dealership revenues, net..... 10,51210,933 2.7 11,546 2.6 10,904 2.4
-------- ------ -------- ------
Total revenues............... 403,951404,372 100.0 449,701450,343 100.0
Cost of sales....................... 348,982348,486 86.2 389,093 86.4 389,596 86.6
-------- ------ -------- ------
Gross profit........................ 54,969 13.6 60,105 13.4
Selling, general and administrative
expenses........................... $ 45,529 11.3%55,886 13.8% $ 50,265 11.2%61,250 13.6%
======== ====== ======== ======

29NEW VEHICLE DATA

PRO FORMA COMBINED COMPANY'S NEW VEHICLE DATA
----------------------------------------------------
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)

Retail unit sales................... 19,361 20,357 21,378 10,391 11,625
Retail sales revenue................ $391,709 $422,348 $469,318 $227,170 $251,830
Gross profit........................ $ 25,802 $ 29,252 $ 34,421 $ 16,602 $ 18,819
Gross margin........................ 6.6% 6.9% 7.3% 7.3% 7.5%
Average gross profit per retail unit
sold.............................. $ 1,333 $ 1,437 $ 1,610 $ 1,598 $ 1,619

35
37

USED VEHICLE DATA

PRO FORMA COMBINED COMPANY'S USED VEHICLE DATA
----------------------------------------------------
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)

Retail unit sales................... 13,147 15,358 17,220 8,705 9,203
Retail sales revenue(1)............. $147,914 $185,665 $219,183 $110,091 $120,854
Gross profit........................ $ 14,594 $ 17,560 $ 21,358 $ 11,014 $ 10,655
Gross margin........................ 9.9% 9.5% 9.7% 10.0% 8.8%
Average gross profit per retail
unit sold......................... $ 1,110 $ 1,143 $ 1,240 $ 1,265 $ 1,158

- ---------------

(1) Excludes wholesale revenues.

PARTS AND SERVICE DATA

PRO FORMA COMBINED COMPANY'S PARTS AND SERVICE DATA
----------------------------------------------------
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)

Sales revenue....................... $ 61,024 $ 65,599 $ 77,184 $ 36,667 $ 38,400
Gross profit........................ $ 28,787 $ 31,408 $ 35,978 $ 17,337 $ 20,230
Gross margin........................ 47.2% 47.9% 46.6% 47.3% 52.7%

SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996

REVENUES. Revenues increased $45.7$45.9 million, or 11.3%11.4%, from $404.0$404.4 million
for the six months ended June 30, 1996 to $449.7$450.3 million for the six months
ended June 30, 1997. New vehicle sales increased $24.6 million, or 10.8%, from
$227.2 million for the six months ended June 30, 1996 to $251.8 million for the
six months ended June 30, 1997. The increase is primarily attributable to new
franchise operations, strong customer acceptance of the Combined Company's
products, particularly Lexus and Nissan, and successful marketing efforts. The
new franchise operations include a Dodge franchise acquired by the Howard Group
in May 1996 ("Bob Howard Dodge") and a new Nissan franchise awarded to the Smith
Group during 1996. Used vehicle sales increased $19.0 million, or 14.7%, from
$129.6 million for the six months ended June 30, 1996 to $148.6 million for the
six months ended June 30, 1997. This increase is primarily attributable to the
new franchise operations and successful marketing efforts. Parts and service
sales increased $1.7 million, or 4.6%, from $36.7 million for the six months
ended June 30, 1996 to $38.4 million for the six months ended June 30, 1997. The
increase is attributable to the new franchise operations and a growing customer
base at the McCall Lexus franchise. Other dealership revenues increased $0.4$0.6
million or 3.8%5.5% from $10.5$10.9 million for the six months ended June 30, 1996 to
$10.9$11.5 million for the six months ended June 30, 1997. The increase is due
primarily to an increase in the number of retail new and used vehicle sales.

GROSS PROFIT. Gross profit increased $5.1$5.4 million, or 9.3%9.7% from $55.0$55.9
million for the six months ended June 30, 1996 to $60.1$61.3 million for the six
months ended June 30, 1997. The increase is attributable to increased sales
offset by a reduced gross margin. The gross margin declined from 13.6%13.8% for the
six months ended June 30, 1996 to 13.4%13.6% for the six months ended June 30, 1997.
The reduced gross margin resulted primarily from new anda decline in used vehicle sales
being a greater percentage of total revenue.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $4.8 million, or 10.5%, from $45.5 million for
the six months ended June 30, 1996 to $50.3 million for the six months ended
June 30, 1997. The increase is primarily attributable to the new franchise
operations and to variable incentive pay to employees which is related directly
to thegross
margin, offset by an increase in revenues. As a percentage of revenues, selling, generalnew vehicle and administrative expenses declined from 11.3% for the six months ended June 30,
1996 to 11.2% for the six months ended June 30, 1997.parts and service gross
margins.

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

REVENUES. Revenues increased $96.2 million, or 13.2%, from $728.6$729.4 million
for the year ended December 31, 1995 to $824.8$825.6 million for the year ended
December 31, 1996. New vehicle revenues

36
38

increased $47.0 million, or 11.1%, from $422.3 million for the year ended
December 31, 1995 to $469.3 million for the year ended December 31, 1996. This
increase is primarily attributable to increased sales at all but one of the
Founding Groups with the McCall Group accounting for $40.6 million of the
increase. New and expanded franchise operations, primarily the Howard Group's
new Dodge franchise, successful marketing efforts and strong customer acceptance
of the Combined Company's products, particularly Toyota, Lexus and Chevrolet,
contributed to the increase. The Smith Group had an $8.0 million decline in new
vehicle revenues caused by reduced unit sales at its Dallas Nissan franchise.
Used vehicle revenues increased $35.6 million, or 16.0%, from $222.4 million for
the year ended December 31, 1995 to $258.0 million for the year ended December
31, 1996. All of the Founding Groups' had increases in used vehicle revenues
with the McCall Group accounting for $22.6 million of the increase. The increase
is attributable primarily to expanded operations at McCall Toyota, a strong used vehicle market and successful
marketing efforts. Parts and service sales increased $11.6 million, or 17.7%,
from $65.6 million for the year ended December 31, 1995 to $77.2 million for the
year ended December 31, 1996. The increase is primarily attributable to new and
expanded operations at McCall Lexus, and increased vehicle sales. Other
dealership revenues increased $2.0$2.1 million or 10.9%11.1% from $18.3$19.0 million for the
year ended December 31, 1995 to $20.3$21.1 million for the year ended December 31,
1996. The increase is due primarily to an increase in the number of retail new
and used vehicle sales.

30
32

GROSS PROFIT. Gross profit increased $15.4$15.6 million, or 16.1%16.0%, from $95.6$97.3
million for the year ended December 31, 1995 to $111.0$112.9 million for the year
ended December 31, 1996. The increase is attributable to increased revenues and
an increase in gross margin from 13.1%13.3% for the year ended December 31, 1995 to
13.5%13.7% for the year ended December 31, 1996. The increase in gross margin is
primarily due to a change in the merchandise mix as parts and service sales
became a greater percentage of total revenues. Additionally, gross margin on new
retail vehicle sales increased from 6.8%6.9% for the year ended December 31, 1995 to
7.1%7.3% for the year ended December 31, 1996. The gross margin on used retail
vehicle sales increased from 9.5% for the year ended December 31, 1995, to 9.7%
for the year ended December 31, 1996. However, gross margin on parts and service
sales decreased from 47.9% for the year ended December 31, 1995 to 46.6% for the
year ended December 31, 1996.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $13.2 million, or 16.4%, from $80.3 million
for the year ended December 31, 1995 to $93.5 million for the year ended
December 31, 1996. The increase is directly related to the increase in revenues
and the expenses associated with two new franchises awarded in 1996. As revenues
increase, the Combined Company generally incurs a greater amount of variable
incentive pay to employees. Additionally, the Combined Company invested more in
marketing, which directly contributed to the increased revenue. As a percentage
of revenues, selling, general and administrative expenses increased from 11.0%
for the year ended December 31, 1995 to 11.3% for the year ended December 31,
1996.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

REVENUES. Revenues increased $75.9$76.3 million, or 11.6%11.7%, from $652.7$653.1 million
for the year ended December 31, 1994 to $728.6$729.4 million for the year ended
December 31, 1995. New vehicle revenues increased $30.6 million, or 7.8% from
$391.7 million for the year ended December 31, 1994 to $422.3 million for the
year ended December 31, 1995. The increase is the result of increased sales at
all but one of the Founding Groups. The increase in revenue is attributable to
new franchise operations at Bob Howard Honda/Acura which was acquired during
1994, successful marketing efforts and strong customer acceptance of the
Combined Company's products. Used vehicle revenues increased $38.2 million, or
20.7%, from $184.2 million for the year ended December 31, 1994 to $222.4
million for the year ended December 31, 1995. The increase is primarily
attributable to the new franchise operations and successful marketing efforts.
Parts and service sales increased $4.6 million, or 7.5%, from $61.0 million for
the year ended December 31, 1994 to $65.6 million for the year ended December
31, 1995. The increase is primarily attributable to the new dealership
operations and increased vehicle sales. Other dealership revenues increased $2.5$2.8
million or 15.8%17.3% from $15.8$16.2 million for the year ended December 31, 1994 to
$18.3$19.0 million for the year ended December 31, 1995. The increase is due
primarily to an increase in the number of retail new and used vehicle sales.

GROSS PROFIT. Gross profit increased $11.6$11.9 million, or 13.8%13.9%, from $84.0$85.4
million for the year ended December 31, 1994 to $95.6$97.3 million for the year ended
December 31, 1995. The increase is attributable to increased revenues and an
improved gross margin. Changes in the merchandise mix and certain product gross
margins resulted in the Combined Company's gross margin increasing from 12.9%13.1%
for the year ended December 31, 19961994 to 13.1%13.3% for the year ended December 31,
1995. The gross margin on new retail vehicle sales increased from 6.5%6.6% for the
year ended December 31, 1994 to 6.8%6.9% for the year ended December 31, 1995. The
gross margin for used retail vehicle sales declined from 9.9% for the year

37
39

ended December 31, 1994 to 9.5% for the year ended December 31, 1995. Parts and
service gross margin increased from 47.2% for the year ended December 31, 1994
to 47.9% for the year ended December 31, 1995.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $8.6 million, or 12.0%, from $71.7 million for
the year ended December 31, 1994 to $80.3 million for the year ended December
31, 1995. The increase is primarily attributable to the new franchise operations
and increased variable incentive pay to employees and additional marketing
expenses. As a percentage of revenues, selling, general and administrative
expenses remained constant at 11.0% of total revenues over the same period.

31
33

LIQUIDITY AND CAPITAL RESOURCES -- COMBINED FOUNDING GROUPS

The Combined Company's principal sources of liquidity are cash on hand,
cash from operations and floorplan financing.

CASH FLOWS

On a combined basis, the Founding Groups' net cash flow provided by (used
in) operating activities was $3.9 million, $14.7 million and $6.5 million for
the years ended December 31, 1994, 1995 and 1996, respectively, and $(5.7)
million and $1.9 million for the six months ended June 30, 1996 and June 30,
1997, respectively. Net income plus depreciation and amortization is the primary
source of cash flow from operating activities. Net cash flow from operating
activities declined from $14.7 million for the year ended December 31, 1995, to
$6.5 million for the year ended December 31, 1996. The decline is primarily due
to the usage of funds by the McCall Group to pay down floor plan notes payable
and to increase inventories to support strong sales growth. Net cash flow from
operating activities improved from $(5.7) million for the six months ended June
30, 1996 to $1.9 million for the six months ended June 30, 1997. The improvement
is due primarily to the McCall Group having invested significantly in increased
inventory during the six months ended June 30, 1996.

Net cash used in investing activities by the Founding Groups on a combined
basis was $3.4 million, $2.3 million and $6.9 million for the years ended
December 31, 1994, 1995 and 1996, respectively, and $6.0 million and $1.6
million for the six months ended June 30, 1996 and June 30, 1997, respectively.
Most of the cash used in investing activities during these periods was used to
purchase property and equipment for the McCall Group Lexus franchise's new
collision service center added in 1995, showroom expansions at both of the
McCall Group franchises, facility improvements and equipment purchases for
certain of the Smith Group dealerships and franchise acquisitions at the Howard
Group in 1994 and 1996.

Net cash used in financing activities by the Founding Groups on a combined
basis was $1.4 million, $2.3 million and $3.6 million for the years ended
December 31, 1994, 1995 and 1996, respectively and $3.0 million and $5.4 million
for the six months ended June 30, 1996 and June 30, 1997, respectively. The
majority of the cash used in financing activities during these periods was for
net repayments of long-term debt and distributions to stockholders offset by
cash provided by stock issuances. The combined cash and cash equivalents of the
Founding Groups decreased $4.1 million from $38.9 million at December 31, 1995
to $34.8 million at December 31, 1996. This decrease is primarily due to
significant net pay downs on floor plan notes payable, increased investments in
inventories and property and equipment and payment of dividends.

ACQUISITION LINE OFGROUPS' COMMITMENTS

CREDIT FACILITY

The Combined Company is currently negotiatinghas negotiated and executed an arrangement letter with
Chase Securities, Inc. and Comerica Bank for a credit facility with a
major bank. It is anticipated that the facility will provide the Combined
Company with a revolving line of credit of up to $100$125 million Credit Facility
which may be used for acquisitions, floorplan financing, general corporate
purposes, acquisitions, capital expenditures and working capitalcapital. The arrangement letter
provides for Chase Securities, Inc. to use commercially reasonable efforts to
assemble a syndicate of financial institutions subsequent to the Offering. Chase
Securities, Inc. and floorplan financing. Loans under this commitment will bear interest
at a designated variable base rate plus margins ranging from to basis
points.Comerica Bank have committed for approximately 50% of the
Credit Facility. At the Combined Company's option, the loansCredit Facility may bear
interest based on a designated London Interbank Offering Rate plus a margin
ranging from 150 to 275 basis points. It is anticipated that the line of credit will matureThe Credit Facility matures three years
from the date the loan is closed.

The Combined Company intends to pursue attractive acquisition
opportunities. The timing, size or successclosed and is secured by certain of any acquisition effort and the
associated potential capital commitments are currently not known, although,
based on current facts and circumstances, management believes the Combined
Company's acquisition program will result in the Combined Company's revenues
increasing significantly. The Combined Company expects to fund future
acquisitions primarily through a combination of working capital, cash flow from
operations, borrowings and issuance of additional equity and/or long-term debt

32
34

obligations. While there can be no assurance, based on current facts and
circumstances, management believes it has adequate cash flows and financing
alternatives to fund its current operations and to implement its acquisition
strategy.assets.

FLOORPLAN FINANCING

As of June 30, 1997, the Combined Company had approximately $97.5 million
of floorplan debt outstanding. The Combined Company intends to repay $$31.4
million of floorplan indebtedness with the proceeds of the Offering. Currently,
the Founding Group's floorplan financing is provided by seven sources. The Combined
Company is negotiatingIn
connection with several lenders to refinance a portion of its
floorplan debt with more favorable terms. Additionally, certain other lenders,
in anticipationthe Offering, all of the Offering, have reduced theCombined Company's floorplan financing
will benefit from interest rate on certain floor
plan financing. Thesereductions. Rate reductions have already become
effective with respect to approximately 75% of the Combined Company's floorplan
debt. The current reductions range between 25 and 225 basis points.
Additionally, subsequent to the Offering, the Combined Company intends to
refinance approximately $50 million in floorplan financing with the Credit
Facility.

LEASES

The Founding Groups lease various facilities and equipment under operating
lease agreements, including leases with related parties. In connection with the
Acquisitions, the Combined Company intends to replace certain of its leases with
new leases that will have terms of 30 years and will be cancelable at the
Combined Company's option ten years from execution of the lease and at the end
of each subsequent five year period. Such leases will initially have the same
rent as the currently existing leases and will be subject to increase every five
years based on a percentage of the consumer price index.Consumer Price Index. See "Certain
Transaction -- Leases". Future minimum lease payments for existing operating
leases are as follows: $6.6 million in 1997, $6.5 million in 1998, $6.0 million
in 1999, $5.2 million in 2000 and $3.9 million in 2001.

INDIVIDUAL FOUNDING GROUPS

The selected historical financial information presented in the tables below
is derived from the respective audited financial statements of the individual
Founding Groups included elsewhere herein. The following discussion should be
read in conjunction with the Financial Statements of the Founding Groups and the
notes thereto appearing elsewhere in this Prospectus. The financial statements
of the Kingwood Group have not been separately included within this Prospectus
because the Kingwood Group does not qualify as a significant subsidiary under
the Securities and Exchange Commission's Staff Accounting Bulletin (SAB) No. 80
and, accordingly, are not required to be presented. The Kingwood Group's results
of operations and statement of financial position are included in the Pro Forma
Financial Statements.

For financial statement presentation purposes, as required by the rules and
regulations of the Securities Act, the Howard Group has been identified as the
accounting acquiror.

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40

RESULTS OF OPERATIONS -- HOWARD GROUP

This group is one of the largest dealership groups in Oklahoma, consisting
of Acura, Chevrolet, Chrysler, Dodge, Eagle, GMC, Honda, Isuzu, Jeep, Mazda,
Plymouth, Pontiac and Toyota dealerships located in Oklahoma City. Robert E.
Howard II, the principal owner, has been involved in the automotive retailing
industry for over 28 years. Bob Howard opened his first dealership in 1978 which
later became the foundation for the Bob Howard Automall ("Bob Howard Automall").
The Bob Howard Automall currently houses the Chrysler, Eagle, GMC, Isuzu, Jeep,
Mazda, Plymouth and Pontiac franchises.

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35

The following table sets forth certain selected financial data and data as
a percentage of revenues for the Howard Group for the periods indicated:

Revenues:
New vehicle sales.................... $136,831 60.2% $151,227 59.5% $164,979 58.5%
Used vehicle sales................... 69,862 30.8 79,448 31.3 88,477 31.4
Parts and service sales.............. 14,402 6.3 16,940 6.7 21,173 7.5
Other dealership revenue, net........ 6,164 2.7 6,388 2.5 7,387 2.6
-------- ----- -------- ----- -------- -----
Total revenues................. 227,259 100.0 254,003 100.0 282,016 100.0
Cost of sales......................... 198,992 87.6 221,773 87.3 244,396 86.7
-------- ----- -------- ----- -------- -----
Gross profit.......................... 28,267 12.4 32,230 12.7 37,620 13.3
Selling, general and administrative
expenses............................. 24,253 10.7 26,166 10.3 30,768 10.9
-------- ----- -------- ----- -------- -----
Income from operations................ 4,014 1.7 6,064 2.4 6,852 2.4
Other income and expense:
Interest expense, net................ (1,102) (0.5) (1,604) (0.6) (1,194) (0.4)
Other income (expense) net........... 9 -- (81) (0.1) (69) --
-------- ----- -------- ----- -------- -----
Income before income taxes............ 2,921 1.2 4,379 1.7 5,589 2.0
Provision (benefit) for income
taxes................................ 768 0.3 744 0.3 382 0.1
-------- ----- -------- ----- -------- -----
Net income............................ $ 2,153 0.9% $ 3,635 1.4% $ 5,207 1.9%
======== ===== ======== ===== ======== =====

Revenues:
New vehicle sales.................... $ 82,523 58.7% $ 84,922 55.1%
Used vehicle sales................... 44,036 31.3 54,354 35.3
Parts and service sales.............. 10,142 7.2 10,763 7.0
Other dealership revenue, net........ 3,949 2.8 4,006 2.6
-------- ----- -------- -----
Total revenues................. 140,650 100.0 154,045 100.0
Cost of sales......................... 121,654 86.5 134,130 87.1
-------- ----- -------- -----
Gross profit.......................... 18,996 13.5 19,915 12.9
Selling, general and administrative
expenses............................. 15,032 10.7 16,453 10.7
-------- ----- -------- -----
Income from operations................ 3,964 2.8 3,462 2.2
Other income and expense:
Interest expense, net................ (680) (0.5) (808) (0.5)
Other income (expense) net........... (28) -- 34 --
-------- ----- -------- -----
Income before income taxes............ 3,256 2.3 2,688 1.7
Provision (benefit) for income
taxes................................ 307 0.2 166 0.1
-------- ----- -------- -----
Net income............................ $ 2,949 2.1% $ 2,522 1.6%
======== ===== ======== =====

SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996

REVENUES. Revenues increased $13.3 million, or 9.5%, from $140.7 million
for the six months ended June 30, 1996 to $154.0 million for the six months
ended June 30, 1997. New vehicle sales increased $2.4 million, or 2.9%, from
$82.5 million for the six months ended June 30, 1996 to $84.9 million for the
six months ending June 30, 1997. The increase is primarily attributable to sales
generated by Bob Howard Dodge and the Toyota franchise which were partially
offset by reduced sales at theBob Howard Automall. Used vehicle sales increased
$10.4 million, or 23.6%, from $44.0 million for the six months ended June 30,
1996 to $54.4 million for the six months ended June 30, 1997. This increase is
attributable to sales generated by Bob Howard Dodge in addition to increased
sales at all of the Howard Group's other franchises. Parts and service sales
increased $0.7 million, or 6.9%, from $10.1 million for the six months ended
June 30, 1996 to $10.8 million for the six months ended June 30, 1997. The
increase is attributable primarily to sales generated by Bob Howard Dodge. Other
dealership revenues increased $0.1 million or 2.6% from $3.9 million for the six
months ended June 30, 1996 to $4.0 million for the six months ended June 30,
1997. The increase is due primarily to an increase in the number of retail used
vehicle sales while the number of retail new vehicle sales was stable.

GROSS PROFIT. Gross profit increased $0.9 million, or 4.7%, from $19.0
million for the six months ended June 30, 1996 to $19.9 million for the six
months ended June 30, 1997. The increase is attributable primarily to increased
sales, offset partially by reduced vehicle gross margins at certain of the
Howard Group's other franchises. The Howard Group's gross margin declined from 13.5%
for the six months ended June 30, 1996 to 12.9% for the six months ended June
30, 1997 due primarily to changesincreased competitive pressures in the merchandise mix.marketplace.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1.5 million or 10.0% from $15.0 million for
the six months ended June 30, 1996 to $16.5 million for the six months ended
June 30, 1997. The increase is primarily attributable to expenses

39
41

incurred by Bob Howard Dodge, which was acquired late in the second quarter of
1996. Selling, general and administrative expenses, as a percentage of total
revenues, remained constant at 10.7% for the six month periods ended June 30,
1996 and June 30, 1997.

INTEREST EXPENSE, NET. Interest expense, net, increased $0.1 million or
14.3% from $0.7 million for the six months ended June 30, 1996 to $0.8 million
for the six months ended June 30, 1997. Interest expense increased primarily due
to interest expense incurred by Bob Howard Dodge and increased vehicle
inventories carried at certain of the Howard Group's franchises.

34
36

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

REVENUES. Revenues increased by $28.0 million, or 11.0% from $254.0 million
for the year ended December 31, 1995 to $282.0 million for the year ended
December 31, 1996. New vehicle sales increased $13.8 million, or 9.1%, from
$151.2 million for the year ended December 31, 1995 to $165.0 million for the
year ended December 31, 1996. The increase is primarily attributable to strong
sales at the Chevrolet franchise and the acquisition of Bob Howard Dodge, offset
by reduced sales at theBob Howard Automall. Used vehicle revenues increased $9.1
million, or 11.5%, from $79.4 million for the year ended December 31, 1995 to
$88.5 million for the year ended December 31, 1996. This increase is
attributable to the acquisition of Bob Howard Dodge and the Howard Group's
successful marketing efforts at all of the Howard Group's other franchises.
Parts and service sales increased $4.3 million, or 25.4%, from $16.9 million for
the year ended December 31, 1995 to $21.2 million for the year ended December
31, 1996. The increase is attributable to increased sales at each of the Howard
Group's franchises and new sales from the acquisition of Bob Howard Dodge. Other
dealership revenues increased $1.0 million or 15.6% from $6.4 million for the
year ended December 31, 1995 to $7.4 million for the year ended December 31,
1996. The increase is due primarily to an increase in the number of retail new
and used vehicle sales.

GROSS PROFIT. Gross profit increased by $5.4 million, or 16.8%, from $32.2
million for the year ended December 31, 1995 to $37.6 million for the year ended
December 31, 1996. The increase is attributable to increased sales and
improvement in the Howard Group's gross profit margin from 12.7% for the year
ended December 31, 1995 to 13.3% for the year ended December 31, 1996. The gross
margin improved as revenues from parts and service and other dealership revenues
became a greater percentage of total revenues.

SELLING, GENERAL AND ADMINISTRATION EXPENSES. Selling, general and
administration expenses increased $4.6 million, or 17.6%, from $26.2 million for
the year ended December 31, 1995 to $30.8 million for the year ended December
31, 1996. The increase is primarily attributable to costs related to the newly
acquired Bob Howard Dodge and variable incentive pay to employees which is
related to the increase in revenues. As a percentage of total revenues, selling,
general and administrative expenses increased from 10.3% for the year ended
December 31, 1995 to 10.9% for the year ended December 31, 1996.

INTEREST EXPENSE, NET. Interest expense, net, decreased $0.4 million, or
25.0%, from $1.6 million for the year ended December 31, 1995 to $1.2 million
for the year ended December 31, 1996. The decrease is attributable to an
approximately 50 basis point decrease in the average floorplan interest rate and
increased manufacturer assistance, partially offset by interest expense incurred
by the newly acquired Bob Howard Dodge.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

REVENUES. Revenues increased by $26.7 million, or 11.7%, from $227.3
million for the year ended December 31, 1994 to $254.0 million for the year
ended December 31, 1995. New vehicle sales increased $14.4 million, or 10.5%,
from $136.8 million for the year ended December 31, 1994 to $151.2 million for
the year ended December 31, 1995. The increase is primarily attributable to
strong sales growth of the Chevrolet franchise due to strong customer acceptance
of Chevrolet products and successful marketing efforts, and the inclusion of a
full year of revenues for the Honda and Acura franchises acquired during 1994.
Used vehicle sales increased $9.5 million, or 13.6%, from $69.9 million

40
42

for the year ended December 31, 1994 to $79.4 million for the year ended
December 31, 1995. This increase is primarily attributable to successful
marketing efforts and the inclusion of a full year of revenues for the Honda and
Acura franchises acquired during 1994. Parts and service sales increased $2.5
million or 17.4% from $14.4 million for the year ended December 31, 1994 to
$16.9 million for the year ended December 31, 1995. The overall increase is
primarily attributable to continued steady growth driven by increased vehicle
sales. Other dealership revenues increased $0.2 million or 3.2% from $6.2
million for the year ended December 31, 1994 to $6.4 million for the year ended
December 31, 1995. The increase is due primarily to an increase in the number of
retail new and used vehicle sales.

35
37

GROSS PROFIT. Gross profit increased by $3.9 million, or 13.8%, from $28.3
million for the year ended December 31, 1994 to $32.2 million for the year ended
December 31, 1995. The increase is primarily attributable to increased sales.
Additionally, the gross margin improved from 12.4% for the year ended December
31, 1994 to 12.7% for the year ended December 31, 1995 due primarily to parts
and service revenues becoming a greater percentage of total revenues.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1.9 million, or 7.8%, from $24.3 million for
the year ended December 31, 1994 to $26.2 million for the year ended December
31, 1995. The increase is primarily attributable to variable incentive pay to
employees which is related directly to the increase in revenues. Selling,
general and administrative expenses declined as a percentage of revenues from
10.7% for the year ended December 31, 1994 to 10.3% for the year ended December
31, 1995.

INTEREST EXPENSE, NET. Interest expense, net, increased $0.5 million, or
45.5%, from $1.1 million for the year ended December 31, 1994 to $1.6 million
for the year ended December 31, 1995. The increase is primarily attributable to
an approximately 170 basis point increase in the average floorplan interest rate
and an increase in inventory to support growing retail sales.

LIQUIDITY AND CAPITAL RESOURCES -- HOWARD GROUP

The Howard Group's principal sources of liquidity are cash on hand, cash
from operations and floor plan financing.

The following table sets forth historical selected information from the
Howard Group statements of cash flows:

SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- ------------------
1994 1995 1996 1996 1997
------- ------ ------- ------- -------
(IN THOUSANDS) (UNAUDITED)

Net cash provided by operating
activities.......................... $ 4,204 $7,197 $ 7,332 $ 1,884 $ 2,406
Net cash used in investing
activities.......................... (3,032) (1,303) (4,615) (4,335) (89)
Net cash used in financing
activities.......................... (157) (520) (1,558) (2,112) (4,059)
------- ------ ------- ------- -------
Net increase (decrease) in cash and
cash equivalents.................... $ 1,015 $5,374 $ 1,159 $(4,563) $(1,742)
======= ====== ======= ======= =======

CASH FLOWS

Total cash and cash equivalents at June 30, 1997, were $9.9 million.

For the three year period ended December 31, 1996, the Howard Group
generated $18.7 million in net cash from operating activities, primarily from
net income plus depreciation and amortization. Net cash flow from operating
activities remained stable for the years ended December 31, 1995 and December
31, 1996.

Net cash from operating activities increased from $1.9 million for the six
months ended June 30, 1996 to $2.4 million for the six months ended June 30,
1997, primarily due to change in inventories, floor plan financing and accounts
payable and accrued liabilities.

41
43

The change in net cash used in investing activities was attributable to
purchases of property and equipment and the purchases of the Honda and Acura
franchises in 1994 and the Dodge franchise in 1996.

The change in net cash used in financing activities was primarily
attributable to dividends paid in excess of cash received from contributions and
stock issuances.

36
38

FLOORPLAN FINANCING

The Howard Group currently obtains floorplan financing for its vehicle
inventory primarily through General Motors Acceptance Corporation ("GMAC"). As
of June 30, 1997, the Howard Group had approximately $37.8 million of floorplan
financing outstanding. The debt bears interest at a rate of prime minus 5075 basis
points. Interest expense on floorplan notes payable, before manufacturer
interest assistance, totaled approximately $2.5$2.4 million, $3.7$3.4 million and $3.6$3.1
million for the year ended December 31, 1994, 1995 and 1996. Manufacturer
interest assistance, which is recorded as a reduction to interest expense,
totaled approximately $1.4 million, $1.9 million and $2.0 million for the years
ended December 31, 1994, 1995 and 1996.

LEASES

The Howard Group leases various real estate, facilities and equipment under
operating lease agreements, including leases with related parties. In connection
with the Acquisitions, the Howard Group intends to replace certain existing
leases with leases that have terms of 30 years and will be cancellable at the
Combined Company's option ten years from execution of the lease and at the end
of each subsequent five year period. Such leases initially will have the same
rent as the existing leases and will be subject to increases every five years
based on a percentage of the consumer price index.Consumer Price Index. See "Certain
Transactions -- Leases". Future minimum lease payments of existing operating
leases are as follows: $2.9 million in 1997, $2.9 million in 1998, $2.5 million
in 1999, $2.2 million in 2000 and $1.7 million in 2001.

OTHER

The Howard Group had working capital of $6.4 million as of December 31,
1996. Historically, the Howard Group has funded its operations with internally
generated cash flow and borrowings from lenders. While there can be no
assurance, based on current facts and circumstances, management believes it has
adequate cash flows and financing alternatives to fund its current operations.

3742
3944

RESULTS OF OPERATIONS -- MCCALL GROUP

This group consists of the second largest Toyota dealership in the United
States, as ranked by 1996 new unit sales, and a Lexus dealership, both located
in Houston, Texas. Sterling B. McCall, Jr., the principal owner, has been
involved in the automotive retailing industry for more than 27 years.

The following table sets forth certain selected financial data and data as
a percentage of revenues for the McCall Group for the periods indicated:

YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1994 1995 1996
------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)

Revenues:
New vehicle sales............... $105,402 59.5% $125,810 57.5% $166,382 57.6%
Used vehicle sales.............. 49,872 28.1 68,332 31.2 90,895 31.5
Parts and service sales......... 17,939 10.1 19,432 8.9 24,454 8.5
Other dealership revenue, net... 4,107 2.3 5,314 2.4 6,811 2.4
-------- ------ -------- ------ -------- ------
Total revenues................ 177,320 100.0 218,888 100.0 288,542 100.0
Cost of sales.................... 152,573 86.0 188,731 86.2 249,560 86.5
-------- ------ -------- ------ -------- ------
Gross profit..................... 24,747 14.0 30,157 13.8 38,982 13.5
Selling, general and
administrative expenses......... 22,477 12.7 27,752 12.7 35,072 12.1
-------- ------ -------- ------ -------- ------
Income from operations........... 2,270 1.3 2,405 1.1 3,910 1.4
Other expense:
Interest expense, net........... (2,463) (1.4) (3,215) (1.5) (2,748) (1.0)
Other expense, net.............. (6) -- (44) -- (45) --
-------- ------ -------- ------ -------- ------
Income (loss) before income
taxes........................... (199) (0.1) (854) (0.4) 1,117 0.4
Provision for income taxes....... 232 0.1 283 0.1 178 0.1
-------- ------ -------- ------ -------- ------
Net income (loss)................ $ (431) (0.2)% (1,137) (0.5)% $ 939 0.3%
======== ====== ======== ====== ======== ======

SIX MONTHS ENDED JUNE 30,
-------------------------------------
1996 1997
----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
(UNAUDITED)

Revenues:
New vehicle sales............... $78,633 57.3% $81,609 55.5%
Used vehicle sales.............. 44,237 32.2 49,796 33.9
Parts and service sales......... 11,042 8.1 12,305 8.4
Other dealership revenue, net... 3,304 2.4 3,243 2.2
------- ----- ------- -----
Total revenues................ 137,216 100.0 146,953 100.0
Cost of sales.................... 118,277 86.2 127,276 86.6
------- ----- ------- -----
Gross profit..................... 18,939 13.8 19,677 13.4
Selling, general and
administrative expenses......... 16,959 12.4 17,546 11.9
------- ----- ------- -----
Income from operations........... 1,980 1.4 2,131 1.5
Other expense:
Interest expense, net........... (1,526) (1.1) (504) (0.4)
Other expense, net.............. (28) -- (34) --
------- ----- ------- -----
Income (loss) before income
taxes........................... 426 0.3 1,593 1.1
Provision for income taxes....... 72 -- 637 0.4
------- ----- ------- -----
Net income (loss)................ $ 354 0.3% $ 956 0.7%
======= ===== ======= =====

SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996

REVENUES. Revenues increased $9.8 million, or 7.1%, from $137.2 million for
the six months ended June 30, 1996 to $147.0 million for the six months ended
June 30, 1997. New vehicle sales increased $3.0 million, or 3.8%, from $78.6
million for the six months ended June 30, 1996 to $81.6 million for the six
months ending June 30, 1997. The increase is primarily attributable to
successful marketing efforts and continued strong customer support of Lexus
products partially offset by a decline in sales at the Toyota franchise, due to
product availability limitations. Used vehicle sales increased $5.6 million, or
12.7%, from $44.2 million for the six months ended June 30, 1996 to $49.8
million for the six months ended June 30, 1997. This increase is primarily
attributable to successful marketing efforts. Parts and service sales increased
$1.3 million, or 11.8%, from $11.0 million for the six months ended June 30,
1996 to $12.3 million for the six months ended June 30, 1997. The increase is
primarily attributable to growth in vehicle sales at the Lexus franchise,
resulting in new parts and service customers. Other dealership revenues declined
$0.1 million or 3.0% from $3.3 million for the six months ended June 30, 1996 to
$3.2 million for the six months ended June 30, 1997. The decline is due
primarily to a slight decline in the number of retail new and used vehicle
sales. New vehicle revenues increased despite the decline in the number of units
sold as higher cost Lexus franchise sales more than offset the reduced Toyota
franchise sales.

GROSS PROFIT. Gross profit increased $0.8 million, or 4.2%, from $18.9
million for the six months ended June 30, 1996 to $19.7 million for the six
months ended June 30, 1997. The increase is due to increased sales offset by a
decline in the gross margin from 13.8% for the six months ended June 30, 1996 to
13.4% for the six months ended June 30, 1997. The decline in gross margin is
primarily due to reduced margins on used vehicle sales at the Toyota franchise
as new sales management reduced the inventory level.level, which also reduced interest
expense.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expenses increased $.5$0.5 million, or 2.9%, from $17.0 million for
the six months ended June 30, 1996 to

43
45

$17.5 million

38
40 for the six months ended June 30, 1997. The increase is primarily
attributable to variable incentive pay to employees which is related directly to
the increase in the revenues. As a percentage of total revenues, selling,
general and administrative expenses declined from 12.4% for the six months ended
June 30, 1996 to 11.9% for the six months ended June 30, 1997.

INTEREST EXPENSE, NET. Interest expense, net, decreased $1.0 million, or
66.7%, from $1.5 million for the six months ended June 30, 1996 to $0.5 million
for the six months ended June 30, 1997. The decrease is attributable to
increased manufacturer interest assistance and reduced inventory levels.

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

REVENUES. Revenues increased by $69.6 million, or 31.8%, from $218.9
million for the year ended December 31, 1995 to $288.5 million for the year
ended December 31, 1996. New vehicle sales increased $40.6 million, or 32.3%,
from $125.8 million for the year ended December 31, 1995 to $166.4 million for
the year ended December 31, 1996. The increase is primarily attributable to
successful marketing efforts, continued strong customer support of Toyota and
Lexus products, the installation of a new management team at the Lexus franchise
in February 1996 and showroom expansions at both the Toyota and Lexus franchises
in 1996. Used vehicle revenues increased $22.6 million, or 33.1%, from $68.3
million for the year ended December 31, 1995 to $90.9 million for the year ended
December 31, 1996. This increase is attributable to successful marketing
efforts
and the expansion of used vehicle sales facilities at the Toyota franchise
during 1996.efforts. Parts and service sales increased $5.1 million, or 26.3%, from $19.4
million for the year ended December 31, 1995, to $24.5 million for the year
ended December 31, 1996. The increase is primarily attributable to the addition
of a state-of-the-art collision service center at the Lexus franchise in late
1995 and increased vehicle sales. Other dealership revenues increased $1.5
million or 28.3% from $5.3 million for the year ended December 31, 1995 to $6.8
million for the year ended December 31, 1996. The increase is due primarily to
an increase in the number of retail new and used vehicle sales.

GROSS PROFIT. Gross profit increased by $8.8 million, or 29.1%, from $30.2
million for the year ended December 31, 1995 to $39.0 million for the year ended
December 31, 1996. The increase is attributable to increased sales, net of a
minor decline in gross margin from 13.8% for the year ended December 31, 1995 to
13.5% for the year ended December 31, 1996. The slight decline in gross margin
is primarily due to an increase in new and used vehicle revenues as a percentage
of total revenues.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $7.3 million, or 26.3%, from $27.8 million for
the year ended December 31, 1995 to $35.1 million for the year ended December
31, 1996. The increase is primarily attributable to variable incentive pay to
employees and increased marketing expense, both of which are related to the
increase in revenues. As a percentage of revenues, selling, general and
administrative expenses decreased from 12.7% for the year ended December 31,
1995 to 12.1% for the year ended December 31, 1996 as fixed costs were spread
over a larger pool of revenue.

INTEREST EXPENSE, NET. Interest expense, net, decreased $0.5 million, or
15.6%, from $3.2 million for the year ended December 31, 1995 to $2.7 million
for the year ended December 31, 1996. The decrease is attributable to an
approximately 50 basis point decrease in the average floorplan interest rate as
well as to improved inventory management.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

REVENUES. Revenues increased $41.6 million, or 23.5%, from $177.3 million
for the year ended December 31, 1994 to $218.9 million for the year ended
December 31, 1995. New vehicle sales increased $20.4 million, or 19.4%, from
$105.4 million for the year ended December 31, 1994 to $125.8 million for the
year ended December 31, 1995. The increase is primarily attributable to
successful marketing efforts and continued strong customer support of Toyota
products. Used vehicle sales increased $18.4 million, or 36.9%, from $49.9
million for the year ended December 31, 1994 to $68.3 million for the year ended
December 31, 1995. This increase is primarily attributable to successful
39
41

marketing efforts. Parts and service sales increased $1.5 million, or 8.4%, from
$17.9 million for the year

44
46

ended December 31, 1994 to $19.4 million for the year ended December 31, 1995.
The increase is attributable to continued steady growth driven by increased
vehicle sales. Other dealership revenues increased $1.2 million or 29.3% from
$4.1 million for the year ended December 31, 1994 to $5.3 million for the year
ended December 31, 1995. The increase is due primarily to an increase in the
number of retail new and used vehicle sales.

GROSS PROFIT. Gross profit increased $5.5 million, or 22.3% from $24.7
million for the year ended December 31, 1994 to $30.2 million for the year ended
December 31, 1995. The increase is attributable to increased sales, net of a
minor decline in gross margin from 14.0% for the year ended December 31, 1994 to
13.8% for the year ended December 31, 1995. The slight decline in gross margin
is primarily due to an increase in used vehicle revenues as a percentage of
total revenues.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $5.3 million, or 23.6%, from $22.5 million for
the year ended December 31, 1994 to $27.8 million for the year ended December
31, 1995. The increase is primarily attributable to variable incentive pay to
employees and increased marketing expense, both of which are related to the
increase in revenues. Selling, general and administrative expenses, as a
percentage of revenues, remained constant at 12.7% for the year ended December
31, 1994 and for the year ended December 31, 1995.

INTEREST EXPENSE, NET. Interest expense, net, increased $0.7 million, or
28.0%, from $2.5 million for the year ended December 31, 1994 to $3.2 million
for the year ended December 31, 1995. The increase is attributable primarily to
an approximately 170 basis point increase in the floorplan interest rate.

LIQUIDITY AND CAPITAL RESOURCES -- MCCALL GROUP

The McCall Group's principal sources of liquidity are cash on hand, cash
from operations and floor plan financing.

The following table sets forth historical selected information from the
McCall Group statements of cash flows:

SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------- ------------------
1994 1995 1996 1996 1997
------- ------ ------- -------- -------
(IN THOUSANDS) (UNAUDITED)

Net cash provided by (used in) operating
activities............................. $(1,499) $2,576 $(5,416) $ (9,900) $(2,592)
Net cash used in investing activities.... (159) (252) (1,467) (1,339) (1,172)
Net cash provided by (used in) financing
activities............................. (342) 326 348 462 98
------- ------ ------- -------- -------
Net increase (decrease) in cash and cash
equivalents............................ $(2,000) $2,650 $(6,535) $(10,777) $(3,666)
======= ====== ======= ======== =======

CASH FLOWS

Total cash and cash equivalents at June 30, 1997, were $10.4 million.

For the three years ended December 31, 1996, the McCall Group generated
$0.8 million in cash flow from net income plus depreciation and amortization.
Net cash flow from operating activities declined from $2.6 million for the year
ended December 31, 1995 to $(5.4) million for the year ended December 31, 1996.
The decline is due primarily to the usage of funds by the McCall Group to pay
down floorplan notes payable and increase inventories. These funds plus other
working capital were primarily invested in inventory to support the McCall
Group's significant growth.

40
42

For the six months ended June 30, 1997, the McCall Group generated net cash
flow of $1.2 million from net income plus depreciation and amortization. Floor
plan notes payable paydowns resulted in the net use of cash by operating
activities.

45
47

The change in net cash used in investing activities for the three years
ended December 31, 1996, was primarily attributable to purchases of property and
equipment for the Lexus franchise's new collision service center added in 1995
and showroom expansions at both franchises during 1996.

