<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
Commission file number: 1-13461
GROUP 1 AUTOMOTIVE, INC.
(Exact name of Registrant as specified in its charter)
Delaware 76-0506313
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
950 Echo Lane, Suite 350
Houston, Texas 77024
(Address of principal executive offices) (Zip code)
(713) 467-6268
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Title Outstanding
Common stock, par value $.01 18,267,515
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
UNAUDITED COMBINED STATEMENTS OF OPERATIONS
BASIS OF PRESENTATION
In October 1997, Group 1 Automotive, Inc. ("Group 1") completed its
acquisition of substantially all of the net assets of four automobile dealership
groups (the "Founding Groups") simultaneous with the completion of its initial
public offering. The Founding Groups were acquired in exchange for consideration
consisting principally of common stock of Group 1. During the first nine months
of 1998, Group 1 acquired thirty-two additional automobile dealership
franchises, which have been accounted for as purchases (the "Purchased
Companies").
The accompanying historical combined statements of operations, for the
three months and nine months ended September 30, 1998, include the operations of
Group 1 and the Founding Groups, from January 1, 1998, and the Purchased
Companies, from the effective dates of the acquisitions.
The accompanying pro forma combined statements of operations, for the
three months and nine months ended September 30, 1997, include the combined
operations of Group 1 and the Founding Groups, from January 1, 1997, and give
effect to the completion of Group 1's initial public offering and certain pro
forma adjustments. The 1997 data may not be comparable to and may not be
indicative of Group 1's post-combination results of operations because the
Founding Groups were not under common control of management.
Operating results of interim periods are not necessarily indicative of
the results for full year periods. The results of operations have historically
been subject to seasonal fluctuations, with the first and fourth quarters
generally contributing less operating profit than the second and third quarters.
These combined statements of operations should be read in conjunction with the
Company's filings with the Securities and Exchange Commission.
2
<PAGE> 3
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
UNAUDITED COMBINED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ----------------------------
1998 1997 1998 1997
---------- --------- ---------- ---------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
<S> <C> <C> <C> <C>
REVENUES:
New vehicle sales ................ $273,282 $140,098 $662,323 $391,928
Used vehicle sales ............... 142,351 72,168 363,096 220,735
Parts and service sales .......... 41,542 19,988 97,264 58,389
Other dealership revenues, net ... 14,875 6,453 34,833 17,998
-------- -------- ---------- --------
Total revenues ............ 472,050 238,707 1,157,516 689,050
COST OF SALES:
New vehicle sales ................ 251,038 128,804 609,918 359,163
Used vehicle sales ............... 130,722 66,642 335,180 204,554
Parts and service sales .......... 19,327 9,562 45,081 27,733
-------- -------- ---------- --------
Total cost of sales ....... 401,087 205,008 990,179 591,450
-------- -------- ---------- --------
GROSS PROFIT ....................... 70,963 33,699 167,337 97,600
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ............ 52,502 25,555 125,282 75,492
DEPRECIATION AND AMORTIZATION ...... 2,040 717 4,375 2,044
-------- -------- ---------- --------
Income from operations .... 16,421 7,427 37,680 20,064
OTHER INCOME AND EXPENSES:
Floorplan interest expense ....... (3,690) (1,104) (8,994) (3,928)
Other interest expense, net ...... (1,767) (230) (2,705) (684)
Other income (expense), net ...... 40 2 (8) (17)
-------- -------- ---------- --------
INCOME BEFORE INCOME TAXES ......... 11,004 6,095 25,973 15,435
PROVISION FOR INCOME TAXES ......... 4,489 2,486 10,723 6,333
-------- -------- ---------- --------
NET INCOME ......................... $6,515 $3,609 $15,250 $9,102
======== ======== ========== ========
Earnings per share on net income:
Basic ............................ $0.36 $0.25 $0.90 $0.62
Diluted .......................... $0.35 $0.24 $0.87 $0.60
Weighted average shares outstanding:
Basic ............................ 18,199,646 14,673,051 16,957,327 14,673,051
Diluted .......................... 18,855,004 15,101,510 17,538,446 15,101,510
</TABLE>
The accompanying notes are an integral part of these combined
statements of operations.