The change in net cash used in investing activities for the six months
ended June 30, 1997, was primarily attributable to purchases of property and
equipment for the Toyota franchise's used vehicle showroom expansion.

The change in net cash related to financing activities was primarily
attributable to changes in long term debt and cash flows provided by payments on
subscriptions receivable and issuance of common stock.

FLOORPLAN FINANCING

The McCall Group currently obtains floorplan financing for its vehicle
inventory primarily through Toyota Motor Credit Corporation. As of June 30,
1997, the McCall Group had approximately $20.2 million of outstanding floorplan
financing. The debt bears interest at rates ranging from prime plus 50minus 75 basis
points to prime plus 150minus 100 basis points. Interest expense on floorplan notes
payable, before manufacturer interest assistance, totaled approximately $2.4
million, $3.1 million and $2.5 million for the years ended December 31, 1994,
1995 and 1996, respectively. Manufacturer interest assistance, which is recorded
as a reduction to interest expense, totaled approximately $82,000, $91,000 and
$136,000 for the years ended December 31, 1994, 1995 and 1996, respectively.

LEASES

The McCall Group leases various real estate, facilities and equipment under
operating lease agreements, including leases with related parties. In connection
with the Acquisitions, the McCall Group intends to replace certain existing
leases with leases that have terms of 30 years and will be cancellable at the
Combined Company's option ten years from execution of the lease and at the end
of each subsequent five year period. Such leases initially will have the same
rent as the existing leases and will be subject to increases every five years
based on a percentage of the consumer price index.Consumer Price Index. See "Certain
Transactions -- Leases."Leases". Future minimum lease payments for existing operating
leases are as follows: $2.3 million in 1997, $2.2 million in 1998, $2.1 million
in 1999, $2.0 million in 2000 and $1.4 million in 2001.

OTHER

The McCall Group is required to buy certain retail loans from a third party
lender if the loans become delinquent. These loans are due from individuals who
have difficulty obtaining financing and may not have otherwise been able to
secure other financing to purchase a vehicle. These loans carry an interest rate
of prime plus approximately 9% and are secured by the vehicle sold to the
individual. As of June 30, 1997, the aggregate balance of these loans was
approximately $10.2 million. The McCall Group had charge-offs relating to these
loans of $200,000, $232,000, and $539,000 for the years ending December 31,
1994, 1995 and 1996, respectively. The increase in charge-offs during 1996 and
the additions to the reserve for guaranteed loan losses during 1996 are directly
attributable to the increase in loans guaranteed by the McCall Group from 1994
through 1996. The McCall Group sold approximately $3.5 million, $4.5 million and
$7.5 million of full recourse loans to the lender for the years ended December
31, 1994, 1995 and 1996, and had guaranteed loans outstanding of $7.4 million
and $10.4 million at December 31, 1995 and 1996, respectively. Due to the
increase in the number of loans outstanding during this three year period, the
McCall Group experienced a larger number of charge-offs during 1996 than in
prior years. The McCall Group's loan loss reserve has been determined based on
historical charge-off experience, and has remained relatively flat as a
percentage of guaranteed loans outstanding. Management has reviewed the 41
43

status
of these loans and, based on current facts and circumstances, does not believe
the above described commitment will significantly impact the Combined Company's
operations or liquidity.

46
48

The McCall Group had working capital of $2.1 million as of December 31,
1996, excluding the reserve for finance, insurance and service contract
chargebacks and the accumulated LIFO reserve. Historically, the McCall Group has
funded its operations with internally generated cash flows and borrowings from
lenders. While there can be no assurance, based on current facts and
circumstances, management believes it has adequate cash flows and financing
alternatives to fund its current operations.

RESULTS OF OPERATIONS -- SMITH GROUP

This group consists of an Acura dealership in Houston, Texas, Honda, GMC,
Oldsmobile, Mitsubishi, Lincoln, Mercury and Kia dealerships in Beaumont, Texas,
a Nissan dealership in Richardson, Texas (a suburb of Dallas) and two Nissan
dealerships, one Mitsubishi dealership and one Suzuki dealership in Austin,
Texas. The Smith family has been in the automotive retailing business since
1917.

The following table sets forth certain historical selected financial data
and data as a percentage of revenues for the Smith Group for the periods
indicated:

Revenues:
New vehicle sales............. $136,917 63.1% $132,150 59.7% $124,174 56.9%
Used vehicle sales............ 49,549 22.8 57,363 25.9 60,579 27.8
Parts and service sales....... 25,502 11.7 26,238 11.9 28,631 13.1
Other dealership revenue,
net......................... 5,109 2.4 5,507 2.5 4,895 2.2
-------- ------ -------- ------ -------- ------
Total revenues.............. 217,077 100.0 221,258 100.0 218,279 100.0
Cost of sales.................. 189,920 87.5 192,665 87.1 189,169 86.7
-------- ------ -------- ------ -------- ------
Gross profit................... 27,157 12.5 28,593 12.9 29,110 13.3
Selling, general and
administrative expenses....... 21,727 10.0 22,824 10.3 23,711 10.8
-------- ------ -------- ------ -------- ------
Income from operations......... 5,430 2.5 5,769 2.6 5,399 2.5
Other income and expense:
Interest expense, net......... (2,147) (1.0) (2,956) (1.3) (1,710) (0.8)
Other income (expense), net... (29) -- 202 0.1 223 0.1
-------- ------ -------- ------ -------- ------
Income before income taxes..... 3,254 1.5 3,015 1.4 3,912 1.8
Provision for income taxes..... 455 0.2 562 0.3 678 0.3
-------- ------ -------- ------ -------- ------
Net income..................... $ 2,799 1.3% $ 2,453 1.1% $ 3,234 1.5%
======== ====== ======== ====== ======== ======

Revenues:
New vehicle sales............. $ 59,437 54.9% $ 75,203 59.0%
Used vehicle sales............ 32,073 29.7 35,153 27.6
Parts and service sales....... 14,045 13.0 14,082 11.0
Other dealership revenue,
net......................... 2,618 2.4 3,021 2.4
-------- ----- -------- -----
Total revenues.............. 108,173 100.0 127,459 100.0
Cost of sales.................. 93,830 86.7 109,914 86.2
-------- ----- -------- -----
Gross profit................... 14,343 13.3 17,545 13.8
Selling, general and
administrative expenses....... 11,575 10.7 13,846 10.9
-------- ----- -------- -----
Income from operations......... 2,768 2.6 3,699 2.9
Other income and expense:
Interest expense, net......... (825) (0.8) (941) (0.8)
Other income (expense), net... 18 -- (19) --
-------- ----- -------- -----
Income before income taxes..... 1,961 1.8 2,739 2.1
Provision for income taxes..... 322 0.3 531 0.4
-------- ----- -------- -----
Net income..................... $ 1,639 1.5% $ 2,208 1.7%
======== ===== ======== =====

SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996

REVENUES. Revenues increased $19.3 million, or 17.8%, from $108.2 million
for the six months ended June 30, 1996 to $127.5 million for the six months
ended June 30, 1997. New vehicle sales increased $15.8 million, or 26.6%, from
$59.4 million for the six months ended June 30, 1996 to $75.2 million for the
six months ended June 30, 1997. The increase is primarily attributable to the
addition of the new Nissan franchise during 1996 located just north of Austin,
Texas. Additionally, sales at the Smith Group's Nissan franchises were
positively impacted by manufacturer incentive programs. Used vehicle sales
increased $3.1 million, or 9.7%, from $32.1 million for the six months ended
June 30, 1996 to $35.2 million for the six months ended June 30, 1997. The
increase is due primarily to the addition of the new Nissan franchise during
1996, offset by declines at other franchises in the Smith Group. The declines
were caused in large part by the strong new vehicle sales capturing many used
vehicle customers. Parts and service sales increased $0.1 million, or 0.7%, from
$14.0 million for the six months ended June 30, 1996 to $14.1 million for the
six months ended June 30, 1997. The increase is primarily attributable to the
addition of the new Nissan franchise during 1996, while the other franchises
declined 42
44

slightly from year to year. Other dealership revenue increased $0.4
million or 15.4% from $2.6 million for the six months ended June 30, 1996 to
$3.0 million for the six months ended June 30, 1997. The increase is due
primarily to an increase in the number of retail new and used vehicle sales.

47
49

GROSS PROFIT. Gross profit increased $3.2 million, or 22.4%, from $14.3
million for the six months ended June 30, 1996 to $17.5 million for the six
months ended March 31,June 30, 1997. The increase is attributable to increased sales and
an increase in the gross margin from 13.3% for the six months ended June 30,
1996 to 13.8% for the six months ended June 30, 1997. The gross margin was
favorably impacted by manufacturer incentive programs which increased new
vehicle gross margins.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling general and
administrative expenses increased $2.2 million, or 19.0%, from $11.6 million for
the six months ended June 30, 1996 to $13.8 million for the six months ended
June 30, 1997. The increase is primarily attributable to variable incentive pay
to employees and expenses relating to the new Nissan franchise opened in 1996.
As a percentage of revenues, selling, general and administrative expenses
increased slightly from 10.7% for the six months ended June 30, 1996 to 10.9%
for the six months ended June 30, 1997.

INTEREST EXPENSE, NET. Interest expense, net, increased $0.1 million or
12.5% from $0.8 million for the six months ended June 30, 1996 to $0.9 million
for the six months ended June 30, 1997. The increase is primarily due to the
addition of the new Nissan franchise opened in 1996.

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

REVENUES. Revenues decreased $3.0 million, or 1.4%, from $221.3 million for
the year ended December 31, 1995 to $218.3 million for the year ended December
31, 1996. New vehicle sales decreased $8.0 million, or 6.1%, from $132.2 million
for the year ended December 31, 1995 to $124.2 million for the year ended
December 31, 1996. The decrease is primarily attributable to reduced unit sales
at the Smith Group's Dallas Nissan franchise. The sales were impacted by changes
in the franchise's market place and consumer preferences in the region. The
decline was partially offset by revenues generated by a new Nissan franchise
located just north of Austin, Texas, opened in late 1996. Used vehicle sales
increased $3.2 million, or 5.6%, from $57.4 million for the year ended December
31, 1995 to $60.6 million for the year ended December 31, 1996. The increase is
primarily attributable to increased focus on used vehicle sales by the Dallas
Nissan franchise in response to changes in its new vehicle market conditions.
Parts and service sales increased $2.4 million, or 9.2%, from $26.2 million for
the year ended December 31, 1995 to $28.6 million for the year ended December
31, 1996. Other dealership revenues decreased $0.6 million or 10.9% from $5.5
million for the year ended December 31, 1995 to $4.9 million for the year ended
December 31, 1996. The decrease is due primarily to a decline in the number of
retail new vehicle sales, partially offset by an increase in the number of
retail used vehicle sales.

GROSS PROFIT. Gross profit increased by $0.5 million, or 1.8%, from $28.6
million for the year ended December 31, 1995 to $29.1 million for the year ended
December 31, 1996. Gross profit increased, despite decreased sales, due to a
higher gross margin. The gross margin increased as higher margin parts and
service sales increased and became a greater percentage of total revenues. Gross
margin increased from 12.9% for the year ended December 31, 1995 to 13.3% for
the year December 31, 1996.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $0.9 million, or 3.9%, from $22.8 million
for the year ended December 31, 1995 to $23.7 million for the year ended
December 31, 1996. The increase is primarily attributable to marketing expenses
relating to the opening of the Smith Group's new Nissan franchise in Austin,
Texas. As a percentage of total revenues, selling, general and administrative
expenses increased from 10.3% for the year ended December 31, 1995 to 10.8% for
the year ended December 31, 1996.

INTEREST EXPENSE, NET. Interest expense, net, decreased by $1.3 million, or
43.3%, from $3.0 million for the year ended December 31, 1995 to $1.7 million
for the year ended December 31, 1996. The decrease is attributable to an
approximately 50 basis point decrease in the average floorplan interest 43
45

rate,
increased floorplan assistance payments from the Manufacturers and reduced
average floorplan levels.

48
50

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

REVENUES. Revenues increased $4.2 million, or 1.9%, from $217.1 million for
the year ended December 31, 1994 to $221.3 million for the year ended December
31, 1995. New vehicle sales decreased $4.7 million or 3.4% from $136.9 million
for the year ended December 31, 1994 to $132.2 million for the year ended
December 31, 1995. The decline is primarily due to a reduced level of customer
support of the Smith Group's products. Used vehicle sales increased $7.9
million, or 16.0%, from $49.5 million for the year ended December 31, 1994 to
$57.4 million for the year ended December 31, 1995. The increase is primarily
attributable to increased focus on used vehicle sales in response to changes in
the Smith Group's new vehicle market conditions. Parts and service sales
increased $0.7 million, or 2.7%, from $25.5 million for the year ended December
31, 1994 to $26.2 million for the year ended December 31, 1995. The growth is
primarily attributable to continued steady growth driven by overall increased
vehicle sales. Other dealership revenues increased $0.4 million or 7.8% from
$5.1 million for the year ended December 31, 1994 to $5.5 million for the year
ended December 31, 1995. The increase is due primarily to an increase in the
number of retail used vehicle sales, partially offset by a decline in the number
of retail new vehicle sales.

GROSS PROFIT. Gross profit increased $1.4 million, or 5.1%, from $27.2
million for the year ended December 31, 1994 to $28.6 million for the year ended
December 31, 1995. The increase is attributable to increased revenues and
improved gross margin, as higher margin parts and service sales increased and
became a greater percentage of total revenues. Gross margin increased from 12.5%
for the year ended December 31, 1994 to 12.9% for the year ended December 31,
1995.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1.1 million, or 5.1% from $21.7 million for
the year ended December 31, 1994 to $22.8 million for the year ended December
31, 1995. As a percentage of revenues, selling, general and administrative
expenses increased from 10.0% for the year ended December 31, 1994 to 10.3% for
the year ended December 31, 1995.

INTEREST EXPENSE, NET. Interest expense, net, increased $0.9 million, or
42.9%, from $2.1 million for the year ended December 31, 1994 to $3.0 million
for the year ended December 31, 1995. The increase is primarily attributable to
an approximately 170 basis point increase in the average floorplan interest
rate.

LIQUIDITY AND CAPITAL RESOURCES -- SMITH GROUP

The Smith Group's principal sources of liquidity are cash on hand, cash
from operations and floor plan financing.

The following table sets forth selected information from the Smith Group
statements of cash flows:

SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------ -----------------
1994 1995 1996 1996 1997
------ ------ ------ ------- -------
(IN THOUSANDS) (UNAUDITED)

Net cash provided by operating
activities.......................... $1,170 $4,975 $4,534 $ 2,355 $ 2,0892,109
Net cash used in investing
activities.......................... (218) (700) (858) (298) (360)
Net cash used in financing
activities.......................... (905) (2,081) (2,343) (1,382) (1,413)
------ ------ ------ ------- -------
Net increase in cash and cash
equivalents......................... $ 47 $2,194 $1,333 $ 675 $ 316336
====== ====== ====== ======= =======

CASH FLOWS

Total cash and cash equivalents at June 30, 1997, were $9.4 million.

44
46

For the three year period ended December 31, 1996, the Smith Group
generated $10.7 million in net cash from operating activities, primarily from
net income plus depreciation and amortization.

49
51

Net cash from operating activities decreased from $2.4 million for the six
months ended June 30, 1996 to $2.1 million for the six months ended June 30,
1997, as cash generated by increased net income for the six months ended June
30, 1997 of $0.6 million and changes in inventories and floorplan financing were
offset by changes in accounts payable and accrued liabilities and accounts
receivable.

The change in net cash used in investing activities was primarily
attributable to purchases of property and equipment relating to the new Nissan
franchise in Austin, Texas and various facility improvements and computer
equipment purchases at the other Smith Group franchises.

The change in net cash used in financing activities was primarily
attributable to net borrowings and repayments of debt and distributions to the
stockholders.

FLOORPLAN FINANCING

The Smith Group currently obtains floorplan financing for its vehicle
inventory through Ford Motor Credit Company, NationsBank and Nissan Motor
Acceptance Corporation. As of June 30, 1997, the Smith Group had approximately
$33.5 million of floorplan indebtedness outstanding. The debt bears interest at
rates ranging from prime to prime plus 175 basis points for new and used
vehicles. Interest expense on floorplan notes payable, before manufacturer
interest assistance, totaled approximately $2.2 million, $3.2 million and $2.5
million for the years ended December 31, 1994, 1995 and 1996, respectively.
Manufacturer interest assistance, which is recorded as a reduction to interest
expense, totaled approximately $0.7 million, $0.8 million and $1.1 million for
the years ended December 31, 1994, 1995 and 1996, respectively. Payments on the
notes are due when the related vehicles are sold and are collateralized by
substantially all new and used vehicles.

LEASES

The Smith Group leases various facilities and equipment under operating
lease agreements, including leases with related parties. Certain of these leases
are noncancelable and expire on various dates through August 2013. These lease
agreements are subject to renewal under essentially the same terms and
conditions as the original leases. In connection with the Acquisitions, the
Smith Group intends to replace certain existing leases with leases that will
have terms of 30 years and will be cancellable at the Combined Company's option
ten years from execution of the lease and at the end of each subsequent five
year period. Such leases initially will have the same rent as the existing
leases and will be subject to increases every five years based on a percentage
of the consumer price index.Consumer Price Index. See "Certain Transactions -- Leases". Future
minimum lease payments for existing operating leases are as follows: $1.4
million in 1997, $1.4 million in 1998, $1.4 million in 1999, $1.0 million in
2000 and $0.8 million in 2001.

OTHER

The Smith Group had working capital of $8.1 million as of December 31,
1996, adjusted for the accumulated LIFO reserves. Historically, the Smith Group
has funded its operations with internally generated cash flow and borrowings
from lenders. While there can be no assurance, based on current facts and
circumstances, management believes it has adequate cash flows and financing
alternatives to fund its current operations.

CYCLICALITY

The Combined Company's operations, like the automotive retailing industry
in general, can be impacted by a number of factors relating to general economic
conditions, including the consumer business cycles, consumer confidence, economic
conditions, availability of consumer credit and interest rates. Although the
above factors, among others, can impact the Combined Company's business, the
Combined Company believes the impact on its operations of future negative trends
in such factors will be 45
47

somewhat mitigated by its (i) strong parts, service and
collision repair services, (ii) variable cost salary structure, (iii) geographic
diversity, and (iv) product diversity.

50
52

SEASONALITY

The Combined Company's 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, which primarily affect parts and service and (iii)
consumer buying patterns.

EFFECTS OF INFLATION

Due to the relatively low levels of inflation experienced in fiscal 1994,
1995 and 1996 and the six months of 1997, inflation did not have a significant
effect on the results of the combined Founding Groups during those periods.

FORWARD-LOOKING STATEMENTS

Certain statements contained herein are not based on historical facts, but
are forward-looking statements that are based upon numerous assumptions about
future conditions that could prove not to be accurate. Such forward-looking
statements include, without limitation, the statements regarding the trends in
the industry set forth in the Prospectus Summary and under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" regarding the Combined Company's anticipated future financial
results and position. Although the Combined Company believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to have been correct.
Important factors that could cause actual results to differ materially from the
Combined Company's expectations are disclosed in this Prospectus, including but
not limited to the matters described in "Risk Factors".

4651
4853

BUSINESS

GENERAL

OVERVIEW

The Combined Company was founded to become a leading operator and
consolidator in the highly fragmented automotive retailing industry. The
Combined Company owns 30 automobile dealerships and related businessesfive collision service
centers located in Texas and Oklahoma, and sells new and used cars and light
trucks, provides maintenance and repair services, sells replacement parts and
provides related financing, insurance and extended service contracts. The
Combined Company represents 21 American and Asian brands includingoperating two Acura,
one Chevrolet, one Chrysler, one Dodge, one Eagle, two GMC, three Honda, Infiniti,two
Isuzu, one Jeep, one Kia, one Lexus, one Lincoln, one Mazda, one Mercury, two
Mitsubishi, three Nissan, one Oldsmobile, one Plymouth, one Pontiac, one Suzuki
and Toyota.two Toyota dealerships. The Combined Company's dealerships include the
second-largest Toyota dealership in the United States as measured by 1996 new
retail unit sales and one of the largest dealership groups in Oklahoma.

The Combined Company is experiencing
significant momentum in its financial results. From 1994 to 1996, the Combined
Company's revenues increased by $172.1 million, or 26.4%, to $824.8 million from
$652.7 million. During this period, gross profit increased $27.0 million, or
32.1%, to $111.0 million from $84.0 million, or to 13.5% from 12.9% of revenues.

The principals of the Founding Groups have over 90 years of combined
experience in the automotive retailing industry with family ownership dating
back as far as 1917. In addition, theythe principals of the Founding Groups have
been recognized as leaders in the automotive retailing industry, serving at
various times in leadership positions in state and national industry
organizations. The Combined Company's dealerships have also received numerous
awards based on various performance measures. The principals of the Founding
Groups will continue to manage their businesses and play a significant role in
the Combined Company's operating and acquisition strategies.

The Combined Company believes that its structural, managerial and
operational strengths include (i) brand and geographic diversity; (ii) the
ability to capitalize on regional economies of scale; (iii) cost savings derived
from nationally centralized financing and administrative functions; (iv) the
experience of the Combined Company's senior management in successfully
consolidating and
successfully operating in highly fragmented industries; (v) the
reputations, experience and performance of the Combined Company's management and
principals as leaders in the automotive retailing industry; (vi) the established
customer base and local name recognition of the Combined Company's dealerships;
(vii) the Combined Company's proven ability to source high quality used vehicles
cost-effectively through trade-ins and off-lease programs; and (viii) access to
equity incentives to attract and retain high quality management.personnel.

The Combined Company will pursue a growth strategy led by a management team
with extensive experience in consolidation and the management of growth
companies. B.B. Hollingsworth, Jr., Chairman of the Board, President and Chief
Executive Officer of the Combined Company, has experience not only in the
automotive retailing industry, but also in consolidating a major national
industry, having served in various senior management capacities, including
President, of Service Corporation International during its early growth period
as the world's leading consolidator of the funeral industry. In addition, John
T. Turner, Senior Vice President -- Corporate Development, has ledbeen actively
involved in the acquisition efforts of several companies involved in industry
consolidations.

47consolidations, including Service Corporation International, The Loewen Group,
Inc. and Paragon Family Services, Inc. See "Management".

52
4954

FOUNDING GROUPS

The following table sets forth revenues for each of the Founding Groups for
the periods indicated:

YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1994 1995 1996
--------------------- --------------------- ---------------------
REVENUES PERCENTAGE REVENUES PERCENTAGE REVENUES PERCENTAGE
-------- ---------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)

Howard Group......... $227,259 34.8% $254,003 34.9% $282,016 34.2%
McCall Group......... 177,320 27.2 218,888 30.0 288,542 34.9
Smith Group.......... 217,077 33.3 221,258 30.4 218,279 26.5
Kingwood Group....... 31,036 4.7 34,459 4.7 35,949 4.4
-------- ----- -------- ----- -------- -----
Total........ $652,692 100.0% $728,608 100.0% $824,786 100.0%
======== ===== ======== ===== ======== =====

SIX MONTHS ENDED JUNE 30,
---------------------------------------------
1996 1997
--------------------- ---------------------
REVENUES PERCENTAGE REVENUES PERCENTAGE
-------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)

Howard Group......... $140,650 34.8% $154,045 34.3%
McCall Group......... 137,216 34.0 146,953 32.7
Smith Group.......... 108,173 26.8 127,459 28.3
Kingwood Group....... 17,912 4.4 21,244 4.7
-------- ----- -------- -----
Total........ $403,951 100.0% $449,701 100.0%
======== ===== ======== =====

The following table sets forth retail unit sales for new vehicles for each
of the Founding Groups for the periods indicated:

YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1994 1995 1996
----------------------- ----------------------- -----------------------
UNITS SOLD PERCENTAGE UNITS SOLD PERCENTAGE UNITS SOLD PERCENTAGE
---------- ---------- ---------- ---------- ---------- ----------

Howard Group......... 7,381 38.1% 7,782 38.2% 8,181 38.3%
McCall Group......... 4,239 21.9 5,030 24.7 6,458 30.2
Smith Group.......... 7,023 36.3 6,815 33.5 5,983 28.0
Kingwood Group....... 718 3.7 730 3.6 756 3.5
------ ----- ------ ----- ------ -----
Total................ 19,361 100.0% 20,357 100.0% 21,378 100.0%
====== ===== ====== ===== ====== =====

SIX MONTHS ENDED JUNE 30,
-------------------------------------------------
1996 1997
----------------------- -----------------------
UNITS SOLD PERCENTAGE UNITS SOLD PERCENTAGE
---------- ---------- ---------- ----------

Howard Group......... 4,148 39.9% 4,093 35.2%
McCall Group......... 3,072 29.6 3,037 26.1
Smith Group.......... 2,810 27.0 3,972 34.2
Kingwood Group....... 361 3.5 523 4.5
------ ----- ------ -----
Total................ 10,391 100.0% 11,625 100.0%
====== ===== ====== =====

THE HOWARD GROUP. The Howard Group is one of the largest dealership groups
in Oklahoma, consisting of Acura, Chevrolet, Chrysler, Dodge, Eagle, GMC, Honda,
Isuzu, Jeep, Mazda, Plymouth, Pontiac and Toyota dealerships located in Oklahoma
City. Additionally, the Howard Group expects to enterhas entered into an agreement to purchase a
Chevrolet dealership in Tulsa, Oklahoma for the assumption of its liabilities. Robert E.liabilities
which are currently approximately $2.5 million. See "The Acquisitions". Mr.
Howard, II, the principal owner, has been involved in the automotive retailing
industry for over 28 years.

ACQUISITIONS AND MANUFACTURER AWARDED DEALERSHIP

The Founding Groups have a history of successfully acquiring and
integrating dealerships. Since 1994 the Founding Groups have acquired four
dealerships and were awarded one new franchise by a Manufacturer. For the year
ended December 31, 1996, these dealerships represented $63.8 million in total
revenues, two of which had only part year revenues in 1996. The Howard Group
acquired a Honda and an Acura dealership in 1994 and a Dodge dealership in 1996;
all of which are located in Oklahoma City. Additionally, the Howard Group
expects to enter into an agreement to purchase a Chevrolet

48
50

dealership in Tulsa, Oklahoma for the assumption of its liabilities. The Smith Group was awarded a new
Nissan franchise in Austin, Texas in December 1996. The Kingwood Group acquired
an Isuzu dealership in Houston, Texas in late 1996.

INDUSTRY OVERVIEW

With more than $600 billion in 1996 sales, automotive retailing is the
largest retail trade sector in the United States. The industry is highly
fragmented and largely privately held with approximately 22,000 automobile
dealershipsdealership locations representing more than 53,000 franchises.franchised dealerships. In
1996, U.S. franchised automobile dealers sold 15.1 million new vehicles and 19.2
million used vehicles for sales of approximately $328.4 billion and $171.8
billion, respectively. It is estimated that sales by franchised automobile
dealers account for one-fifth of the nation's total retail sales of all products
and merchandise. Since 1992, new vehicle revenues have grown at a 10.5% compound
annual rate. Over the same period,

53
55

used vehicle revenues have grown at a 14.6% compound annual rate. Slower unit
volume growth over this time period has been offset by the rising prices
associated with new vehicles and, on average, the higher prices paid for later
model high quality used vehicles which now comprise a significant part of the
used vehicle market. Automobile sales are affected by many factors, including
rates of employment, income growth, interest rates, weather patterns and other
national and local economic conditions, automotive innovations and general
consumer sentiment. See "Risk Factors -- Cyclicality" and "Risk
Factors -- Seasonality".

The following table sets forth new and used vehicle sales by franchised
automobile dealers in the United States for each of the five years ended
December 31, 1996. New vehicles can only be sold at retail by franchised
dealerships. The following table excludes sales of used vehicles by
nonfranchised dealerships and casual sales by individuals. Nonfranchised
dealerships and individuals had aggregate sales of $117.3 billion, $133.2
billion, $173.8 billion, $181.3 billion and $172.4 billion, respectively, for
each of the five years ended December 31, 1996.

UNITED STATES FRANCHISED DEALERS' VEHICLE SALES
-----------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
(UNITS IN MILLIONS; DOLLARS IN BILLIONS)

New vehicle unit sales................. 12.9 13.9 15.1 14.8 15.1
New vehicle sales...................... $220.6 $253.0 $289.9 $302.7 $328.4
Used vehicle unit sales................ 15.1 16.3 17.8 18.5 19.2
Used vehicle sales..................... $ 99.5 $115.0 $138.6 $157.0 $171.8
Total vehicle sales.................... $320.1 $368.0 $428.5 $459.7 $500.2
Annual growth in total vehicle sales... --% 15.0% 16.5% 7.3% 8.8%

Manufacturers originally established franchised dealer networks for the
distribution of their vehicles as single-dealership, single-owner operations. In
return for distribution rights within specified territories, Manufacturers
exerted significant influence over such matters as a dealer's location,
inventory size and composition and merchandising programs, as well as the
identity of owners and managers. This strict control contributed to the
proliferation of small dealerships, which at their peak in the late 1940s
numbered in excess of 46,000.46,000 dealership locations. Several Manufacturersmanufacturers went
out of business in the 1950s, and the number of dealershipsdealership locations decreased
to 36,000 by 1960.

Significant industry changes took place in the 1970s when fuel shortages
forced dramatic increases in gasoline prices and foreign Manufacturersmanufacturers increased
their penetration of the U.S. market with fuel-efficient, low-cost vehicles. As
a result of these competitive pressures, dealers were able to negotiate
significant changes in the traditional distribution system with Manufacturers.manufacturers.
Dealers began to add foreign franchises and the phenomenon of the
multi-franchise automobile dealer, or megadealer, emerged, prompting the
significant acquisition and consolidation activities of the 1980s. The easing of
restrictions against megadealers, competitive pressures upon undercapitalized
dealerships and the aging of dealership owners has led to further consolidation
of the industry. Since 1960, the number of dealershipsdealership locations has declined 39%
to the current 22,000 level.

49
51

As the industry has evolved, so has the dealership profile. Over the past
three decades, there has been a trend toward fewer, but larger, dealerships. In
1996, each of the largest 100 dealer groups had more than $200 million in
revenues. Although significant consolidation has taken place since its
inception, the industry today remains highly fragmented, with the largest 100
dealer groups generating less than 10% of total sales revenues and controlling
approximately 5% of all franchised dealerships. The Combined Company believes
that these factors, together with increasing capital requirements for operating
automobile dealerships, lack of a viable exit strategy (especially for larger
dealerships) and the aging of dealership owners provide an attractive
environment for consolidation opportunities.

As with retailers generally, automobile dealership profitability varies
widely and depends in part on the effective management of inventory, marketing,
quality control and responsiveness to customers. Since 1991, retail automobile
dealerships in the United States have earned on average between 12.9%

54
56

and 14.1% total gross margin on sales with smaller dealerships generally
realizing a higher gross margin than larger dealerships. New vehicle sales were
the smallest proportionate contributors to dealers' gross profits during this
period, most recently earning an average gross margin of 6.5% in 1996. Used
vehicles provided higher gross margins than new vehicles during this period,
with an average used vehicle gross margin of 11.0% in 1996. Dealerships also
offer a range of other services and products, including repair and warranty
work, replacement parts, extended service contracts, financing and credit
insurance.

BUSINESS STRATEGY

The Combined Company plans to achieve its goal of becoming a leading
consolidator, while maintaining its high operating standards in the automotive
retailing industry, by (i) emphasizing growth through acquisitions and (ii)
implementing an operating strategy that focuses on decentralized dealership
operations, nationally centralized administrative functions, the expansion of
higher margin businesses, a commitment to customer service and the
implementation of new technology initiatives. By complementing the Combined
Company's industry leaders, management talent and proven operating capabilities
with its corporate management team which is experienced in achieving and
managing long-term growth in a consolidation environment, the Combined Company
believes that it is in a strong position to execute this strategy.

GROWTH THROUGH ACQUISITIONS

The Combined Company intends to implement an aggressive, yet disciplined,
acquisition program by pursuing (i) large, profitable and well managed
"platform" acquisitions in large metropolitan and high-growth suburban
geographic markets that the Combined Company does not currently serve and (ii)
smaller "add-on" acquisitions that will allow the Combined Company to increase
brand diversity, capitalize on regional economies of scale and offer a greater
breadth of products and services in each of the markets in which it operates. In
this regard, the Combined Company is currently negotiatinghas negotiated and executed an arrangement
letter with Chase Securities Inc. and Comerica Bank for a $100$125 million credit facility with a major bankCredit
Facility, of which a portion will be used, in combination with the Combined
Company's common stock, for acquisitions. See "Risk Factors"Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Dependence on Acquisitions for Growth; Manufacturers'
Restrictions on Acquisitions" for a discussion of Manufacturers' restrictions on
acquisitions of franchised dealerships.Combined Founding
Groups' Commitments -- Credit Facility".

ENTERING NEW GEOGRAPHIC MARKETS. The Combined Company intends to expand
into geographic markets it does not currently serve by acquiring large,
profitable and well established megadealers that, like the Founding Groups, are
leaders in their regional markets. The Combined Company will target new platform
megadealers having superior operational and financial management personnel which
the Combined Company will seek to retain. The Combined Company believes that
retaining existing high quality management will enable acquired megadealers to
continue to operate effectively with management personnel who understand the
local market while allowing the Combined Company to source future acquisitions
more effectively and expand its operations without having to employ and train
untested new personnel. Moreover, the Combined Company believes that it is well
positioned to pursue larger, well established acquisition candidates as a result
of its depth of management, the Combined Company's 50
52

capital structure and the
reputation of the principals of the Founding Groups as leaders in the automotive
retailing industry.

EXPANDING WITHIN EXISTING MARKETS. The Combined Company plans to acquire
additional dealerships in each of the markets in which it operates, including
acquisitions that increase the brands, products or services offered in that
market. The Combined Company believes that these acquisitions will facilitate
operating efficiencies and cost savings on a regional level in areas such as
facility and personnel utilization, vendor consolidation and advertising. The
Combined Company has recently entered into definitive agreements to acquire,
subject to manufacturer approval and a due diligence investigation, two
dealerships in Texas for aggregate payments of $9.0 million in cash. These two
acquisitions, if consummated, would also require the Combined Company to incur
approximately $13.0 million of floorplan indebtedness in connection with the
purchase of vehicle inventories of the dealerships.

55
57

MANUFACTURERS' LIMITATIONS ON ACQUISITIONS. The Combined Company's
acquisition program may be limited to some extent by the Manufacturers. Under
the limitations currently imposed by the Manufacturers, the Combined Company
could acquire no more than five additional Toyota dealerships, two additional
Lexus dealerships, four additional Honda dealerships, one additional Acura
dealership, approximately 400 additional Ford and Lincoln Mercury dealerships
and 10 additional GM dealership locations (within the next two years, subject to
being increased). The Combined Company currently owns two Toyota, one Lexus,
three Honda, two Acura, one Lincoln and one Mercury franchise and three GM
dealership locations. The other Manufacturers, which have no such limitations,
accounted for the following approximate number of dealerships in the United
States, as of December 31, 1996: Chrysler Corporation, 13,000 (at 4,600
locations); Nissan, 1,200; Mitsubishi, 500; Isuzu, 500; Suzuki, 300; and Kia,
200. In addition, all of the Manufacturers, whether or not they have numerical
limitations on the number of dealerships that may be acquired, require the
Combined Company to obtain the consent of the applicable Manufacturer prior to
the acquisition of any dealership franchises of such Manufacturer. In addition,
the Combined Company has not yet entered into any agreement with American Honda
with respect to the approval of the proposed acquisitions of the Honda and Acura
dealerships by the Combined Company and with respect to future acquisitions of
such dealerships. See "Risk Factors -- Manufacturers' Control over Dealerships",
"Risk Factors -- No Agreement with American Honda Motor Co., Inc.", "Risk
Factors -- Risks Relating to Failure to Meet Manufacturer CSI Scores" and "Risk
Factors -- Dependence on Acquisitions for Growth; Manufacturers' Restrictions on
Acquisitions".

Of the approximately 15 million new vehicles sold in the United States in
1996, approximately 31.3% were manufactured by GM, 25.4% were manufactured by
Ford Motor, 16.2% were manufactured by Chrysler Corporation, 7.7% were
manufactured by Toyota Motor, 5.6% were manufactured by Honda Motor, 5.0% were
manufactured by Nissan Motor and 8.8% were manufactured by other manufacturers.

OPERATING STRATEGY

The Combined Company intends to implement an operations strategy that
focuses on decentralized dealership operations, nationally centralized
administrative functions, expansion of higher margin businesses, commitment to
customer service and new technology initiatives.

NATIONALLY CENTRALIZED ADMINISTRATIVE FUNCTIONS. The consolidation of
purchasing power on a centralized basis in the area of financing should result
in significant additional cost savings. For example, in anticipationconnection with the
Offering, all of the Offering, severalCombined Company's floorplan lenders have reduced thefinancing will benefit from
interest rate on certainreductions. Rate reductions have already become effective with
respect to approximately

56
58

75% of the Combined Company's floorplan financing.debt. The current reductions range
between 25 and 225 basis points. The Combined Company is continuing to negotiate with certain other
lenders and expects additional rate reductions will result fromAdditionally, the Combined Company's enhanced credit quality. In addition,Credit
Facility, once closed, will result in further rate reductions. Subsequent to the
Offering, the Combined Company intends to refinance approximately $50 million in
floorplan financing with the Credit Facility. The impact of these changes is
expected to reduce the Combined Company's annual interest expense by more than
$1.0 million. Furthermore, the Combined Company expects that significant cost
savings can be achieved through the consolidation of administrative functions
such as risk management, employee benefits and employee training on a centralized basis.training. For example, the Combined Company is working
with a national insurance firm to develop an overall risk management strategy to
protect the Company's assets. By utilizing the Combined Company's purchasing
power, financial strength and providing the insurance underwriters a diversified
risk pool
the Combined Company has negotiated insurance coverage that is expected to
result in annual cost savings of approximately 25 to 30 percent.

EXPAND HIGHER MARGIN ACTIVITIES. The Combined Company is focused on
expanding its higher margin businesses such as used vehicle retail sales,
service and parts and finance and insurance. While each of the Combined
Company's platforms will be able to operate independently in a manner consistent
with its specific market's characteristics, each platform will pursue an
integrated strategy to grow each of these higher margin businesses to enhance
profitability and stimulate internal growth. With a competitive advantage in
sourcing, the ability to provide manufacturer-backed extended service contracts,
and

51
53 attractive lease financing, new vehicle franchises are especially well
positioned to capitalize on industry growth in used vehicle sales. In addition,
each of the Combined Company's dealerships offers an integrated service and
parts department, which provides an important source of recurring higher margin
revenues. The Combined Company also has the opportunity on each new or used
vehicle sold to generate incremental revenues from the sale of extended service
contracts, credit insurance policies and finance and lease contracts. Each of
these business areas will be a focus of internal growth.

COMMITMENT TO CUSTOMER SERVICE. The Combined Company is focused on
providing a high level of customer service to meet the needs of an increasingly
sophisticated and demanding automotive consumer. The Combined Company strives to
cultivate lasting relationships with its customers, which it believes enhances
the opportunity for significant repeat and referral business. For example, the
Combined Company regards its service and repair activities as an integral part
of its overall approach to customer service, providing an opportunity to foster
ongoing relationships with the Combined Company's customers and deepen customer
loyalty. The Combined Company's dealerships continuously review their selling
processes in their effort to satisfy their customers.

DEALERSHIP OPERATIONS

The Combined Company has established a management structure that promotes
and rewards entrepreneurial spirit, individual pride and responsibility and the
achievement of team goals. Each dealership's general manager 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, service
and parts 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 Combined Company believes that the general manager and
the other members of the dealership management team, as long-time members of
their local communities, are best able to judge how to conduct day-to-day
operations based on the team's experience in and familiarity with its local
market.

The Combined Company's dealerships engage in a number of inter-related
businesses: new vehicle sales; used vehicle sales; service and parts operations;
and finance and insurance.

57
59

NEW VEHICLE SALES

In 1996, the Combined Company sold 21,378 new vehicles at retail, and new
vehicle operations (excluding fleet sales) generated $469.3 million in revenues,
representing 56.9% of total dealership revenues. The following table presents,
on a combined basis for each of the three years ended December 31, 1996 and for
the six months ended June 30, 1996 and June 30, 1997, unit sales, sales revenue,
gross profit, gross margin and average gross profit per retail unit sold related
to the Combined Company's retail sales of new vehicles:

COMBINED COMPANY'S NEW VEHICLE SALES
----------------------------------------------------
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)

Retail unit sales........... 19,361 20,357 21,378 10,391 11,625
Retail sales revenue........ $391,709 $422,348 $469,318 $227,170 $251,830
Gross profit................ $ 25,464 $ 28,696 $ 33,454 $ 16,105 $ 18,317
Gross margin................ 6.5% 6.8% 7.1% 7.1% 7.3%
Average gross profit per
retail unit sold.......... $ 1,315 $ 1,410 $ 1,565 $ 1,550 $ 1,576

52
54

The Combined Company represents 21 American and Asian brands of economy,
family, sports and luxury cars and light trucks and sport utility vehicles. This
brand and product diversity reduces the risk of changes in customer preferences
as well as over-dependence on any one manufacturer.Manufacturer. The Combined Company intends
to pursue an acquisition strategy that will enhance its brand diversity. The
following table sets forth for 1996, certain information relating to the brands
of new vehicles sold at retail by the Combined Company:

NUMBER OF PERCENTAGE OF
NEW VEHICLES NEW VEHICLES
MANUFACTURER SOLD AT RETAIL SOLD AT RETAIL
------------ -------------- --------------

Toyota................................................. 6,346 29.7%
Nissan................................................. 3,060 14.3
Honda.................................................. 2,531 11.8
Chevrolet.............................................. 1,602 7.5
GMC.................................................... 1,199 5.6
Lexus.................................................. 989 4.6
Acura.................................................. 836 3.9
Pontiac................................................ 699 3.3
Mitsubishi............................................. 599 2.8
Mazda.................................................. 590 2.8
Dodge.................................................. 553 2.6
Jeep................................................... 536 2.5
Chrysler............................................... 360 1.7
Plymouth............................................... 356 1.6
Isuzu.................................................. 285 1.3
Kia.................................................... 277 1.3
Mercury................................................ 169 0.8
Oldsmobile............................................. 165 0.8
Eagle.................................................. 75 0.4
Suzuki................................................. 69 0.3
Lincoln................................................ 48 0.2
Other.................................................. 34 0.2
------ -----
Total........................................ 21,378 100.0%
====== =====

The Combined Company's new vehicle retail sales include traditional new
vehicle retail lease transactions and lease-type transactions, both of which are
arranged by the Combined Company. New vehicle leases generally have short terms,
which brings the consumer back to the market sooner than if the purchase were
debt financed. In addition, leases provide the Combined Company with a steady
source of late-model, off-lease vehicles for its used vehicle inventory.
Generally, leased vehicles remain under factory warranty for the term of the
lease, which allows the Combined Company to provide repair service to the lessee
throughout the lease term.

The Combined Company seeks to provide customer-oriented service designed to
meet the needs of its customers and establish lasting relationships that will
result in repeat and referral business. For example, the Combined Company's
dealerships strive to: (i) employ more efficient selling approaches; (ii)
utilize computer technology that decreases the time necessary to purchase a
vehicle; (iii) engage in extensive follow-up after a sale in order to develop
long-term relationships with customers; and (iv) extensively train their sales
staffs to be able to meet the needs of the customer. The Combined Company
continually evaluates innovative ways to improve the buying experience for its
customers and believes that its ability to share best practices among its
dealerships gives it an advantage over smaller dealerships.

58
60

The Combined Company acquires substantially all its new vehicle inventory
from Manufacturers. Manufacturers allocate a limited inventory among their
franchised dealers based primarily on sales 53
55

volume and input from dealers. The
Combined Company finances its inventory purchases through revolving credit
arrangements known in the industry as floor
planfloorplan facilities. As a result of its
size and based on discussions with several lenders, the Combined Company
believes it will be able to secure floorplan financing on terms more favorable
than those generally available to smaller dealers.

USED VEHICLE SALES

In 1996, the Combined Company sold 17,220 used vehicles at retail and used
vehicle operations generated $258.0 million in revenues, representing 31.3% of
total dealership revenues. The following table presents, on a combined basis for
each of the three years ended December 31, 1996 and for the six months ended
June 30, 1996 and June 30, 1997, unit sales, sales revenue, gross profit, gross
margin and average gross profit per retail unit sold related to the Combined
Company's retail sales of used vehicles:

COMBINED COMPANY'S USED VEHICLE SALES
----------------------------------------------------
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)

Retail unit sales........... 13,147 15,358 17,220 8,705 9,203
Retail sales revenue(1)..... $147,914 $185,665 $219,183 $110,091 $120,854
Gross profit................ $ 14,594 $ 17,560 $ 21,358 $ 11,014 $ 10,655
Gross margin................ 9.9% 9.5% 9.7% 10.0% 8.8%
Average gross profit per
retail unit sold.......... $ 1,110 $ 1,143 $ 1,240 $ 1,265 $ 1,158

- ---------------

(1) Excludes wholesale revenues.

The Combined Company sells used vehicles at each of its franchised
dealerships. Sales of used vehicles have become an increasingly significant
source of profit for the Combined Company. Sales of used vehicles as a
percentage of total vehicles sold by the Combined Company has increased from
28.2%40.4% in 1994 to 31.3%44.6% in 1996. 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. The Combined Company intends to
continue growing its used vehicle sales operations by maintaining a high quality
inventory, providing competitive prices and extended service contracts for its
used vehicles and continuing to promote used vehicle sales.

Profits from sales of used vehicles are dependent primarily on the ability
of the Combined Company's dealerships to obtain a high quality supply of used
vehicles and effectively manage that inventory. The Combined Company's new
vehicle operations provide the Combined Company's 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 Combined Company supplements its
used vehicle inventory with used vehicles purchased at auctions.

The Combined Company generally maintains a 45-6045 to 60 day supply of used
vehicles and offers to other dealers and wholesalers used vehicles that the
Combined Company does not retail to customers. Trade-ins may be transferred
among dealerships to provide balanced inventories of used vehicles at each of
the Combined Company's dealerships. The Combined Company believes that
acquisitions of additional dealerships will expand its internal market for
transfers of used vehicles among its dealerships and, therefore, increase the
ability of each of the Combined Company's dealerships to offer the same brand of
used vehicles as it sells new and to maintain a balanced inventory of used
vehicles. The Combined Company intends to develop integrated computer inventory
systems that will allow it to coordinate vehicle transfers between its
dealerships, primarily on a regional basis.

54
56

The Combined Company has taken several steps towards building client
confidence in its used vehicle inventory, one of which includes its
participation in the Manufacturers' certification processes which are available
only to new vehicle franchises. This process makes these used vehicles eligible
for new vehicle benefits such as new vehicle finance rates and extended
Manufacturer warranties. In addition, the Combined Company's dealerships offer
extended warranties covering the used vehicles that each of its dealerships
sells.

The Combined Company believes that franchised dealership strengths in
offering used vehicles include: (i) access to trade-ins on new vehicle
purchases, which are typically lower mileage and higher quality relative to
trade-ins on used car purchases, (ii) access to late-model, low mileage
off-lease vehicles, and (iii) the availability of Manufacturer certification and
extended Manufacturer warranties for the Combined Company's higher quality used
vehicles. This supply of high quality trade-ins and off-lease vehicles reduces
the Combined Company's dependence on auction vehicles, which are typically a
higher cost source of used vehicles.

SERVICE59
61

PARTS AND PARTS

In 1996, the Combined Company's service and parts operations generated
$77.2 million in revenues, representing 9.3% of total dealership revenues. The
following table presents, on a combined basis for each of the six years ended
December 31, 1996 and for the six months ended June 30, 1996 and June 30, 1997,
sales revenue, gross profit and gross margin related to the Combined Company's
service and parts operations:

COMBINED COMPANY'S SERVICE AND PARTS OPERATIONS
----------------------------------------------------
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)(UNAUDITED)

Sales revenue............... $ 61,024 $ 65,599 $ 77,184 $ 36,667 $ 38,400
Gross profit................ $ 28,787 $ 31,408 $ 35,978 $ 17,337 $ 20,230
Gross margin................ 47.2% 47.9% 46.6% 47.3% 52.7%

The Combined Company provides serviceparts and partsservice at each of its franchised
dealerships primarily for the vehicle makes sold by its dealerships. The
Combined Company provides maintenance and repair services at its 30 dealerships
and five collision service centers. The Combined Company utilizes approximately
500 service bays in providing these services. The Combined Company performs both
warranty and non-warranty service work.

Historically, the automotive repair industry has been highly fragmented.
However, the Combined Company believes that the increased use of advanced
technology in vehicles has made it difficult for independent repair shops to
retain the expertise to perform major or technical repairs. Additionally,
Manufacturers permit warranty work to be performed only at franchised
dealerships. Hence, unlike independent service stations, or independent and
superstore used car dealerships with service operations, the Combined Company's
franchised dealerships are qualified to perform work covered by Manufacturer
warranties. Given the increasing technological complexity of motor vehicles and
the trend toward extended Manufacturermanufacturer and dealer warranty periods for new
vehicles, the Combined Company believes that an increasing percentage of repair
work will be performed at the Combined Company's franchised dealerships each of
which have the sophisticated equipment and skilled personnel necessary to
perform such repairs and offer extended service contracts.

The Combined Company attributes its profitability in parts and service to a
comprehensive management system, including the use of a variable rate pricing
structure, cultivation of strong client relationships through an emphasis on
preventive maintenance and the efficient management of parts inventory.

55
57

In charging for its mechanics' labor, the Combined Company uses a variable
rate structure 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. The Combined Company
believes that variable rate pricing helps the Combined Company to achieve
overall gross margins in parts and service superior to those of certain
competitors who rely on fixed labor rates and percentage markups.

The Combined Company seeks to retain each purchaser of a vehicle as a
customer of the Combined Company's service and parts departments. The Combined
Company's dealerships have systems in place that track their customers'
maintenance records and notify owners of vehicles purchased at the dealerships
when their vehicles are due for periodic services. The Combined Company regards
its service and repair activities as an integral part of its overall approach to
customer service, providing an opportunity to foster ongoing relationships with
the Combined Company's customers and deepen customer loyalty.

The dealerships' parts departments support their respective sales and
service divisions. Each of the Combined Company's dealerships sells
factory-approved parts for vehicle makes and models sold by that dealership.
These parts are either used in repairs made by the dealership or sold at retail
to its customers or at wholesale to independent repair shops. Currently, each of
the Combined Company's dealerships employs its own parts manager and
independently controls its parts inventory and sales. Dealerships that sell the
same new vehicle makes have access to each other's computerized inventories and
frequently obtain unstocked parts from other dealerships.

OTHER DEALERSHIP REVENUESOPERATIONS

Other dealership revenues consist primarily of finance and insurance
income. The Combined Company arranges financing for its customers' vehicle
purchases, sells vehicle service contracts and arranges selected types of credit
insurance in connection with the financing of vehicle sales. The Combined
Company places heavy emphasis on finance and insurance ("F&I") and offers
advanced F&I training to its finance and insurance managers. This emphasis
resulted in the Combined Company's arranging of financing for 68% of its new
vehicle sales and 55% of its used vehicle sales in 1996, as compared to 60% and
56% respectively, in 1995. Typically, the Combined Company's dealerships

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forward proposed financing contracts to Manufacturers' captive finance
companies, selected commercial banks or other financing parties. The Combined
Company receives a finance fee from the lender for arranging the financing and
is typically assessed a charge-back against a portion of the finance fee if the
contract is terminated prior to its scheduled maturity for any reason, such as
early repayment or default. As a result, companies 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).

At the time of a new vehicle sale, the Combined Company offers extended
service contracts to supplement the Manufacturer warranty. Additionally, the
Combined Company sells primary service contracts for used vehicles. Currently,
the Combined Company primarily sells service contracts of third party vendors,
for which it recognizes a commission upon the sale of the contract. The Combined
Company also sells its own service contracts at one location and recognizes the
associated revenue over the life of the contract. In 1996, the Combined Company
sold service contracts on 36% and 44% of its new and used vehicle sales,
respectively.

The Combined Company also offers certain types of credit insurance to
customers who finance their vehicle purchases through the Combined Company. The
Combined Company sells credit life insurance policies to these customers, which
policies provide for repayment of the vehicle loan if the obligor dies while the
loan is outstanding. The Combined Company also sells accident and health
insurance policies, which provide payment of the monthly loan obligations during
a period in which the obligor is disabled.

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FRANCHISE AGREEMENTS

Each of the Combined Company's dealerships operates pursuant to a franchise
agreement between the applicable Manufacturer and the subsidiary of the Combined
Company that operates such dealership. The typical automotive franchise
agreement specifies the locations at which the dealer has the right and the
obligation to sell motor vehicles and related parts and products and to perform
certain approved services in order to serve a specified market area. The
designation of such areas and the allocation of new vehicles among dealerships
are subject to the discretion of the Manufacturer, which generally does not
guarantee exclusivity within a specified territory. A franchise agreement may
impose requirements on the dealer concerning such matters as the showrooms, the
facilities and equipment for servicing vehicles, the maintenance of inventories
of vehicles and parts, the maintenance of minimum net working capital and the
training of personnel. Compliance with these requirements is closely monitored
by the Manufacturer. In addition, Manufacturers require each dealership to
submit a financial statement of operations on a monthly and annual basis. The
franchise agreement also grants the dealer the non-exclusive right to use and
display the Manufacturer's trademarks, service marks and designs in the form and
manner approved by the Manufacturer.

Each franchise agreement sets forth the name of the person approved by the
Manufacturer to exercise full managerial authority over the dealership's
operations and the names and ownership percentages of the approved owners of the
dealership and contains provisions requiring the Manufacturer's prior approval
of changes in management or transfers of ownership of the dealership. Each of
the Combined Company's dealerships is owned, directly or indirectly, by the
Combined Company at the subsidiary level. A number of Manufacturers prohibit the
acquisition of a substantial ownership interest in the Combined Company or
transactions that may affect management control of the Combined Company, in each
case without the approval of the Manufacturer. See "Risk
Factors -- Manufacturers' Control Over Dealerships.Dealerships", "Risk Factors -- No
Agreement with American Honda Motor Co., Inc." and "Risk Factors -- Dependence
on Acquisitions for Growth; Manufacturers' Restrictions on Acquisitions".

Most franchise agreements expire after a specified period of time, ranging
from one to five years, and the Combined Company expects to renew any expiring
agreements in the ordinary course of business. The typical franchise agreement
provides for early termination or non-renewal by the Manufacturer under certain
circumstances such as change of management or ownership without Manufacturer
approval, insolvency or bankruptcy of the dealership, death or incapacity of the
dealer manager, conviction of a

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dealer manager or owner of certain crimes, misrepresentation of certain
information by the dealership or dealer manager or owner to the Manufacturer,
failure to adequately operate the dealership, failure to maintain any license,
permit or authorization required for the conduct of business, or material breach
of other provisions of the franchise agreement. The dealership is typically
entitled to terminate the franchise agreement at any time without cause.

The automobile franchise relationship is also governed by various federal
and state laws established to protect dealerships from the general unequal
bargaining power between the parties. The following discussion of state court
and administrative holdings and various state laws is based on management's
beliefs and may not be an accurate description of the state court and
administrative holdings and various state laws. The state statutes generally
provide that it is a violation for a Manufacturermanufacturer to terminate or fail to renew
a franchise without good cause. These statutes also provide that the
Manufacturermanufacturer is prohibited from unreasonably withholding approval for a proposed
change in ownership of the dealership. Acceptable grounds for disapproval
include material reasons relating to the character, financial ability or
business experience of the proposed transferee. Accordingly, certain provisions
of the franchise agreements, particularly as they relate to a Manufacturer'smanufacturer's
rights to terminate or fail to renew the franchise, have repeatedly been held
invalid by state courts and administrative agencies.

Under Texas law, despite the terms of contracts between Manufacturersmanufacturers and
dealers, Manufacturersmanufacturers may not unreasonably withhold approval of a transfer of a
dealership. It is unreasonable under Texas law for a Manufacturermanufacturer to reject a
prospective transferee of a dealership who is of good moral character and who
otherwise meets the Manufacturer'smanufacturer's written, reasonable and uniformly applied
standards or qualifications relating to the prospective transferee's business
experience and financial qualifications. In 57
59

addition, under Texas and Oklahoma
law and the laws of other states, franchised dealerships may challenge
Manufacturers'manufacturers' attempts to establish new franchises in the franchised dealers'
markets, and state regulators may deny applications to establish new dealerships
for a number of reasons, including a determination that the Manufacturermanufacturer is
adequately represented in the region. Texas and Oklahoma law limit the ability
of Manufacturersmanufacturers to terminate or fail to renew franchises. In addition, other
laws in Texas and elsewhere limit the ability of Manufacturersmanufacturers to withhold their
approval for the relocation of a franchise or require that disputes be
arbitrated. In addition, a Manufacturer'smanufacturer's license to distribute vehicles in
Texas and Oklahoma may be revoked if, among other things, the Manufacturermanufacturer has
forced or attempted to force an automobile dealer to accept delivery of motor
vehicles not ordered by that dealer. In Oklahoma, a Manufacturer'smanufacturer's license to
operate in the state may be revoked or suspended upon a finding that a
Manufacturermanufacturer has coerced or intimidated a dealer or acted dishonestly or failed
to act in accordance with reasonable standards of fair dealing. For further
discussion regarding Texas and Oklahoma law with regard to the transfer of
automobile franchises, see "Risk Factors -- No Agreement with American Honda
Motor Co., Inc."

COMPETITION

The automotive retailing industry is extremely 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 a vehicle serviced.

In the new vehicle area, the Combined Company competes with other
franchised dealers in each of its marketing areas. The Combined Company does not
have any cost advantage in purchasing new vehicles from the Manufacturers, and
typically relies on advertising and merchandising, sales expertise, service
reputation and location of its dealerships 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 Motor has announced that it is
exploring the possibility of going into business with some of its dealers to
create automotive superstores in selected markets.

In used vehicles, the Combined Company competes with other franchised
dealers, independent used car dealers, automobile rental agencies, private
parties and used car "superstores" for supply and

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resale of used vehicles. Used car "superstores" have recently opened in certain
markets in which the Combined Company competes, including Houston, Texas. In
addition, the Combined Company expects that additional used car "superstores"
will open in other markets in which the Combined Company competes. See "-- Used
Vehicle Sales".

The Combined Company believes that the principal competitive factors in
vehicle sales are the marketing campaigns conducted by Manufacturers, the
ability of dealerships to offer a wide selection of the most popular vehicles,
the location of dealerships and the quality of customer service. Other
competitive factors include customer preference for particular brands of
automobiles, pricing (including Manufacturer rebates and other special offers)
and warranties. The Combined Company believes that its dealerships are
competitive in all of these areas.

The Combined Company competes 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 Combined Company competes with
other automobile dealers, service stores and auto parts retailers in its parts
operations. The Combined Company believes 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 Combined Company's
prices.

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FACILITIES

Set forth in the table below is certain information relating to the
properties that the Combined Company uses in its business. Certain of the leases
described below reflect the terms of new leases to be entered into by the
Combined Company in connection with the Acquisitions. See "Certain
Transactions -- Leases".

OCCUPANT LOCATION USE LEASE/OWN
-------- -------- --- ---------

HOWARD GROUP
Bob Howard Automall... 13300 N. Broadway New and used car sales; Lease; expires in 2027 and is cancelable at
Extension, service; F&I the Combined Company's option in 2007 and at
Oklahoma City, Oklahoma the end of each subsequent five year period
13220 N. Broadway New and used car sales; Lease; expires in 2027 and is cancelable at
Extension, service; F&I the Combined Company's option in 2007 and at
Oklahoma City, Oklahoma the end of each subsequent five year period
715 W. Memorial Road, Storage and make ready Lease; current term is month-to-month
Oklahoma City, Oklahoma facility
Bob Howard Chevrolet.. 13130 N. Broadway New and used car sales; Lease; expires in 2027 and is cancelable at
Chevrolet........... Extension, service; F&I the Combined Company's option in 2007 and at
Oklahoma City, Oklahoma the end of each subsequent five year period
Bob Howard Toyota..... 13200 N. Broadway New and used car sales; Lease; expires in 2027 and is cancelable at
Extension, service; F&I the Combined Company's option in 2007 and at
Oklahoma City, Oklahoma the end of each subsequent five year period

Bob Howard
Honda-Acura......... 14137 N. Broadway New and used car sales; Lease; expires in 2027 and is cancelable at
Extension, service; F&I the Combined Company's option in 2007 and at
Edmond,Oklahoma City, Oklahoma the end of each subsequent five year period

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OCCUPANT LOCATION USE LEASE/OWN
-------- -------- --- ---------

Bob Howard
Honda/Acura......... 14137 N. Broadway New and used car sales; Lease; expires in 2001
Extension, service; F&I
Edmond, Oklahoma
3700 S. Broadway Collision services Lease; expires in 1999
Extension, center
Edmond, Oklahoma
Bob Howard Dodge...... 616 W. Memorial Road, New and used car sales; Lease; expires in 2001
Edmond, Oklahoma service; collision
services center; F&I

MCCALL GROUP
Sterling McCall
Toyota.............. 9400 Southwest Freeway New and used car sales; Lease; threetwo leases which expire in 2027 and
Sterling McCall Toyota.. Houston, Texas service; F&I are cancelable at the Combined Company's
option in 2007 and at the end of each
subsequent five year period
6015 Skyline Collision services Lease; expires in 2027 and is cancelable at
Houston, Texas center the Combined Company's option in 2007 and at
the end of each subsequent five year period
Sterling McCall 10422 Southwest Freeway New and used car sales; Lease; two leases each of which expireexpires in 2027 and is cancelable at
Lexus............... Houston, Texas service; F&I 2027 and are cancelable at the Combined Company's option in 2007 and at
the end of each subsequent five year period
10610 Wilcrest Collision services Lease; expires in 2027 and is cancelable at
Houston, Texas center the Combined Company's option in 2007 and at
the end of each subsequent five year period
10430 Southwest Freeway New & Used Car Sales Lease; lease expires in 2000 with an option to
Houston, Texas to extend until 2005

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OCCUPANT LOCATION USE LEASE/OWN
-------- -------- --- ---------

SMITH GROUP
Courtesy Nissan....... 1777 North Central Expwy. New and used car sales; Lease; expires in 2013
Richardson, Texas service; F&I
421 Industrial Boulevard Storage and make ready Lease; expires September 30,in 1997
Richardson, Texas facility
Mike Smith 1515 I-10 South New and used car sales; Lease; expires in 2027 and is cancelable at
Autoplaza........... Beaumont, Texas service; collision the Combined Company's option in 2007 and at
services center; F&I the end of each subsequent five year period
Town North............ 9150 U.S. Highway 183 New and used car sales; Owned by dealership
Austin, Texas service; F&I
9112 U.S. Highway 183 New and used car sales; Owned by dealership
Austin, Texas service; F&I
9008 United Drive Used car sales Lease; expires July 1,in 2001
Austin, Texas
9094 U.S. Highway 183 Storage Facility Lease; expires March 31,in 2001
Austin, Texas
9400 United Drive Storage Facility Lease; expires December 31, 1997 and
Austin, Texas automatically renews for successive one year
terms unless notice given by either party
8908 McCann Street Storage Facility Lease; month to month; may be terminated by
Austin, Texas either party with 30 days written notice

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OCCUPANT LOCATION USE LEASE/OWN
-------- -------- --- ---------

Round Rock Nissan..... 3050 North IH 35 New and used car sales; Lease; expires in 2027 and areis cancelable at
Austin, Texas service; F&I the Combined Company's option in 2007 and at
the end of each subsequent five year period
Acura Southwest....... 10455 Southwest Freeway New and used car sales; Owned by dealership
Houston, Texas service; F&I

KINGWOOD GROUP
A.J. Foyt Honda.......Motors........... 22575 Highway 59 N New and used car sales; Owned by dealership
Kingwood, Texas service; F&I
A.J. Foyt Isuzu....... 22577 Highway 59 N New and used car sales; Owned by dealership
Kingwood, Texas service; F&I
A.J. Foyt Used Cars...
401 South I.H. 45 Used car sales; F&I Owned by dealership
Conroe, Texas

GOVERNMENTAL REGULATIONS

A number of regulations affect the Combined Company's business of
marketing, selling, financing and servicing automobiles. The Combined Company
also is subject to laws and regulations relating to business corporations
generally.

Under Texas and Oklahoma law, the Combined Company must obtain a license in
order to establish, operate or relocate a dealership or provide certain
automotive repair services. These laws also regulate the Combined Company's
conduct of business, including its advertising and sales practices. Other states
may have similar requirements.

The Combined Company's financing activities with its 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 60
62

criminal and civil fines and
penalties, and in certain instances, create a private cause of action for
individuals. The Combined Company believes that it complies substantially with
all laws and regulations affecting its business and does 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 the Combined Company's capital expenditures, earnings, or
competitive position, and the Combined Company does not anticipate that such
compliance will have a material effect on the Combined Company in the future.

ENVIRONMENTAL MATTERS

The Combined Company is subject to a wide range of federal, state, and
local environmental laws and regulations, including those governing discharges
to the air and water, the storage of petroleum substances and chemicals, the
handling and disposal of wastes, and the remediation of contamination arising
from spills and releases. As with automobile dealerships generally, and service
and parts and collision repair center operations in particular, the Combined
Company's business involves the generation, use, handling 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 the Combined Company must comply.

The Combined Company's business also involves the use of aboveground and
underground storage tanks. Under applicable laws and regulations, the Combined
Company is responsible for the proper use, maintenance and abandonment of
regulated storage tanks owned or operated by it, and for remediation

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of subsurface soils and groundwater impacted by releases from such existing or
abandoned aboveground or underground storage tanks. In addition to these
regulated tanks, the Combined Company owns, operates, or has 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 the Combined Company to remediate any soils or groundwater resulting
from such releases.

The Combined Company is also subject to laws and regulations governing
remediation of contamination at facilities it operates or to which it sends
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 statutes 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. The Combined Company expects to implement programs that
address wastewater discharge requirements as well as containment of potential
discharges and spill contingency planning.

Environmental laws and regulations have become very complex and it has
become very difficult for businesses that routinely handle hazardous and
non-hazardous wastes to achieve and maintain full compliance with all applicable
environmental laws. Like virtually any network of automobile dealerships 61
63

and
vehicle service facilities, from time to time the Combined Company can be
expected to experience incidents and encounter conditions that will not be in
compliance with environmental laws and regulations. However, none of the
Combined
Company has notFounding Companies have been subject to any material environmental liabilities
in the past and the Combined Company does not anticipate that any material
environmental liabilities will be incurred in the future. Furthermore, the
Combined Company is in the process of establishing an environmental management
program that is intended to reduce the risk of noncompliance with environmental
laws and regulations. Nevertheless, environmental laws and regulations and their
interpretation and enforcement are changed frequently and the Combined Company
believes that the trend of more expansive and more strict environmental
legislation and regulations is likely to continue. Hence, there can be no
assurance that compliance with environmental laws or regulations or the future
discovery of unknown environmental conditions will not require additional
expenditures by the Combined Company, or that such expenditures would not be
material. See "Risk Factors -- Governmental Regulations and Environmental
Matters".

EMPLOYEES

As of June 30, 1997, the Combined Company employed 1,503 people, of whom
approximately 196 were employed in managerial positions, 533 were employed in
non-managerial sales positions, 551 were employed in non-managerial parts and
service positions and 223 were employed in administrative support positions. The
Combined Company intends, upon completion of the Offering, to provide certain
executive officers and managers with options to purchase Common Stock and
believes this equity incentive will be attractive to existing and prospective
employees of the .Combined Company. See "Management -- 1996 Stock Incentive Plan"
and "1998 Employee Stock Purchase Plan".

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The Combined Company believes that its relationships with its employees are
favorable. None of the Combined Company's employees is represented by a labor
union. Because of its dependence on the Manufacturers, however, the Combined
Company may be affected by labor strikes, work slowdowns and walkouts at the
Combined Company Manufacturers' manufacturing facilities.

LEGAL PROCEEDINGS AND INSURANCE

From time to time, the Combined Company is named in claims involving the
manufacture of automobiles, contractual disputes and other matters arising in
the ordinary course of the Combined Company's business. Currently, no legal
proceedings are pending against or involve the Combined Company that, in the
opinion of management, could be expected to have a material adverse effect on
the business, financial condition or results of operations of the Combined
Company.

Because of their vehicle inventory and nature of business, automobile
retail dealerships generally require significant levels of insurance covering a
broad variety of risks. The Combined Company's insurance includes an umbrella
policy with a $50 million per occurrence limit (upon consummation of the
Offering) 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.

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MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

Set forth below are the Combined Company's executive officers and
directors, together with their positions and ages.

EXPIRATION OF
NAME AGE POSITION TERM AS DIRECTOR
---- --- -------- ----------------

B.B. Hollingsworth, Jr............ 55 Chairman, President and Chief Executive 2000
Officer
Robert E. Howard, II.............. 50 Director; President of Howard Group 2000
Sterling B. McCall, Jr............ 62 Director; President of McCall Group 1998
Charles M. Smith.................. 51 Director; President of Smith Group 1999
John T. Turner.................... 53 Senior Vice President -- Corporate
Development
Scott L. Thompson................. 38 Senior Vice President -- Chief Financial
Officer and Treasurer
Frank R. Todaro................... 50 Vice President -- Corporate Services
John H. Duncan.................... 69 Director 1999
Bennett E. Bidwell................ 70 Director 1998

Set forth below is a brief description of the business experience of the
directors and executive officers of the Combined Company.

B.B. HOLLINGSWORTH, JR. has served as President, Chief Executive Officer
and Director of the Combined Company since August 1996. Prior to joining the
Combined Company, Mr. Hollingsworth spent nineteen years with Service
Corporation International ("SCI"), where he directed an acquisition program that
established SCI as the world's leading consolidator of the funeral industry. He
joined SCI in 1967, was then named Vice President for Corporate Development, was
named Vice President and Chief Financial Officer in 1972, and was elected
President and named Director in 1975. He served as President and Director of SCI
from 1975 until retirement in 1986. From 1986 to 1996, Mr. Hollingsworth served
as a consultant to SCI. Mr. Hollingsworth is a shareholder and director of Foyt
Motors, Inc., a Founding Company. He has served as a director of several public
and private companies.

ROBERT E. HOWARD, II. has served as a Director of the Combined Company
since April 1997. Mr. Howard will also serve as President of Howard Group upon
consummation of the Acquisitions. Mr. Howard has more than 28 years experience
in the automotive retailing industry. From 1969 to 1977, he served in various
management positions at franchised dealerships. Since 1978 he has been a
shareholder and has served as Chairman of Howard Pontiac-GMC, Inc., a franchised
dealership within the Howard Automall umbrella and a Founding Company. Mr.
Howard is also Chairman and a shareholder of the following additional Founding
Companies: Bob Howard Chevrolet, Bob Howard Honda-Acura,Honda/Acura, Bob Howard Toyota and
Bob Howard Dodge. He is a recipient of the 1997 Time Magazine Quality Dealer
Award and presently serves as Chairman of the Oklahoma Motor Vehicle Commission
and as a Director of the Oklahoma City Metropolitan Automobile Dealers
Association.

STERLING B. MCCALL, JR. has served as Director of the Combined Company
since August 1996. Mr. McCall will also serve as President of McCall Group upon
consummation of the Acquisitions. Mr. McCall has over 27 years experience in the
automotive retailing industry and is Chairman of Sterling McCall Toyota and
Sterling McCall Lexus, both Founding Companies. He has been a shareholder and
has served as President or Chairman of Sterling McCall Toyota and Sterling
McCall Lexus since their inception in 1969 and 1989, respectively. He is a
former Director of the American International Automobile Dealers Association, a
former Director and Chairman of the Houston Automobile Dealers Association and a
former Chairman of the Gulf States Toyota Dealer Council, and presently is a
Director of the Texas Automobile Dealers Association. Mr. McCall has won the
Time Magazine Quality Dealer Award and the Sports Illustrated Dealer of
Distinction Award.

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CHARLES M. SMITH has served as Director of the Combined Company since its
formation in December 1995. Mr. Smith will also serve as president of Smith
Group upon consummation of the Acquisitions. Mr. Smith has more than 28 years
experience in the automotive retailing industry. From 1968 to 1980, he served in
various capacities in dealerships owned and operated by the Smith family. From
1980 to 1985, he owned and operated his own automobile dealership. Since 1985 he
has served as managing partner of Smith & Liu Management Company, the management
entity for the Smith Group dealerships prior to the Acquisitions. He is Chairman
of the American International Automobile Dealers Association and is Vice
Chairman of the Texas Automobile Dealers Association. He has won the Time
Magazine Quality Dealer Award and the Sports Illustrated All-Star Dealer Award.

JOHN T. TURNER has served as the Combined Company's Senior Vice
President -- Corporate Development since December 1996. Prior to joining the
Combined Company, Mr. Turner functioned as Managing Director -- Corporate
Development, Europe for SCI. From 1990 to 1993, Mr. Turner served as Senior Vice
President -- Operations and Director of The Loewen Group, Inc. From 1986 to
1990, he served as President and Director of Paragon Family Services, Inc. From
1981 to 1986, he served as Senior Vice President -- Corporate Development for
SCI. Mr. Turner was a partner in Arthur Young & Company from 1977 to 1981.
Currently he is a director of COREStaff, Inc.

SCOTT L. THOMPSON has served as Senior Vice President -- Chief Financial
Officer and Treasurer of the Combined Company since December 1996. From 1991 to
1996, Mr. Thompson served as Executive Vice President, Operations and Finance
for KSA Industries, Inc., a diversified enterprise with interests in automotive
retailing, energy and professional sports. Among Mr. Thompson's other
responsibilities within the KSA group of companies, he served as a Vice
President and director of three Houston-area automobile dealerships with
aggregate annual revenues of $180 million. Additionally, in connection with his
position at KSA Industries, Inc. he served as a director of Adams Resources
Energy, Inc., a public oil and gas company. He is a Certified Public Accountant,
and from 1980 to 1991 he held various positions with Arthur Andersen LLP.

FRANK R. TODARO has served as Vice President -- Corporate Services of the
Combined Company since March 1997. From 1993 to 1997, Mr. Todaro served as a
self employed consultant providing marketing and management consulting services.
From 1985 to 1993, Mr. Todaro was a Principal with Ernst & Young where he served
as the Director of General Management Consulting and later the Director of
Marketing. From 1972 to 1985, Mr. Todaro served in various managerial and sales
positions with engineering consulting firms.

JOHN H. DUNCAN was elected Director of the Combined Company in June 1997.
Since 1988, Mr. Duncan has been a private investor with holdings in the
automotive, oil and gas and real estate industries. From 1958 to 1968, Mr.
Duncan served as President of Gulf & Western Industries (now Paramount
Communications), a company which he co-founded. Mr. Duncan currently serves as a
director, Chairman of the Executive Committee and member of the Compensation
Committee of Enron Corporation and a director and Chairman of the Compensation
Committee of Enron Oil Trading & Transportation. Mr. Duncan also serves on the
Board of Trustees of Southwestern University, the Board of Trustees of the Texas
Heart Institute and the Board of Visitors of the University of Texas (M.D.
Anderson) Cancer Foundation.

BENNETT E. BIDWELL was elected Director of the Combined Company in June
1997. Mr. Bidwell joined Chrysler Corporation as Executive Vice President in
1983 and was elected to the Board of Directors in that same year. He was named
Vice Chairman of Chrysler Corporation in 1985, Vice Chairman of Chrysler Motors
Corporation in 1987 and President - Product and Marketing of Chrysler Motors
Corporation in 1988. From 1988 to 1990, Mr. Bidwell served as Chairman of
Chrysler Motors Corporation. Mr. Bidwell retired from Chrysler Corporation in
1993. Prior to joining Chrysler, Mr. Bidwell spent 27 years with Ford Motor
Company, and from 1981 to 1983 he was President and Chief Operating Officer of
The Hertz Corporation. His past directorships include National Steel Corporation
(1981-1983) and McDonald & Company Securities, Inc. (1992-1995). Mr. Bidwell
currently serves as a director for Kerr-McGee Corporation, International
Management Group, Budd Company and Kelly Management Group.

6469
6671

COMMITTEES OF THE BOARD OF DIRECTORS

AUDIT COMMITTEE

The Audit Committee which will be established prior to consummation of the
Offering, will consistconsists of Messrs. Duncan and Bidwell. The Audit
Committee will
havehas responsibility for, among other things, (i) recommending the
selection of the Combined Company's independent accountants, (ii) reviewing and
approving the scope of the independent accountants' audit activity and extent of
non-audit services, (iii) reviewing with Management and the independent
accountants the adequacy of the Combined Company's basic accounting systems and
the effectiveness of the Combined Company's internal audit plan and activities,
(iv) reviewing with Management and the independent accountants the Combined
Company's financial statements and exercising general oversight of the Combined
Company's financial reporting process and (v) reviewing the Combined Company's
litigation and other legal matters that may affect the Combined Company's
financial condition and monitoring compliance with the Combined Company's
business ethics and other policies.

COMPENSATION COMMITTEE

The Compensation Committee which will be established prior to consummation
of the Offering, will consistconsists of Messrs. Duncan and Bidwell. This
committee will
havehas general supervisory power over, and the power to grant awards
under the 1996 Stock Incentive Plan (the "Plan").Plan. The Compensation Committee will havehas
responsibility for, among other things, (i) reviewing the recommendations of the
Chief Executive Officer as to appropriate compensation of the Combined Company's
principal executive officers and certain other key personnel and the Chief
Executive Officer; (ii) examining periodically the general compensation
structure of the Combined Company and (iii) supervising the welfare and pension
plans and compensation plans of the Combined Company.

CHAIRMAN'S COUNCIL

The Chairman's Council which will be established prior to consummation of
the Offering, will initially consistconsists of Messrs. Howard, McCall and
Smith. The Chairman's Council may recommend up to three individuals to be
nominated as directors, which recommendation may be accepted at the sole
discretion of the Board of Directors. Members of the Chairman's Council may be
appointed or removed at any time by the Board of Directors and all members of
the Chairman's Council shall be subject to annual election by the Board of
Directors.

DIRECTORS COMPENSATION

Directors who are full-time employees of the Combined Company do not
receive a retainer or fees for service on the Board of Directors or on
committees of the board.Board. Members of the Board of Directors who are not full-time
employees of the Combined Company receive an annual fee of $ ,$6,000 and a fee of
$$1,500 for attendance at each meeting of the Board of Directors. Directors and at each
meetingalso
receive the use of its committeesone demonstrator vehicle or any special committee established by the board, and
a fee of $ per day for any special assignments. The chairmen of the
audit and compensation committees receive a fee of $ for attendance at
each meeting of the committee they chair.economic equivalent. In
addition, directors of the Combined Company (including directors who are not
full-time employees of the Combined Company) are eligible for grants of stock
options and other awards pursuant to the 1996 Stock Incentive Plan. 65Upon
consummation of the Offering, Messrs. Duncan and Bidwell will each receive
options to purchase 10,000 shares of Common Stock at the initial public offering
price.

70
6772

EXECUTIVE COMPENSATION; EMPLOYMENT AGREEMENTS

The following table sets forth certain summary information concerning the
compensation provided by the Combined Company in 1996 to its Chief Executive
Officer. No other person serving as an executive officer during 1996 earned
$100,000 or more in combined salary and bonus during such year.

SUMMARY COMPENSATION TABLE

ANNUAL
COMPENSATION(1)(2)
--------------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY(3) BONUS COMPENSATION
--------------------------- --------- -------- ------------

B.B. Hollingsworth, Jr., Chairman, President and Chief
Executive Officer......................................... $60,000 $ -- $ --

- ---------------

(1) Amounts exclude perquisites and other personal benefits because such
compensation did not exceed the lesser of $50,000 or 10% of the total annual
salary and bonus reported.

(2) In addition, in March 1997 Mr. Hollingsworth, Jr. was granted options to
purchase 100,000 shares of Common Stock at $2.90 per share.

(3) Reflects amounts that were earned by Mr. Hollingsworth during 1996. Such
amounts have not been paid and are contingent upon the closing of the
Acquisitions and the Offering.

The Combined Company anticipates that during 1997, its most highly
compensated executive officers will be Messrs. Hollingsworth, Howard, McCall,
Smith, Turner and Thompson. Each of these executive officers will enter into an
employment agreement with the Combined Company, which will be effective upon
consummation of the Acquisitions and the Offering. The employment agreements
provide for the following base salaries for 1997: B.B. Hollingsworth,
Jr. -- $360,000; Robert E. Howard, II -- $300,000; Sterling B. McCall,
Jr. -- $300,000; Charles M. Smith -- $300,000; John T. Turner -- $250,000; and
Scott L. Thompson -- $180,000. The employment agreements also provide that such
officers' participation in bonus plans will be governed by the bonus and
incentive plans adopted by the Board of Directors in which the officer is a
participant. Currently, the Board of Directors has not adopted any bonus or
incentive plans.

Each employment agreement is for a term of five years, and unless
terminated or not renewed by the Combined Company or the employee, the term will
continue thereafter on a month-to-month basis terminable at any time by either
the Combined Company or the employee, with or without cause, upon thirty days
notice. In the event of a termination of employment by the Combined Company
without cause or by the employee due to an uncorrected material breach of the
employment agreement by the Combined Company, the employee is entitled to
receive his or her base salary paid bi-weekly until the end of his contract
term. In the event of an involuntary termination of employment following a
merger, consolidation or dissolution of the Combined Company or a sale of all
its assets, the employee is entitled to a lump sum payment equal to the amount
of base pay he is entitled to under the remainder of his contract. The Combined
Company is not obligated to pay any amounts to the employee other than his pro
rata base salary through the date of his or her termination upon (i) voluntary
termination of employment by the employee; (ii) termination of employment by the
Combined Company for cause (as defined); (iii) death of the employee; or (iv)
long-term disability of the employee. During the period of employment and for a
period of three years after termination of employment, the employees are
generally prohibited from competing or assisting others to compete with the
Combined Company. Mr. Howard, however, will be permitted to own and operate the
Chevrolet dealership in Tulsa, Oklahoma, together with other related franchises,
if the Combined Company's agreement to acquire the Tulsa Chevrolet dealership is
terminated. See "The Acquisitions". In addition, during the period of employment
and for a period of five years after termination of employment, the employees
are generally prohibited from inducing any other employee to terminate
employment with the Combined Company.

71
73

1996 STOCK INCENTIVE PLAN

In November 1996, the Board of Directors and the stockholders of the
Combined Company adopted the Combined Company's 1996 Stock Incentive Plan (the
"Plan"). The purpose of the Plan is to provide directors, employees (key
operating managers at the dealerships) and consultants of the Combined

66
68 Company
and its subsidiaries additional incentive and reward opportunities designed to
enhance the profitable growth of the Combined Company. The Plan provides for the
granting of incentive stock options intended to qualify under Section 422 of the
Code, options that do not constitute incentive stock options and restricted
stock awards. The Plan is administered by the Compensation Committee of the
Board of Directors. In general, the Compensation Committee is authorized to
select the recipients of awards and the terms and conditions of those awards.

The number of shares of Common Stock that may be issued under the Plan may
not exceed 2,000,000 shares (subject to adjustment to reflect stock dividends,
stock splits, recapitalizations and similar changes in the Combined Company's
capital structure). Shares of Common Stock which are attributable to awards
which have expired, terminated or been canceled or forfeited are available for
issuance or use in connection with future awards. The maximum number of shares
of Common Stock that may be subject to awards granted under the Plan to any one
individual during any calendar year may not exceed 500,000 (subject to
adjustment to reflect stock dividends, stock splits, recapitalizations and
similar changes in the 'sCombined Company's capital structure).

The price at which a share of Common Stock may be purchased upon exercise
of an option granted under the Plan will be determined by the Compensation
Committee but (i) in the case of an incentive stock option, such purchase price
will not be less than the fair market value of a share of Common Stock on the
date such option is granted, and (ii) in the case of an option that does not
constitute an incentive stock option, such purchase price will not be less than
80% of the fair market value of a share of Common Stock on the date such option
is granted. Shares of Common Stock that are the subject of a restricted stock
award under the Plan will be subject to restrictions on disposition by the
holder of such award and an obligation of such holder to forfeit and surrender
the shares to the under certain circumstances (the "Forfeiture Restrictions").
The Forfeiture Restrictions will be determined by the Compensation Committee in
its sole discretion, and the Compensation Committee may provide that the
Forfeiture Restrictions will lapse upon (a) the attainment of one or more
performance targets established by the Compensation Committee, (b) the award
holder's continued employment with the Combined Company or continued service as
a consultant or director for a specified period of time, (c) the occurrence of
any event or the satisfaction of any other condition specified by the
Compensation Committee in its sole discretion or (d) a combination of any of the
foregoing.

No awards under the Plan may be granted after ten years from the date the
Plan was adopted by the Board of Directors. The Plan will remain in effect until
all awards granted under the Plan have been satisfied or expired. The Board of
Directors in its discretion may terminate the Plan at any time with respect to
any shares of Common Stock for which awards have not been granted. The Plan may
be amended, other than to increase the maximum aggregate number of shares that
may be issued under the Plan or to change the class of individuals eligible to
receive awards under the Plan, by the Board of Directors without the consent of
the stockholders of the .Combined Company. No change in any award previously
granted under the Plan may be made which would impair the rights of the holder
of such award without the approval of the holder.

In December 1996, the Combined Company issued options to purchase 205,000
shares of Common Stock at $2.90 per share as follows: 125,000 shares to John T.
Turner and 80,000 shares to Scott L. Thompson. Each of these options will vest
16.7% per year after the issuance of the options. In March 1997, the Combined
Company issued options to purchase an additional 360,000 shares of Common Stock
at $2.90 per share to certain employees of the Combined Company, including the
following executive officers: B.B. Hollingsworth, Jr. -- 100,000 shares, John T.
Turner -- 80,000 shares and Scott L. Thompson -- 80,000 shares. In addition,
upon consummation of the Acquisitions and the Offering, the Combined Company
will issue options to purchase 305,000750,950 shares of Common Stock at the initial
public

72
74

offering price to itscertain employees and directors of the Combined Company,
including the following executive officers as follows: 100,000 shares toofficers: Mr. Hollingsworth 125,000 shares to-- 100,000, Mr.
Turner -- 125,000 and 80,000 shares to Mr. Thompson.

67
69Thompson -- 80,000.