3
<PAGE> 4
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO COMBINED STATEMENTS OF OPERATIONS
1. BASIS OF PRESENTATION
The 1998 historical combined data are a presentation in accordance with
generally accepted accounting principles. The financial data represent the
combined historical results of operations of Group 1 and the Founding Groups,
for the three months and nine months ended September 30, 1998, and the Purchased
Companies, from the effective dates of the acquisitions.
The 1997 pro forma combined data does not purport to be a presentation
in accordance with generally accepted accounting principles, but represents a
summation of certain data on an historical basis including the effects of
certain pro forma adjustments. See note 4 to the Consolidated Financial
Statements for a description of the pro forma adjustments. This data may not be
comparable to and may not be indicative of Group 1's post-combination results of
operations because the Founding Groups were not under common control of
management.
2. EARNINGS PER SHARE
SFAS No. 128 requires the presentation of basic earnings per share and
diluted earnings per share in financial statements of public enterprises. Under
the provisions of this statement, basic earnings per share is computed based on
weighted average shares outstanding and excludes dilutive securities. Diluted
earnings per share is computed including the impacts of all potentially dilutive
securities. The following table sets forth the shares outstanding for the
earnings per share calculations:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------- --------------------------
1998 1997 1998 1997
---------- --------- ---------- ---------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Common stock outstanding, beginning
of period ........................ 17,759,531 450,000 14,673,051 450,000
Shares issued in initial public
offering ......................... -- 5,148,136 -- 5,148,136
Shares issued in acquisition of
Founding Groups .................. -- 9,074,915 -- 9,074,915
Weighted average common stock
issued to Purchased Companies .... 386,025 -- 2,280,121 --
Weighted average common stock
issued to Employee Stock
Purchase Plan .................... 61,546 -- 58,259 --
Weighted average common stock
issued in stock option exercises . 12,435 -- 4,731 --
Less: Weighted average treasury
shares repurchased ............... (19,891) -- (58,835) --
---------- ---------- ---------- ----------
Shares used in computing basic earnings
per share ........................ 18,199,646 14,673,051 16,957,327 14,673,051
---------- ---------- ---------- ----------
Dilutive effect of stock options, net
of assumed repurchase of
treasury stock ................... 655,358 428,459 581,119 428,459
---------- ---------- ---------- ----------
Shares used in computing diluted
earnings per share ............... 18,855,004 15,101,510 17,538,446 15,101,510
========== ========== ========== ==========
</TABLE>
4
<PAGE> 5
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................ $55,403 $35,092
Accounts receivable, net ......................... 22,233 9,749
Inventories, net ................................. 193,324 105,421
Deferred income taxes ............................ 14,627 8,692
Other assets ..................................... 3,265 2,728
-------- --------
Total current assets ...................... 288,852 161,682
-------- --------
PROPERTY AND EQUIPMENT, net ........................ 44,741 21,586
GOODWILL, net ...................................... 112,884 27,078
OTHER ASSETS ....................................... 3,559 2,803
-------- --------
Total assets .............................. $450,036 $213,149
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Floorplan notes payable .......................... $160,316 $58,488
Current maturities of long-term debt ............. 1,487 2,316
Accounts payable and accrued expenses ............ 82,260 50,668
-------- --------
Total current liabilities ................. 244,063 111,472
-------- --------
DEBT, net of current maturities .................... 65,393 7,053
DEFERRED INCOME TAXES .............................. 4,282 3,699
OTHER LIABILITIES .................................. 5,478 1,553
STOCKHOLDERS' EQUITY:
Preferred stock, 1,000,000 shares authorized, none
issued or outstanding .......................... -- --
Common stock, $.01 par value, 50,000,000 shares
authorized, 18,240,795 and 14,673,051 issued and
outstanding .................................... 182 147
Additional paid-in capital ....................... 118,509 91,846
Retained earnings (deficit) ...................... 12,721 (2,529)
Treasury stock, at cost, 40,000 and 10,000 shares (592) (92)
-------- --------
Total stockholders' equity ................ 130,820 89,372
-------- --------
Total liabilities and stockholders' equity $450,036 $213,149
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE> 6
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ----------------------------
1998 1997 1998 1997