The following table provides certain information regarding options granted
during 1996:

OPTION GRANTS IN LAST FISCAL YEAR

INDIVIDUAL GRANTS
----------------------------------------------------------
PERCENT OF POTENTIAL REALIZABLE PERCENT OF VALUE AT ASSUMED
NUMBER OF TOTAL ASSUMED ANNUAL RATES OF
STOCK
SECURITIES OPTIONS EXERCISE STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OR BASE OPTION TERM
OPTIONS EMPLOYEES PRICE EXPIRATION ----------------------------------------------------
NAME GRANTED (#) IN FISCAL YEAR ($/ SH) DATE 5% ($) 10% ($)
---- ----------- -------------- -------- ---------- --------- ---------------------- -------------

John T. Turner.............Turner........ 125,000(1) 61.0% $2.90 12/13/06 1,480,000 2,074,000
Scott L. Thompson..........Thompson..... 80,000(1) 39.0% $2.90 12/13/06 947,000 1,326,000

- ---------------

(1) The options were granted in December 1996 and vest 16.7% annually.

1998 EMPLOYEE STOCK PURCHASE PLAN

In September 1997, the Board of Directors and the stockholders of the
Combined Company adopted the Combined Company's 1998 Employee Stock Purchase
Plan (the "Purchase Plan"). The Purchase Plan authorizes the issuance of up to
200,000 shares of Common Stock (subject to adjustment in the event of stock
dividends, stock splits and certain other events) 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 Combined Company and its participating
subsidiaries who are employed as of January 1, 1998 or the first day of each
successive April, July, October and January thereafter (a "Date of Grant").
However, an employee may not be granted an option under the Purchase Plan if
after the granting of the option such employee would be deemed to own 5% or more
of the combined voting power or value of all classes of stock of the Combined
Company. A committee appointed by the Board of Directors (the "Committee") is
charged with the general administration of the Purchase Plan and has the
authority to designate any present or future subsidiary of the Combined Company
as a participating subsidiary.

For each three-month period beginning on a Date of Grant (an "Option
Period") during the term of the Purchase Plan, unless the Committee determines
otherwise, each eligible employee may authorize payroll deductions to be made
during the Option Period, which amounts are used at the end of the Option Period
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.
Employees have discretion to determine the amount of their payroll deduction
under the Purchase Plan, subject to the limit that not more than 10% of
compensation may be deducted in any Option Period and other limitations set
forth in Section 423 of the Code. No employee may purchase Common Stock under
the Purchase Plan valued at more than $25,000 for each calendar year in
accordance with the provisions of the Code. An employee may withdraw from the
Purchase Plan, in whole but not in part, at any time prior to the last day of an
Option Period, by delivering a withdrawal notice to the Combined Company. In the
event an employee withdraws, the Combined Company will refund the entire amount
of the payroll deductions during the Option Period, without interest.

73
75

CERTAIN TRANSACTIONS

In connection with the formation of Group 1 Automotive in December 1995,
Group 1 Automotive issued 1,000 shares of Common Stock for $500 to Smith & Liu
Management Company, a Texas general partnership which has provided management
services to the Smith Group dealerships prior to consummation of the
Acquisitions ("Smith & Liu"). Mr. Smith is a partner of Smith & Liu and a
director of the Combined Company. In July 1996, Group 1 Automotive acquired
1,000 shares of Common Stock from Smith & Liu for aggregate consideration of
$500 and issued 500 shares to Mr. Hollingsworth for an aggregate consideration
of $5,000. Subsequently, Group 1 Automotive split its outstanding common stock
on a 900-for-one basis accomplished as a stock dividend. For a description of
the Acquisitions, see "The Acquisitions".

In order to finance the expenses of Group 1 Automotive prior to the
Acquisitions and the Offering, Smith & Liu, the Howard Group, the McCall Group,
the Smith Group and the Kingwood Group made loans to Group 1 Automotive, as of
August 15,October 14, 1997, of $87,960, $282,901, $521,506, $433,674$353,626, $592,231, $504,399 and $126,345,$144,170,
respectively. These advances all have maturities of less than one year and bear
interest at a rate of 7% per annum. As of October 14, 1997, interest accrued on
loans from Smith & Liu, the Howard Group, the McCall Group, the Smith Group and
the Kingwood Group equaled $5,654, $6,783, $18,836, $13,065 and $4,290,
respectively.

Certain officers, directors and stockholders, or their affiliates, of the
Combined Company have engaged in transactions with the Founding Companies prior
to consummation of the Acquisitions. Except for the transactions described
below, none of these transactions will continue after consummation of the
Acquisitions. For a discussion of these transactions for the three years ended
December 31, 1996 and for the six months ended June 30, 1997, see the Notes to
Combined Financial Statements.

LEASES

Certain of the properties leased by the Founding Companies are owned by
officers, directors or holders of 5% or more of the Common Stock of the Combined
Company or their affiliates. As part of the Acquisitions, the Founding Companies
have agreed to replace each of the existing leases with officers, directors or
5% stockholders (the "Related Party Leases") with a standard lease agreement for
each property. However, one Related Party Lease, covering the real estate and
facilities of the Howard collision repair center, will remain in place between
Bob Howard Honda-Acura,Honda/Acura, as lessee, and North Broadway Real Estate, an Oklahoma
limited liability company owned 50% by Robert E. Howard II and 50% by an
unrelated third party. This lease provides for a five-year term ending July 1,
1999 and a monthly rental rate of $9,000, and requires Bob Howard Honda/Acura to
pay all applicable property taxes, maintain adequate insurance and repair or
replace the leased building if necessary.

The term of each lease that is to be replaced is for 30 years and is
cancelable at the Combined Company's option ten years from execution of the
lease and at the end of each subsequent five year period. Additionally, the
Combined Company has a right of first refusal to acquire the property. The lease
requires the Combined Company to be responsible for taxes, insurance and, in
certain circumstances, maintenance. Each of the Related Party Leases and the
rents payable thereunder are described below. Under each of the Related Party
Leases, the rent is subject to increases every five years based on increases in
the consumer price index.Consumer Price Index. The Combined Company believes that the terms of the
Related

68
70 Party Leases, taken as a whole, are no less favorable to the Combined
Company than could be obtained from unaffiliated parties.

Under two separate leases, Sterling McCall Toyota leases property owned by
partnerships of which Mr. McCall and his affiliates are partners and that are
used by Sterling McCall Toyota as an automobile dealership. The two leases
provide for aggregate monthly rentals of $70,000.

Sterling McCall Toyota leases property owned by SMC Investment, Inc. ("SMC
Investment") and that is used by Sterling McCall Toyota as a repair center. Mr. McCall
and his affiliates own all of the stock of SMC Investment. The lease provides
for aggregatea monthly rentalsrental of $7,000 per month. The property and fixtures subject to
this lease secure indebtedness of SMC Investment. The amount of such
indebtedness outstanding as of June 30, 1997 was approximately $0.7 million.

74
76

Sterling McCall Toyota leases property that is owned by a partnership of
which Mr. McCall is a partner and that is used by Sterling McCall Toyota as a
storage lot. The lease provides for aggregatea monthly rentalsrental of $7,000. Under three separate leases,The property and
fixtures subject to this lease secure indebtedness of Mr. McCall. The amount of
such indebtedness outstanding as of June 30, 1997 was approximately $0.2
million.

Sterling McCall LexusToyota leases propertiesproperty that is owned by two partnerships of
which Mr. McCall is a partner and histhat is used by Sterling McCall Toyota as an
automobile dealership. The lease provides for a monthly rental of $70,000. The
property and fixtures subject to this lease secure indebtedness of two
affiliates are partners.of Mr. McCall. The properties areamount of such indebtedness outstanding as of June
30, 1997 was approximately $4.6 million.

Sterling McCall Lexus leases property that is owned by a partnership of
which Mr. McCall is a partner and that is used by SMC Luxury Cars as an
automobile dealershipdealership. The lease provides for a monthly rental of $70,000. The
property and fixtures subject to this lease secure indebtedness of an affiliate
of Mr. McCall. The amount of such indebtedness outstanding as of June 30, 1997
was approximately $3.4 million.

Sterling McCall Lexus leases property that is owned by Mr. McCall and that
is used by Sterling McCall Lexus as a repair center. The two leases that relate to the use of the automobile dealership
provide for aggregate monthly rentals of $70,000. The lease relating to the
repair center provides for aggregatea
monthly rentalsrental of $6,500. The property subject to this lease secures
indebtedness of Mr. McCall. The amount of such indebtedness outstanding as of
June 30, 1997 was approximately $0.4 million.

Mike Smith Autoplaza Inc. ("Mike Smith Autoplaza") leases property owned by a general partnership, of
which the children of Charles M. Smith are partners. The property is used by
Mike Smith Autoplaza as an automobile dealership. The leases provide for monthly
rental payments of $46,500. The property and fixtures subject to this lease
secure indebtedness of an affiliate of Mr. Smith. The amount of such
indebtedness outstanding as of June 30, 1997 was approximately $2.2 million.

Round Rock Nissan Inc. ("Round Rock Nissan") leases property owned by SKLR Round Rock, L.L.C., a Texas
limited liability corporation in which Charles M. Smith, has an ownership
interest. The property is used by Round Rock Nissan as an automobile dealership.
The lease provides for current monthly rental payments of $32,000. The property
and fixtures subject to this lease secure indebtedness of an affiliate of Mr.
Smith. The amount of such indebtedness outstanding as of June 30, 1997 was
approximately $2.4 million.

Bob Howard Automall leases two properties owned by Robert E.Mr. Howard II and used by
Bob Howard Automall as automobile dealerships. These leases relating to these
properties provide for aggregate monthly rentals of $85,862. The property and
fixtures subject to this lease secure indebtedness of Mr. Howard. The amount of
such indebtedness outstanding as of June 30, 1997 was approximately $3.6
million.

Bob Howard Chevrolet leases property owned by Robert E.Mr. Howard II and used by Bob
Howard Chevrolet as an automobile dealership. The lease relating to this
property provides for a monthly rental of $48,500. The property and fixtures
subject to this lease secure indebtedness of Mr. Howard. The amount of such
indebtedness outstanding as of June 30, 1997 was approximately $3.3 million.

Bob Howard Honda-AcuraHonda/Acura leases property owned by North Broadway Real Estate,
L.L.C., an Oklahoma limited liability company in which Robert E.Mr. Howard II owns a 50%
interest. This property is used as a collision repair center, and the lease
relating to this property provides for a monthly rental of $9,000.

Bob Howard Toyota leases property owned by Robert E.Mr. Howard II and used by Bob
Howard Toyota as an automobile dealership. The lease relating to this property
provides for a monthly rental of $33,500. The property and the fixtures subject to
these leasesthis lease secure indebtedness of Mr. Howard. The amount of such indebtedness
outstanding as of June 30, 1997 was $0.9 million.

Certain of the property and the fixtures leased to the Combined Company
serve as collateral for various indebtedness of the principals of the Founding
Companies.Companies and certain affiliates of such principals, as described above. Each of
such principals have agreed to take all action necessary to secure an agreement
from each of the lenders that, upon a default of any of such principals, such
lenders

75
77

will honor the lease and will not disturb the Combined Company's right to
possession of the applicable property under the lease. Such principals of the
Founding Companies have also agreed to grant an option to purchase the
applicable leased premises at a price equal to the outstanding indebtedness that
is secured by the property if the principals of the Founding Companies have not
obtained such an agreement from the lenders within 90 days after consummation of
the Acquisitions.

LOANS

Certain of the Founding Groups have incurred indebtedness which has been
personally guaranteed by itstheir stockholders or by entities controlled by itstheir
stockholders. The Combined Company intends to

69
71 repay, refinance or otherwise take
steps to remove these personal guarantees. It is the intention of management
that as soon as practicable after the Acquisitions and the Offering, the debt of
the Combined Company will cease to be personally guaranteed by any of its
officers, directors or stockholders.

CertainThe following table sets forth, as of June 30, 1997, the indebtedness of
the Founding Groups which is guaranteed by stockholders of the Founding Groups:

DEBTOR GUARANTOR PRINCIPAL AMOUNT
------ --------- ----------------
(IN MILLIONS)

Town North Nissan........... Charles Smith, W.C. Smith, Ronald Kutz, Randall Ross, Kuo $ 3.4
Kang Liu, Daniel C.Y. Liu
Acura Southwest............. Charles Smith, Daniel C.Y. Liu, Ralph O'Connor 1.4
Foyt Motors................. B.B. Hollingsworth, Jr., John Duncan, Robert Struzynski, 2.7
A.J. Foyt, Jr.
Round Rock Nissan........... Charles Smith, Daniel C.Y. Liu, Ronald Kutz, William 0.4
Lawrence, Randall Ross, Janet Sopronyi, Thomas Park
Bob Howard Automall......... Robert E. Howard II 15.8
Bob Howard Honda/Acura...... Robert E. Howard II 5.3
Bob Howard Chevrolet........ Robert E. Howard II 8.4
Bob Howard Dodge............ Robert E. Howard II 5.3
Bob Howard Toyota........... Robert E. Howard II 3.0
Sterling McCall Toyota...... Sterling B. McCall, Jr. 0.2
Sterling McCall Toyota...... Sterling B. McCall, Jr. 14.1
Sterling McCall Toyota and
Sterling McCall Lexus..... Sterling B. McCall, Jr. 10.2
Sterling McCall Lexus....... Sterling B. McCall, Jr. 6.1

Certain principals of the Founding Groups, and certain affiliates of such
principals, have incurred indebtedness which prior to consummation of the Acquisitions have beenis guaranteed by certain of the
Founding Companies. With the exception of the Round Rock Nissan guarantee
described below, all applicable lenders have agreed to release the Founding
Companies and/or securedfrom their guarantees of indebtedness of the principals and their
affiliates. These releases will be effective upon the consummation of the
Offering. Following is a list of indebtedness of principals and their affiliates
which will cease to be guaranteed by certainthe Founding Companies upon consummation of
their assets.the Offering: Mr. Howard, approximately $7.8 million, Mr. McCall and affiliates,
approximately $8.0 million; and Mr. Smith and affiliates, approximately $2.2
million.

Upon consummation of the Offering, Round Rock Nissan will continue to be a
guarantor of indebtedness incurred by SKLR Round Rock, L.C., a limited liability
company in which Charles M. Smith owns a 22% interest. No other entity
comprising the Combined Company will be liable under Round Rock Nissan's
guarantee. At June 30, 1997, the aggregateoutstanding principal amount of this
indebtedness of these principals that was subject
to guarantees or secured by assets of the Founding Companies was approximately $20.4$2.4 million. Such principalsHowever, if Round Rock Nissan's
guarantee of the Founding Companies have agreed to take all
action necessary to remove such guarantees and security interests prior to
consummation of the Acquisitions and the removal of the guarantees and security
interests related to approximately $10.2 million of suchthis indebtedness is a
condition to consummation of the Acquisitions. The removal of guarantees and
security interests relating to the other approximately $10.2 million of such
indebtedness is not a condition to consummation of the Acquisitions, however, if
such guarantees and security interests are not removed within 90 days after consummation
of the Acquisitions, the Combined Company will have an option to acquire the
land and fixtures securing such indebtedness (which is the property on which
Round Rock Nissan is located) at a price equal to such indebtedness. The
following table provides certain information, asCombined Company currently

76
78

intends to acquire such land and fixtures if the guarantee is not released. In
connection with a proposed refinancing of June
30, 1997, relating toSKLR Round Rock, L.C.'s debt on such
land and fixtures, a local real estate appraisal firm provided the guaranteesCombined
Company with a verbal estimate of value of $2.6 million, which exceeds SKLR
Round Rock L.C.'s outstanding loan balance on such property by approximately
$200,000. Since the Combined Company believes that the fair market value of the
approximately $10.2 million ofproperty is greater than the outstanding indebtedness guaranteed by Round Rock
Nissan, the Combined Company expects that might not be removedit would record negative goodwill in
connection with the Acquisitions.

DEBTOR GUARANTOR PRINCIPAL AMOUNT
------ --------- ----------------

Robert E. Howard..................... Bob Howard Chevrolet, Inc. $ 3,279,999
Robert E. Howard..................... Bob Howard Motors, Inc. 933,333
Robert E. Howard..................... Bob Howard Pontiac-GMC, Inc. 3,552,788
SKLR Round Rock, L.L.C.(1)........... Round Rock Nissan, Inc. 2,413,136
-----------
$10,179,256
===========

- ---------------

(1) Charles M. Smith ownsacquisition.

If the Combined Company's acquisition of the Tulsa Dealership is
consummated, the Combined Company will assume a 20%loan made by Mr. Howard to the
Tulsa Dealership. The amount outstanding under this loan is approximately $2.5
million, and bears interest in SKLR Round Rock, L.L.C.at the prime rate plus 100 basis points. If the
Combined Company's acquisition of the Tulsa Dealership is not consummated, this
loan will not be assumed by the Combined Company. See "The Acquisitions".

OTHER

Sterling McCall Toyota and Sterling McCall Lexus have entered into an
agreement with Dealer Solutions, L.L.C. ("DSL") pursuant to which DSL is to
provide management information systems software and related services to the
dealerships. Pursuant to the agreement, the dealerships will pay a monthly
maintenance fee of approximately $2,500 until the earlier of the time the
dealerships' existing contract for such services with a different vendor
terminates inor March 1999, at which time the monthly maintenance fee will
increase to approximately $12,500 per month.month for the remainder of the five year
term of the agreement. After an initial five-year term, this agreement is
subject to successive automatic one-year extensions with the same terms and fees
unless terminated by either party with thirty days notice. In addition, upon
installation of the software system at Sterling McCall Lexus, an installation
fee of $20,000 will be paid to DSL. No installation fee has been paid by
Sterling McCall Toyota. Mr. McCall, his affiliates and family members own
approximately 24%18% of DSL and Kevin H. Whalen (who will beneficially own more
than 5% of the outstanding shares of Common Stock after the Acquisitions and the
Offering) owns approximately 15%11% of DSL. The Combined Company is currently only
committed to implement this system in Sterling McCall Toyota and Sterling McCall
Lexus. The Combined Company does not currently have any formal plans to
implement this system in its other dealerships. The Combined Company believes
that the Combined Company has acquired these systems from DSL on substantially similar terms, taken as
a whole, that are no less favorable than those terms offered by DSL to otherthat could be obtained from
non-affiliated dealerships.

70third parties.

77
7279

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Combined Company's Common Stock: (a) as of June 30,August 31, 1997
after giving effect to the Acquisitions and (b) following the sale of the shares
of Common Stock offered hereby, by (i) each person known to beneficially own
more than 5% of the outstanding shares of Common Stock; (ii) each of the
Combined Company's directors and persons who have consented to be named as directors; (iii) each named executive officer; (iv) each
Selling Stockholder, and (v) all executive officers directors and persons who have consented to be named as directors as a group.
All persons listed have an address c/o the Combined
Company's principal executive offices and have sole voting and dispositive power over the shares
indicated as owned by such person unless otherwise indicated.

SHARES OF COMMON SHARES OF COMMON
STOCK BENEFICIALLY STOCK TO BE BENEFICIALLY
OWNED BEFORE OFFERING OWNED AFTER OFFERING
-------------------------- -----------------------------
NUMBER SHARES TO NUMBER
NAME OF BENEFICIAL OWNER OF SHARES(1) PERCENTAGE BE SOLD OF SHARES(1) PERCENTAGE(2)
------------------------ ------------ ---------- --------- ------------ -------------

B.B. Hollingsworth, Jr(3)........(6)..... 546,368 5.7% -- 546,368 3.9%
Robert E. Howard, II............. 3,145,520 32.9II(4)(6)....... 2,910,374 30.5 -- 3,145,520 22.52,910,374 20.9
Sterling B. McCall, Jr(4)........Jr(5)(6)..... 1,461,031 15.3 -- 1,461,031 10.410.5
Charles M. Smith.................Smith(6).............. 679,181 7.1 -- 679,181 4.9
John H. Duncan................... 196,368 2.1 -- 196,368 1.4
5851 San Felipe, Suite 850
Houston, Texas 77056
Bennett E. Bidwell............... -- -- -- -- --
626 Yarboro Drive
Bloomfield Hills, Michigan
48304
W. C. Smith...................... 619,773 6.5 371,864 247,909 1.8
3400 South Loop West
Houston, Texas 77025
SMC Investment, Inc. ............ 637,475 6.7 -- 637,475 4.6
9400 Southwest Freeway
Houston, Texas 77074
Kevin H. Whalen..................Whalen(6)............... 774,040 8.1 -- 774,040 5.5
All directors and executive
officers as a group (8(9 persons
including the directors and
executive officers named
above)......................... 6,028,468 63.0%5,793,322 60.8% -- 6,028,468 43.1%5,793,322 41.5%

- ---------------

(1) Does not include options to purchase stock that are not exercisable within
60 days of June 30,August 31, 1997.

(2) Assumes that the Underwriters' overallotment option is not exercised.

(3) Excludes 100,000 shares of Common Stock held in trust for the benefit of Mr.
Hollingsworth's children. Mr. Hollingsworth is not the trustee of such
trust, does not have or share voting or investment power over the Common
Stock held by the trust and disclaims beneficial ownership of such shares.

(4) Includes 592,303 shares of Common Stock issued to Mr. Howard which will be
held in escrow and may be distributed pro rata to the stockholders of the
Founding Companies under certain conditions. See "The Acquisitions".

(5) Includes (i) 637,475 shares owned by SMC Investment, Inc. which is
controlled by Mr. McCall; (ii) 250,248 shares owned by Gulf Coast Family
Limited Partnership which is controlled by Mr. McCall; (iii) 106,041 shares
owned by SBM-T Family Limited Partnership which is controlled by Mr. McCall;
and (iv) 30,629 shares owned by Mr. McCall's spouse.

71(6) Have an address c/o the Combined Company's principal executive offices at
950 Echo Lane, Suite 350, Houston, Texas 77024.

78
7380

DESCRIPTION OF CAPITAL STOCK

The Combined Company's authorized capital stock consists of 50,000,000
shares of Common Stock and 1,000,000 shares of Preferred Stock, par value $.01
per share ("Preferred Stock"). After giving effect to the Acquisitions, but
prior to consummation of the Offering, the Combined Company will have
outstanding 9,573,8909,529,084 shares of Common Stock and no shares of Preferred Stock.
Upon completion of the Offering, the Combined Company will have outstanding
14,002,02613,957,220 shares of Common Stock (14,722,026(14,677,220 shares if the Underwriters'
over-allotment option is exercised in full) and no shares of Preferred Stock.

COMMON STOCK

Subject to any special voting rights of any series of Preferred Stock that
may be issued in the future, the holders of the Common Stock are entitled to one
vote for each share held on all matters voted upon by stockholders, including
the election of directors. Holders of Common Stock are not entitled to cumulate
their votes in elections of directors.

Subject to the rights of any then outstanding shares of Preferred Stock,
the holders of the Common Stock are entitled to such dividends as may be
declared in the discretion of the Board of Directors out of funds legally
available therefor. Holders of Common Stock are entitled to share ratably in the
net assets of the Combined Company upon liquidation after payment or provision
for all liabilities and any preferential liquidation rights of any Preferred
Stock then outstanding. The holders of Common Stock have no preemptive rights to
purchase shares of stock of the Combined Company. Shares of Common Stock are not
subject to any redemption provisions and are not convertible into any other
securities of the Combined Company. All outstanding shares of Common Stock are,
and the shares of Common Stock to be issued pursuant to the Offering will be
upon payment therefor, fully paid and non-assessable.

PREFERRED STOCK

Preferred Stock may be issued from time to time by the Board of Directors
in one or more series. Subject to the provisions of the Combined Company's
Charter and limitations prescribed by law, the Board of Directors is expressly
authorized to adopt resolutions to issue the shares, to fix the number of shares
and to change the number of shares constituting any series and to provide for or
change the voting powers, designations, preferences and relative participating,
optional or other special rights, qualifications, limitations or restrictions
thereof, including dividend rights (including whether dividends are cumulative),
dividend rates, terms of redemption (including sinking fund provisions),
redemption prices, conversion rights and liquidation preferences of the shares
constituting any series of the Preferred Stock, in each case without any further
action or vote by the stockholders. One of the effects of undesignated Preferred
Stock may be to enable the Board of Directors to render more difficult or to
discourage an attempt to obtain control of the Combined Company by means of a
tender offer, proxy contest, merger or otherwise, and thereby to protect the
continuity of the Combined Company's management. The issuance of shares of the
Preferred Stock pursuant to the Board of Directors' authority described above
may adversely affect the rights of the holders of Common Stock. For example,
Preferred Stock issued by the Combined Company may rank prior to the Common
Stock as to dividend rights, liquidation preference or both, may have full or
limited voting rights and may be convertible into shares of Common Stock.
Accordingly, the issuance of shares of Preferred Stock may discourage bids for
the Common Stock or may otherwise adversely affect the market price of the
Common Stock.

CERTAIN ANTI-TAKEOVER AND OTHER PROVISIONS OF THE CHARTER AND BYLAWS

In addition to the Combined Company's Board of Directors to issue Preferred
Stock, the Charter and the Bylaws of the Combined Company contain certain
provisions that could have an anti-takeover effect.

7279
7481

CLASSIFIED BOARD OF DIRECTORS AND LIMITATIONS ON REMOVAL OF DIRECTORS

The Combined Company's Board of Directors is divided into three classes.
The directors of each class are elected for three-year terms, with the terms of
the three classes staggered so that directors from a single class are elected at
each annual meeting of stockholders. Stockholders may remove a director only for
cause upon the vote of holders of at least 80% of the voting power of the
outstanding shares of Common Stock. In general, the Board of Directors, not the
stockholders, has the right to appoint persons to fill vacancies on the Board of
Directors.

NO WRITTEN CONSENT OF STOCKHOLDERS

The Charter provides that any action required or permitted to be taken by
the stockholders of the must be taken at a duly called annual or special meeting
of stockholders. In addition, special meetings of the stockholders may be called
only by the Board of Directors.

BUSINESS COMBINATIONS UNDER DELAWARE LAW

The Combined Company is a Delaware corporation and is subject to Section
203 of the Delaware General Corporation Law. In general, Section 203 prevents an
"interested stockholder" (defined generally as a person owning 15% or more of
the Combined Company's outstanding voting stock) from engaging in a "business
combination" (as defined in Section 203) with the Combined Company for three
years following the date that person becomes an interested stockholder unless
(a) before that person became an interested stockholder, the Combined Company's
Board of Directors approved the transaction in which the interested stockholder
became an interested stockholder or approved the business combination; (b) upon
completion of the transaction that resulted in the interested stockholder
Combined Company's becoming an interested stockholder, the interested
stockholder owns at least 85% of the voting stock outstanding at the time the
transaction commenced (excluding stock held by directors who are also officers
of the Combined Company and by employee stock plans that do not provide
employees with the right to determine confidentially whether shares held subject
to the plan will be tendered in a tender or exchange offer); or (c) following
the transaction in which that person became an interested stockholder, the
business combination is approved by the Combined Company's Board of Directors
and authorized at a meeting of stockholders by the affirmative vote of the
holders of at least two-thirds of the outstanding voting stock not owned by the
interested stockholder. Under Section 203, these restrictions also do not apply
to certain business combinations proposed by an interested stockholder following
the announcement or notification of one of certain extraordinary transactions
involving the Combined Company and a person who was not an interested
stockholder during the previous three years or who became an interested
stockholder with the approval of a majority of the Combined Company's directors,
if that extraordinary transaction is approved or not opposed by a majority of
the directors who were directors before any person became an interested
stockholder in the previous three years or who were recommended for election or
elected to succeed such directors by a majority of such directors then in
office.

STOCKHOLDER RIGHTS PLAN

Immediately prior to completion of the Offering, the Combined Company's
Rights Plan (the "Rights Plan") will take effect. Under the Rights Plan, each
Right entitles the registered holder under the circumstances described below to
purchase from the Combined Company one one-thousandth of a share of Junior
Participating Preferred Stock, $.01 par value per share (the "Preferred
Shares"), of the Combined Company at a price of $$65 per one one-thousandth of a
Preferred Share (the "Purchase Price"), subject to adjustment. The description
and terms of the Rights arewill be set forth in a Rights Agreement (the "Rights
Agreement") dated as of , 1997, betweento be entered into by the Combined Company and ChaseMellon
Shareholders Services, L.L.C., as Rights Agent (the "Rights Agent") prior to
consummation of the Offering and this description of the Rights is qualified in
its entirety by reference to the Rights Agreement.

7380
7582

Until the Distribution Date (as defined below), the Rights will attach to
all Common Stock certificates representing outstanding shares and no separate
Right Certificate will be distributed. Accordingly, a right will be issued for
each share of Common Stock issued in the Offering. The Rights will separate from
the Common Stock and a Distribution Date will occur upon the earlier of (i) 10
business days following a public announcement that a person or group of
affiliated or associated persons (an "Acquiring Person") has acquired beneficial
ownership of 20% or more of the outstanding Voting Shares (as defined in the
Rights Agreement) of the Combined Company, or (ii) 10 business days following
the commencement or announcement of an intention to commence a tender offer or
exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 20% or more of such outstanding Voting Shares.

Until the Distribution Date (or earlier redemption or expiration of the
Rights) the Rights will be evidenced by the certificates representing such
Common Stock. As soon as practicable following the Distribution Date, separate
certificates evidencing the Rights (the "Right Certificates") will be mailed to
holders of record of the Common Stock as of the close of business on the
Distribution Date and such separate Right Certificates alone will thereafter
evidence the Rights.

The Rights are not exercisable until the Distribution Date. The Rights will
expire on , 2007the tenth anniversary date of the closing of the Offering (the "Final
Expiration Date"), unless the Final Expiration Date is extended or the Rights
are earlier redeemed or exchange by the Combined Company as described below.

If a person or group were to acquire 20% or more of the Voting Shares of
the Combined Company, each Right then outstanding (other than Rights
beneficially owned by the Acquiring Person which would become null and void)
would become a right to buy that number of shares of Common Stock (or under
certain circumstances, the equivalent number of one one-thousandths of a
Preferred Share) that at the time of such acquisition would have a market value
of two times the Purchase Price of the Right.

If the Combined Company were acquired in a merger or other business
combination transaction or assets constituting more than 50% of its consolidated
assets or producing more than 50% of its earning power or cash flow were sold,
proper provision will be made so that each holder of a Right will thereafter
have the right to receive, upon the exercise thereof at the then current
Purchase Price of the Right, that number of shares of common stock of the
acquiring company which at the time of such transaction would have a market
value of two times the Purchase Price of the Right.

The dividend and liquidation rights, and the non-redemption feature, of the
Preferred Shares are designed so that the value of one one-thousandth of a
Preferred Share purchasable upon exercise of each Right will approximate the
value of one share of Common Stock. The Preferred Shares issuable upon exercise
of the Rights will be non-redeemable and rank junior to all other series of the
Combined Company's preferred stock. Each whole Preferred Share will be entitled
to receive a quarterly preferential dividend in an amount per share equal to the
greater of (i) $1.00 in cash, or (ii) in the aggregate, 1,000 times the dividend
declared on the Common Stock. In the event of liquidation, the holders of
Preferred Shares will be entitled to receive a preferential liquidation payment
equal to the greater of (i) $1,000 per share, or (ii) in the aggregate, 1,000
times the payment made on the shares of Common Stock. In the event of any
merger, consolidation or other transaction in which the shares of Common Stock
are exchanged for or changed into other stock or securities, cash or other
property, each whole Preferred Share will be entitled to receive 1,000 times the
amount received per share of Common Stock. Each whole Preferred Share shall be
entitled to 1,000 votes on all matters submitted to a vote of the stockholders
of the Combined Company, and Preferred Shares shall generally vote together as
one class with the Common Stock and any other capital stock on all matters
submitted to a vote of stockholders of the Combined Company.

The offer and sale of the Preferred Shares issuable upon exercise of the
Rights will be registered with the Commission and such registration will not be
effective until the Rights become exercisable.

7481
7683

The number of one one-thousandths of a Preferred Share or other securities
or property issuable upon exercise of the Rights, and the Purchase Price
payable, are subject to customary adjustments from time to time to prevent
dilution.

The number of outstanding Rights and the number of one one-thousandths of a
Preferred Share issuable upon exercise of each Right are also subject to
adjustment in the event of a stock split of the Common Stock or a stock dividend
on the Common Stock payable in Common Stock or a subdivision, consolidation or
combination of the Common Stock occurring, in any such case, prior to the
Distribution Date.

At any time after the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 20% or more of the outstanding
Voting Shares of the Combined Company and before the acquisition by a person or
group of 50% or more of the outstanding Voting Shares of the Combined Company,
the Board of Directors may, at its option, issue Common Stock in mandatory
redemption of, and in exchange for, all or part of the then outstanding and
exercisable Rights (other than Rights owned by such person or group which would
become null and void) at an exchange ratio of one share of Common Stock (or one
one-thousandth of a Preferred Share) for each two shares of Common Stock for
which each Right is then exercisable, subject to adjustment.

At any time prior to the first public announcement that a person or group
has become the beneficial owner of 20% or more of the outstanding Voting Shares,
the Board of Directors of the Combined Company may redeem all but not less than
all the then outstanding Rights at a price of $0.01 per Right (the "Redemption
Price"). The redemption of the Rights may be made effective at such time, on
such basis and with such conditions as the Board of Directors in its sole
discretion may establish. Immediately upon the action of the Board of Directors
ordering redemption of the Rights, the right to exercise the Rights will
terminate and the only right of the holders of Rights will be to receive the
Redemption Price.

Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Combined Company, including, without limitation,
the right to vote or to receive dividends.

The terms of the Rights may be amended by the Board of Directors of the
Combined Company without the consent of the holders of the Rights, including an
amendment to extend the Final Expiration Date, and, provided a Distribution Date
has not occurred, to extend the period during which the Rights may be redeemed,
except that after the first public announcement that a person or group has
become the beneficial owner of 20% or more of the outstanding Voting Shares, no
such amendment may materially and adversely affect the interests of the holders
of the Rights.

The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Combined
Company on terms not determined by the Board of Directors to be in the best
interests of all stockholders. The Rights will not interfere with a merger or
other business combination approved by the Board of Directors, prior to the time
that a person or group has acquired beneficial ownership of 20% or more of the
Common Stock, since the rights may be redeemed by the Combined Company prior to
that time.

LIMITATION OF LIABILITY OF OFFICERS AND DIRECTORS -- INDEMNIFICATION

Delaware law authorizes corporations to limit or eliminate the personal
liability of officers and directors to corporations and their stockholders for
monetary damages for breach of officers' and directors' fiduciary duty of care.
The duty of care requires that, when acting on behalf of the corporation,
officers and directors must exercise an informed business judgment based on all
material information reasonably available to them. Absent the limitations
authorized by Delaware law, officers and directors are accountable to
corporations and their stockholders for monetary damages for conduct
constituting gross negligence in the exercise of their duty of care. Delaware
law enables corporations to limit available relief to equitable remedies such as
injunction or rescission. The Charter limits the liability of officers and
directors of the Combined Company to the Combined Company or its stockholders to
the fullest extent permitted by Delaware law. Specifically, officers and
directors of the Combined Company will not be

7582
7784

personally liable for monetary damages for breach of an officer's or director's
fiduciary duty in such capacity, except for liability (i) for any breach of the
officer's or director's duty of loyalty to the Combined Company or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) for unlawful
payments of dividends or unlawful stock repurchases or redemptions as provided
in Section 174 of the Delaware General Corporation Law, or (iv) for any
transaction from which the officer and director derived an improper personal
benefit.

The inclusion of this provision in the Charter may have the effect of
reducing the likelihood of derivative litigation against officers and directors,
and may discourage or deter stockholders or management from bringing a lawsuit
against officers and directors for breach of their duty of care, even though
such an action, if successful, might otherwise have benefitted the Combined
Company and its stockholders. Both the Combined Company's Charter and Bylaws
provide indemnification to the Combined Company's officers and directors and
certain other persons with respect to certain matters to the maximum extent
allowed by Delaware law as it exists now or may hereafter be amended. These
provisions do not alter the liability of officers and directors under federal
securities laws and do not affect the right to sue (nor to recover monetary
damages) under federal securities laws for violations thereof.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar of the Common Stock, as well as the rights
agent under the Rights Plan is Chase MellonChaseMellon Shareholder Services, L.L.C.

SHARES ELIGIBLE FOR FUTURE SALE

Upon consummation of the Acquisitions and completion of the Offering,
assuming no exercise of the Underwriters' over-allotment option, the Combined
Company will have 14,002,02613,957,220 shares of Common Stock outstanding (14,722,026(14,677,220
shares if the Underwriters' over-allotment option is exercised in full). Of
these outstanding shares of Common Stock, the 4,800,000 shares sold in the
Offering (5,520,000 shares if the Underwriters' over-allotment option is
exercised in full) will be freely tradeable without restriction unless acquired
by affiliates of the Combined Company. None of the remaining 9,202,0269,157,220
outstanding shares of Common Stock have been registered under the Securities
Act, which means that they may be resold publicly only upon registration under
the Securities Act or in compliance with an exemption from the registration
requirements of the Securities Act, including the exemption provided by Rule 144
thereunder.

In general, under Rule 144 as currently in effect, if one year has elapsed
since the later of the date of the acquisition of restricted shares of Common
Stock from either the Combined Company or any affiliate of the Combined Company,
the acquiror or subsequent holder thereof may sell, within any three month
period commencing 90 days after the date of this Prospectus, a number of shares
that does not exceed the greater of 1% of the then outstanding shares of the
Common Stock (140,023(139,572 shares upon completion of the Offering), or the average
weekly trading volume of the Common Stock on the New York Stock Exchange during
the four calendar weeks preceding the date on which notice of the proposed sale
is sent to the Commission. Sales under Rule 144 are also subject to certain
manner of sale provisions, notice requirements and the availability of current
public information about the Combined Company. If two years have elapsed since
the later of the date of the acquisition of restricted shares of Common Stock
from the Combined Company or any affiliate of the Combined Company, a person who
is not deemed to have been an affiliate of the Combined Company at any time for
90 days preceding a sale would be entitled to sell such shares under Rule 144
without regard to the volume limitations, manner of sale provisions or notice
requirements.

7683
7885

Combined Company, the Selling Stockholder and the Underwriters, the Combined
Company and its officers, directors and stockholders who beneficially own
9,202,0269,157,220 shares of Common Stock in the aggregate have agreed not to sell or
otherwise dispose of any shares of Common Stock and certain other securities of
the Combined Company for a period of 180 days after the date of this Prospectus
without the prior written consent of the representatives. See "Underwriting".

Prior to the Offering, there has been no public market for the Common
Stock. No prediction can be made regarding the effect, if any, that public sales
of shares of Common Stock or the availability of shares for sale will have on
the market price of the Common Stock after the Offering. Sales of substantial
amounts of the Common Stock in the public market following the Offering, or the
perception that such sales may occur, could adversely affect the market price of
the Common Stock and could impair the ability of the Combined Company to raise
capital through sales of its equity securities.

84
86

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Combined Company and the Selling Stockholder have agreed to sell to each of the
Underwriters named below, and each of such Underwriters, for whom Goldman, Sachs
& Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and NationsBanc
Montgomery Securities, Inc. are acting as representatives, has severally agreed
to purchase from the Combined Company and the Selling Stockholder, the
respective number of shares of Common Stock set forth opposite its name below:

NUMBER OF
SHARES OF
UNDERWRITER COMMON STOCK
----------- ------------

Goldman, Sachs & Co.........................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated..........
NationsBanc Montgomery Securities, Inc......................

Total............................................. 4,800,000
=========

Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.

The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus, and in part to certain securities dealers at such
price less a concession of $ per share. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $ per share to certain
brokers and dealers. After the shares of Common Stock are released for sale to
the public, the offering price and other selling terms may from time to time be
varied by the representatives.

The Combined Company has granted the Underwriters an option exercisable for
30 days after the date of this Prospectus to purchase up to an aggregate of
720,000 additional shares of Common Stock to cover over-allotments, if any. If
the Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each of
them, as shown in the foregoing table, bears to the 4,800,000 shares of Common
Stock offered.

The Combined Company, its officers and directors and the stockholders of
the Combined Company, including the Selling Stockholder, have agreed that,
during the period beginning from the date of this Prospectus and continuing to
and including the date 180 days after the date of this Prospectus, they will not
offer, sell, contract to sell or otherwise dispose of any shares of Common
Stock, any securities of the Combined Company which are substantially similar to
the shares of Common Stock or which are convertible or exchangeable for
securities which are substantially similar to the shares of Common Stock (other
than (i) pursuant to employee stock option plans existing, or on the conversion
or exchange of convertible or exchangeable securities outstanding, on the date
of this Prospectus or (ii) in connection with and as consideration for
acquisitions of automobile dealerships; provided that the proposed transferee
agrees in writing for the benefit of the Underwriters to be bound by the
foregoing provisions)

85
87

without the prior written consent of the representatives, except for the shares
of Common Stock offered in connection with the Offering.

The representatives of the Underwriters have informed the Combined Company
that they do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of shares of
Common Stock offered by them.

Prior to this Offering, there has been no public market for the shares. The
initial public offering price will be negotiated among the Combined Company, the
Selling Stockholder and the representatives. Among the factors to be considered
in determining the initial public offering price of the Common Stock, in
addition to prevailing market conditions, will be the Combined Company's
historical performance, estimates of the business potential and earnings
prospects of the Combined Company, an assessment of the Combined Company's
management and the consideration of the above factors in relation to market
valuation of companies in related businesses.

The Common Stock has been approved for listing, subject to notice of
issuance, on the New York Stock Exchange under the symbol "GPI". In order to
meet one of the requirement for listing the Common Stock on the New York Stock
Exchange, the Underwriters have undertaken to sell lots of 100 or more shares to
a minimum of 2,000 beneficial holders.

In connection with the Offering, the Underwriters may purchase and sell
Common Stock in the open market. These transactions may include overallotment
and stabilizing transactions and purchases to cover syndicate short positions
created in connection with the Offering. Stabilizing transactions consist of
certain bids or purchases for the purpose of preventing or retarding a decline
in the market price of the Common Stock; and syndicate short positions involve
the sale by the Underwriters of a greater number of shares of Common Stock than
they are required to purchase from the Combined Company in the Offering. The
Underwriters may also impose a penalty bid, whereby selling concessions allowed
to syndicate members or other broker-dealers in respect of the Common Stock sold
in the Offering for their account may be reclaimed by the syndicate if such
Common Stock is repurchased by the syndicate in stabilizing or covering
transactions. These activities may stabilize, maintain or otherwise affect the
market price of the Common Stock which may be higher than the price that might
otherwise prevail in the open market. These transactions may be effected on the
New York Stock Exchange, in the over-the-counter market or otherwise, and these
activities, if commenced, may be discontinued at any time.

The Combined Company and the Selling Stockholder have agreed to indemnify
the several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933.

VALIDITY OF COMMON STOCK

The validity of the shares of Common Stock offered hereby is being passed
upon for the Combined Company and the Selling Stockholder by Vinson & Elkins
L.L.P., Houston, Texas, and for the Underwriters by Sullivan & Cromwell, New
York, New York. John S. Watson, the Secretary of the Combined Company, is a
partner of Vinson & Elkins L.L.P.

EXPERTS

The audited financial statements included in this Prospectus have been
audited, the pro forma statement of operations for the year ended December 31,
1996 has been examined and the pro forma financial statements as of and for the
six months ended June 30, 1997 have been reviewed by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.

86
88

AVAILABLE INFORMATION

The Combined Company has not previously been subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended. The Combined
Company has filed with the Securities and Exchange Commission (the "Commission")
a Registration Statement on Form S-1 (the "Registration Statement") under the
Securities Act, with respect to the offer and sale of Common Stock pursuant to
this Prospectus. This Prospectus, filed as a part of the Registration Statement,
does not contain all of the information set forth in the Registration Statement
or the exhibits and schedules thereto in accordance with the rules and
regulations of the Commission and reference is hereby made to such omitted
information. Statements made in this Prospectus concerning the contents of any
contract, agreement or other document filed as an exhibit to the Registration
Statement are summaries of the terms of such contracts, agreements or documents
and are not necessarily complete. Reference is made to each such exhibit for a
more complete description of the matters involved and such statements shall be
deemed qualified in their entirety by such reference. The Registration Statement
and the exhibits and schedules thereto filed with the Commission may be
inspected, without charge, and copies may be obtained at prescribed rates, at
the public reference facility maintained by the Commission at its principal
office at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the regional offices of the Commission located at Seven World Trade Center, 13th
Floor, New York, New York 10048 and Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. The Commission also maintains a
Website (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. For further information pertaining to the Common Stock
offered by this Prospectus and the Combined Company, reference is made to the
Registration Statement.

The Combined Company intends to furnish to its stockholders annual reports
containing audited financial statements certified by independent auditors and
quarterly reports for the first three quarters of each fiscal year containing
unaudited financial statements.

7787
7989

INDEX TO FINANCIAL PAGES

Group 1 Automotive, Inc. -- Pro Forma Financial Information
Unaudited Pro Forma Combined Financial Statements -- BasisReport of Presentation........................................Independent Public Accountants.................. F-2
Pro Forma Combined Statement of Operations December 31,
1996................................................... F-3
Pro Forma Combined Balance Sheet -- June 30, 1997......... F-4
Pro Forma Combined Statement of Operations -- June 30,
1997................................................... F-5
Notes to Pro Forma Financial Statements................... F-6
Group 1 Automotive, Inc. -- Financial Statements
Report of Independent Public Accountants.................. F-10F-11
Balance Sheets............................................ F-11F-12
Statements of Operations.................................. F-12F-13
Statements of Stockholders' Equity (Deficit).............. F-13F-14
Statements of Cash Flows.................................. F-14F-15
Notes to Financial Statements............................. F-15F-16
Howard Group -- Combined Financial Statements
Report of Independent Public Accountants.................. F-20F-21
Combined Balance Sheets................................... F-21F-22
Combined Statements of Operations......................... F-22F-23
Combined Statements of Stockholders' Equity............... F-23F-24
Combined Statements of Cash Flows......................... F-24F-25
Notes to Combined Financial Statements.................... F-25F-26
McCall Group -- Combined Financial Statements
Report of Independent Public Accountants.................. F-35F-36
Combined Balance Sheets................................... F-36F-37
Combined Statements of Operations......................... F-37F-38
Combined Statements of Stockholders' Deficit.............. F-38F-39
Combined Statements of Cash Flows......................... F-39F-40
Notes to Combined Financial Statements.................... F-40F-41
Smith Group -- Combined Financial Statements
Report of Independent Public Accountants.................. F-52F-54
Combined Balance Sheets................................... F-53F-55
Combined Statements of Operations......................... F-54F-56
Combined Statements of Stockholders' Equity............... F-55F-57
Combined Statements of Cash Flows......................... F-56F-58
Notes to Combined Financial Statements.................... F-57F-59

F-1
80

GROUP90

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Group 1 AUTOMOTIVE, INC.Automotive, Inc.,

AND FOUNDING GROUPS

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
(UNAUDITED)

The following unauditedWe have examined the pro forma adjustments reflecting the transactions
described in Note 2 and the application of those adjustments to the historical
amounts in the accompanying pro forma combined financial statements give effect
to the acquisitions bystatement of operations of Group
1 Automotive, Inc. (Group 1),for the year ended December 31, 1996. The historical combined
statement of substantially all
of the net assets of (a) Howard Group (Howard), (b) McCall Group (McCall), (c)
Smith Group (Smith) and (d) Kingwood Group (Kingwood), (together, the Founding
Groups). Group 1 and the Founding Groups are hereinafter referred to as the
Company. The acquisitions (the Acquisitions) will occur simultaneously with the
closing of Group 1's initial public offering (the Offering) and will be
accounted for using the purchase method of accounting. Howard, one of the
Founding Groups, has been identified as the acquiror for financial statement
presentation purposes. The unaudited pro forma combined financial statements
also give effect to the issuance of Common Stock, which will be issued by Group
1 to the sellers of the Founding Groups upon the effectiveness of the Offering.
These statements are based onoperations was derived from the historical financial statements of
Group 1 Automotive, Inc., Howard Group, McCall Group and Smith Group, which were
audited by us, appearing elsewhere herein, and Kingwood Group, which was audited
by us and not separately presented herein. Such pro forma adjustments are based
upon management's assumptions described in Notes 3, 4 and 5. Our examination was
made in accordance with standards established by the Founding GroupsAmerican Institute of
Certified Public Accountants and, accordingly, included elsewheresuch procedures as we
considered necessary in this Prospectus (except Kingwood)the circumstances.

In addition, we have reviewed the related pro forma adjustments reflecting
the transactions described in Note 2 and the estimates and assumptions set forth below andapplication of those adjustments to
the historical amounts in the notes to the unaudited pro
forma combined financial statements.

The unauditedaccompanying pro forma combined balance sheet gives effect to these
transactions (the Acquisitionsof
Group 1 Automotive, Inc. as of June 30, 1997, and the Offering) as if they had occurred on June
30, 1997. The unaudited pro forma combined
statement of operations for the six months then ended. These historical combined
financial statements were derived from the historical unaudited financial
statements of operations give effect
to these transactions as if they had occurred at the beginning of each period
presented.

TheGroup 1 Automotive, Inc., Howard Group, McCall Group, and Smith
Group which were reviewed by us, appearing elsewhere herein, and Kingwood Group,
which was reviewed by us, and not appearing elsewhere herein. Such pro forma
adjustments are based on preliminary estimates, available
informationmanagement's assumptions as described in Notes 3, 4 and
certain assumptions that management deems appropriate.5. Our review was conducted in accordance with standards established by the
American Institute of Certified Public Accountants.

The unauditedobjective of this pro forma combined financial data presented herein do not purportinformation is to representshow what the
Company's financial position or results of operations wouldsignificant effects on the historical information might have actually been had such eventsthe
transaction occurred at an earlier date. However, the beginning of the periods
presented, as assumed, or to project the Company's financial position or results
of operations for any future period or the future results of the Founding
Groups. The unaudited pro forma combined
financial statements should be readare not necessarily indicative of the results of operations
or related effects on financial position that would have been attained had the
above-mentioned transaction actually occurred earlier.

In our opinion, management's assumptions provide a reasonable basis for
presenting the significant effects directly attributable to the above-mentioned
transaction described in conjunction withNote 2, the otherrelated pro forma adjustments give
appropriate effect to those assumptions, and the pro forma column reflects the
proper application of those adjustments to the historical financial statementsstatement
amounts in the pro forma combined statement of operations for the year ended
December 31, 1996.

A review is substantially less in scope than an examination, the objective
of which is the expression of an opinion on management's assumptions, the pro
forma adjustments and notes thereto included
elsewherethe application of those adjustments to historical
financial information. Accordingly, we do not express such an opinion on the pro
forma adjustments or the application of such adjustments to the pro forma
combined balance sheet as of June 30, 1997, and the pro forma combined statement
of operations for the six months then ended. Based on our review, however,
nothing came to our attention that caused us to believe that management's
assumptions do not provide a reasonable basis for presenting the significant
effects directly attributable to the above mentioned transaction described in
this Prospectus. Also see "Risk Factors" included elsewhere herein.Note 2, that the related pro forma adjustments do not give appropriate effect to
those assumptions, or that the pro forma and as adjusted columns do not reflect
the proper application of those adjustments to the historical financial
statement amounts in the pro forma combined balance sheet as of June 30, 1997,
and the pro forma combined statement of operations for the six months then
ended.

Arthur Andersen LLP
Houston, Texas
May 9, 1997

F-2
8191

GROUP 1 AUTOMOTIVE, INC. AND FOUNDING GROUPS

PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996

GROUP 1 HOWARD MCCALL SMITH KINGWOOD TOTAL
-------- ------------ ------------ ------------ ----------- ------------

REVENUES:
New vehicle sales............................ $ -- $164,978,710 $166,381,686 $124,173,950 $13,783,723 $469,318,069
Used vehicle sales........................... -- 88,477,330 90,895,516 60,579,545 18,074,591 258,026,982
Parts & service sales........................ -- 21,173,371 24,454,187 28,630,577 2,925,513 77,183,648
Other dealership revenues, net............... -- 7,386,747 6,810,908 4,895,329 1,165,553 20,258,537
-------- ------------ ------------ ------------ ----------- ------------
Total revenues........................... -- 282,016,158 288,542,297 218,279,401 35,949,380 824,787,236
COST OF SALES................................ -- 244,396,047 249,560,060 189,169,263 30,640,004 713,765,374
-------- ------------ ------------ ------------ ----------- ------------
Gross Profit............................. -- 37,620,111 38,982,237 29,110,138 5,309,376 111,021,862
GOODWILL AMORTIZATION........................ -- 36,982 -- 67,015 -- 103,997
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................... 95,008 30,731,251 35,072,460 23,643,889 3,997,111 93,539,719
-------- ------------ ------------ ------------ ----------- ------------
Income (loss) from operations............ (95,008) 6,851,878 3,909,777 5,399,234 1,312,265 17,378,146
OTHER INCOME AND EXPENSE
Interest expense, net........................ -- (1,193,810) (2,747,719) (1,710,157) (439,164) (6,090,850)
Other Income (expense), net.................. -- (69,328) (45,094) 222,470 66,957 175,005
-------- ------------ ------------ ------------ ----------- ------------
INCOME (LOSS) BEFORE INCOME TAXES........ (95,008) 5,588,740 1,116,964 3,911,547 940,058 11,462,301
PROVISION FOR INCOME TAXES................... 381,752 177,772 677,751 41,015 1,278,290
-------- ------------ ------------ ------------ ----------- ------------
NET INCOME (LOSS)........................ $(95,008) $ 5,206,988 $ 939,192 $ 3,233,796 $ 899,043 $ 10,184,011
======== ============ ============ ============ =========== ============

PRO FORMA % OF
ADJUSTMENTS PRO FORMA REVENUES
----------- ------------ --------

REVENUES:
New vehicle sales............................ $ -- $469,318,069 56.8%
Used vehicle sales........................... -- 258,026,982 31.3%
Parts & service sales........................ -- 77,183,648 9.3%
Other dealership revenues, net............... (858,864) 21,117,401 2.6%
----------- ------------ ------
Total revenues........................... (858,864) 825,646,100 100.00%100.0%
COST OF SALES................................ (992,988) 712,772,386 86.3%
----------- ------------ ------
Gross Profit............................. (1,851,852) 112,873,714 13.7%
GOODWILL AMORTIZATION........................ 749,359 853,356656,655 760,652 0.1%
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................... 26,013 93,565,732 11.4%(29,487) 93,510,232 11.3%
----------- ------------ ------
Income (loss) from operations............ (1,076,480) 18,454,626 2.2%(1,224,684) 18,602,830 2.3%
OTHER INCOME AND EXPENSE
Interest expense, net........................ (2,754,451) (3,336,399) (0.3)(2,514,839) (3,576,011) (0.5)%
Other Income (expense), net.................. -- 175,005 0.0%
----------- ------------ ------
INCOME (LOSS) BEFORE INCOME TAXES........ (3,830,931) 15,293,232 1.9%(3,739,523) 15,201,824 1.8%
PROVISION FOR INCOME TAXES................... 5,058,533 6,336,823 0.8%5,026,889 6,305,179 0.7%
----------- ------------ ------
NET INCOME (LOSS)........................ $1,227,602$1,287,366 $ 8,956,4098,896,645 1.1%
=========== ============ ======
Earnings Per Share $ .64.62
============
Weighted average shares outstanding 14,373,265
============

The accompanying notes are an integral part of these
pro forma combined financial statements

F-3
8292

GROUP 1 AUTOMOTIVE, INC. AND FOUNDING GROUPS

PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1997
(UNAUDITED)

GROUP 1 HOWARD MCCALL SMITH KINGWOOD TOTAL
---------- ----------- ----------- ----------- ----------- ------------

CURRENT ASSETS:
Cash and cash equivalents......... $ 10,344 $ 1,030,4539,936,653 $10,427,402 $ 253,0689,405,257 $ 1,645,2191,936,862 $ 970,177 $ 3,909,261
Contracts in transit.............. -- 8,906,200 10,174,334 7,760,038 966,685 27,807,25731,716,518
Accounts receivable, net.......... -- 6,200,606 2,689,166 4,876,051 613,847 14,379,670
Due from affiliates............... -- -- 1,062,854 -- -- 1,062,854
Inventories....................... -- 45,202,216 15,025,873 33,099,771 5,806,901 99,134,761
Notes receivable, net............. -- -- 340,523 -- 482,683 823,206
Prepaid expenses.................. -- 889,780 151,675 641,495 171,133 1,854,083
Deferred income tax benefit....... -- -- 1,735,044 182,081 35,967 1,953,092
---------- ----------- ----------- ----------- ----------- ------------
Total current assets........ 10,344 62,229,255 31,432,537 48,204,655 9,047,393 150,924,184
PROPERTY AND EQUIPMENT, net........ 52,480 3,820,115 3,924,236 9,935,715 4,299,315 22,031,861
NOTES RECEIVABLE................... -- 513,585 -- -- 891,578 1,405,163
DEFERRED INCOME TAX BENEFIT........ -- -- 104,882 -- -- 104,882
GOODWILL, net...................... -- 1,436,473 -- 2,281,636 330,004 4,048,113
OTHER ASSETS....................... 2,783,868 731,069 1,887,640 550,452 48,369 6,001,398
---------- ----------- ----------- ----------- ----------- ------------
Total assets................ 2,846,692 68,730,497 37,349,295 60,972,458 14,616,659 184,515,601$2,846,692 $68,730,497 $37,349,295 $60,972,458 $14,616,659 $184,515,601
========== =========== =========== =========== =========== ============
CURRENT LIABILITIES:
Floor plan notes payable.......... $ -- 37,816,102 20,216,458 33,522,252$37,816,102 $20,216,458 $33,522,252 $ 5,945,717 $ 97,500,529
Current maturities of long-term
debt............................ -- 21,659 78,736 1,034,180 171,288 1,305,863
Due to affiliates................. 1,067,384 -- 1,082,574 -- -- 2,149,958
Deferred income taxes............. -- 401,972 -- -- -- 401,972
Accounts payable and accrued
expenses........................ 3,466,325 18,864,797 15,732,890 9,272,030 1,340,850 48,676,892
---------- ----------- ----------- ----------- ----------- ------------
Total current liabilities... 4,533,709 57,104,530 37,110,658 43,828,462 7,457,855 150,035,214
LONG-TERM DEBT, net of current
maturities........................ -- 153,661 576,330 4,493,037 2,996,756 8,219,784
LONG-TERM DEFERRED INCOME TAXES.... -- 58,604 -- 197,611 8,288 264,503
OTHER LONG-TERM LIABILITIES........ -- 586,724 412,124 -- 594,641 1,593,489
COMMITMENTS AND CONTINGENCIES...... -- -- -- -- -- --
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock...................... 4,500 491,500 71,278 3,090 2,756 573,124
Additional paid-in capital........ 4,995 6,622,802 3,222,043 6,369,228 919,325 17,138,393
Treasury stock, at cost........... 0 (808,798) -- (395,297) -- (1,204,095)
Retained earnings (deficit)....... (1,696,512) 4,521,474 (4,043,138) 6,476,327 2,637,038 7,895,189
---------- ----------- ----------- ----------- ----------- ------------
Total stockholders' equity
(deficit)................. (1,687,017) 10,826,978 (749,817) 12,453,348 3,559,119 24,402,611
---------- ----------- ----------- ----------- ----------- ------------
Total liabilities and
stockholders' equity...... 2,846,692 68,730,497 37,349,295 60,972,458 14,616,659 184,515,601$2,846,692 $68,730,497 $37,349,295 $60,972,458 $14,616,659 $184,515,601
========== =========== =========== =========== =========== ============

POST
PRO FORMA MERGER AS
ADJUSTMENTS PRO FORMA ADJUSTMENTS ADJUSTED
----------- ------------ ------------ ------------

CURRENT ASSETS:
Cash and cash equivalents......... $(3,909,261) $ --(3,909,261) $ 27,807,257 $ 4,157,000 $ 4,157,000
Contracts in transit.............. -- 27,807,257 -- 27,807,25731,964,257
Accounts receivable, net.......... -- 14,379,670 -- 14,379,670
Due from affiliates............... (1,062,854) -- -- --
Inventories....................... 8,124,770 107,259,531 -- 107,259,531
Notes receivable, net............. -- 823,206 -- 823,206
Prepaid expenses.................. -- 1,854,083 -- 1,854,083
Deferred income tax benefit....... (1,953,092) -- -- --
----------------------- ------------ ------------ ------------
Total current assets........ 1,199,563 152,123,747 4,157,000 156,280,747
PROPERTY AND EQUIPMENT, net........ (2,000,000) 20,031,861 -- 20,031,861
NOTES RECEIVABLE................... -- 1,405,163 -- 1,405,163
DEFERRED INCOME TAX BENEFIT........ (104,882) -- -- --
GOODWILL, net...................... 27,878,608 31,926,72124,170,458 28,218,571 -- 31,926,72128,218,571
OTHER ASSETS....................... (1,067,383) 4,934,015 (4,168,868) 765,147
----------------------- ------------ ------------ ------------
Total assets................ 25,905,906 210,421,507$ 22,197,756 $206,713,357 $ (11,868) 210,409,639
===========$206,701,489
============ ============ ============ ============
CURRENT LIABILITIES:
Floor plan notes payable.......... $ -- $ 97,500,529 34,763,632 62,736,897$ 31,435,496 $ 66,065,033
Current maturities of long-term
debt............................ -- 1,305,863 -- 1,305,863
Due to affiliates................. (3,550,043) 5,700,001(3,300,042) 5,450,000 250,0015,450,000 --
Deferred income taxes............. 377,975 23,997 -- 23,997
Accounts payable and accrued
expenses........................ 532,541 48,144,351282,540 48,394,352 3,435,868 44,708,483
-----------44,958,484
------------ ------------ ------------ ------------
Total current liabilities... (2,639,527) 152,674,741 43,649,500 109,025,24140,321,364 112,353,377
LONG-TERM DEBT, net of current
maturities........................ -- 8,219,784 -- 8,219,784
LONG-TERM DEFERRED INCOME TAXES.... (179,177) 443,680 -- 443,680
OTHER LONG-TERM LIABILITIES........ -- 1,593,489 -- 1,593,489
COMMITMENTS AND CONTINGENCIES...... -- -- -- --
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock...................... 477,385 95,739477,833 95,291 (44,281) 140,020139,572
Additional paid-in capital........ (34,311,056) 51,449,449 (43,593,351) 95,042,800(30,542,322) 47,680,715 (40,265,215) 87,945,930
Treasury stock, at cost........... (1,204,095) --
Retained earnings (deficit)....... 11,950,564 (4,055,375)11,889,532 (3,994,343) -- (4,055,375)
-----------(3,994,343)
------------ ------------ ------------ ------------
Total stockholders' equity
(deficit)................. (23,087,202) 47,489,813 (43,637,632) 91,127,445
-----------(19,379,052) 43,781,663 (40,309,496) 84,091,159
------------ ------------ ------------ ------------
Total liabilities and
stockholders' equity...... (25,905,906) 210,421,507$(22,197,756) $206,713,357 $ 11,868 210,409,639
===========$206,701,489
============ ============ ============ ============

The accompanying notes are an integral part of these
pro forma combined financial statements

F-4
8393

GROUP 1 AUTOMOTIVE, INC. AND FOUNDING GROUPS

PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)

GROUP 1 HOWARD MCCALL SMITH KINGWOOD TOTAL
----------- ------------ ------------ ------------ ----------- ------------

REVENUES:
New vehicle sales................... $ -- $ 84,922,460 $ 81,608,967 $ 75,203,290 $10,094,813 $251,829,530
Used vehicle sales.................. -- 54,353,896 49,796,182 35,153,070 9,264,009 148,567,157
Parts & service sales............... -- 10,762,746 12,304,906 14,081,839 1,250,878 38,400,369
Other dealership revenues, net...... -- 4,006,206 3,242,694 3,020,378 634,250 10,903,528
----------- ------------ ------------ ------------ ----------- ------------
Total revenues.................. -- 154,045,308 146,952,749 127,458,577 21,243,950 449,700,584
COST OF SALES....................... -- 134,130,539 127,275,652 109,913,986 18,275,231 389,595,408
----------- ------------ ------------ ------------ ----------- ------------
Gross Profit.................... -- 19,914,769 19,677,097 17,544,591 2,968,719 60,105,176
GOODWILL AMORTIZATION............... -- 20,360 -- 28,008 4,176 52,544
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.......................... 1,572,250 16,432,893 17,545,957 13,817,849 2,415,797 51,784,746
----------- ------------ ------------ ------------ ----------- ------------
Income (loss) from operations... (1,572,250) 3,461,516 2,131,140 3,698,734 548,746 8,267,886
OTHER INCOME AND EXPENSE
Interest expense, net............... (25,155) (807,954) (503,525) (940,371) (93,016) (2,370,021)
Other income (expense), net......... 396 34,079 (34,029) (19,035) -- (18,589)
----------- ------------ ------------ ------------ ----------- ------------
INCOME (LOSS) BEFORE INCOME
TAXES......................... (1,597,009) 2,687,641 1,593,586 2,739,328 455,730 5,879,276
PROVISION (BENEFIT) FOR INCOME
TAXES............................. -- 165,617 637,435 531,563 20,508 1,355,123
----------- ------------ ------------ ------------ ----------- ------------
NET INCOME (LOSS)............... $(1,597,009) $ 2,522,024 $ 956,151 $ 2,207,765 $ 435,222 $ 4,524,153
=========== ============ ============ ============ =========== ============

PRO FORMA % OF
ADJUSTMENTS PRO FORMA REVENUES
----------- ------------ --------

REVENUES:
New vehicle sales................... $ -- $251,829,530 55.9%
Used vehicle sales.................. -- 148,567,157 33.0%
Parts & service sales............... -- 38,400,369 8.5%
Other dealership revenues, net...... (642,019) 11,545,547 2.6%
----------- ------------ -----
Total revenues.................. (642,019) 450,342,603 100.0%
COST OF SALES....................... (502,636) 389,092,772 86.4%
----------- ------------ -----
Gross Profit.................... (1,144,655) 61,249,831 13.6%
GOODWILL AMORTIZATION............... 346,540 399,084300,188 352,732 0.1%
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.......................... (891,987) 50,892,759(919,737) 50,865,009 11.3%
----------- ------------ -----
Income (loss) from operations... (1,690,102) 9,957,988(1,764,204) 10,032,090 2.2%
OTHER INCOME AND EXPENSE
Interest expense, net............... (1,390,545) (979,476)(1,257,420) (1,112,601) 0.2%
Other income (expense), net......... -- (18,589) 0.0
----------- ------------ -----
INCOME (LOSS) BEFORE INCOME
TAXES......................... (3,080,647) 8,959,923(3,021,624) 8,900,900 2.0%
PROVISION (BENEFIT) FOR INCOME
TAXES............................. 2,341,686 3,696,8092,300,062 3,655,185 0.8%
----------- ------------ -----
NET INCOME (LOSS)............... $ (738,961)(721,562) $ 5,263,1145,245,715 1.2%
=========== ============ =====
Earnings Per Share $ 0.370.36
============
Weighted average shares outstanding 14,373,265
============

The accompanying notes are an integral part of these
pro forma combined financial statements

F-5
8494

GROUP 1 AUTOMOTIVE, INC. AND FOUNDING GROUPS

NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS

1. GROUP 1 AUTOMOTIVE, INC.

Group 1 Automotive, Inc. has conducted no operations to date and will
acquire the Founding Groups immediately prior to the closing of the Offering.

2. BASIS OF PRESENTATION

The pro forma combined financial statements give effect to the acquisitions
by Group 1 Automotive, Inc. (Group 1), of substantially all of the net assets of
(a) Howard Group (Howard), (b) McCall Group (McCall), (c) Smith Group (Smith)
and (d) Kingwood Group (Kingwood), (together, the Founding Groups) and the
initial public offering of 4,428,136 shares of the common stock of Group 1.
Group 1 and the Founding Groups are hereinafter referred to as the Company.
These acquisitions (the Acquisitions) will occur immediately prior to the
closing of Group 1's public offering (the Offering) and will be accounted for
using the purchase method of accounting. Howard, one of the Founding Groups, has
been identified as the acquiror for financial statement presentation purposes in
accordance with SAB No. 97 as it will hold the single largest voting interest
subsequent to the Acquisitions. The pro forma combined financial statements also
give effect to the issuance of Common Stock, which will be issued by Group 1 to
the sellers of the Founding Groups immediately prior to the Offering. These
statements are based on the historical financial statements of the Founding
Groups included elsewhere in this Prospectus (except Kingwood, which has been
excluded as it is not a significant subsidiary under SAB No. 80) and the
estimates and assumptions set forth below.

The pro forma combined balance sheet gives effect to these transactions
(the Acquisitions and the Offering) as if they had occurred on June 30, 1997.
The pro forma combined statements of operations for the year ended December 31,
1996 and the six months ended June 30, 1997 give effect to these transactions as
if they had occurred at the beginning of the periods (January 1, 1996 and
January 1, 1997, respectively). Included in the pro forma combined balance sheet
and statement of operations are amounts related to Honda and Acura dealerships
(See "Risk Factors -- No Agreement with American Honda Motor Co., Inc."). These
dealerships represent, as of June 30, 1997, current assets of approximately
$19.4 million, total assets of approximately $20.9 million, current liabilities
of approximately $17.9 million and total liabilities of approximately $18.3
million. Additionally, these dealerships contributed revenues of approximately
$63.0 million and income before income taxes of approximately $1.3 million for
the six months ended June 30, 1997.

3. CONSIDERATION PAID TO FOUNDING GROUPS

The following table sets forth for each Founding Group the consideration to
be paid its common stockholders in shares of Common Stock.

SHARES FAIR VALUE(1)
--------- -------------

Howard Group........................... 3,619,2783,574,472(2) $ 25,557,475
McCall Group........................... 2,318,826 16,579,606
Smith Group............................ 2,725,933 20,922,097
Kingwood Group......................... 459,853 3,287,949
--------- ------------
Total........................ 9,123,8909,079,084 $ 66,347,127
========= ============

- ---------------

(1) Excludes $2.3 million and $3.1 million in cash consideration to be paid to
Howard and Kingwood Groups, respectively.

(2) Includes 592,303 shares of Common Stock issued to an owner of the Howard
Group which will be held in escrow and distributed pro rata to the
stockholders of the Founding Groups if the Combined Company's acquisition of
the Chevrolet dealership in Tulsa, Oklahoma is not consummated with General
Motors' approval within two years of the Offering.

F-6
95

GROUP 1 AUTOMOTIVE, INC. AND FOUNDING GROUPS

NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

The holders of approximately 8,752,0268,707,220 shares of Common Stock issued in
payment of the Acquisitions have agreed not to offer, sell or otherwise dispose
of any of those shares for a period of two years after the Offering and do not
have registration rights. The fair value of these shares reflects this
restriction. The remaining 371,864 shares of Common Stock issued in payment of
the Acquisitions will be sold by a shareholder at the date of the offering, and
accordingly, the value of those shares has not been adjusted from the Offering
price.

Based upon management's preliminary analysis, it is anticipated that the
historical carrying value of the Founding Groups' assets and liabilities will
approximate fair value. The amount of goodwill subse-

F-6
85

GROUP 1 AUTOMOTIVE, INC. AND FOUNDING GROUPS

NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

quentsubsequent to the Acquisitions is
$31.9$28.2 million, with $30.5$26.8 million attributable to the acquisitions, and $1.4
million attributable to the existing goodwill of the Howard Group, the
accounting acquiror. The Company will use an estimated life of 40 years for the
amortization of goodwill. Management of Group 1 has not identified any other
material tangible or identifiable intangible assets of the Founding Groups to
which a portion of the purchase price could reasonably be allocated.

4. PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS FOR THE YEAR ENDED
DECEMBER 31, 1996 AND THE SIX MONTHS ENDED JUNE 30, 1997:1997 (UNAUDITED):

The following tables set forth the components of the pro forma statement of
operations adjustments:

DECEMBER 31, 1996
---------------------------------------------------------------------------------------------------------------------------------------------------------------------
(A) (B) (C) (D) (E) (F) TOTAL
----------- -------- -------------------- ---------- ----------- ---------- -----------
Other dealership revenues,
net...........net...................... $ (858,864) $ $ $ $ $ $ (858,864)
Cost of sales............................sales.............. (992,988) (992,988)
Goodwill amortization.................... 749,359 749,359amortization...... 656,655 656,655
Selling, general and
administrative
expenses............................... 26,013 26,013expenses................. (3,179,487) 3,150,000 (29,487)
Interest expense, net.................... (2,754,451) (2,754,451)net...... (2,514,839) (2,514,839)
Provision for income
taxes............... 5,058,533 5,058,533taxes.................... 5,026,889 5,026,889
----------- -------- -------------------- ---------- ----------- ---------- -----------
$(1,851,852) $749,359$656,655 $(3,179,487) $3,150,000 $(2,514,839) $5,026,889 $ 26,013 $(2,754,451) $5,058,533 $ 1,227,6021,287,366
=========== ======== ==================== ========== =========== ========== ===========

JUNE 30, 1997
---------------------------------------------------------------------------(UNAUDITED)
------------------------------------------------------------------------------------------
(A) (B) (C) (D) (E) (F) TOTAL
----------- -------- -------------------- ---------- ----------- ---------- -----------
Other dealership revenues,
net...........net...................... $ (642,019) $ $ $ $ $ $ (642,019)
Cost of sales............................sales.............. (502,636) (502,636)
Goodwill amortization.................... 346,540 346,540amortization...... 300,188 300,188
Selling, general and
administrative
expenses............................... (891,987) (891,987)expenses................. (919,737) (919,737)
Interest expense, net.................... (1,390,545) (1,390,545)net...... (1,257,420) (1,257,420)
Provision for income
taxes............... 2,341,686 2,341,686taxes.................... 2,300,062 2,300,062
----------- -------- -------------------- ---------- ----------- ---------- -----------
$(1,144,655) $346,540 $(891,987) $(1,390,545) $2,341,686$300,188 $ (738,961)(919,737) $ -- $(1,257,420) $2,300,062 $ (721,562)
=========== ======== ==================== ========== =========== ========== ===========

(a) Records increases in revenues and decreases in cost of sales related to
certain third party products sold by the dealerships. The owners of one of the
Founding Groups currently have agreements in place which decrease the fees and
commissions paid to the dealerships for sales of certain finance and insurance
products and increase the cost of these products, and thecertain aftermarket products. The amounts
withheld are paid directly to the owners of the Founding Groups. Upon completion
of the Offering, such agreements will be terminated and the dealerships will
recognize an immediate increase in revenues and decreases in cost of sales
related to the products sold. The adjustments were determined based on the
actual cash payments to the owners during the period.

F-7
96

GROUP 1 AUTOMOTIVE, INC. AND FOUNDING GROUPS

NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(b) Records the pro forma goodwill amortization expense over an estimated
useful life of 40 years.

(c) Adjusts compensation expense and management fees to the level that
certain management employees and owners of the Founding Groups will
contractually receive subsequent to the closing of the Acquisitions, and records
estimatedAcquisitions.

(d) Records incremental corporate overhead costs based on the corporate budget of
Group 1related to personnel
costs, rents, professional service fees and actual costs incurred during the period.

(d)directors and officers liability
insurance premiums that are supported by employment agreements, lease
agreements, professional service firm fee quotes and a premium notification.

(e) Records the pro forma decrease in interest expense resulting from the
repayment of floorplan obligations with proceeds from the offering.

(e)offering in the amount
of $31.4 million with a weighted average interest rate of 8.0%.

(f) Records the incremental provision for federal and state income taxes
relating to the compensation differential, S corporation income and other pro
forma adjustments.

F-7F-8
8697

GROUP 1 AUTOMOTIVE, INC. AND FOUNDING GROUPS

NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

5. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:

The following tables set forth the components of the pro forma and post
merger adjustments as of June 30, 1997:

Pro Forma Adjustments

PRO FORMA
(A) (B) (C) (D) (E) (F)
ADJUSTMENTS----------- ----------- ------------ ------------ ----------- -----------
----------- --------- --------- ------------

ASSETS:
Cash and cash equivalents.......... $ $(5,889,541) $ (19,720) $ 2,000,000equivalents........ $(6,157,000) $ $ $ (3,909,261)$ $ (19,720)
Due from affiliates....affiliates.............. (1,062,854)
(1,062,854)
Inventories............ 8,124,770 8,124,770Inventories...................... 3,704,416 4,420,354
Deferred income tax benefit.............. (2,036,242) 83,150 (1,953,092)benefit...... 753,150
Property and equipment, net.................. (2,000,000) (2,000,000)net......
Deferred income tax benefit.............. (104,882) (104,882)benefit...... 205,625
Goodwill, net.......... 27,021,608 857,000 27,878,608net.................... 6,635,493 14,611,760 2,923,205
Other assets........... (1,067,383) (1,067,383)assets.....................
LIABILITIES AND STOCKHOLDERS
EQUITY:
Due to affiliates...... (4,632,617)affiliates................ (2,300,000) (3,149,999) 1,082,574 (3,550,043)
Deferred income taxes................ 377,975 377,975taxes............ (1,014,160) (1,702,691)
Accounts Payable and accrued
expenses..... 532,541 532,541expenses........................ 800,000 (250,001)
Long-term deferred income
taxes......... (78,077)taxes........................... (101,100)
(179,177)
Common stock........... 477,385 477,385stock..................... 455,755 (24,169) 48,090 (1,843)
Additional paid-in capital.............. (33,578,669) (732,387) (34,311,056)capital....... (318,312) (14,525,610) (13,334,375) (2,364,025)
Treasury stock, at cost................. (1,204,095) (1,204,095)cost.......... (808,798) (395,297)
Retained earnings (deficit)............ 6,700,227 4,500,000 732,387 17,950 11,950,564...... 5,357,000 2,319,305 5,619,327 (4,043,138) 2,637,038
----------- ----------- ------------ ------------ ----------- ----------- ----------- --------- --------- ------------
$ -- $ -- $ -- $ -- $ -- $ --
$ --=========== =========== ============ ============ =========== ===========

PRO FORMA
(G) (H) ADJUSTMENTS
----------- ----------- ------------

ASSETS:
Cash and cash equivalents........ $ 2,000,000 $ 267,459 $ (3,909,261)
Due from affiliates.............. (1,062,854)
Inventories...................... 8,124,770
Deferred income tax benefit...... (2,706,242) (1,953,092)
Property and equipment, net...... (2,000,000) (2,000,000)
Deferred income tax benefit...... (310,507) (104,882)
Goodwill, net.................... 24,170,458
Other assets..................... (1,067,383) (1,067,383)
LIABILITIES AND STOCKHOLDERS
EQUITY:
Due to affiliates................ 1,067,383 (3,300,042)
Deferred income taxes............ 3,094,826 377,975
Accounts Payable and accrued
expenses........................ (267,459) 282,540
Long-term deferred income
taxes........................... (78,077) (179,177)
Common stock..................... 477,833
Additional paid-in capital....... (30,542,322)
Treasury stock, at cost.......... 1,204,095
Retained earnings (deficit)...... 11,889,532
----------- ----------- ------------
$ -- $ -- $ --
=========== ========= ==================== ============

F-9
98

GROUP AUTOMOTIVE, INC. AND FOUNDING GROUPS

NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(a) Records distribution of three Founding Groups' S-Corporation
Accumulated Adjustment Accounts.

(b) Records the acquisition of the Howard Group (the accounting acquiror)
in exchange for the common stock of Group 1 and the accrued cash portion of the
purchase price to be paid from the offering proceeds, the conversion of the
S-Corporations of the Howard Group to C-Corporations upon completion of the
Acquisitions and the recognition of certain deferred tax assets of Group 1 which
were previously reserved due to uncertainty of realization.

(c)(d)(e) Records the acquisition of the Founding Groups in exchange for
the common stock of Group 1 and the accrued cash portion of the purchase price
to be paid from the offering proceeds, andproceeds. The following table sets forth the
goodwill to be recorded after the adjustment of the basis of certain assets and
liabilities upon allocation of the purchase price (including amounts
attributable to deferred tax assets and liabilities, and the conversion from the last-in, first out methodadjustment of
inventory pricing to specific identification)fair value).

(b) Records distribution of three Founding Groups' S Corporation
Accumulated Adjustment Accounts.

Estimated total consideration:
Cash............................................. $ -- $ -- $3,100,000
Note Payable..................................... -- -- 300,000
Common Stock..................................... 20,922,097 16,579,606 3,287,949
----------- ----------- ----------
Total.................................. 20,922,097 16,579,606 6,687,949
Less: Fair value of tangible net tangible assets
acquired....................................... 14,286,604 1,967,846 3,764,744
----------- ----------- ----------
Excess of purchase price over net tangible assets
acquired....................................... $ 6,635,493 $14,611,760 $2,923,205
=========== =========== ==========

(f) Records the settlement of certain related party payables and
receivables by owners of the Founding Groups.

(d)(g) Records the sale of certain nonoperating assets to one of the owners of
a Founding Group at a price that approximates market.

(e)(h) Records the effectreclassification of personal sharesdeferred tax assets and liabilities for
financial reporting purposes and the elimination of stock grantedintercompany advances from
the Founding Groups to employees by
an owner of a Founding Group as consideration for prior services at the initial
public offering price.

F-8
87

GROUP 1 AUTOMOTIVE, INC. AND FOUNDING GROUPS

NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(f) Records the conversion of S-Corporations of the accounting acquiror to
C-Corporations upon completion of the Acquisitions.acquisition.

Post Merger Adjustments

(G) (H) (I) (J) (K) TOTAL
------------ ----------- ------------ ------------

Cash and cash equivalents........ $ 44,370,63241,042,496 $(5,450,000) $(34,763,632)$(31,435,496) $ 4,157,000
Other assets..................... (4,168,868) (4,168,868)
Floor plan notes payable......... 34,763,632 34,763,63231,435,496 31,435,496
Due to affiliates................ 5,450,000 5,450,000
Accounts payable and accrued
expenses....................... 3,435,868 3,435,868
Common stock..................... (44,281) (44,281)
Additional paid-in capital....... (43,593,351) (43,593,351)(40,265,215) (40,265,215)
------------ ----------- ------------ ------------
$ -- $ -- $ -- $ --
============ =========== ============ ============

(g)(i) Records the proceeds from the issuance of 4,428,136 shares of Group 1
Automotive, Inc. common stock net of estimated offering costs of $9.5 million
(including prepaid offering costs) (based on an
assumed initial public offering price of $$11 per share). Offering costs consist
primarily of underwriting discounts and commissions, accounting fees, legal fees
and printing expenses.

(h)(j) Records the settlement of the accrued cash portion of the purchase
price.

(i)(k) Records the repayment of floorplan obligations with proceeds from the
offering.

F-9F-10
8899

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Group 1 Automotive, Inc.:

We have audited the accompanying balance sheets of Group 1 Automotive, Inc.
(a Delaware corporation) (the Company) as of December 31, 1995 and 1996 and the
related statements of operations, stockholders' equity (deficit) and cash flows
for the period from Inception (December 21, 1995) to December 31, 1995, and for
the year ended December 31, 1996. 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, 1995 and 1996, and the results of its operations and cash flows for the
period from Inception to December 31, 1995 and for the year ended December 31,
1996 in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP
Houston, Texas
May 9, 1997

F-10F-11
89100

GROUP 1 AUTOMOTIVE, INC.

BALANCE SHEETS

ASSETS

DECEMBER 31,
---------------------------- JUNE 30,
1995 1996 1997
------------ ------------ ----------
(UNAUDITED)

CURRENT ASSETS:
Cash and cash equivalents......................... $ 500 $ 7,769 $ 10,344
-------- -------- ----------
Total current assets...................... 500 7,769 10,344
PROPERTY AND EQUIPMENT, net......................... -- 1,716 52,480
OTHER ASSETS........................................ -- 774,198 2,783,868
-------- -------- ----------
Total assets.............................. $ 500 $783,683 $2,846,692
======== ======== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES:
Advances from Founding Groups..................... $ -- $150,987 $1,067,384
Accounts payable and accrued expenses............. -- 722,704 3,466,325
-------- -------- ----------
Total current liabilities................. -- 873,691 4,533,709
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.01 par value, 2,000,000 shares
authorized in 1995 and 1996, 50,000,000 shares
authorized in 1997, 1,000, 450,000 and 450,000
shares issued and outstanding, respectively.... 10 4,500 4,500
Additional paid-in capital........................ 490 4,995 4,995
Retained deficit.................................. -- (99,503) (1,696,512)
-------- -------- ----------
Total stockholders' equity (deficit)...... 500 (90,008) (1,687,017)
-------- -------- ----------
Total liabilities and stockholders' equity
(deficit)............................... $ 500 $783,683 $2,846,692
======== ======== ==========

The accompanying notes are an integral part of these financial statements.

F-11F-12
90101

GROUP 1 AUTOMOTIVE, INC.

STATEMENTS OF OPERATIONS

INCEPTION
(DECEMBER 21,
1995) THROUGH YEAR ENDED SIX MONTHS ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ---------------------------
1995 1996 1996 1997
------------- ------------ ------------ -----------
(UNAUDITED)

REVENUES:
Sales............................. $ -- $ -- $ -- $ --
Other dealership revenues, net.... -- -- -- --
-------- -------- -------- -----------
Total revenues............ -- -- -- --
COST OF SALES....................... -- -- -- --
-------- -------- -------- -----------
Gross Profit.............. -- -- -- --
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.......................... -- 95,008 -- 1,572,250
-------- -------- -------- -----------
Operating loss............ -- (95,008) -- (1,572,250)
OTHER INCOME (EXPENSE)
Interest Expense, Net..... -- -- -- (24,759)
-------- -------- -------- -----------
LOSS BEFORE INCOME TAXES............ -- (95,008) -- (1,597,009)
PROVISION FOR INCOME TAXES.......... -- -- -- --
-------- -------- -------- -----------
NET LOSS............................ $ -- $(95,008) $ -- $(1,597,009)
======== ======== ======== ===========

The accompanying notes are an integral part of these financial statements.

F-12F-13
91102

GROUP 1 AUTOMOTIVE, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDERS'
---------------- PAID-IN EQUITY
SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
------- ------ ---------- ----------- -------------

BALANCE, Inception (December 21,
1995)................................ -- $ -- $ -- $ -- $ --
Stock issuance for cash........... 1,000 10 490 -- 500
------- ------ ------ ----------- -----------
BALANCE, December 31, 1995............. 1,000 10 490 -- 500
Purchase and cancellation of
treasury stock for cash......... (1,000) (10) (490) -- (500)
Stock issuance for cash........... 500 5 4,995 -- 5,000
Stock split (900-1), (Note 3)..... 449,500 4,495 -- (4,495) --
Net loss.......................... -- -- -- (95,008) (95,008)
------- ------ ------ ----------- -----------
BALANCE, December 31, 1996............. 450,000 4,500 4,995 (99,503) (90,008)
Net loss (unaudited).............. -- -- -- (1,597,009) (1,597,009)
------- ------ ------ ----------- -----------
BALANCE, June 30, 1997 (unaudited)..... 450,000 $4,500 $4,995 $(1,696,512) $(1,687,017)
======= ====== ====== =========== ===========

The accompanying notes are an integral part of these financial statements.