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
REVENUES:
New vehicle sales ................ $273,282 $46,598 $662,323 $131,521
Used vehicle sales ............... 142,351 27,674 363,096 82,028
Parts and service sales .......... 41,542 5,423 97,264 16,186
Other dealership revenues, net ... 14,875 2,375 34,833 6,381
-------- -------- ---------- --------
Total revenues ............ 472,050 82,070 1,157,516 236,116
COST OF SALES:
New vehicle sales ................ 251,038 43,706 609,918 123,027
Used vehicle sales ............... 130,722 25,262 335,180 74,449
Parts and service sales .......... 19,327 2,288 45,081 6,828
-------- -------- ---------- --------
Total cost of sales ....... 401,087 71,256 990,179 204,304
-------- -------- ---------- --------
GROSS PROFIT ....................... 70,963 10,814 167,337 31,812
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ............ 52,502 8,270 125,282 24,382
DEPRECIATION AND AMORTIZATION ...... 2,040 200 4,375 541
-------- -------- ---------- --------
Income from operations .... 16,421 2,344 37,680 6,889
OTHER INCOME AND EXPENSES:
Floorplan interest expense ....... (3,690) (754) (8,994) (2,632)
Other interest expense, net ...... (1,767) (9) (2,705) (21)
Other income (expense), net ...... 40 9 (8) 43
-------- -------- ---------- --------
INCOME BEFORE INCOME TAXES ......... 11,004 1,590 25,973 4,279
PROVISION FOR INCOME TAXES ......... 4,489 90 10,723 256
-------- -------- ---------- --------
NET INCOME ......................... $6,515 $1,500 $15,250 $4,023
======== ======== ========== ========
S Corporation pro forma income taxes 538 1,434
-------- --------
Pro forma net income ............... $962 $2,589
======== ========
Earnings per share on net income:
Basic ............................ $0.36 $0.90
Diluted .......................... $0.35 $0.87
Weighted average shares outstanding:
Basic............................. 18,199,646 16,957,327
Diluted........................... 18,855,004 17,538,446
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE> 7
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997
-------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................................... $15,250 $4,023
Adjustments to reconcile net income to net cash provided
by operating activities -
Depreciation and amortization ........................................ 4,375 541
Deferred income taxes ................................................ (6,127) 45
Provision for doubtful accounts and uncollectible notes .............. 219 69
Gain on sale of assets ............................................... (123) (18)
Changes in assets and liabilities -
Accounts receivable ........................................... (6,210) 485
Inventories ................................................... 25,864 12,533
Other assets .................................................. (821) (773)
Floorplan notes payable ....................................... (34,819) (13,539)
Accounts payable and accrued expenses ......................... 12,208 (1,125)
-------- --------
Total adjustments ........................................ (5,434) (1,782)
-------- --------
Net cash provided by operating activities ............ 9,816 2,241
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable .................................. (1,760) (98)
Collections on notes receivable ............................... 947 29
Purchases of property and equipment ........................... (7,218) (886)
Proceeds from sales of property and equipment ................. 152 279
Cash paid in acquisitions, net of cash received ............... (68,122) --
-------- --------
Net cash used in investing activities ................ (76,001) (676)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under floorplan facilities for acquisition financing 33,523 --
Principal payments of long-term debt .......................... (2,632) (205)
Borrowings of long-term debt .................................. 56,214 --
Issuance of common stock to benefit plans ..................... 1,128 --
Purchase of treasury stock .................................... (1,737) --
Dividends paid in cash, prior to the initial public offering .. -- (4,451)
-------- --------
Net cash provided by (used in) financing activities .. 86,496 (4,656)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ............................................................ 20,311 (3,091)
CASH AND CASH EQUIVALENTS, beginning of period ......................... 35,092 11,679
-------- --------
CASH AND CASH EQUIVALENTS, end of period ............................... $55,403 $8,588
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for -
Interest ...................................................... $10,702 $2,814
Taxes ......................................................... $12,293 $41
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
7
<PAGE> 8
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Group 1 Automotive, Inc. and subsidiaries ("Group 1" or the "Company"),
founded in December 1995, is a leading operator and consolidator in the highly