F-13F-14
92103

GROUP 1 AUTOMOTIVE, INC.

STATEMENTS OF CASH FLOWS

INCEPTION
(DECEMBER 21,
1995)
THROUGH YEAR ENDED SIX MONTHS ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, -------------------------
1995 1996 1996 1997
------------- ------------ --------- -------------
(UNAUDITED)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................ $ -- $ (95,008) $ -- $(1,597,009)
Adjustments to reconcile net loss to net
cash used in operating activities --
Depreciation and Amortization........ -- -- -- 4,554
Changes in operating assets and
liabilities --
Increase in --
Other noncurrent assets............ -- (774,198) (2,617) (2,009,670)
Accounts payable and accrued
expenses........................ -- 722,704 2,617 2,743,621
---- --------- ------- -----------
Net cash used in operating
activities......................... -- (146,502) -- (858,504)
---- --------- ------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and equipment..... -- (1,716) -- (55,318)
---- --------- ------- -----------
Net cash used in investing
activities......................... -- (1,716) -- (55,318)
---- --------- ------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from Founding Groups........... -- 150,987 -- 916,397
Purchase of common stock................ -- (500) -- --
Proceeds from issuance of common
stock................................ 500 5,000 -- --
---- --------- ------- -----------
Net cash provided by financing
activities......................... 500 155,487 -- 916,397
---- --------- ------- -----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS............................. 500 7,269 -- 2,575
CASH AND CASH EQUIVALENTS, beginning of
period.................................. -- 500 500 7,769
---- --------- ------- -----------
CASH AND CASH EQUIVALENTS, end of
period.................................. $500 $ 7,769 $ 500 $ 10,344
==== ========= ======= ===========

The accompanying notes are an integral part of these financial statements.

F-14F-15
93104

GROUP 1 AUTOMOTIVE, INC.

NOTES TO FINANCIAL STATEMENTS
(All discussions and disclosures with a reference date subsequent to May 9, 1997
are unaudited.)
1. BUSINESS AND ORGANIZATION:

Group 1 Automotive, Inc. (Group 1 or the Company), was founded on December
21, 1995 to become a leading operator and consolidator in the automotive
retailing industry. Group 1 intends to acquire 30 automobile dealerships and
related businesses which are currently owned by four dealership groups located
in Texas and Oklahoma (the Founding Groups) (the Acquisitions), complete an
initial public offering (the Offering) of its common stock and, subsequent to
the Offering, continue to acquire, through merger or purchase, similar companies
to expand its national and regional operations.

Group 1's primary assets at December 31, 1996 and June 30, 1997 are cash
and deferred offering costs. Group 1 has not conducted any operations, and all
activities to date have related to the Acquisitions. There is no assurance that
the Acquisitions discussed below will be completed and that Group 1 will be able
to generate future operating revenues. Funding for the deferred offering costs
has been provided by the Founding Groups. Group 1 is dependent upon the Offering
to fund the amounts due to the Founding Groups and future operations. In the
event that the Offering is not completed, Group 1 will pursue alternative
sources of funding in order to meet its current obligations.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Major Suppliers and Franchise Agreements

The Founding Groups purchase substantially all of their new vehicles from
various manufacturers at the prevailing prices charged by the manufacturers to
all franchised dealers. Group 1's sales volume subsequent to the Acquisitions
could be adversely impacted by the manufacturers' inability to supply the
dealerships with an adequate supply of popular models or as a result of an
unfavorable allocation of vehicles by the manufacturers.

The dealer franchise agreements contain provisions which may limit changes
in dealership management and ownership, place certain restrictions on the
dealerships (such as minimum net worth requirements) and which also provide for
termination of the franchise agreement by the manufacturers in certain
instances. Subsequent to the Acquisitions, Group 1's ability to acquire
additional franchises from a particular manufacturer may be limited due to
certain restrictions imposed by manufacturers, the Company's ability to enter
into significant acquisitions may be restricted and the acquisition of the
Company's stock by third parties may be limited by the terms of the franchise
agreement. See "Risk Factors -- Manufacturers Control Over Dealerships" and
"Business -- Franchise Agreements" for further discussion.

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.

Other Assets

The Company has capitalized all costs incurred in connection with the
Offering as a component of other assets in the accompanying financial
statements. Upon completion of the Offering, all such costs will be offset
against additional paid-in capital. Deferred offering costs capitalized in other
assets totaled approximately $767,000 and $2,777,000 as of December 31, 1996 and
June 30, 1997, respectively.

F-15F-16
94105

GROUP 1 AUTOMOTIVE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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 received or liabilities are settled.

Use of Estimates

3. NEW ACCOUNTING PRONOUNCEMENTS

During June 1996 the Financial Accounting Standards Board (FASB) issued
statement of Financial Accounting Standards (SFAS) No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities."
During February 1997 the FASB issued SFAS No. 128 and 129 "Earnings per Share"
and "Disclosure of Information about Capital Structure," respectively, and in
June 1997 issued SFAS No. 130 and 131 "Reporting Comprehensive Income" and
"Disclosures about Segments of an Enterprise and Related Information,"
respectively. The major provisions of these statements and their impact on the
Company are discussed below.

SFAS No. 125 established criteria for recognition of a sale in conjunction
with the transfer of financial assets, under which sales may only be recognized
when the transferor has surrendered control of the assets. This statement is not
currently anticipated to have any impact on the Company as the Company does not
currently enter into transactions which fall under the scope of this statement.

SFAS No. 128 requires the presentation of basic earnings per share and
diluted earnings per share in financial statements of public enterprises rather
than primary and fully diluted earnings per share as previously required. Under
the provisions of this statement, basic earnings per share will be computed
based on weighted average shares outstanding and will exclude dilutive
securities such as options, warrants, etc. Diluted earnings per share will be
computed including the impacts of all potentially dilutive securities. The
Company will adopt this statement in December 1997, but does not anticipate that
the statement will have an impact on the Company as the Company does not have a
significant number of potentially dilutive securities outstanding.

SFAS No. 129 will require additional disclosure of information about an
entity's capital structure, including information about dividend and liquidation
preferences, voting rights, contracts to issue additional shares, conversion and
exercise prices, etc. The Company will adopt this statement in December 1997.

SFAS No. 130 requires the presentation of comprehensive income in an
entity's financial statements. Comprehensive income represents all changes in
equity of an entity during the reporting period, including net income and
charges directly to equity which are excluded from net income. This statement is
not anticipated to have any impact on the Company as the Company currently does
not enter into any transactions which result in charges (or credits) directly to
equity (such as additional minimum pension liability changes, currency
translation adjustments, unrealized gains and losses on available for sale
securities, etc.).

F-16F-17
95106

GROUP 1 AUTOMOTIVE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

SFAS No. 131 will be adopted by the Company during 1998, SFAS No. 131
provides revised disclosure guidelines for segments of an enterprise based on a
management approach to defining operating segments. The Company currently
operates in only one industry segment and analyzes operations on a Company-wide
basis, therefore the statement is not expected to impact the Company.

Interim Financial Information

As is normal and customary, the interim financial statements as of June 30,
1997, and for the six months ended June 30, 1996 and 1997, are unaudited, and
certain information normally included in financial statements prepared in
accordance with generally accepted accounting principles has not been included
herein. In the opinion of management, all adjustments necessary to fairly
present the financial position, results of operations and cash flows with
respect to the interim financial statements, have been properly included. Due to
seasonality and other factors, the results of operations for the interim periods
are not necessarily indicative of the results that will be realized for the
entire fiscal year.

Statements of Cash Flows

For purposes of the statements of cash flows, cash and cash equivalents
include all highly liquid debt instruments purchased with an original maturity
of three months or less.

3. CAPITAL STOCK AND STOCK OPTIONS

Group 1 effected a 900-for-one-stock split on December 13, 1996. The effect
of the common stock split has been accounted for as a stock dividend in the
accompanying financial statements. On February 5, 1997 the Board of Directors
increased the authorized number of shares of common stock from 2,000,000 to
50,000,000, and authorized the issuance of up to 1,000,000 shares of preferred
stock.

The Company has approved the 1996 Stock Incentive Plan (the Plan), which
provides for the granting or awarding of stock options, stock appreciation
rights and restricted stock to nonemployee directors, officers and other key
employees (including officers of the Founding Groups) and independent
contractors. The number of shares authorized and reserved for issuance under the
Plan is 2,000,000 shares. In general, the terms of the option awards (including
vesting schedules) will be established by the Compensation Committee of the
Company's Board of Directors. As of December 31, 1996, the Company has granted
options to employees covering an aggregate of 205,000 shares of common stock.
During March 1997, the Company granted additional options to employees to
purchase an aggregate of 360,000 shares of common stock under the Plan. All
outstanding options are exercisable over a period not to exceed 10 years and
vest over a six year period. The exercise price of the options under the Plan is
at least 100 percent of the estimated fair market value of the stock at the time
the option is granted.

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," which, if fully adopted, requires the Company to record
stock-based compensation at fair value. The Company has adopted the disclosure
requirements of SFAS No. 123 and has elected to record employee compensation
expense in accordance with Accounting Principles Board (APB) Opinion No. 25.
Accordingly, compensation expense is recorded for stock options based on the
excess of the fair market value of the common stock on the date the options were
granted over the aggregate exercise price of the options. As the exercise price
of options granted under the Plan has been equal to or greater than the market
price of the Company's stock on the date of grant, no compensation expense
related to the Plan has been recorded.

F-17F-18
96107

GROUP 1 AUTOMOTIVE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Had compensation expense for the Plan been determined consistent with SFAS No.
123, the impact on the Company's net loss would have been as follows for the
year ended December 31, 1996:

Net loss as reported........................................ $ 95,008
Pro forma net loss.......................................... $102,640

At December 31, 1996 and June 30, 1997, no options were exercisable and
1,795,000 and 1,435,000 options, respectively, were available for future grant
under the Plan. The exercise prices of options outstanding under the Plan at
December 31, 1996 and June 30, 1997, were $2.90. The weighted average
contractual life of options outstanding at December 31, 1996 and June 30, 1997,
was 10 years. The weighted average fair value of options granted during the year
ended December 31, 1996 and the six month period ended June 30, 1997, was $2.90.
The fair value of each option grant is estimated on the date of grant using the
minimum value method with the following weighted average assumptions: a weighted
average risk-free interest rate of 5.0 percent; no expected dividend yields; and
expected lives of four years.

4. INCOME TAXES

The following tables set forth the components of the Company's deferred tax
assets as of December 31, 1996 along with a reconciliation of income tax for the
year ended December 31, 1996. The Company has recorded a valuation allowance
against its deferred tax assets as in management's opinion it is more likely
than not that such amounts may not be realized in future periods.

1996
--------

Benefit at the statutory rate............................... $(32,303)
Increase (decrease) resulting from State income tax, net of
benefit for federal....................................... (2,822)
Valuation allowance....................................... 35,125
--------
$ --
========
Net operating loss carryforward............................. 35,125
Valuation allowance......................................... (35,125)
--------
Net deferred tax assets................................... $ --
========

5. PROPOSED ACQUISITIONS BY GROUP 1

Group 1 has signed definitive agreements to acquire four dealership groups
(the Founding Groups) consisting of 30 automobile dealerships and related
businesses. The Founding Groups are as follows:

Howard Group -- Consisting of Howard Pontiac-GMC, Inc., Bob Howard
Chevrolet, Inc., Bob Howard Automotive-H, Inc.
(Honda/Acura), Bob Howard Motors, Inc. (Toyota) and Bob
Howard Dodge, Inc.

McCall Group -- Consisting of SMC Luxury Cars, Inc. (d.b.a. Sterling McCall
Lexus) and Southwest Toyota, Inc. (d.b.a. Sterling McCall
Toyota).

Smith Automotive Group -- Consisting of Mike Smith Autoplaza, Inc., Town
North Nissan,Smith, Liu and
Kutz, Inc., Town North Suzuki, Inc., Town
North Mitsubishi, Inc. (Town North), Courtesy Nissan, Inc., Smith Liu &
Corbin, Inc. (d.b.a. Acura Southwest) and Round Rock Nissan,
Inc.

Kingwood Group -- Consisting of Foyt Motors, Inc.

F-18F-19
97108

GROUP 1 AUTOMOTIVE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The aggregate consideration that will be paid by Group 1 to acquire the
Founding Groups is approximately $5.4 million in cash and 9,123,8909,079,084 shares of
Group 1 common stock (based on an assumed initial public offering price of $$11
per share, the midpoint of the estimated initial public offering price range).

The following table sets forth the consideration to be paid to each of the
Founding Groups.

SHARES CASH
--------- ----------

Howard Group.............................................. 3,619,278Group............................................ 3,574,472(1) $2,300,000
McCall Group..............................................Group............................................ 2,318,826 --
Smith Group...............................................Group............................................. 2,725,933 --
Kingwood Group............................................Group.......................................... 459,853 3,100,000
--------- ----------
Total........................................... 9,123,890Total......................................... 9,079,084 $5,400,000
========= ==========

- ---------------

(1) Includes 592,303 shares of Common Stock issued to an owner of the Howard
Group which will be held in escrow and distributed pro rata to the
stockholders of the Founding Groups if the Combined Company's acquisition of
the Chevrolet dealership in Tulsa, Oklahoma is not consummated with General
Motors' approval within two years of the Offering.

In conjunction with the Acquisitions and the Offering, the Founding Groups
have advanced funds to the Company for operations and offering costs. As of
December 31, 1996, these advances totaled $150,987 and bearaccrued interest at a
rate of 7% per annum. As of August 15,October 14, 1997, these advances totaled $1,452,386.

F-19$1,682,386.

F-20
98109

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Howard Group:

We have audited the accompanying combined balance sheets of the companies
identified in Note 1 (the Companies) as of December 31, 1995 and 1996, and the
related combined statements of operations, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Companies as of December
31, 1995 and 1996, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.

ARTHUR ANDERSEN LLP
Houston, Texas
May 9, 1997

F-20F-21
99110

HOWARD GROUP

COMBINED BALANCE SHEETS

ASSETS

PRO FORMA
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1995 1996 1997 1997
------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)

CURRENT ASSETS:
Cash and cash equivalents.....................equivalents......... $10,519,771 $11,679,050 $ 3,497,7459,936,653 $ 3,559,650 $ 1,030,453
Contracts in transit.......................... 7,022,026 8,119,400 8,906,2005,436,653
Accounts receivable, net......................net.......... 6,301,692 5,898,736 6,200,606 Inventories...................................6,200,606
Inventories....................... 39,572,596 47,674,462 45,202,216 45,202,216
Prepaid expenses..............................expenses.................. 359,668 858,886 889,780 889,780
----------- ----------- ----------- -----------
Total current assets..................assets...... 56,753,727 66,111,134 62,229,255 57,729,255
----------- ----------- ----------- -----------
PROPERTY AND EQUIPMENT, net.....................net......... 2,810,966 4,128,880 3,820,115 3,820,115
NOTES RECEIVABLE................................RECEIVABLE.................... 374,826 417,675 513,585 513,585
GOODWILL, NET...................................NET....................... 989,845 1,456,833 1,436,473 1,436,473
OTHER ASSETS....................................ASSETS........................ 711,753 759,714 731,069 731,069
----------- ----------- ----------- -----------
Total assets..........................assets.............. $61,641,117 $72,874,236 $68,730,497 $64,230,497
=========== =========== =========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Floor plan notes payable......................payable.......... $37,035,648 $42,543,902 $37,816,102 $37,816,102
Current maturities of long-term
debt..........debt........................... 99,743 33,685 21,659 21,659
Deferred income taxes.........................taxes............. 690,998 357,172 401,972 401,972
Accounts payable and accrued
expenses.........expenses....................... 14,219,262 16,740,525 18,864,797 18,864,797
----------- ----------- ----------- -----------
Total current
liabilities............. 52,045,651 59,675,284 57,104,530 57,104,530
----------- ----------- ----------- -----------
LONG-TERM DEBT, net of current
maturities.......maturities........................ 184,199 309,779 153,661 153,661
LONG-TERM DEFERRED INCOME TAXES.................TAXES..... 40,409 58,604 58,604 58,604
OTHER LONG-TERM LIABILITIES.....................LIABILITIES......... 750,571 620,896 586,724 586,724
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock..................................stock...................... 490,500 491,500 491,500 491,500
Additional paid-in capital....................capital........ 5,123,802 6,622,802 6,622,802 6,622,802
Retained earnings.............................earnings................. 3,814,783 5,904,169 4,521,474 21,474
Treasury stock, at cost.......................cost........... (808,798) (808,798) (808,798) (808,798)
----------- ----------- ----------- -----------
Total stockholders'
equity............equity.................. 8,620,287 12,209,673 10,826,978 6,326,978
----------- ----------- ----------- -----------
Total liabilities and
stockholders' equity..............................equity.... $61,641,117 $72,874,236 $68,730,497 $64,230,497
=========== =========== =========== ===========

The accompanying notes are an integral part of these combined financial
statements.

F-21F-22
100111

HOWARD GROUP

COMBINED STATEMENTS OF OPERATIONS

FOR THE SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------ ----------------------------------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ----------- ----------------------- ------------
(UNAUDITED)

REVENUES:
New vehicle sales..........sales............ $136,831,043 $151,226,737 $164,978,710 $82,522,708 $84,922,460$ 82,522,708 $ 84,922,460
Used vehicle sales.........sales........... 69,861,948 79,447,701 88,477,330 44,036,067 54,353,896
Parts and service sales....sales...... 14,402,326 16,940,622 21,173,371 10,141,875 10,762,746
Other dealership revenues,
net.....................net....................... 6,163,506 6,388,131 7,386,747 3,949,257 4,006,206
------------ ------------ ------------ ----------- ----------------------- ------------
Total revenues.....revenues....... 227,258,823 254,003,191 282,016,158 140,649,907 154,045,308
COST OF SALES................SALES:
New vehicle cost of sales.... 128,795,822 141,952,762 154,682,896 77,336,926 80,403,283
Used vehicle cost of sales... 63,263,368 71,553,967 78,911,645 39,096,474 49,186,187
Parts and service cost of
sales..................... 6,932,727 8,266,771 10,801,506 5,220,454 4,541,069
------------ ------------ ------------ ------------ ------------
Total cost of
sales.............. 198,991,917 221,773,500 244,396,047 121,653,854 134,130,539
------------ ------------ ------------ ----------- ----------------------- ------------
Gross profit.......profit......... 28,266,906 32,229,691 37,620,111 18,996,053 19,914,769
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES....EXPENSES...... 24,253,223 26,165,535 30,768,233 15,032,054 16,453,253
------------ ------------ ------------ ----------- ----------------------- ------------
Income from
operations.......operations......... 4,013,683 6,064,156 6,851,878 3,963,999 3,461,516
OTHER INCOME AND EXPENSE:
Interest expense, net......net........ (1,101,487) (1,604,204) (1,193,810) (679,842) (807,954)
Other income (expense), net.....................net.. 8,942 (80,446) (69,328) (28,411) 34,079
------------ ------------ ------------ ----------- ----------------------- ------------
INCOME BEFORE INCOME TAXES...TAXES..... 2,921,138 4,379,506 5,588,740 3,255,746 2,687,641
PROVISION FOR INCOME TAXES...TAXES..... 767,850 744,316 381,752 306,492 165,617
------------ ------------ ------------ ----------- ----------------------- ------------
NET INCOME...................INCOME..................... $ 2,153,288 $ 3,635,190 $ 5,206,988 $ 2,949,254 $ 2,522,024
============ ============ ============ =========== ======================= ============
S-Corporation pro forma income
taxes (unaudited)............... 388,920 989,968 1,831,389 982,783 898,689
------------ ------------ ------------ ----------- ----------------------- ------------
Pro forma net income
(unaudited).................................. $ 1,764,368 $ 2,645,222 $ 3,375,599 $ 1,966,471 $ 1,623,335
============ ============ ============ =========== ======================= ============

The accompanying notes are an integral part of these combined financial
statements.

F-22F-23
101112

HOWARD GROUP

COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY

ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK TOTAL
-------- ---------- ----------- --------- -----------

BALANCE, December 31,
1993..................... $490,000 $2,399,302 $ 1,556,192 $(808,798) $ 3,636,696
Net income............... -- -- 2,153,288 -- 2,153,288
Issuance of common
stock................. 500 999,500 -- -- 1,000,000
Dividends................ -- -- (1,443,706) -- (1,443,706)
-------- ---------- ----------- --------- -----------
BALANCE, December 31,
1994..................... 490,500 3,398,802 2,265,774 (808,798) 5,346,278
Net income............... -- -- 3,635,190 -- 3,635,190
Capital contribution..... -- 1,725,000 -- -- 1,725,000
Dividends................ -- -- (2,086,181) -- (2,086,181)
-------- ---------- ----------- --------- -----------
BALANCE, December 31,
1995..................... 490,500 5,123,802 3,814,783 (808,798) 8,620,287
Net income............... -- -- 5,206,988 -- 5,206,988
Issuance of common
stock................. 1,000 1,499,000 -- -- 1,500,000
Dividends................ -- -- (3,117,602) -- (3,117,602)
-------- ---------- ----------- --------- -----------
BALANCE, December 31,
1996..................... 491,500 6,622,802 5,904,169 (808,798) 12,209,673
Net income (unaudited)... -- -- 2,522,024 -- 2,522,024
Dividends (unaudited).... -- -- (3,904,719) -- (3,904,719)
-------- ---------- ----------- --------- -----------
BALANCE, June 30, 1997
(unaudited).............. $491,500 $6,622,802 $ 4,521,474 $(808,798) $10,826,978
======== ========== =========== ========= ===========

The accompanying notes are an integral part of these combined financial
statements.

F-23F-24
102113

HOWARD GROUP

COMBINED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------- -------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)

CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income......................... $ 2,153,288 $ 3,635,190 $ 5,206,988 $ 2,949,254 $ 2,522,024
----------- ----------- ----------- ----------- -----------
Adjustments to reconcile net income
to net cash provided by (used
in) operating activities --
Depreciation and amortization... 429,915 538,493 740,811 344,642 340,043
Deferred income taxes........... 39,207 190,787 (315,631) (178,774) 44,800
Provision for doubtful
accounts...................... 113,112 84,833 108,068 46,509 41,952
Loss (gain) on sale of assets... (56,503) 15,313 18,350 8,991 (17,628)
Changes in assets and
liabilities --
Accounts receivable........... (3,393,986) 197,696 294,888 1,451,630 (343,822)
Inventories................... (8,492,539) (4,873,611) (6,106,872) (1,762,205) 2,472,246
Prepaid expenses and other
assets..................... (58,113) 196,943 (514,167) 539,069 (2,249)
Floor plan notes payable...... 9,451,846 3,876,738 5,508,254 106,005 (4,727,800)
Accounts payable and accrued
expenses................... 4,017,618 3,334,511 2,391,588 (1,620,990) 2,076,626
----------- ----------- ----------- ----------- -----------
Total adjustments.......... 2,050,557 3,561,703 2,125,289 (1,065,123) (115,832)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used
in) operating
activities............... 4,203,845 7,196,893 7,332,277 1,884,131 2,406,192
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable,
net.............................receivable....... -- (374,826) (42,849) (14,205)(235,054) (220,848) (95,910)
Collections on notes receivable.... -- -- 192,205 206,643 --
Purchases of property and
equipment....................... (1,197,283) (928,017) (1,977,075) (1,726,306) (272,500)
Proceeds from sale of property and
equipment....................... -- -- -- -- 278,736
Acquisition of Business............ (1,834,426) -- (2,594,994) (2,594,994) --
----------- ----------- ----------- ----------- -----------
Net cash used in investing
activities............... (3,031,709) (1,302,843) (4,614,918) (4,335,505) (89,674)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term
debt............................ (225,313) (171,910) (152,807) (76,404) (168,144)
Borrowings of long-term debt....... 512,204 13,111 212,329 92,925 --
Issuance of common stock........... 1,000,000 -- 1,500,000 -- --
Contribution from stockholders..... -- 1,725,000 -- -- --
Dividends.......................... (1,443,706) (2,086,181) (3,117,602) (2,128,403) (3,890,771)
----------- ----------- ----------- ----------- -----------
Net cash used in financing
activities............... (156,815) (519,980) (1,558,080) (2,111,882) (4,058,915)
----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 1,015,321 5,374,070 1,159,279 (4,563,256) (1,742,397)
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 4,130,380 5,145,701 10,519,771 10,519,771 11,679,050
----------- ----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 5,145,701 $10,519,771 $11,679,050 $ 5,956,515 $ 9,936,653
=========== =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for --
Interest........................ $ 2,295,200 $ 3,427,813 $ 3,117,601 $ 1,775,231 $ 2,006,376
Taxes........................... 715,000 475,000 924,456 514,379 10,991

The accompanying notes are an integral part of these combined financial
statements.

F-24F-25
103114

HOWARD GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS
(All discussions and disclosures with a reference date subsequent to May 9, 1997
are unaudited.)

1. BUSINESS AND ORGANIZATION:

Howard Group (the Companies) is primarily engaged in the retail sale of new
and used automobiles and the sale of the related finance, insurance and service
contracts thereon. In addition, the Companies sell automotive parts, provide
vehicle servicing and sell wholesale used vehicles.

The following companies are included within the combined group:

Howard Pontiac -- GMC, Inc. (Automall)

Automall consists of several franchises which conduct business at
contiguous locations in Oklahoma City, Oklahoma. The franchises
operated in this location include Pontiac, GMC, Mazda, Isuzu, Jeep,
Eagle, Chrysler and Plymouth.

Bob Howard Chevrolet, Inc. (BHC)

BHC is a Chevrolet dealership located in Oklahoma City, Oklahoma.

Bob Howard Automotive -- H, Inc. (BHH)

BHH consists of two franchises, Honda and Acura, which conduct business
at contiguous locations in Oklahoma City, Oklahoma.

Bob Howard Motors, Inc. (BHT)

BHT is a Toyota dealership located in Oklahoma City, Oklahoma.

Bob Howard Dodge, Inc. (BHD)

BHD is a Dodge dealership located in Oklahoma City, Oklahoma.

The Companies and their stockholders intend to enter into a definitive
agreement with Group 1 Automotive, Inc. (Group 1), pursuant to which all
outstanding shares of the Companies' common stock will be exchanged for cash and
shares of Group 1's common stock concurrent with the consummation of the initial
public offering of the common stock of Group 1.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of Presentation

The accompanying combined financial statements include the accounts of the
companies listed above. The Companies have been presented on a combined basis
due to their related operations, common ownership and common management control.
All significant intercompany balances and transactions have been eliminated in
combination.

Major Suppliers and Franchise Agreements

The Companies purchase substantially all of their new vehicles at the
prevailing prices charged by the manufacturers to all franchised dealers. The
Companies' sales volume could be adversely impacted by the manufacturers'
inability to supply the dealership with an adequate supply of popular models or
as a result of an unfavorable allocation of vehicles by the manufacturer.

F-25F-26
104115

HOWARD GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

both by state courts and administrative agencies. See "Risk
Factors -- Manufacturers' Control Over Dealerships" and "Business -- Franchise
Agreements" for further discussion.

Revenue Recognition

Revenue from vehicle sales, parts sales and vehicle service is recognized
upon delivery to the customer.

Finance, Insurance and Service Contract Income Recognition

The Companies arrange financing for customers through various institutions
and receive financing fees equal to the difference between the loan rates
charged to customers over the predetermined financing rates set by the financing
institution. In addition, the Companies receive commissions from the sale of
credit life and disability insurance and extended service contracts to
customers.

The Companies may be charged back (chargebacks) for unearned financing
fees, insurance or service contract commissions in the event of early
termination of the contracts by customers. The revenues from financing fees and
commissions are recorded at the time of the sale of the vehicles. The reserves
for future chargebacks are based on historical operating results and the
termination provisions of the applicable contracts. Finance, insurance and
service contract income, net of estimated chargebacks, are included in other
dealership revenue in the accompanying combined financial statements.

Cash and Cash Equivalents

Cash and cash equivalents include highly liquid investments that have an
original maturity of three months or less at the date of purchase.

Contractspurchase and contracts
in Transittransit. Contracts in transit represent contracts on vehicles sold, for which
the proceeds are in transit from financing institutions.

Inventories

New, used and demonstrator vehicles are stated at the lower of cost or
market, determined on a specific-unit basis.

Parts and accessories are stated at the lower of cost (determined on a
first-in, first-out basis) or market.

Property and Equipment

Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are capitalized and amortized over the lesser of the life of the
lease or the estimated useful life of the asset.

Expenditures for major additions or improvements which extend the useful
lives of assets are capitalized. Minor replacements, maintenance and repairs
which do not improve or extend the life of such assets are charged to operations
as incurred. Disposals are removed at cost less accumulated depreciation, and
any resulting gain or loss is reflected in current operations.

F-26
105

HOWARD GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Goodwill

Goodwill represents the excess of the purchase price of dealerships
acquired (BHH, BHD and Automall) over the fair value of assets acquired at the
date of acquisition. Goodwill is being amortized on a straight-line basis over
40 years. Amortization expense charged to operations totaled approximately
$21,000, $27,000 and $36,000 for the years ended December 31, 1994, 1995 and
1996, respectively.

F-27
116

HOWARD GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Accumulated amortization totaled approximately $93,000 and $129,000 as of
December 31, 1995 and 1996, respectively.

Income Taxes

The Companies follow 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.

Certain of the Companies have elected S Corporation status, as defined by
the Internal Revenue Code, whereby the Companies are 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.

Environmental Liabilities and Expenditures

Accruals for environmental matters, if any, are recorded in operating
expenses when it is probable that a liability has been incurred and the amount
of the liability can be reasonably estimated. Accrued liabilities are exclusive
of claims against third parties and are not discounted.

In general, costs related to environmental remediation are charged to
expense. Environmental costs are capitalized if the costs increase the value of
the property and/or mitigate or prevent contamination from future operations.

Interest Expense

Automobile manufacturers periodically provide floorplan interest
assistance, or subsidies, which reduce the Companies' cost of financing. The
accompanying combined financial statements reflect interest expense net of
floorplan assistance.

Fair Value of Financial Instruments

The Companies' financial instruments consist primarily of floor plan 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.

Advertising

The Company expenses production and other costs of advertising as incurred.
Advertising expense for the years ended December 31, 1994, 1995 and 1996 totaled
$3,511,447, $3,422,453 and $3,245,451, respectively.

F-27
106

HOWARD GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Concentration of Credit Risk

Financial instruments which potentially subject the Companies to a
concentration of credit risk consist principally of cash, cash equivalents,
contracts in transit and accounts receivable. The Company maintains cash
balances at financial institutions which may at times be in excess of federally
insured levels. The Companies grant credit to local companies in various
businesses. The Companies perform ongoing credit evaluations of their customers
and generally do not require collateral. The Companies maintain an allowance for
doubtful accounts at a level which management believes is sufficient to cover

F-28
117

HOWARD GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

potential credit losses. The Companies have not incurred significant losses
related to these financial instruments to date.

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 future chargebacks on
finance, insurance and service contract income. Actual results could differ from
those estimates.

Interim Financial Information

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 floor plan financing of inventory, which is a
customary financing technique in the industry, is reflected as an operating
activity in the statements of cash flows.

New Accounting Pronouncement

Effective January 1, 1996, the Companies adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." SFAS No. 121 requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the asset in question may not be recoverable. If an evaluation is required, the
estimated future undiscounted cash flows associated with the asset would be
compared to the asset's carrying amount to determine if a write-down to market
value or discounted cash flow value is necessary. Adoption of this standard did
not have a material effect on the financial position or results of operations of
the Companies.

During June 1996 and June 1997 the Financial Accounting Standards Board
(FASB) issued statement of Financial Accounting Standards (SFAS) No. 125
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities" and SFAS No. 130 "Reporting Comprehensive Income, respectively."
The major provisions of these statements and their impact on the Company are
discussed below.

F-28
107

HOWARD GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

F-29
118

HOWARD GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

anticipated to have any impact on the Company as the Company currently does not
enter into any transactions which result in charges (or credits) directly to
equity (such as additional minimum pension liability changes, currency
translation adjustments, unrealized gains and losses on available for sale
securities, etc.).

3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:

Accounts receivable consist of the following:

DECEMBER 31,
------------------------
1995 1996
---------- ----------

Amounts due from manufacturers............................ $4,051,091 $3,075,483
Parts and service receivables............................. 873,874 652,222
Warranty receivables...................................... 250,971 499,470
Due from finance companies................................ 781,383 1,002,153
Other..................................................... 404,471 777,329
---------- ----------
6,361,790 6,006,657
Less -- Allowance for doubtful accounts................... (60,098) (107,921)
---------- ----------
$6,301,692 $5,898,736
========== ==========

Activity in the Companies' allowance for doubtful accounts consists of the
following:

DECEMBER 31,
---------------------------------
1994 1995 1996
--------- -------- --------

Balance, beginning of year..................... $ 6,900 $ -- $ 60,098
Additions charged to expense................... 113,112 84,833 108,068
Deductions for uncollectible receivables
written off.................................. (120,012) (24,735) (60,245)
--------- -------- --------
$ -- $ 60,098 $107,921
========= ======== ========

Inventories consist of the following:

DECEMBER 31,
------------------------------
1995 1996
----------- -----------

New vehicles....................................... $30,680,418 $36,973,347
Used vehicles...................................... 7,440,761 8,612,757
Parts, accessories and other....................... 1,451,417 2,088,358
----------- -----------
$39,572,596 $47,674,462
=========== ===========

Accounts payable and accrued expenses consist of the following:

DECEMBER 31,
------------------------------
1995 1996
----------- -----------

Accounts payable, trade............................ $ 6,416,124 $ 6,135,880
Reserve for finance, insurance and service contract
chargebacks...................................... 5,661,473 5,782,600
Other accrued expenses............................. 2,141,665 4,822,045
----------- -----------
$14,219,262 $16,740,525
=========== ===========

F-29F-30
108119

HOWARD GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

4. PROPERTY AND EQUIPMENT:

Property and equipment consist of the following:

ESTIMATED DECEMBER 31,
USEFUL LIVES ------------------------------
IN YEARS 1995 1996
------------ ----------- -----------

Buildings.............................. 20 $ 28,675 $ 32,058
Leasehold improvements................. 7 861,361 1,086,129
Machinery and equipment................ 3 to 7 2,165,606 2,460,465
Furniture and fixtures................. 5 to 7 1,161,304 1,387,095
Company vehicles....................... 5 829,192 2,146,377
----------- -----------
Total........................ 5,046,138 7,112,124
Less -- Accumulated depreciation....... (2,235,172) (2,983,244)
----------- -----------
Property and equipment,
net........................ $ 2,810,966 $ 4,128,880
=========== ===========

5. FLOOR PLAN NOTES PAYABLE:

Floor plan notes payable reflect amounts payable for the purchase of
specific vehicle inventory and consist of the following:

DECEMBER 31,
--------------------------
1995 1996
----------- -----------

New vehicles........................................... $33,056,624 $38,677,985
Used vehicles.......................................... 3,979,024 3,865,917
----------- -----------
Total floor plan notes payable............... $37,035,648 $42,543,902
=========== ===========

Floorplan notes payable are due to one floor plan lender, bearing interest
at a rate of prime less 0.5%. As of December 31, 1995 and 1996, the weighted
average interest rate, on floorplan notes payable outstanding was 8.25% and
7.75%. Interest expense on floorplan notes payable, before manufacturer interest
assistance, totaled approximately $2,508,000, $3,656,000$2,408,000, $3,410,000 and $3,569,000$3,112,000 for the
years ended December 31, 1994, 1995 and 1996, respectively. Manufacturer
interest assistance, which is recorded as a reduction to interest expense in the
accompanying financial statements, totaled approximately $1,350,000, $1,867,000
and $1,974,000 for the years ended December 31, 1994, 1995 and 1996,
respectively. The flooring arrangements permit the Companies to borrow up to
$58,380,000, dependent upon new and used vehicle sales and inventory levels. As
of December 31, 1996, total available borrowings under floor plan agreements
were approximately $15,836,000. Payments on the notes are due when the related
vehicles are sold and are collateralized by substantially all of the inventories
of the Companies.

6. STOCKHOLDERS' EQUITY:

Capital stock consists of the following:

AUTHORIZED ISSUED OUTSTANDING PAR VALUE
---------- ------- ----------- ---------

Common Stock --
Automall............................. 1,000,000 460,000 114,500 $ 1.00
BHC.................................. 2,000 1,000 1,000 25.00
BHH.................................. 5,000 500 500 1.00
BHT.................................. 25,000 5,000 5,000 1.00
BHD.................................. 50,000 1,000 1,000 1.00

F-30F-31
109120

HOWARD GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Treasury stock consists of 345,500 shares of the common stock of Automall
at a cost of approximately $809,000 at December 31, 1995 and 1996.

7. RELATED-PARTY TRANSACTIONS:

Operating Leases With Stockholder

The principal stockholder of the Companies leases the dealerships' premises
under operating leases. Additional information regarding the terms of these
leases is contained in Note 8, "Operating Leases."

The principal stockholder of the Companies has certain loans outstanding
which are secured by assets of the dealerships. See Note 10, "Commitments and
Contingencies," for a detail of loans secured by the assets of the dealerships.

Stockholder Loan Guarantees

The Companies have provided guarantees and/or pledged assets as security
for certain outstanding loan obligations of various related parties. See Note 10
"Commitments and Contingencies," for discussion of guarantee and security
arrangements provided on behalf of related parties.

Company Indebtedness Guaranteed by Stockholder

The principal stockholder of the Companies has provided a personal
guarantee relating to the repayment of floorplan obligations incurred by the
Companies. As of December 31, 1996 and June 30, 1997, floorplan obligations
guaranteed by the principal stockholder totaled approximately $42.5 million and
$37.8 million, respectively.

Advances to Group 1

The Companies have consummated a loan with Group 1 in order to finance the
expenses of Group 1 prior to the acquisition. The balance of this loan at
December 31, 1996 and June 30, 1997 was approximately $0 and $164,000,
respectively, bearing interest at a rate of 7.0% per annum.

8. OPERATING LEASES:

The Companies lease various facilities and equipment under operating lease
agreements, including leases with related parties. These leases are
noncancelable and expire on various dates through 2002. The lease agreements are
subject to renewal under essentially the same terms and conditions as the
original leases.

Future minimum lease payments for operating leases are as follows:

YEAR ENDING RELATED THIRD
DECEMBER 31, PARTIES PARTIES TOTAL
- ------------ ---------- ---------- -----------
1997................................ $2,127,296 $ 742,740 $ 2,870,036
1998................................ 2,122,296 742,740 2,865,036
1999................................ 1,728,796 742,740 2,471,536
2000................................ 1,432,296 742,740 2,175,036
2001................................ 1,432,296 308,055 1,740,351
Thereafter.......................... 1,030,296 -- 1,030,296
---------- ---------- -----------
Total..................... $9,873,276 $3,279,015 $13,152,291
========== ========== ===========

Total rent expense under all operating leases, including operating leases
with related parties, was approximately $2,074,000, $2,159,000 and $2,331,000
for the years ended December 31, 1994, 1995

F-32
121

HOWARD GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

and 1996, respectively. Rental expense on related-party leases, which is
included in the above amounts, totaled approximately $1,847,000, $1,942,000 and
$1,960,000 for the years ended December 31, 1994, 1995 and 1996, respectively.

F-31
110

HOWARD GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

9. INCOME TAXES:

The S Corporations will terminate S Corporation status concurrent with the
effective date of the Offering.

Federal and state income taxes are as follows:

DECEMBER 31,
---------------------------------
1994 1995 1996
-------- -------- ---------

Federal --
Current...................................... $614,059 $476,615 $ 586,642
Deferred..................................... 33,010 160,631 (261,857)
State --
Current...................................... 114,584 76,914 110,741
Deferred..................................... 6,197 30,156 (53,774)
-------- -------- ---------
$767,850 $744,316 $ 381,752
======== ======== =========

Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34 percent to income
before income taxes as follows:

DECEMBER 31,
--------------------------------------
1994 1995 1996
--------- ---------- -----------

Provision at the statutory rate............ $ 993,187 $1,489,032 $ 1,900,172
Increase (decrease) resulting from --
Income of S Corporation.................. (391,102) (877,106) (1,584,686)
State income tax, net of benefit for
federal deduction..................... 79,715 70,666 37,598
Other.................................... 86,050 61,724 28,668
--------- ---------- -----------
$ 767,850 $ 744,316 $ 381,752
========= ========== ===========

Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax (assets) and liabilities result principally from the following:

DECEMBER 31,
--------------------------
1995 1996
----------- -----------

Inventory valuation.................................... $ 2,381,631 $ 2,637,029
Reserves and accruals not deductible until paid........ (1,645,669) (2,175,732)
Depreciation........................................... 40,411 58,604
Other.................................................. (44,966) (104,125)
----------- -----------
$ 731,407 $ 415,776
=========== ===========

F-32F-33
111122

HOWARD GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

The net deferred tax assets and liabilities are comprised of the following:

DECEMBER 31,
--------------------------
1995 1996
----------- -----------

Deferred tax assets --
Current.............................................. $(1,569,170) $(2,144,789)
Deferred tax liabilities --
Current.............................................. 2,260,168 2,501,961
Long-term............................................ 40,409 58,604
----------- -----------
Total........................................ 2,300,577 2,560,565
----------- -----------
Net deferred income tax liabilities.......... $ 731,407 $ 415,776
=========== ===========

10. COMMITMENTS AND CONTINGENCIES:

Litigation

The Companies are defendants in several lawsuits arising from normal
business activities. Management has reviewed pending litigation with legal
counsel and believes that the ultimate liability, if any, resulting from such
actions will not have a material adverse effect on the Companies' financial
position or results of operations.

Insurance

The Companies carry a standard range of insurance coverage, including
general and business auto liability, commercial property, workers' compensation
and excess liability coverage. The Companies have not incurred significant
claims or losses on any of their insurance policies.

Stockholder Loans Guaranteed by the Companies

The principal stockholder of the Companies has various loans totaling
$8,128,000 and $7,766,120 outstanding with a financial institution as of
December 31, 1996 and June 30, 1997. The loans are guaranteed by Automall, BHC
and BHT and are secured by all of the real estate, buildings and improvements at
the dealerships. The notes mature on various dates through 2004 and bear
interest at prime less .5% (8.25% at December 31, 1996).

11. RETIREMENT PLAN:

Effective April 1, 1996, the Companies established a 401(k) salary
deferral/savings plan for the benefit of all employees. Employees electing to
participate in the plan may contribute up to 15% of annual compensation, limited
to the maximum amount that can be deducted for income tax purposes each year.

The Companies, at their discretion, have the option to match each
employee's contribution up to a maximum of 6% of annual compensation each plan
year. The Companies elected to make contributions totaling $178,000 for the year
ended December 31, 1996.

12. PROPOSED ACQUISITION BY GROUP 1:

The stockholders of the Companies intend to enter into definitive purchase
agreements with Group 1 providing for the purchase of the Companies by Group 1.
In conjunction with the acquisition of the Companies by Group 1, all existing
operating leases with related parties will be restructured under new lease
agreements and the principal stockholder of the Companies will either obtain
releases for the Companies from the stockholder loan guarantees discussed above
or will obtain alternative financing in order to obtain release from the
stockholder loan guarantees.