fragmented automotive retailing industry. The Company is primarily engaged in
the retail sale of new and used vehicles, automotive parts and service, the
arranging of vehicle financing and sale of vehicle service contracts and
insurance. In October 1997, Group 1 acquired four separate dealership groups
(the "Founding Groups"), consisting of 30 dealership franchises and related
businesses, in exchange for consideration consisting principally of restricted
common stock. Concurrent with the acquisition of the Founding Groups, Group 1
completed an initial public offering of 5,520,000 shares of common stock.
During the first nine months of 1998 the Company acquired thirty-two
additional dealership franchises in exchange for a combination of restricted
common stock and cash.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
For financial statement presentation purposes, as required by the
Securities and Exchange Commission, the Howard Group, one of the Founding
Groups, has been identified as the accounting acquirer. The acquisitions of the
remaining Founding Groups and the subsequent acquisitions were accounted for
using the purchase method of accounting. The results of operations of the Howard
Group are included for all periods presented. The operations of Group 1
Automotive, Inc., the parent company, and the Founding Groups, excluding the
Howard Group, are included in the results of operations beginning October 31,
1997, the effective closing date of the acquisitions for accounting purposes.
The operations of all acquisitions subsequent to October 31, 1997 are included
from the effective dates of the closings of the acquisitions. The allocations of
purchase price to the assets acquired and liabilities assumed are initially
assigned and recorded based on preliminary estimates of fair value and may be
revised as additional information concerning the valuation of such assets and
liabilities becomes available. All significant intercompany balances and
transactions have been eliminated in consolidation.
Reclassifications
Certain reclassifications have been made to prior year financial
statements to conform them to the current year presentation.
3. EARNINGS PER SHARE:
SFAS No. 128 requires the presentation of basic earnings per share and
diluted earnings per share in financial statements of public enterprises. Under
the provisions of this statement, basic earnings per share is computed based on
weighted average shares outstanding and excludes dilutive securities. Diluted
earnings per share is computed including the impacts of all potentially dilutive
securities. As the Company was not a public enterprise until October 1997, and
the companies included in the statements of operations were under different tax
structures (S Corporations and C Corporations), no earnings per share data has
been presented for the historical results of operations for the three months and
nine months ended September 30, 1997. The following table sets forth the shares
outstanding for the earnings per share calculations:
8
<PAGE> 9
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1998
------------- -------------
<S> <C> <C>
Common stock outstanding, beginning of period ...... 17,759,531 14,673,051
Weighted average common stock issued in
acquisitions .................................. 386,025 2,280,121
Weighted average common stock issued to
Employee Stock Purchase Plan .................. 61,546 58,259
Weighted average common stock issued in
stock option exercises ........................ 12,435 4,731
Less: Weighted average treasury shares repurchased (19,891) (58,835)
---------- ----------
Shares used in computing basic earnings per share .. 18,199,646 16,957,327
---------- ----------
Dilutive effect of stock options, net of assumed
repurchase of treasury stock .................. 655,358 581,119
---------- ----------
Shares used in computing diluted earnings per share 18,855,004 17,538,446
========== ==========
</TABLE>
4. BUSINESS COMBINATIONS
During the first nine months of 1998, the Company acquired thirty-two
automobile dealership franchises. These acquisitions were accounted for as
purchases. The consideration paid in completing these acquisitions, including
real estate acquired, included approximately $68.1 million in cash, net of cash
received, approximately 3.5 million shares of restricted common stock and the
assumption of an estimated $103.1 million of inventory financing and $2.9
million of mortgage financing. Additional consideration may be paid based on the
financial performance of certain dealerships, over specified periods. Additional
consideration, if any, will be payable in cash and common stock and will result
in an increase in goodwill on the balance sheet of the Company. The accompanying
consolidated balance sheet includes preliminary allocations of the purchase
price of the acquisitions, which are subject to final adjustment. The
preliminary allocations resulted in recording approximately $87.3 million of
goodwill, which is being amortized over 40 years.