F-33F-34
112123

HOWARD GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

13. PRO FORMA BALANCE SHEET -- JUNE 30, 1997 (UNAUDITED)

In conjunction with the proposed Acquisition by Group 1, the Howard Group
will make distributions from the S-Corporation accumulated adjustment accounts
to certain shareholders totaling $4,500,000. The pro forma balance sheet as of
June 30, 1997 gives effect to these distributions as of June 30, 1997.

14. SUBSEQUENT EVENTS (UNAUDITED)

During 1997, an affiliate of the Howard Group entered into an agreement to
acquire, subject to manufacturer approval, a Chevrolet dealership in Tulsa,
Oklahoma. The Howard Group has not received approval from the manufacturer, and
in June 1997, entered into a management contract with the owner of the Chevrolet
dealership. Group 1 expects to enter into an agreement to acquire the Chevrolet
dealership from the affiliate of the Howard Group for the assumption of the
dealership's liabilities.

F-34F-35
113124

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO MCCALL GROUP:

We have audited the accompanying combined balance sheets of the companies
identified in Note 1 (the Companies) as of December 31, 1995 and 1996, and the
related combined statements of operations, stockholders' deficit and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

ARTHUR ANDERSEN LLP
Houston, Texas
May 9, 1997

F-35F-36
114125

MCCALL GROUP

COMBINED BALANCE SHEETS

ASSETS

DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
------------ ------------- -----------
(UNAUDITED)

CURRENT ASSETS:
Cash and cash equivalents..................... $ 301,277 $ 193,975 $ 253,068
Contracts in transit.......................... 20,327,507 13,899,508 10,174,334$20,628,784 $14,093,483 $10,427,402
Accounts receivable, net...................... 3,535,825 4,407,835 2,689,166
Due from affiliates........................... 3,769,789 1,397,454 1,062,854
Inventories................................... 22,490,889 23,720,965 15,025,873
Notes receivable, net......................... 226,113 237,547 340,523
Prepaid expenses.............................. 123,976 294,044 151,675
Deferred income tax benefit................... 1,972,348 1,769,529 1,735,044
----------- ----------- -----------
Total current assets.................. 52,747,724 45,920,857 31,432,537
----------- ----------- -----------
PROPERTY AND EQUIPMENT, net..................... 2,492,651 3,147,017 3,924,236
LONG-TERM DEFERRED INCOME TAX BENEFIT........... -- 104,882 104,882
OTHER ASSETS.................................... 425,661 1,300,432 1,887,640
----------- ----------- -----------
Total assets.......................... $55,666,036 $50,473,188 $37,349,295
=========== =========== ===========

LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES:
Floor plan notes payable...................... $35,940,161 $32,219,713 $20,216,458
Current maturities of long-term debt.......... 28,553 146,303 78,736
Due to affiliates............................. 849,404 798,413 1,082,574
Accounts payable and accrued expenses......... 18,832,580 18,176,922 15,732,890
----------- ----------- -----------
Total current liabilities............. 55,650,698 51,341,351 37,110,658
----------- ----------- -----------
LONG-TERM DEBT, net of current maturities....... 180,655 410,805 576,330
LONG-TERM DEFERRED INCOME TAXES................. 112,250 -- --
OTHER LONG-TERM LIABILITIES..................... 150,000 427,000 412,124
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock.................................. 125,800 71,278 71,278
Additional paid-in capital.................... 2,930,419 3,222,043 3,222,043
Retained deficit.............................. (3,483,786) (4,999,289) (4,043,138)
----------- ----------- -----------
Total stockholders' deficit........... (427,567) (1,705,968) (749,817)
----------- ----------- -----------
Total liabilities and stockholders'
deficit............................. $55,666,036 $50,473,188 $37,349,295
=========== =========== ===========

The accompanying notes are an integral part of these combined financial
statements.

F-36F-37
115126

MCCALL GROUP

COMBINED STATEMENTS OF OPERATIONS

SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------ ----------------------------------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ----------- ----------------------- ------------
(UNAUDITED)

REVENUES:
New vehicle sales.............sales............ $105,402,077 $125,809,681 $166,381,686 $78,632,836 $81,608,967$ 78,632,836 $ 81,608,967
Used vehicle sales............sales........... 49,871,793 68,332,375 90,895,516 44,236,716 49,796,182
Parts and service sales.......sales...... 17,938,636 19,431,385 24,454,187 11,041,837 12,304,906
Other dealership revenues,
net.........................net....................... 4,107,658 5,314,141 6,810,908 3,304,178 3,242,694
------------ ------------ ------------ ----------- ----------------------- ------------
Total revenues.........revenues....... 177,320,164 218,887,582 288,542,297 137,215,567 146,952,749
COST OF SALES...................SALES:
New vehicle cost of sales.... 96,897,653 115,503,816 152,190,268 71,693,688 74,597,041
Used vehicle cost of sales... 46,511,037 64,157,498 84,806,452 41,238,717 47,659,535
Parts and service cost of
sales..................... 9,164,705 9,069,093 12,563,340 5,344,403 5,019,076
------------ ------------ ------------ ------------ ------------
Total cost of
sales.............. 152,573,395 188,730,407 249,560,060 118,276,808 127,275,652
------------ ------------ ------------ ----------- ----------------------- ------------
Gross profit...........profit......... 24,746,769 30,157,175 38,982,237 18,938,759 19,677,097
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES.......EXPENSES...... 22,476,554 27,751,831 35,072,460 16,958,684 17,545,957
------------ ------------ ------------ ----------- ----------------------- ------------
Income from
operations...........operations......... 2,270,215 2,405,344 3,909,777 1,980,075 2,131,140
OTHER INCOME AND EXPENSE:
Interest expense, net.........net........ (2,462,618) (3,215,245) (2,747,719) (1,526,344) (503,525)
Other expense, net............net........... (6,511) (43,735) (45,094) (27,635) (34,029)
------------ ------------ ------------ ----------- ----------------------- ------------
INCOME (LOSS) BEFORE INCOME
TAXES.........................TAXES........................ (198,914) (853,636) 1,116,964 426,096 1,593,586
PROVISION FOR INCOME TAXES......TAXES..... 232,173 282,887 177,772 71,584 637,435
------------ ------------ ------------ ----------- ----------------------- ------------
NET INCOME (LOSS)............................. $ (431,087) $ (1,136,523) $ 939,192 $ 354,512 $ 956,151
============ ============ ============ =========== ======================= ============

The accompanying notes are an integral part of these combined financial
statements.

F-37F-38
116127

MCCALL GROUP

COMBINED STATEMENTS OF STOCKHOLDERS' DEFICIT

ADDITIONAL
COMMON PAID-IN SUBSCRIPTIONS RETAINED
STOCK CAPITAL RECEIVABLE DEFICIT TOTAL
-------- ---------- ------------- ----------- -----------

BALANCE, December 31, 1993................ $ 94,600 $1,961,619 $ -- $(1,916,176) $ 140,043
Net loss................................ -- -- -- (431,087) (431,087)
Issuance of common stock................ 31,200 968,800 (850,000) -- 150,000
Payments on subscriptions receivable.... -- -- 11,317 -- 11,317
-------- ---------- --------- ----------- -----------
BALANCE, December 31, 1994................ 125,800 2,930,419 (838,683) (2,347,263) (129,727)
Net loss................................ -- -- -- (1,136,523) (1,136,523)
Payments on subscriptions receivable.... -- -- 270,272 -- 270,272
Settlement of subscriptions
receivable........................... -- -- 568,411 -- 568,411
-------- ---------- --------- ----------- -----------
BALANCE, December 31, 1995................ 125,800 2,930,419 -- (3,483,786) (427,567)
Net income.............................. -- -- -- 939,192 939,192
Dividend to parent under tax sharing
agreement............................ -- -- -- (323,590) (323,590)
Purchase and retirement of treasury
stock................................ (57,898) -- -- (2,131,105) (2,189,003)
Stock issued to employees............... 3,376 291,624 -- -- 295,000
-------- ---------- --------- ----------- -----------
BALANCE, December 31, 1996................ 71,278 3,222,043 -- (4,999,289) (1,705,968)
Net income (unaudited).................. -- -- -- 956,151 956,151
-------- ---------- --------- ----------- -----------
BALANCE, June 30, 1997 (unaudited)........ $ 71,278 $3,222,043 $ -- $(4,043,138) $ (749,817)
======== ========== ========= =========== ===========

The accompanying notes are an integral part of these combined financial
statements.

F-38F-39
117128

MCCALL GROUP

COMBINED STATEMENTS OF CASH FLOWS

FOR THE
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------- ----------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ------------ ------------
(UNAUDITED)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................... $ (431,087) $(1,136,523) $ 939,192 $ 354,512 $ 956,151
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities --
Depreciation and amortization..................... 387,093 439,402 598,278 281,292 248,615
Deferred income taxes............................. (154,493) (514,187) (14,313) (2,197) 34,485
Provision for loan losses and doubtful accounts... 226,530 208,972 357,860 165,313 139,035
Loss (gain) on sale of assets..................... 129,930 (23,259) 32,632 15,343 --
Non-cash compensation............................. -- -- 295,000 -- --
Tax carryforward benefited........................ -- -- (323,590) (93,762) --
Changes in assets and liabilities --
Accounts receivable............................. (2,770,395) 2,651,367 (1,059,288) (135,702) 1,523,669
Inventories..................................... (2,172,325) (3,085,245) (1,230,076) 576,694 8,695,092
Due from affiliates, net........................ 1,515,356 (1,565,588) 132,341 (786,325) 618,761
Prepaid expenses................................ 274,449 (25,720) (170,068) 13,899 142,369
Other assets.................................... 30,262 (9,546) (874,771) (163,081) (487,208)
Floor plan notes payable........................ (1,113,893) (2,058,861) (3,720,448) (9,909,815) (12,003,255)
Accounts payable and accrued expenses........... 2,579,781 7,695,141 (655,658) (493,298) (2,444,459)
Other long term liabilities..................... -- -- 277,000 277,000 (14,876)
----------- ----------- ----------- ------------ ------------
Total adjustments............................. (1,067,705) 3,712,476 (6,355,101) (10,254,639) (3,547,772)
----------- ----------- ----------- ------------ ------------
Net cash provided by (used in) operating
activities.................................. (1,498,792) 2,575,953 (5,415,909) (9,900,127) (2,591,621)
----------- ----------- ----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase)Increase in notes receivable............. 187,893 361,811 (182,016) (594,970) (102,976)receivable........................ (1,390,560) (909,260) (1,151,783) (837,412) (1,071,200)
Collections on notes receivable..................... 1,578,453 1,271,071 969,767 242,442 968,224
Purchases of property and equipment................. (346,920) (613,890) (1,285,276) (744,300) (1,069,442)
----------- ----------- ----------- ------------ ------------
Net cash used in investing activities......... (159,027) (252,079) (1,467,292) (1,339,270) (1,172,418)
----------- ----------- ----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt................ (503,368) (54,555) (164,694) (50,093) (29,111)
Borrowings of long-term debt........................ -- 110,168 512,594 512,594 127,069
Payments on subscriptions receivable................ 11,317 270,272 -- -- --
Issuance of common stock............................ 150,000 -- -- -- --
----------- ----------- ----------- ------------ ------------
Net cash provided by (used in) financing
activities.................................. (342,051) 325,885 347,900 462,501 97,958
----------- ----------- ----------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS......................................... (1,999,870) 2,649,759 (6,535,301) (10,776,896) (3,666,081)
CASH AND CASH EQUIVALENTS, beginning of period........ 19,978,895 17,979,025 20,628,784 20,628,784 14,093,483
----------- ----------- ----------- ------------ ------------
CASH AND CASH EQUIVALENTS, end of period.............. $17,979,025 $20,628,784 $14,093,483 $ 9,851,888 10,427,402
=========== =========== =========== ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for --
Interest.......................................... $ 2,523,650 $ 3,253,486 $ 2,808,993 $ 1,560,561 $ 1,490,835
Taxes............................................. -- 227,090 818,962 286,388 168,200
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Receivables from stockholder forgiven in conjunction
with purchase of treasury stock................... -- -- 2,189,003 -- --
Settlement of subscriptions receivable from
stockholder in lieu of bonus...................... -- 568,411 -- -- --
Note received upon issuance of common stock......... 850,000 -- -- -- --

The accompanying notes are an integral part of these combined financial
statements.

F-39F-40
118129

MCCALL GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS
(All discussions and disclosures with a reference date subsequent to May 9, 1997
are unaudited.)

1. BUSINESS AND ORGANIZATION:

McCall Group (the Companies) is primarily engaged in the retail sale of new
and used automobiles and the sale of the related finance, insurance and service
contracts thereon. In addition, the Companies sell automotive parts, provide
vehicle servicing and sell wholesale used vehicles.

The following companies are included within the combined group:

Southwest Toyota, Inc. (d.b.a. Sterling McCall Toyota) (SMT) -- SMT is a
Toyota dealership located in Houston, Texas.

SMC Luxury Cars, Inc. (d.b.a. Sterling McCall Lexus) (SML) -- SML is a
Lexus dealership located in Houston, Texas.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of Presentation

The accompanying combined financial statements include the accounts of SMT
and SML. The Companies have been presented on a combined basis due to their
related operations, common ownership and common management control. All
significant intercompany balances and transactions have been eliminated in
combination. SMC Investments, Inc. (SMC) owns 100% of the issued and outstanding
stock of SML and approximately 51% of the stock of SMT. SMC is a separate
holding company which does not operate in the automobile retailing industry and
has not been included in the accompanying combined financial statements as it
will not be acquired by Group 1.

Major Suppliers and Franchise Agreements

The Companies purchase substantially all of their new vehicles from Toyota
Motor Corp. at the prevailing prices charged by the manufacturers to all
franchised dealers. The Companies' sales volume could be adversely impacted by
the manufacturers' inability to supply the dealership with an adequate supply of
popular models or as a result of an unfavorable allocation of vehicles by the
manufacturer.

The dealer franchise agreements contain provisions which may limit changes
in dealership management and ownership, place certain restrictions on the
dealerships (such as minimum net worth requirements) and which also provide for
termination of the franchise agreement by the manufacturers in certain
instances. Under certain state law, these restrictive provisions have been
repeatedly found invalid both by state courts and administrative agencies. See
"Risk Factors -- Manufacturers' Control Over Dealerships" and
"Business -- Franchise Agreements" for further discussion.

Revenue Recognition

Revenue from vehicle sales, parts sales and vehicle service is recognized
upon delivery to the customer.

Fleet Sales

SMT periodically supplies vehicles to various rental car companies as an
accommodation to the manufacturer and to better utilize dealership capacity.
These transactions generate nominal gross profit,

F-40F-41
119130

MCCALL GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

and in management's opinion, do not represent sales in the normal course of
business. Accordingly, sales of approximately $8.5 million, $7.7 million and
$10.8 million and cost of sales of approximately $8.1 million, $7.5 million and
$10.7 million have been excluded from the accompanying statements of operations
for the years ended December 31, 1994, 1995 and 1996 as management believes
excluding such amounts represents a more appropriate basis of presentation. The
net profit on these wholesale fleet transactions is recorded as other dealership
revenues in the accompanying statements of operations.

Finance, Insurance and Service Contract Income Recognition

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.

Contractspurchase and contracts
in Transittransit. Contracts in transit represent contracts on vehicles sold, for which
the proceeds are in transit from financing institutions.

Inventories

New and demonstrator vehicles are stated at cost, determined on the
last-in, first-out (LIFO) basis, which is not in excess of market.

Used vehicles are stated at 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

F-41
120

MCCALL GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Income Taxes

The Companies follow the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109.
Under this method, deferred income

F-42
131

MCCALL GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

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. SML is a member of a consolidated group for tax
reporting purposes. In accordance with SFAS No. 109, SML reports current and
deferred tax expense using the separate return method, resulting in tax expense
being recorded as if SML filed a separate company return for tax purposes. Under
this method, SML does not recognize benefits for net operating losses (NOL's) as
such amounts will not be refunded to SML by the consolidated group. These NOL
carryforwards are offset against the provision for taxes in subsequent
profitable years and treated as dividends to the parent when benefited. SMT is a
separate tax paying entity and is not a member of a consolidated group.

Environmental Liabilities and Expenditures

Accruals for environmental matters, if any, are recorded as operating
expenses when it is probable that a liability has been incurred and the amount
of the liability can be reasonably estimated. Accrued liabilities are exclusive
of claims against third parties and are not discounted.

Interest Expense

Automobile manufacturers periodically provide floorplan interest
assistance, or subsidies, which reduce the Companies' cost of financing. The
accompanying financial statements reflect interest expense net of floor plan
assistance.

Fair Value of Financial Instruments

The Companies' financial instruments consist primarily of floor plan notes
payable, notes receivable 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.

Advertising

The Company expenses production and other costs of advertising as incurred.
Advertising expense for the years ended December 31, 1994, 1995 and 1996 totaled
$1,961,488, $2,800,699 and $4,034,050, respectively.

Concentration of Credit Risk

F-42F-43
121132

MCCALL GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

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 future chargebacks on
finance, insurance and service contract income and reserves for retail loan loss
guarantees (Notes 2 and 11, respectively). Actual results could differ from
those estimates.

Interim Financial Information

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 or
less. Additionally, the net change in floor plan financing of inventory, which
is a customary financing technique in the industry, is reflected as an operating
activity in the statements of cash flows.

New Accounting Pronouncement

During June 1996 and June 1997 the Financial Accounting Standards Board
(FASB) issued statement of Financial Accounting Standards (SFAS) No. 125
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities" and SFAS No. 130 "Reporting Comprehensive Income." The major
provisions of these statements and their impact on the Company are discussed
below.

F-43F-44
122133

MCCALL GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

transactions which result in charges (or credits) directly to equity (such as
additional minimum pension liability changes, currency translation adjustments,
unrealized gains and losses on available for sale securities, etc.).

3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:

Accounts receivable consist of the following:

DECEMBER 31,
------------------------
1995 1996
---------- ----------

Amounts due from manufacturers............................ $1,067,573 $1,192,275
Parts and service receivables............................. 541,635 870,209
Warranty receivables...................................... 270,386 259,826
Due from finance companies................................ 984,521 1,204,624
Other..................................................... 831,682 1,180,201
---------- ----------
3,695,797 4,707,135
Less -- Allowance for doubtful accounts................... (159,972) (299,300)
---------- ----------
$3,535,825 $4,407,835
========== ==========

Activity in the Companies' allowance for doubtful accounts consists of the
following:

DECEMBER 31,
-------------------------------------
1994 1995 1996
-------- -------- -------------

Balance, beginning of year.................... $ 33,427 $ 35,530 $159,972
Additions charged to expense.................. 35,530 159,972 187,278
Deductions for uncollectible receivables
written off................................. (33,427) (35,530) (47,950)
-------- -------- --------
$ 35,530 $159,972 $299,300
======== ======== ========

Inventories consist of the following:

DECEMBER 31,
--------------------------
1995 1996
----------- -----------

New vehicles........................................... $14,776,185 $13,918,424
Used vehicles.......................................... 8,258,953 11,050,657
Parts, accessories and other........................... 1,502,030 1,566,156
Rental vehicles........................................ 2,452,290 1,674,747
Accumulated LIFO Reserve............................... (4,498,569) (4,489,019)
----------- -----------
$22,490,889 $23,720,965
=========== ===========

If the specific unit method of inventory were used, net income would have
increased (decreased) by approximately $111,000, $305,000 and $(9,000) for the
years ended December 31, 1994, 1995 and 1996, respectively.

Activity in the Companies' allowance for uncollectible notes consists of
the following:

DECEMBER 31,
-------------------------------
1994 1995 1996
-------- -------- ---------

Balance, beginning of year...................... $ -- $191,000 $ 240,000
Additions charged to expense.................... 191,000 49,000 170,580
Deductions for uncollectible receivables
written-off................................... -- -- (196,580)
-------- -------- ---------
$191,000 $240,000 $ 214,000
======== ======== =========

F-44F-45
123134

MCCALL GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Accounts payable and accrued expenses consist of the following:

DECEMBER 31,
--------------------------
1995 1996
----------- -----------

Accounts payable, trade................................ $ 7,738,625 $ 7,452,034
Reserve for finance, insurance and service contract
chargebacks.......................................... 3,023,815 3,011,354
Reserve for retail loan guarantees..................... 1,471,000 1,965,000
Other accrued expenses................................. 6,599,140 5,748,534
----------- -----------
$18,832,580 $18,176,922
=========== ===========

4. PROPERTY AND EQUIPMENT:

Property and equipment consist of the following:

ESTIMATED DECEMBER 31,
USEFUL LIVES --------------------------
IN YEARS 1995 1996
------------ ----------- -----------

Leasehold improvements.................... 20 $ 2,054,158 $ 2,470,037
Machinery and equipment................... 7 878,388 1,136,461
Furniture and fixtures.................... 7 2,090,443 2,622,636
Autos and trucks.......................... 5 348,875 380,626
----------- -----------
Total........................... 5,371,864 6,609,760
Less -- Accumulated depreciation.......... (2,879,213) (3,462,743)
----------- -----------
Property and equipment, net..... $ 2,492,651 $ 3,147,017
=========== ===========

5. FLOOR PLAN NOTES PAYABLE:

Floor plan notes payable reflect amounts payable for the purchase of
specific vehicle inventory and consist of the following:

DECEMBER 31,
--------------------------
1995 1996
----------- -----------

New vehicles........................................... $30,045,548 $24,398,255
Used vehicles.......................................... 3,475,307 6,212,001
Rental vehicles........................................ 2,419,306 1,609,457
----------- -----------
Total floor plan notes payable............... $35,940,161 $32,219,713
=========== ===========

Floorplan notes payable are due to various floor plan lenders, bearing
interest at rates ranging from prime plus .5% to prime plus 1.5%. As of December
31, 1995 and 1996, the weighted average interest rate on floorplan notes payable
outstanding was 9.41 and 8.99 percent. Interest expense on floorplan notes
payable, before manufacturer interest assistance, totaled approximately
$2,369,000, $3,096,000 and $2,498,000 for the years ended December 31, 1994,
1995 and 1996. Manufacturer interest assistance, which is recorded as a
reduction to interest expense in the accompanying financial statements, totaled
approximately $82,000, $91,000 and $136,000 for the years ended December 31,
1994, 1995 and 1996. The flooring arrangements permit the Companies to borrow up
to $38,300,000 dependent upon new and used vehicle sales and inventory levels.
As of December 31, 1996, total available borrowings under the floorplan
agreements were approximately $6,080,000. Payments on the notes are due when the
related vehicles are sold and are collateralized by substantially all new and
used vehicles.

F-45F-46
124135

MCCALL GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

6. LONG-TERM DEBT:

Long-term debt consists of the following:

DECEMBER 31,
---------------------
1995 1996
-------- ---------

Note payable to floorplan institution, principal payable in
monthly installments of $5,000 through August 2001,
interest payable monthly at lender's available financing
rate plus 1.5% (9.3% at December 31, 1996)................ $ -- $ 275,000
Other notes payable, maturing in varying amounts through
April 2001, with interest ranging from 5.5% to 9.6% at
December 31, 1996......................................... 209,208 282,108
-------- ---------
209,208 557,108
Less -- Current portion..................................... (28,553) (146,303)
-------- ---------
$180,655 $ 410,805
======== =========

The aggregate maturities of long-term debt as of December 31, 1996, are as
follows:

YEAR ENDING
DECEMBER 31,
- ------------

1997............................................................. $146,303
1998............................................................. 141,666
1999............................................................. 124,378
2000............................................................. 103,906
2001............................................................. 40,855
--------
$557,108
========

7. STOCKHOLDERS' EQUITY:

Capital stock consists of the following as of December 31, 1996:

AUTHORIZED ISSUED OUTSTANDING PAR VALUE
---------- ------- ----------- ---------

Sterling McCall Toyota.................. 500,000 70,278 70,278 $1.00
Sterling McCall Lexus................... 1,000,000 100,000 100,000 .01

Treasury Stock Transactions

During 1996, SMT and its principal stockholder entered into a series of
treasury stock transactions in which SMT repurchased 57,898 shares of common
stock from its principal stockholder. In conjunction with these transactions,
SMT forgave approximately $2,189,000 of related party receivables due from
various entities owned by the principal stockholder. As part of these
transactions, SMT has agreed to repurchase in certain instances, up to 4,502
additional shares of stock from its principal stockholder in exchange for a note
payable in the amount of $2 million. This repurchase provision will be cancelled
concurrently with an initial public offering of stock by the Companies. The
shares repurchased by SMT have been constructively retired for financial
reporting purposes.

Restricted Stock Awards

During December 1996, the Companies granted 3,376 shares of stock to two
employees as compensation for prior services. The shares were issued as of the
grant date and the Companies

F-46F-47
125136

MCCALL GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

recorded compensation expense of $295,000 related to these shares based on the
estimated fair market value of the shares as of the grant date. The shares
issued are subject to various restrictions relating to transferability and
resale, and contain a right of first refusal for repurchase by the Companies.

8. RELATED-PARTY TRANSACTIONS:

Operating Leases

SMT and SML lease land, facilities and equipment from limited partnerships
and other entities controlled by the majority stockholder of the Companies under
operating leases. Additional information regarding the terms of these leases is
contained in Note 9 "Operating Leases".

Stockholder Loan Guarantees

The Companies have provided guarantees and/or pledged assets as security
for certain outstanding loan obligations of various related parties. See Note 11
"Commitments and Contingencies," for discussion of guarantee and security
arrangements provided on behalf of related parties.

Company Indebtedness Guaranteed by Stockholder

The principal stockholder of the Companies has provided personal guarantees
relating to the repayment of long term debt and floorplan obligations incurred
by the Companies. As of December 31, 1996 and June 30, 1997, floorplan
obligations guaranteed by the principal stockholder totaled approximately $32.2
and $20.2 million, respectively, and long term debt obligations totaled
approximately $.3 and $.2 million, respectively. In addition to the above
guarantees, the principal stockholder has also provided a personal guarantee
related to loan guarantees on second chance finance customers (see Note 11). As
of December 31, 1996 and June 30, 1997, customer notes outstanding which were
guaranteed by the Companies and the stockholder totaled approximately $10.4
million and $10.2 million, respectively.

Commissions and Management Fees

The Companies sell credit life and disability insurance policies and
extended service contracts which are underwritten by three companies owned by
the principal stockholders of the Companies.Companies, as well as similar products
provided by third parties. The Companies also sell various aftermarket products
from certain companies owned by the principal stockholders of the Companies. The
Companies paid commissions toprincipal stockholders currently have agreements in place with these entities
of
approximately $675,700, $1,131,500which decrease the fees and $1,591,000 oncommissions paid to the dealerships for the sale of
credit life and disability insurance policies and extended service contracts,
and increase the cost of aftermarket products soldproducts. The amounts withheld under these
agreements are paid directly to the principal stockholders. Approximately
$675,700, $1,131,500 and $1,591,000 was withheld and paid to the stockholders
under the agreements described above, during the years ended December 31, 1994,
1995 and 1996, respectively.

The Companies pay management fees plus certain allocated and out of pocket
expenses to an entity owned by the principal stockholder of the Companies for
consultation and direct management assistance with respect to operations and
strategic planning. Management fee expense totaled approximately $1,076,400,
$1,255,800 and $1,443,000 for the years ended December 31, 1994, 1995 and 1996,
respectively.

Financing Arrangements

The dealerships arrange financing for certain second chance finance
customers through an entity owned by the principal stockholder of the Companies.
The dealerships pay a financing fee of 2% on these

F-48
137

MCCALL GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

finance contracts, and such contracts are non-recourse to the dealerships. Total
financing fees paid to this entity for the years ended December 31, 1994, 1995
and 1996 were approximately $--, $95,000 and $360,000. In addition to providing
financing for second chance finance customers, this entity also provides loan
servicing, collection and repossession services to the Companies related to
defaulted loans which have been repurchased by the Companies under a financing
arrangement with a third party lender. (See Note 11).

The Companies have entered into a floorplan agreement with a financing
company owned by the principal stockholder which allows for a maximum of
$1,000,000 in borrowing capacity. As of December 31, 1995 and 1996,
approximately $709,200 and $619,100, respectively, of floorplan notes payable
under this agreement are included in due to affiliates in the accompanying
financial statements and disclosed in the detail of related party balances
presented herewithin. Borrowings under the floorplan agreement bear interest at
11.75%.

F-47
126

MCCALL GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Advances to Group 1

The Companies have consummated a loan with Group 1 in order to finance the
expenses of Group 1 prior to the acquisition. The balance of this loan at
December 31, 1996 and June 30, 1997 was approximately $48,000 and $403,000,
respectively, bearing interest at a rate of 7.0% per annum.

Other

The Companies have various balances payable to the principal stockholder
and related entities owned by the principal stockholder which have resulted from
short term working capital advances to the Companies by the principal
stockholder, as well as for amounts incurred under the financing agreement
discussed previously. Additionally, the Companies have various balances
receivable from the principal stockholder and related entities owned by the
principal stockholder which have resulted from short term advances by the
Companies. The table below sets forth the significant components of the amounts
due to/from related parties in the accompanying combined balance sheets:

DECEMBER 31,
---------------------------
1995 1996
------------ ------------

Due from affiliated finance entity......................... $ 509,889 $ 778,460
Receivable from principal stockholder, other............... 3,259,900 618,994
---------- ----------
Total due from affiliates.................................. $3,769,789 $1,397,454
========== ==========
Due to affiliated floor plan company....................... $ 709,218 $ 619,138
Due to principal stockholder, other........................ 140,186 179,275
---------- ----------
Total due to affiliates.................................... $ 849,404 $ 798,413
========== ==========

At June 30, 1997 the aggregate of these balances resulted in a net payable
to the principal stockholder of approximately $19,700. Subsequent to June 30,
1997, SMT executed two additional notes payable to entities owned by the
principal stockholder. These notes payable total $495,000, bear interest at
9 1/4%, and are due January 15, 1998.

9. OPERATING LEASES:

The Companies lease various facilities and equipment under operating lease
agreements, including leases with related parties. These leases are
noncancelable and expire on various dates through 2006. The lease agreements are
subject to renewal under essentially the same terms and conditions as the
original leases.

F-49
138

MCCALL GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Future minimum lease payments for operating leases are as follows:

YEAR ENDING RELATED THIRD
DECEMBER 31, PARTIES PARTIES TOTAL
- ---------------------------------- ---------- ---------- -----------

1997......................... $1,842,000 $ 411,556 $ 2,253,556
1998......................... 1,842,000 354,084 2,196,084
1999......................... 1,842,000 234,590 2,076,590
2000......................... 1,842,000 161,908 2,003,908
2001......................... 1,282,000 73,982 1,355,982
Thereafter................... 648,000 -- 648,000
---------- ---------- -----------
$9,298,000 $1,236,120 $10,534,120
========== ========== ===========

Total rent expense under all operating leases, including operating leases
with related parties, was approximately $1,636,000, $1,906,000 and $2,030,000
for the years ended December 31, 1994, 1995

F-48
127

MCCALL GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) and 1996, respectively. Rental
expense on related-party leases, which is included in the above amounts, totaled
$1,487,000, $1,543,000 and $1,627,000 for the years ended December 31, 1994,
1995 and 1996, respectively.

10. INCOME TAXES:

The Companies are subject to a Texas franchise tax which is an income based
tax. Federal and state income taxes are as follows:

DECEMBER 31,
--------------------------------
1994 1995 1996
--------- --------- --------

Federal --
Current....................................... $ 341,971 $ 695,074 $168,053
Deferred...................................... (133,085) (466,528) (12,618)
State --
Current....................................... 44,695 102,000 24,032
Deferred...................................... (21,408) (47,659) (1,695)
--------- --------- --------
$ 232,173 $ 282,887 $177,772
========= ========= ========

Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34 percent to income
before income taxes as follows:

DECEMBER 31,
-------------------------------
1994 1995 1996
-------- --------- --------

Provision (benefit) at the statutory rate........ $(67,631) $(290,236) $379,768
Increase (decrease) resulting from --
State income tax, net of benefit for federal
deduction................................... 15,369 35,865 14,742
SML NOL (benefited) not benefited.............. 184,144 584,795 (323,590)
Other.......................................... 100,291 (47,537) 106,852
-------- --------- --------
$232,173 $ 282,887 $177,772
======== ========= ========

F-50
139

MCCALL GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities result principally from the following:

DECEMBER 31,
------------------------
1995 1996
---------- ----------

Reserves and accruals not deductible until paid........... $1,760,860 $1,779,755
Other..................................................... 99,238 94,656
---------- ----------
$1,860,098 $1,874,411
========== ==========

F-49
128

MCCALL GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

The net deferred tax assets and liabilities are comprised of the following:

DECEMBER 31,
------------------------
1995 1996
---------- ----------

Deferred tax assets --
Current................................................. $1,972,348 $1,773,229
Long-term............................................... 7,200 182,711
---------- ----------
Total........................................... 1,979,548 1,955,940
---------- ----------
Deferred tax liabilities --
Current................................................. -- (6,836)
Long-term............................................... (119,450) (74,693)
---------- ----------
Total........................................... (119,450) (81,529)
---------- ----------
Net deferred income tax assets.................. $1,860,098 $1,874,411
========== ==========

As discussed in Note 2, SML is a member of a consolidated group for tax
reporting purposes and reports income taxes under the separate return method.
During 1994 and 1995, SML did not record tax benefits of approximately $184,000
and $585,000 related to net operating losses as such amounts would not be
reimbursed by the consolidated group. During 1996, approximately $323,600 of
these benefits were offset against the provision for taxes and accounted for as
a dividend in the accompanying statement of stockholders' equity.

11. COMMITMENTS AND CONTINGENCIES:

Litigation

The Companies are defendants 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
action will not have a material adverse effect on the Companies' financial
position or results of operations.

Insurance

Loan Guarantees Provided on Second Chance Financing

The Companies provide second-chance financing for certain customers through
a third party lender. Under the terms of this financing contract, customers
execute installment contracts which are guaranteed with full recourse by the
Companies. The Companies surrender all rights to the future economic benefits
related to the receivables; however, in the event that the customer defaults on
the note, the

F-51
140

MCCALL GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

lender requires repayment of the principal amount of the note plus earned
interest through the date of default, with repossession of the vehicle to be
performed by the applicable dealership. The Companies do not have the ability to
repurchase these receivables from the lender, and may only be required to
repurchase the receivables from the Lender in the event of default by the
customer. During the years ended December 31, 1994, 1995 and 1996, the Companies
sold approximately $3,518,000, $4,492,000 and $7,471,000, respectively, in full
recourse loans to the lender.

Total customer notes outstanding guaranteed by the dealership at December
31, 1995 and 1996 and June 30, 1997 were approximately $7,413,000, $10,434,000
and $10,190,000, respectively. The F-50
129

MCCALL GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)principal stockholder of the Companies has
also provided a personal guarantee to the lender related to repayment of these
customer notes. The Companies have provided reserves for future loan losses
based on historical loss trends and total guarantees outstanding.

Activity in the Companies' reserve account consists of the following:

DECEMBER 31,
------------------------------------
1994 1995 1996
---------- ---------- ----------

Balance, beginning of year............................ $1,436,000 $1,360,000 $1,471,000
Additions charged to expense.......................... 124,000 343,000 1,033,000
Deductions for loans written off...................... (200,000) (232,000) (539,000)
---------- ---------- ----------
$1,360,000 $1,471,000 $1,965,000
========== ========== ==========

Stockholder Loan Guarantees

The principal stockholder of the Companies has a $6,857,000 line-of-credit
outstanding with a financial institution as of December 31, 1996, which is
guaranteed by SMT and SML and is secured by all of the real estate, buildings
and improvements at the dealerships. The line of credit expires in January 2000;
however, the agreement contains a provision for two additional five-year renewal
periods. The line of credit bears interest at the lender's available financing
rate plus one and one quarter percent (9.03% at December 31, 1996). As of
December 31, 1996 and June 30, 1997, there was approximately $4.7 million and
$4.6, respectively, outstanding on the line-of-credit.

The principal stockholder of the Companies has a $1.5 million revolving
line of credit outstanding with a financial institution as of December 31, 1996,
which is guaranteed by SMT and SML. The line of credit is payable in monthly
installments of $10,000 plus interest and bears interest at prime plus three
percent (11.25% at December 31, 1996). As of December 31, 1996 and June 30,
1997, there was approximately $1,400,000 and $960,000, respectively, outstanding
on the line of credit.

The principal stockholder of the Companies has a $2 million note payable to
a financial institution at December 31, 1996, which is guaranteed by SML. The
note maturesmatured on May 13, 1998,1997, and bearsaccrued interest at the financial
institution's base rate of interest (9.25% at December 31, 1996). The note was
extended until July 12, 1997 at maturity and was repaid in July, (see below). As
of December 31, 1996 and June 30, 1997, there was approximately $1,900,000 and
$2,000,000, respectively, outstanding on the note.

The principal stockholder of the Companies also has a $480,000 note payable
to a financial institution at December 31, 1996, which is guaranteed by SML. The
note is payable in monthly installments of $6,277, including interest, through
December 2005 and bears interest at prime plus one percent (9.25% at December
31, 1996). As of December 31, 1996 and June 30, 1997, there was approximately
$447,000 and $433,000, respectively, outstanding on the note.

Subsequent to year end, an affiliate of the principal stockholder of the
Companies entered into a $3.6$3.4 million loan with a financial institution which is
guaranteed by SML and secured by all of the real

F-52
141

MCCALL GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

estate, buildings and improvements at the dealership. The loan matures in July
20172002 (and contains three five-year renewal options) and bears interest at a
variable rate of LIBOR plus 2.5%. At June 30, 1997 there were no amounts
outstanding on the loan. The note was funded during July and a portion of the
proceeds were utilized to repay the $2 million note discussed above.

12. PROPOSED ACQUISITION BY GROUP 1:

The stockholders of the Companies intend to enter into definitive purchase
agreements with Group 1 providing for the acquisition of the Companies by Group
1. In conjunction with the acquisition of the Companies by Group 1, all existing
operating leases with related parties will be restructured under new lease
agreements and the principal stockholder of the Companies will obtain releases
for the Companies from the stockholder loan guarantees discussed above.

F-51F-53
130142

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Smith Group:

ARTHUR ANDERSEN LLP
Houston, Texas
May 9, 1997

F-52F-54
131143

SMITH GROUP

COMBINED BALANCE SHEETS

ASSETS

DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
------------ ------------ -----------
(UNAUDITED)

CURRENT ASSETS:
Cash and cash equivalents..................... $ 541,5757,736,878 $ 988,1679,069,829 $ 1,645,219
Contracts in transit.......................... 7,195,303 8,081,662 7,760,0389,405,257
Accounts receivable, net...................... 4,485,359 4,467,590 4,876,051
Due from affiliates........................... 46,007 14,580 --
Inventories................................... 27,946,621 30,637,433 33,099,771
Prepaid expenses.............................. 200,585 185,218 641,495
Deferred income tax benefit................... 246,543 182,081 182,081
----------- ----------- -----------
Total current assets.................. 40,661,993 44,556,731 48,204,655
PROPERTY AND EQUIPMENT, net..................... 9,667,539 9,819,994 9,935,715
GOODWILL, net................................... 2,387,514 2,322,307 2,281,636
OTHER ASSETS.................................... 209,951 689,453 550,452
----------- ----------- -----------
Total assets.......................... $52,926,997 $57,388,485 $60,972,458
=========== =========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Floor plan notes payable...................... $27,424,232 $30,676,725 $33,522,252
Current maturities of long-term debt.......... 775,844 949,565 1,034,180
Accounts payable and accrued expenses......... 8,163,483 8,509,815 9,272,030
----------- ----------- -----------
Total current liabilities............. 36,363,559 40,136,105 43,828,462
----------- ----------- -----------
LONG-TERM DEBT, net of current maturities....... 5,607,581 5,006,474 4,493,037
LONG-TERM DEFERRED INCOME TAXES................. 246,234 217,611 197,611
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock.................................. 2,090 3,090 3,090
Additional paid-in capital.................... 5,890,228 6,369,228 6,369,228
Retained earnings............................. 5,212,602 6,051,274 6,476,327
Treasury stock, at cost....................... (395,297) (395,297) (395,297)
----------- ----------- -----------
Total stockholders' equity............ 10,709,623 12,028,295 12,453,348
----------- ----------- -----------
Total liabilities and stockholders'
equity.............................. $52,926,997 $57,388,485 $60,972,458
=========== =========== ===========

The accompanying notes are an integral part of these combined financial
statements.

F-53F-55
132144

SMITH GROUP

COMBINED STATEMENTS OF OPERATIONS

FOR THE SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------ ---------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------
(UNAUDITED)

REVENUES:
New vehicle sales............ $136,916,929 $132,149,669 $124,173,950 $ 59,437,192 $ 75,203,290
Used vehicle sales........... 49,548,703 57,363,332 60,579,545 32,072,688 35,153,070
Parts and service sales...... 25,501,449 26,237,774 28,630,577 14,045,021 14,081,839
Other dealership revenues,
net....................... 5,109,438 5,506,759 4,895,329 2,618,280 3,020,378
------------ ------------ ------------ ------------ ------------
Total revenues....... 217,076,519 221,257,534 218,279,401 108,173,181 127,458,577
COST OF SALES..................SALES:
New vehicle cost of sales.... 129,474,515 124,266,917 116,236,702 55,903,767 69,291,957
Used vehicle cost of sales... 45,972,361 53,162,956 56,247,629 29,697,853 32,521,318
Parts and service cost of
sales..................... 14,473,261 15,234,938 16,684,932 8,228,910 8,100,711
------------ ------------ ------------ ------------ ------------
Total cost of
sales.............. 189,920,137 192,664,811 189,169,263 93,830,530 109,913,986
------------ ------------ ------------ ------------ ------------
Gross profit......... 27,156,382 28,592,723 29,110,138 14,342,651 17,544,591
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES...... 21,726,879 22,823,685 23,710,904 11,575,049 13,845,857
------------ ------------ ------------ ------------ ------------
Income from
operations......... 5,429,503 5,769,038 5,399,234 2,767,602 3,698,734
OTHER INCOME AND EXPENSE:
Interest expense, net........ (2,146,562) (2,955,787) (1,710,157) (825,120) (940,371)
Other income (expense), net.. (28,869) 202,134 222,470 18,359 (19,035)
------------ ------------ ------------ ------------ ------------
INCOME BEFORE INCOME
TAXES........................ 3,254,072 3,015,385 3,911,547 1,960,841 2,739,328
PROVISION FOR INCOME
TAXES........................ 455,385 562,415 677,751 322,136 531,563
------------ ------------ ------------ ------------ ------------
NET INCOME..................... $ 2,798,687 $ 2,452,970 $ 3,233,796 $ 1,638,705 $ 2,207,765
============ ============ ============ ============ ============
S-Corporation pro forma income
taxes (unaudited)............ 797,433 598,508 828,195 432,788 523,078
------------ ------------ ------------ ------------ ------------
Pro forma net income
(unaudited).................. $ 2,001,254 $ 1,854,462 $ 2,405,601 $ 1,205,917 $ 1,684,687
============ ============ ============ ============ ============

The accompanying notes are an integral part of these combined financial
statements.

F-54F-56
133145

SMITH GROUP

COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY

ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK TOTAL
------ ---------- ----------- --------- -----------

BALANCE, December 31, 1993....... $2,090 $5,890,228 $ 3,306,098 $(395,297) $ 8,803,119
Net income..................... -- -- 2,798,687 -- 2,798,687
Dividends...................... -- -- (1,787,914) -- (1,787,914)
------ ---------- ----------- --------- -----------
BALANCE, December 31, 1994....... 2,090 5,890,228 4,316,871 (395,297) 9,813,892
Net income..................... -- -- 2,452,970 -- 2,452,970
Dividends...................... -- -- (1,557,239) -- (1,557,239)
------ ---------- ----------- --------- -----------
BALANCE, December 31, 1995....... 2,090 5,890,228 5,212,602 (395,297) 10,709,623
Net income..................... -- -- 3,233,796 -- 3,233,796
Issuance of common stock....... 1,000 479,000 -- -- 480,000
Dividends...................... -- -- (2,395,124) -- (2,395,124)
------ ---------- ----------- --------- -----------
BALANCE, December 31, 1996....... 3,090 6,369,228 6,051,274 (395,297) 12,028,295
Net income (unaudited)......... -- -- 2,207,765 -- 2,207,765
Dividends (unaudited).......... -- -- (1,782,712) -- (1,782,712)
------ ---------- ----------- --------- -----------
BALANCE, March 31, 1997
(unaudited).................... $3,090 $6,369,228 $ 6,476,327 $(395,297) $12,453,348
====== ========== =========== ========= ===========

The accompanying notes are an integral part of these combined financial
statements.

F-55F-57
134146

SMITH GROUP

COMBINED STATEMENTS OF CASH FLOWS

FOR THE
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------ -----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
UNAUDITED

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................... $2,798,687 $2,452,970 $3,233,796 $1,638,705 $2,207,565
---------- ---------- ---------- ---------- ----------
Adjustments to reconcile net income
to net cash provided by operating
activities --
Depreciation and amortization..... 586,847 669,312 719,991 358,701 306,904
LIFO reserve...................... 510,715 78,061 35,489 -- (68,681)
Deferred income taxes............. (1,258) 29,389 35,839 17,561 (20,000)
Provision for doubtful accounts... 64,357 61,460 49,729 26,207 37,197
Loss (gain) on sale of assets..... 51,662 (74,258) 65,088 32,245 --
Changes in assets and
liabilities --
Accounts receivable............. (1,051,312) (1,207,158) (31,960) 519,041 (445,658)
Inventories..................... (1,860,114) (4,323) (2,726,301) (2,180,430) (2,393,657)
Due from affiliates, net........ 92,489 (136,650) 31,427 36,307 14,580
Prepaid expenses................ (63,039) 264,974 (182,521) (182,521) (456,277)
Other assets.................... 159,412 (12,073) (493,584) 50,610 158,866
Floor plan notes payable........ 1,395,865 2,175,223 3,252,493 769,874 2,845,527
Accounts payable and accrued
expenses..................... (1,513,901) 678,372 346,332 1,268,456 (97,642)(77,442)
---------- ---------- ---------- ---------- ----------
Total adjustments............ (1,628,277) 2,522,329 1,299,910 716,051 (118,841)(98,641)
---------- ---------- ---------- ---------- ----------
Net cash provided by
operating activities....... 1,170,410 4,975,299 4,533,706 2,354,756 2,088,9242,108,924
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and
equipment......................... (217,724) (699,792) (858,245) (298,018) (360,011)
---------- ---------- ---------- ---------- ----------
Net cash used in investing
activities................. (217,724) (699,792) (858,245) (298,018) (360,011)
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term
debt.............................. (945,957) (899,623) (961,108) (483,792) (428,822)
Borrowings of long-term debt........ 1,828,333 375,071 533,722 -- --
Issuance of common stock............ -- -- 480,000 -- --
Dividends........................... (1,787,914) (1,557,239) (2,395,124) (897,701) (984,663)
---------- ---------- ---------- ---------- ----------
Net cash used in financing
activities................. (905,538) (2,081,791) (2,342,510) (1,381,493) (1,413,485)
---------- ---------- ---------- ---------- ----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS......................... 47,148 2,193,716 1,332,951 675,245 315,428335,428
CASH AND CASH EQUIVALENTS,
beginning of period................. 5,496,014 5,543,162 7,736,878 7,736,878 9,069,829
---------- ---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS,
end of period....................... $5,543,162 $7,736,878 $9,069,829 $8,412,123 $9,385,257$9,405,257
========== ========== ========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for --
Interest.......................... $2,562,555 $3,743,310 $2,818,402 $1,396,303 $1,844,514
Taxes............................. 390,641 522,565 543,401 258,451 445,289

The accompanying notes are an integral part of these combined financial
statements.

F-56F-58
135147

SMITH GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS
(All discussions and disclosures with a reference date subsequent to May 9, 1997
are unaudited.)

1. BUSINESS AND ORGANIZATION:

Smith Group (the Companies) is primarily engaged in the retail sale of new
and used automobiles and the sale of the related finance, insurance and service
contracts thereon. In addition, the Companies sell automotive parts, provide
vehicle servicing and sell wholesale used vehicles.

The following companies are included within the combined group:

Mike Smith Autoplaza, Inc. (MSAP)

MSAP consists of several franchises which conduct business at contiguous
locations in Beaumont, Texas. The franchises operated in this location
include Oldsmobile, Lincoln, Mercury, GMC, Mitsubishi, Kia and Honda.

Town North Nissan,Smith, Liu & Kutz, Inc. (Town North)

Town North consists of three companies operating several franchises
which conduct business at contiguous locations in Austin, Texas. The
franchises operated in this location include Nissan, Mitsubishi and
Suzuki.

Courtesy Nissan, Inc. (Courtesy)

Courtesy is a Nissan dealership located in Richardson, Texas.

Smith, Liu & Corbin, Inc. (d.b.a. Acura Southwest) (Acura)

Acura is an Acura dealership located in Houston, Texas.

Round Rock Nissan, Inc. (Round Rock)

Round Rock is a Nissan dealership located in Round Rock, Texas.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of Presentation

The accompanying combined financial statements include the accounts of the
Companies listed above. The Companies have been presented on a combined basis
due to their related operations, common ownership and common management control.
All significant intercompany balances and transactions have been eliminated in
combination.

Major Suppliers and Franchise Agreements

The Companies purchase substantially all of their new vehicles from Nissan
Motor Co., Ltd., Honda Motor Co., Ltd., General Motors Corporation, Mitsubishi
Motors Corp., Suzuki Motor Co., Ltd., Ford Motor Company and Kia Motor Co., Ltd.
at the prevailing prices charged by the manufacturers to all franchised dealers.
The Companies' sales volume could be adversely impacted by the manufacturers'
inability to supply the dealership with an adequate supply of popular models or
as a result of an unfavorable allocation of vehicles by the manufacturer.

F-57F-59
136148

SMITH GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

The dealer franchise agreements contain provisions which may limit changes
in dealership management and ownership, place certain restrictions on the
dealerships (such as minimum net worth requirements) and which also provide for
the termination of the franchise agreement by the manufacturers in certain
instances. Under certain state law, these restrictive provisions have been
repeatedly found invalid both by state courts and administrative agencies. See
"Risk Factors -- Manufacturers' Control Over Dealerships" and
"Business -- Franchise Agreements" for further discussion.

Revenue Recognition

Revenue from vehicle sales, parts sales and vehicle service is recognized
upon delivery to the customer.

Finance, Insurance and Service Contract Income Recognition

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.

Contractspurchase and contracts
in Transittransit. Contracts in transit represent contracts on vehicles sold, for which
the proceeds are in transit from financing institutions.

Inventories

New and demonstrator vehicles are stated at cost, determined on the
last-in, first-out (LIFO) basis, which is not in excess of market.

Used 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

F-58
137

SMITH GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

F-60
149

SMITH GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Goodwill

Goodwill represents the excess of the purchase price of dealerships
acquired (Town North Nissan, Courtesy Nissan and Mike Smith Auto Plaza) over the
fair value of assets acquired at the date of acquisition. Goodwill is being
amortized on a straight-line basis over 40 years and amortization expense
charged to operations totaled approximately $67,000 for each of the three years
in the period ended December 31, 1996. Accumulated amortization totaled
approximately $889,000 and $956,000 as of December 31, 1995 and 1996,
respectively.

Income Taxes

Certain of the Companies have elected S Corporation status, as defined by
the Internal Revenue Code, whereby the companies are 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.

Environmental Liabilities and Expenditures

Interest Expense

Fair Value of Financial Instruments

F-59
138

SMITH GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Advertising

The Company expenses production and other costs of advertising as incurred.
Advertising expense for the years ended December 31, 1994, 1995 and 1996 totaled
$2,241,055, $2,097,002 and $1,879,591, respectively.

Concentration of Credit Risk

F-61
150

SMITH GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

maintains cash balances at financial institutions which may at times be in
excess of federally insured levels. The Companies grant credit to local
companies in various businesses. The Companies perform ongoing credit
evaluations of its customers and generally do not require collateral. The
Companies maintain an allowance for doubtful accounts at a level which
management believes is sufficient to cover potential credit losses. The
Companies have not incurred significant losses related to these financial
instruments to date.

Use of Estimates

Interim Financial Information

Statements of Cash Flows

New Accounting Pronouncement

SMITH GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Adoption of this standard did
not have a material effect on the financial position or results of operations of
the Companies.

During June 1996 and June 1997 the Financial Accounting Standards Board
(FASB) issued statement of Financial Accounting Standards (SFAS) No. 125
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities" and SFAS No. 130 "Reporting Comprehensive Income." The major
provisions of these statements and their impact on the Company are discussed
below.

F-62
151

SMITH GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

assets. This statement is not currently anticipated to have any impact on the
Company as the Company does not currently enter into transactions which fall
under the scope of this statement.

3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:

Accounts receivable consist of the following:

DECEMBER 31,
----------------------------
1995 1996
------------ ------------

Vehicle receivables...................................... $1,080,501 $1,082,909
Amounts due from manufacturers........................... 1,224,067 1,670,776
Parts and service receivables............................ 593,526 949,874
Warranty receivables..................................... 313,040 314,391
Due from finance companies............................... 572,090 392,192
Other.................................................... 833,635 138,948
---------- ----------
4,616,859 4,549,090
Less -- Allowance for doubtful accounts.................. (131,500) (81,500)
---------- ----------
$4,485,359 $4,467,590
========== ==========

Activity in the Companies' allowance for doubtful accounts consists of the
following:

DECEMBER 31,
------------------------------
1994 1995 1996
-------- -------- --------

Balance, beginning of year........................ $123,800 $123,800 $131,500
Additions charged to expense...................... 64,357 61,460 49,729
Deductions for uncollectible receivables written
off............................................. (64,357) (53,760) (99,729)
-------- -------- --------
$123,800 $131,500 $ 81,500
======== ======== ========

Inventories consist of the following:

DECEMBER 31,
----------------------------
1995 1996
------------ ------------

New vehicles........................................... $22,490,819 $24,302,689
Used vehicles.......................................... 5,931,163 6,936,348
Parts, accessories and other........................... 3,193,566 3,102,812
Accumulated LIFO reserve............................... (3,668,927) (3,704,416)
----------- -----------
$27,946,621 $30,637,433
=========== ===========

F-61
140

SMITH GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

If the specific-unit method of inventory were used, net income would have
increased by approximately $511,000, $78,000 and $35,000, for the years ended
December 31, 1994, 1995 and 1996, respectively.

F-63
152

SMITH GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Accounts payable and accrued expenses consist of the following:

DECEMBER 31,
----------------------------
1995 1996
------------ ------------

Accounts payable, trade.................................. $3,342,165 $3,696,293
Reserve for finance, insurance and service contract
chargebacks............................................ 1,633,822 1,374,780
Other accrued expenses................................... 3,187,496 3,438,742
---------- ----------
$8,163,483 $8,509,815
========== ==========

4. PROPERTY AND EQUIPMENT:

Property and equipment consist of the following:

ESTIMATED DECEMBER 31,
USEFUL LIVES ----------------------------
IN YEARS 1995 1996
------------ ------------ ------------

Land...................................... -- $ 4,711,997 $ 4,789,177
Buildings................................. 35 4,797,574 4,858,250
Leasehold improvements.................... 15 1,274,911 1,367,199
Machinery and equipment................... 7 1,517,522 1,720,940
Furniture and fixtures.................... 7 2,300,038 2,535,075
Autos and trucks.......................... 5 213,198 321,316
Rental vehicles........................... -- 95,294 124,023
----------- -----------
Total........................... 14,910,534 15,715,980
Less -- Accumulated depreciation.......... (5,242,995) (5,895,986)
----------- -----------
Property and equipment, net............. $ 9,667,539 $ 9,819,994
=========== ===========

5. FLOOR PLAN NOTES PAYABLE:

Floorplan notes payable reflect amounts payable for the purchase of
specific vehicle inventory and consist of the following:

DECEMBER 31,
----------------------------
1995 1996
------------ ------------

New vehicles........................................... $25,708,702 $27,712,804
Used vehicles.......................................... 1,715,530 2,963,921
----------- -----------
Total floor plan notes payable............... $27,424,232 $30,676,725
=========== ===========

Floorplan notes payable are due to various floor plan lenders, bearing
interest at rates ranging from prime (adjusted for volume with lender (8.0% at
December 31, 1996)) to prime plus 1.75%. As of December 31, 1995 and 1996, the
weighted average interest rate on floorplan notes payable outstanding was 8.84%
and 8.66%, respectively. Interest expense on floorplan notes payable, before
manufacturer interest assistance, totaled approximately $2,248,351, $3,188,220
and $2,523,296 for the years ended December 31, 1994, 1995 and 1996.
Manufacturer interest assistance, which is recorded as a reduction to interest
expense in the accompanying financial statements, totaled approximately
$731,948, $837,201 and $1,111,068 for the years ended December 31, 1994, 1995
and 1996. The flooring arrangements permit the Companies to borrow up to
$37,212,000 dependent upon new and used vehicle sales and inventory levels. As
of December 31, 1996, total available borrowings under floor plan agreements
were F-62
141

SMITH GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

approximately $6,535,000. Payments on the notes are due when the related
vehicles are sold and are collateralized by substantially all new and used
vehicles.

F-64
153

SMITH GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

6. LONG-TERM DEBT:

Long-term debt consists of the following:

DECEMBER 31,
------------------------
1995 1996
---------- ----------

Note payable to Texas Commerce Bank (TCB), with monthly
principal payments of $41,892, due through March 2004,
bearing interest at 7.5%, payable monthly................ $4,143,918 $3,641,136
Mortgage loan with TCB, with monthly principal payments of
$15,000, due through May 2005, bearing interest at prime
plus .25% (8.50% at December 31, 1996), payable
monthly.................................................. 1,675,000 1,494,291
Note payable to Nissan Motor Acceptance Corporation (NMAC),
with monthly principal payments of $7,500, due through
January 2002, bearing interest at prime plus 1.75% (10.0%
at December 31, 1996), payable monthly................... -- 450,000
Other notes payable, maturing in varying amounts through
November 2000 with interest ranging from prime plus .25%
to prime plus 1.5%....................................... 564,507 370,612
---------- ----------
6,383,425 5,956,039
Less -- Current portion.................................... (775,844) (949,565)
---------- ----------
$5,607,581 $5,006,474
========== ==========

The Note payable to TCB due March 2004 is secured by a security interest in
the outstanding and issued capital stock of Town North and Courtesy, and is also
secured by a first priority lien on the land and buildings of Town North. The
note payable to TCB due May 2005 is secured by substantially all property,
improvements and equipment of Acura. The note payable to NMAC is secured by
substantially all of the assets of Round Rock, including vehicle inventory,
machinery and equipment. Certain stockholders of the companies have also
provided personal guarantees on the notes payable.payable to TCB and NMAC.

The aggregate maturities of long-term debt as of December 31, 1996, are as
follows:

YEAR ENDING
DECEMBER 31,
- ------------

1997........................................................... $ 949,565
1998........................................................... 839,644
1999........................................................... 846,513
2000........................................................... 807,428
2001........................................................... 771,704
Thereafter..................................................... 1,741,185
----------
$5,956,039
==========

F-63F-65
142154

SMITH GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

7. STOCKHOLDERS' EQUITY:

Capital stock consists of the following:

AUTHORIZED ISSUED OUTSTANDING PAR VALUE
---------- ------ ----------- ---------

Common stock --
MSAP........................................ 10,000 1,000 800 $1.00
Town North Nissan........................... 1,000 1,000 1,000 .01
Town North Suzuki........................... 1,000 1,000 1,000 .01
Town North Mitsubishi....................... 1,000 1,000 1,000 1.00
Courtesy.................................... 1,000 1,000 1,000 .05
Acura....................................... 2,000 2,000 2,000 .01
Round Rock.................................. 1,000 1,000 1,000 1.00

Treasury stock consists of 200 shares of the common stock of MSAP at a cost
of approximately $395,000 at December 31, 1995 and 1996.

8. RELATED-PARTY TRANSACTIONS:

Operating Leases with Stockholders

MSAP and Round Rock lease land and facilities from entities owned by
various stockholders of the Companies. Additional information regarding the
terms of these leases is contained in Note 9 "Operating Leases".

Stockholder Loan Guarantees

The Companies have provided guarantees and/or pledged assets as security
far certain outstanding loan obligations of various related parties. See Note 11
"Commitments and Contingencies," for discussion of guarantee and security
arrangements provided on behalf of related parties.

Company Indebtedness Guaranteed by Stockholders

Stockholders of Acura, Town North and Round Rock have provided personal
guarantees related to the repayment of long-term debt obligations incurred by
those entities (see Note 6). As of December 31, 1996 and June 30, 1997, Company
debt guaranteed by stockholders totaled approximately $5.6 million and $5.2
million, respectively.

Insurance Commissions and Management Fees

The Companies sell credit life and disability insurance policies which are
underwritten by an entity owned by certain stockholders of the Companies. The
Companies paid commissions of approximately $88,300, $205,000 and $260,800 on
such policies sold during the years ended December 31, 1994, 1995 and 1996,
respectively.

The Companies pay management fees to an entity owned by certain
stockholders of the Companies for consultation and direct management assistance
with respect to operations and strategic planning. Management fee expense
totaled approximately $74,300, $87,700 and $75,700 for the years ended December
31, 1994, 1995 and 1996, respectively.

Other

Certain stockholders of the Companies, employees and family members have
invested funds through the dealerships in cash management accounts with the
dealerships' floorplan institutions. These

F-66
155

SMITH GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

funds are not available for withdrawal by the Companies, and accordingly are
excluded from the accompanying financial statements. The amount of such funds
totalled approximately $4,163,900 and $5,516,200 as of December 31, 1995 and
1996.

F-64
143

SMITH GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Advances to Group 1

The Companies have consummated a loan with Group 1 in order to finance the
expenses of Group 1 prior to the acquisition. The balance of this loan at
December 31, 1996 and June 30, 1997 was approximately $48,000 and $403,000,
respectively, bearing interest at a rate of 7.0% per annum.

9. OPERATING LEASES:

The Companies lease various facilities and equipment under operating lease
agreements, including leases with related parties. These leases are
noncancelable and expire on various dates through August 2013. The lease
agreements are subject to renewal under essentially the same terms and
conditions as the original leases.

Future minimum lease payments for operating leases are as follows:

YEAR ENDING RELATED THIRD
DECEMBER 31 -- PARTIES PARTIES TOTAL
- -------------- ---------- ---------- -----------

1997.................................... $ 918,000 $ 500,681 $ 1,418,681
1998.................................... 918,000 479,876 1,397,876
1999.................................... 918,000 472,655 1,390,655
2000.................................... 499,500 453,149 952,649
2001.................................... 360,000 433,387 793,387
Thereafter.............................. 4,440,000 4,896,000 9,336,000
---------- ---------- -----------
Total......................... $8,053,500 $7,235,748 $15,289,248
========== ========== ===========

Total rent expense under all operating leases, including operating leases
with related parties, was approximately $1,059,000, $1,088,000 and $1,157,000
for the years ended December 31, 1994, 1995 and 1996, respectively. Rental
expense on related-party leases, which is included in the above amounts, totaled
approximately $558,000, $558,000 and $591,000 for the years ended December 31,
1994, 1995 and 1996, respectively.

10. INCOME TAXES:

The S Corporations will terminate S Corporation status concurrent with the
effective date of the offering. The Companies are subject to a Texas franchise
tax which is an income based tax.

Federal and state income taxes are as follows:

DECEMBER 31,
--------------------------------
1994 1995 1996
-------- -------- --------

Federal --
Current....................................... $298,135 $382,865 $460,166
Deferred...................................... 6,547 36,310 29,304
State --
Current....................................... 158,508 150,161 181,746
Deferred...................................... (7,805) (6,921) 6,535
-------- -------- --------
$455,385 $562,415 $677,751
======== ======== ========

F-65F-67
144156

SMITH GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34 percent to income
before income taxes as follows:

DECEMBER 31,
--------------------------------------
1994 1995 1996
---------- ---------- ----------

Provision at the statutory rate............ $1,106,384 $1,025,231 $1,329,926
Increase (decrease) resulting from --
Income of S Corporation.................. (799,855) (619,972) (888,533)
State income tax, net of benefit for
federal deduction..................... 136,750 123,800 165,900
Other.................................... 12,106 33,356 70,458
---------- ---------- ----------
$ 455,385 $ 562,415 $ 677,751
========== ========== ==========

Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities result principally from the following:

DECEMBER 31,
----------------------
1995 1996
--------- ---------

Reserves and accruals not deductible until paid............ $ 257,693 $ 191,862
Depreciation............................................... (246,234) (217,611)
Other...................................................... (11,150) (9,781)
--------- ---------
$ 309 $ (35,530)
========= =========

The net deferred tax assets and liabilities are comprised of the following:

DECEMBER 31,
--------------------
1995 1996
-------- --------

Deferred tax assets --
Current................................................... $257,693 $191,862
Long-term................................................. -- --
-------- --------
Total............................................. 257,693 191,862
-------- --------
Deferred tax liabilities --
Current................................................... 11,150 9,781
Long-term................................................. 246,234 217,611
-------- --------
Total............................................. 257,384 227,392
-------- --------
Net deferred income tax assets (liabilities)...... $ 309 $(35,530)
======== ========

11. COMMITMENTS AND CONTINGENCIES:

Litigation

F-66F-68
145157

SMITH GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Insurance

Loan Guarantees

As discussed in Note 8, MSAP and Round Rock lease land and facilities from
entities owned by certain stockholders of the Companies. Both MSAP and Round
Rock serve as guarantor on mortgage loans covering the leased facilities. MSAP
guarantees two loans which bear interest at prime and a fixed rate of 7.5% and
mature in June 2003 and March 2004, respectively. As of December 31, 1996 and
June 30, 1997, amounts outstanding or these loans totaled $2,384,272 and
$2,256,064, respectively. The loan guaranteed by Round Rock bears interest at
prime plus 1% and matures in November 2009. As of December 31, 1996 and June 30,
1997, amounts outstanding on this note totaled $2,386,258 and $2,413,136,
respectively.

12. PROPOSED ACQUISITION BY GROUP 1:

F-67F-69
146

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Stockholder have agreed to sell to each of the
Underwriters named below, and each of such Underwriters, for whom Goldman, Sachs
& Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Montgomery
Securities are acting as representatives, has severally agreed to purchase from
the Company and the Selling Stockholder, the respective number of shares of
Common Stock set forth opposite its name below:

NUMBER OF
SHARES OF
UNDERWRITER COMMON STOCK
----------- ------------

Goldman, Sachs & Co.........................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated..........
Montgomery Securities.......................................

Total............................................. 4,800,000
=========

Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.

The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of 720,000
additional shares of Common Stock to cover over-allotments, if any. If the
Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each of
them, as shown in the foregoing table, bears to the 4,800,000 shares of Common
Stock offered.

The Company, its officers and directors and the stockholders of the
Company, including the Selling Stockholder, have agreed that, during the period
beginning from the date of this Prospectus and continuing to and including the
date 180 days after the date of this Prospectus, they will not offer, sell,
contract to sell or otherwise dispose of any shares of Common Stock, any
securities of the Company which are substantially similar to the shares of
Common Stock or which are convertible or exchangeable for securities which are
substantially similar to the shares of Common Stock (other than pursuant to
employee stock option plans existing, or on the conversion or exchange of
convertible or exchangeable securities outstanding, on the date of this
Prospectus) without the prior written consent of the representatives, except for
the shares of Common Stock offered in connection with the Offering.

U-1
147

The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of shares of
Common Stock offered by them.

Prior to this Offering, there has been no public market for the shares. The
initial public offering price will be negotiated among the Company, the Selling
Stockholder and the representatives. Among the factors to be considered in
determining the initial public offering price of the Common Stock, in addition
to prevailing market conditions, will be the Company's historical performance,
estimates of the business potential and earnings prospects of the Company, an
assessment of the Company's management and the consideration of the above
factors in relation to market valuation of companies in related businesses.

The Company intends to apply for listing on the New York Stock Exchange
under the symbol "GPI". In order to meet one of the requirement for listing the
Common Stock on the New York Stock Exchange, the Underwriters have undertaken to
sell lots of 100 or more shares to a minimum of 2,000 beneficial holders.

In connection with the Offering, the Underwriters may purchase and sell
Common Stock in the open market. These transactions may include overallotment
and stabilizing transactions and purchases to cover syndicate short positions
created in connection with the Offering. Stabilizing transactions consist of
certain bids or purchases for the purpose of preventing or retarding a decline
in the market price of the Common Stock; and syndicate short positions involve
the sale by the Underwriters of a greater number of shares of Common Stock than
they are required to purchase from the Company in the Offering. The Underwriters
may also impose a penalty bid, whereby selling concessions allowed to syndicate
members or other broker-dealers in respect of the Common Stock sold in the
Offering for their account may be reclaimed by the syndicate if such Common
Stock is repurchased by the syndicate in stabilizing or covering transactions.
These activities may stabilize, maintain or otherwise affect the market price of
the Common Stock which may be higher than the price that might otherwise prevail
in the open market. These transactions may be effected on the New York Stock
Exchange, in the over-the-counter market or otherwise, and these activities, if
commenced, may be discontinued at any time.

The Company and the Selling Stockholder have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933.

U-2
148158

======================================================

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.

--------------------------

TABLE OF CONTENTS

PAGE
----

Prospectus Summary...................Summary.................... 3
Risk Factors......................... 12Factors.......................... 13
The Acquisitions..................... 19Acquisitions...................... 23
Use of Proceeds...................... 22Proceeds....................... 28
Dividend Policy...................... 22
Dilution............................. 23
Capitalization....................... 24Policy....................... 28
Dilution.............................. 29
Capitalization........................ 30
Selected Financial Data.............. 25Data............... 31
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 28
Business............................. 47
Management........................... 63Operations....................... 34
Business.............................. 52
Management............................ 68
Certain Transactions................. 68Transactions.................. 74
Principal and Selling Stockholders... 71Stockholders.... 78
Description of Capital Stock......... 72Stock.......... 79
Shares Eligible for Future Sale...... 76Sale....... 83
Underwriting.......................... 85
Validity of Common Stock............. 77
Experts.............................. 77Stock.............. 86
Experts............................... 86
Available Information................ 77Information................. 87
Index to Financial Statements........Statements......... F-1
Underwriting......................... U-1

THROUGH AND INCLUDING , 1997 (THE 25TH DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

======================================================

4,800,000 SHARES

GROUP 1 AUTOMOTIVE, INC.

COMMON STOCK

(PAR VALUE $.01 PER SHARE)
---------------------------------

[LOGO]PROSPECTUS
---------------------------------
GOLDMAN, SACHS & CO.

MERRILL LYNCH & CO.

NATIONSBANC MONTGOMERY

SECURITIES, INC.

REPRESENTATIVES OF THE UNDERWRITERS
======================================================
149159

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The expenses of the Offering are estimated to be as follows:

Securities and Exchange Commission registration fee......... $ 16,66720,073
NASD filing fee............................................. 6,0007,524
New York Stock Exchange listing fee......................... *120,000
Legal fees and expenses..................................... *1,100,000
Accounting fees and expenses................................ *
Blue Sky fees and expenses.................................. *2,850,000
Printing expenses........................................... *600,000
Transfer Agent fees......................................... *2,500
Miscellaneous............................................... *
--------299,003
----------
Total............................................. $ *
========$5,000,000
==========

- ---------------

* To be provided by amendment.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Article Sixth, Part II, Section I of the Company's Charter, a copy of which
is filed as Exhibit 3.1, provides that directors, officers, employees and agents
shall be indemnified to the fullest extent permitted by Section 145 of the DGCL.

Section 145 of the DGCL authorizes, inter alia, a corporation to indemnify
any person ("indemnitee") who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation), by reason of the fact that such person
is or was an officer or director of such corporation, or is or was serving at
the request of such corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, provided that he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. A
Delaware corporation may indemnify past or present officers and directors of
such corporation or of another corporation or other enterprise at the former
corporation's request, in an action by or in the right of the corporation to
procure a judgment in its favor under the same conditions, except that no
indemnification is permitted without judicial approval if such person is
adjudged to be liable to the corporation. Where an officer or director is
successful on the merits or otherwise in defense of any action referred to
above, or in defense of any claim, issue or matter therein, the corporation must
indemnify him against the expenses (including attorney's fees) which he actually
and reasonably incurred in connection therewith. Section 145 further provides
that any indemnification shall be made by the corporation only as authorized in
each specific case upon a determination by the (i) stockholders, (ii) Board of
Directors by a majority vote of a quorum consisting of directors who were not
parties to such action, suit or proceeding or (iii) independent counsel if a
quorum of disinterested directors so directs. Section 145 provides that
indemnification pursuant to its provision is not exclusive of other rights of
indemnification to which a person may be entitled under any bylaw, agreement,
vote of stockholders or disinterested directors or otherwise.

Section 145 of the DGCL also empowers the Company to purchase and maintain
insurance on behalf of any person who is or was an officer or director of the
Company against liability asserted against or incurred by him in any such
capacity, whether or not the Company would have the power to indemnify

II-1
150160

such officer or director against such liability under the provisions of Section
145. The Company intends to purchase and maintain a directors' and officers'
liability policy for such purposes.

The form of Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement contains certain provisions for indemnification of
directors and officers of the Company and the Underwriters against civil
liabilities under the Securities Act.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

On December 21, 1995, the Company sold 1,000 shares of Common Stock to
Smith & Liu Management Company, a Texas partnership, of which Charles M. Smith
is a partner, for $500. The Company relied on an exemption under Section 4(2) of
the Securities Act in effecting this transaction.

On July 5, 1996, the Company sold 500 shares of Common Stock to B.B.
Hollingsworth, Jr. for $5,000. The Company relied on an exemption under Section
4(2) of the Securities Act in effecting this transaction.

On June 14, 1997, the Company entered into a Stock Purchase Agreement with
each of the Founding Companies and all of their respective stockholders. Under
each Stock Purchase Agreement, all of the capital stock of each Founding Company
will be acquired by the Company and each stockholder of the Founding Companies
will receive cash and/or shares of Common Stock. An aggregate of 9,079,084
shares of Common Stock will be issued in the Acquisitions. Each Acquisition will
be consummated immediately prior to the Closing of the Offering. The Company is
relying on an exemptions under Rule 506 and 4(2) under the Securities Act in
effecting this transaction.

ITEM 16. EXHIBITS

(a) Exhibits:

II-2
151161

*2.9 -- Stock Purchase Agreement among Group 1 Automotive, Inc.,
Smith, Liu & Corbin, Inc. and the stockholders of Smith,
Liu & Corbin, Inc. dated June 14, 1997.
*2.10 -- Stock Purchase Agreement among Group 1 Automotive, Inc.,
Round Rock Nissan, Inc. and the stockholders of Round
Rock Nissan, Inc. dated June 14, 1997.
*2.11 -- Stock Purchase Agreement among Group 1 Automotive, Inc.,
Mike Smith Autoplaza, Inc. and the stockholders of Mike
Smith Autoplaza, Inc. dated June 14, 1997.
*2.12 -- Stock Purchase Agreement among Group 1 Automotive, Inc.,
Courtesy Nissan, Inc. and the stockholders of Courtesy
Nissan, Inc. dated June 14, 1997.
*2.13 -- Stock Purchase Agreement between Group 1 Automotive, Inc.
and the stockholders of Foyt Motors, Inc. dated June 14,
1997.
*3.1 -- Restated Certificate of Incorporation of the Company
**3.2 -- Certificate of Designation of Series A Junior
Participating Preferred Stock
*3.3 -- Bylaws of the Company
**4.1 -- Specimen Common Stock certificate
**5.1 -- Opinion of Vinson & Elkins L.L.P.
**10.1 -- Form of Employment Agreement between the Company and B.B.
Hollingsworth, Jr.
dated , 1997.
**10.2 -- Form of Employment Agreement between the Company and
Robert E. Howard II dated , 1997.
**II.
10.3 -- Form of Employment Agreement between the Company and
Sterling B. McCall, Jr.
dated , 1997.
**10.4 -- Form of Employment Agreement between the Company and
Charles M. Smith dated , 1997.
**Smith.
10.5 -- Form of Employment Agreement between the Company and John
T. Turner dated , 1997.
**Turner.
10.6 -- Form of Employment Agreement between the Company and
Scott L. Thompson dated , 1997.Thompson.
*10.7 -- 1996 Stock Incentive Plan
*10.8 -- First Amendment to 1996 Stock Incentive Plan
*10.9 -- Form of Related Party Lease Agreement
**10.10 -- Rights Agreement between Group 1 Automotive, Inc. and
ChaseMellon Shareholder Services, L.L.C., as rights agent
dated October 3, 1997.
10.11 -- 1998 Employee Stock Purchase Plan
10.12 -- Form of Agreement between Toyota Motor Sales, U.S.A., and
Group 1 Automotive, Inc.
10.13 -- Form of Supplemental Agreement to General Motors
Corporation Dealer Sales and Service Agreement.
10.14 -- Approval Letter dated December 11, 1996 from Nissan Motor
Corporation U.S.A.
10.15 -- Amendment to Approval Letter from Nissan Motor
corporation U.S.A. dated September 29
10.16 -- Supplemental Terms and Conditions between Ford Motor
Company and Group 1 Automotive, Inc. dated September 4,
1997.
**11.110.17 -- Toyota Dealer Agreement between Gulf States Toyota, Inc.
and Southwest Toyota, Inc. dated April 5, 1993.

II-3
162

10.18 -- Lexus Dealer Agreement between Toyota Motor Sales,
U.S.A., Inc. and SMC Luxury Cars, Inc. dated August 21,
1995.
10.19 -- Commitment Letter between Group 1 Automotive, Inc., Texas
Commerce Bank National Association and Chase Securities
Inc. dated September 22, 1997.
10.20 -- Letter Agreement between Mitsubishi Motor Sales of
America, Inc. and Group 1 Automotive, Inc. dated June 20,
1997.
10.21 -- Supplemental Agreement to Dealer Sales and Service
Agreement (Public Traded Company) among Foyt Motors,
Inc., Group 1 Automotive, Inc. and American Isuzu Motors
Inc.
10.22 -- Stock Purchase Agreement Among Howard Pontiac-GMC, Inc.,
Bob Howard Automotive-East, Inc. and the Stockholder of
Bob Howard Automitive-East, Inc. dated as of September
12, 1997.
10.23 -- Form of Employment Agreement between Group 1 Automotive,
Inc. and Kevin H. Whalen.
*11.1 -- Statement re computation of per share earnings
23.1 -- Consent of Arthur Andersen LLP
**23.2 -- Consent of Vinson & Elkins L.L.P. (contained in Exhibit
5.1 hereto)
23.3 -- Consent of Abowitz, Rhodes & Dahnke, P.C.
*24.1 -- Powers of Attorney (included on the signature page to
this Registration Statement)
27.1*27.1 -- Financial Data Schedule

- ---------------
* Previously filed.

** To be filed by amendment.

II-3
152

ITEM 17. UNDERTAKINGS

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

The undersigned Registrant hereby undertakes to provide at the closing
specified in the underwriting agreement certificates in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

(2) For purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-4
153163

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Houston,
State of Texas, on the 19th14th day of August,October, 1997.

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 Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities indicated on the 19th14th day of August,October, 1997.

SIGNATURE TITLE
--------- -----

/s/ B.B. HOLLINGSWORTH, JR. Chairman, President and Chief Executive
- ----------------------------------------------------- Officer and Director (Principal Executive
B.B. Hollingsworth, Jr. Officer)

/s/ SCOTT L. THOMPSON Senior Vice President, Chief Financial
- ----------------------------------------------------- Officer and Treasurer (Chief Financial and
Scott L. Thompson Accounting Officer)

* Director
- -----------------------------------------------------
Robert E. Howard II

* Director
- -----------------------------------------------------
Sterling B. McCall, Jr.

* Director
- -----------------------------------------------------
Charles M. Smith

* Director
- -----------------------------------------------------
John H. Duncan

* Director
- -----------------------------------------------------
Bennett E. Bidwell

*By: /s/ SCOTT L. THOMPSON
------------------------------------------------
Scott L. Thompson
Attorney-in-fact

II-5
154164

INDEX TO EXHIBITS

EXHIBIT
NUMBER DESCRIPTION
------ -----------

**1.1 -- Form of Underwriting Agreement
*2.1 -- Stock Purchase Agreement among Group 1 Automotive, Inc.,
Howard Pontiac-GMC, Inc. and the stockholders of Howard
Pontiac-GMC, Inc. dated June 14, 1997.
*2.2 -- Stock Purchase Agreement among Group 1 Automotive, Inc.,
Bob Howard Motors, Inc. and the stockholders of Bob
Howard Motors, Inc. dated June 14, 1997.
*2.3 -- Stock Purchase Agreement among Group 1 Automotive, Inc.,
Bob Howard Chevrolet, Inc. and the stockholders of Bob
Howard Chevrolet, Inc. dated June 14, 1997.
*2.4 -- Stock Purchase Agreement among Group 1 Automotive, Inc.,
Bob Howard Automotive-H, Inc. and the stockholders of Bob
Howard Automotive-H, Inc. dated June 14, 1997.
*2.5 -- Stock Purchase Agreement among Group 1 Automotive, Inc.,
Bob Howard Dodge, Inc. and the stockholders of Bob Howard
Dodge, Inc. dated June 14, 1997.
*2.6 -- Stock Purchase Agreement among Group 1 Automotive, Inc.,
Southwest Toyota, Inc. and the stockholders of Southwest
Toyota, Inc. dated June 14, 1997.
*2.7 -- Stock Purchase Agreement among Group 1 Automotive, Inc.,
SMC Luxury Cars, Inc. and the stockholders of SMC Luxury
Cars, Inc. dated June 14, 1997.
*2.8 -- Stock Purchase Agreement among Group 1 Automotive, Inc.,
Smith, Liu & Kutz, Inc. and the stockholders of Smith,
Liu & Kutz, Inc. dated June 14, 1997.
*2.9 -- Stock Purchase Agreement among Group 1 Automotive, Inc.,
Smith, Liu & Corbin, Inc. and the stockholders of Smith,
Liu & Corbin, Inc. dated June 14, 1997.
*2.10 -- Stock Purchase Agreement among Group 1 Automotive, Inc.,
Round Rock Nissan, Inc. and the stockholders of Round
Rock Nissan, Inc. dated June 14, 1997.
*2.11 -- Stock Purchase Agreement among Group 1 Automotive, Inc.,
Mike Smith Autoplaza, Inc. and the stockholders of Mike
Smith Autoplaza, Inc. dated June 14, 1997.
*2.12 -- Stock Purchase Agreement among Group 1 Automotive, Inc.,
Courtesy Nissan, Inc. and the stockholders of Courtesy
Nissan, Inc. dated June 14, 1997.
*2.13 -- Stock Purchase Agreement between Group 1 Automotive, Inc.
and the stockholders of Foyt Motors, Inc. dated June 14,
1997.
*3.1 -- Restated Certificate of Incorporation of the Company
**3.2 -- Certificate of Designation of Series A Junior
Participating Preferred Stock
*3.3 -- Bylaws of the Company
**4.1 -- Specimen Common Stock certificate
**5.1 -- Opinion of Vinson & Elkins L.L.P.
**10.1 -- Form of Employment Agreement between the Company and B.B.
Hollingsworth, Jr.
dated , 1997.
155

EXHIBIT
NUMBER DESCRIPTION
------ -----------

**10.2 -- Form of Employment Agreement between the Company and
Robert E. Howard II dated , 1997.
**II.
10.3 -- Employment Agreement between the Company and Sterling B.
McCall, Jr. dated , 1997.
**Form of Employment Agreement between the Company and
Sterling B. McCall, Jr.
165

EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.4 -- Form of Employment Agreement between the Company and
Charles M. Smith dated , 1997.
**Smith.
10.5 -- Form of Employment Agreement between the Company and John
T. Turner dated , 1997.
**Turner.
10.6 -- Form of Employment Agreement between the Company and
Scott L. Thompson dated , 1997.Thompson.
*10.7 -- 1996 Stock Incentive Plan
*10.8 -- First Amendment to 1996 Stock Incentive Plan
*10.9 -- Form of Related Party Lease Agreement
**10.10 -- Rights Agreement between Group 1 Automotive, Inc. and
ChaseMellon Shareholder Services, L.L.C., as rights agent
dated October 3, 1997.
10.11 -- 1998 Employee Stock Purchase Plan
10.12 -- Form of Agreement between Toyota Motor Sales, U.S.A., and
Group 1 Automotive, Inc.
10.13 -- Form of Supplemental Agreement to General Motors
Corporation Dealer Sales and Service Agreement.
10.14 -- Approval Letter dated December 11, 1996 from Nissan Motor
Corporation U.S.A.
10.15 -- Amendment to Approval Letter from Nissan Motor
corporation U.S.A. dated September 29
10.16 -- Supplemental Terms and Conditions between Ford Motor
Company and Group 1 Automotive, Inc. dated September 4,
1997.
**11.110.17 -- Toyota Dealer Agreement between Gulf States Toyota, Inc.
and Southwest Toyota, Inc. dated April 5, 1993.
10.18 -- Lexus Dealer Agreement between Toyota Motor Sales,
U.S.A., Inc. and SMC Luxury Cars, Inc. dated August 21,
1995.
10.19 -- Commitment Letter between Group 1 Automotive, inc., Texas
Commerce Bank National Association and Chase Securities
Inc. dated September 22, 1997.
10.20 -- Letter Agreement between Mitsubishi Motor Sales of
America, Inc. and Group 1 Automotive, Inc. dated June 20,
1997.
10.21 -- Supplemental Agreement to Dealer Sales and Service
Agreement (Public Traded Company) among Foyt Motors,
inc., Group 1 Automotive, Inc. and American Isuzu Motors
Inc.
10.22 -- Stock Purchase Agreement Among Howard Pontiac-GMC, Inc.,
Bob Howard Automotive-East, Inc. and the Stockholder of
Bob Howard Automitive-East, Inc. dated as of September
12, 1997.
10.23 -- Form of Employment Agreement between Group 1 Automotive,
Inc. and Kevin H. Whalen.
*11.1 -- Statement re computation of per share earnings
23.1 -- Consent of Arthur Andersen LLP
**23.2 -- Consent of Vinson & Elkins L.L.P. (contained in Exhibit
5.1 hereto)
23.3 -- Consent of Abowitz, Rhodes & Dahnke, P.C.
*24.1 -- Powers of Attorney (included on the signature page to
this Registration Statement)
27.1*27.1 -- Financial Data Schedule

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* Previously filed.
** To be filed by amendment.