The following unaudited pro forma financial information consists of
income statement data from continuing operations as presented in the
consolidated financial statements plus (1) unaudited income statement data for
all acquisitions, completed before September 30, 1998, assuming that they
occurred on January 1, 1997, (2) the completion of the initial public offering
as of January 1, 1997 and (3) certain pro forma adjustments discussed below.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997
----------- -----------
(in thousands, except
per share amounts)
<S> <C> <C>
Revenues ................................. $1,381,152 $1,204,339
Gross profit ............................. 202,405 176,580
Income from operations ................... 46,233 39,651
Net income ............................... 17,079 14,300
Basic earnings per share ................. 0.94 0.79
Diluted earnings per share ............... 0.91 0.77
</TABLE>
Pro forma adjustments included in the amounts above primarily relate
to: (a) increases in revenues and decreases in cost of sales related to
commission arrangements on certain third-party products sold by the dealerships
which previously directly benefited the stockholders and which were terminated
in conjunction with the acquisitions, allowing the dealerships to realize the
benefits thereafter; (b) pro forma goodwill amortization expense over an
estimated useful life of 40 years; (c) reductions in compensation
9
<PAGE> 10
expense and management fees to the level that certain management employees and
owners of the acquired companies will contractually receive; (d) incremental
corporate overhead costs related to personnel costs, rents, professional service
fees and directors and officers liability insurance premiums; (e) net decreases
in interest expense resulting from the repayment of floorplan obligations with
proceeds from the initial public offering, net of cash utilized to complete
acquisitions; and (f) incremental provisions for federal and state income taxes
relating to the compensation differential, S Corporation income and other pro
forma adjustments.
5. SUBSEQUENT EVENT
The Company closed an amendment to its syndicated credit facility on
November 11, 1998, increasing its existing $345 million credit facility to a
$425 million credit facility and extending the term from December 2000 to
December 2001. The credit facility consists of two tranches: the floorplan
tranche and the acquisition tranche. The acquisition tranche totals $130 million
and, as of November 11, 1998, $74 million was available, subject to certain
financial ratios.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following should be read in conjunction with the response to Part
I, Item 1 of this Report and the Company's filings with the Securities and
Exchange Commission.
OVERVIEW
The Company is a leading operator and consolidator in the highly
fragmented automotive retailing industry. The Company owns automobile dealership
franchises located in Texas, Oklahoma, Florida, New Mexico, Georgia and
Colorado. Additionally, the Company provides maintenance and repair services at
all of its dealerships and operates 12 collision service centers. The Company
expects that a significant portion of its future growth will be derived from
acquisitions of additional dealerships.
The 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 service sales,
finance fees, insurance commissions, vehicle service contract sales, documentary
fees and after-market product sales. Sales revenues from new and used vehicle
sales and parts and service sales include sales to retail customers, other
dealers and wholesalers. Other dealership revenue includes revenue from
arranging financing and selling vehicle service contracts and insurance, net of
a provision for anticipated chargebacks, and documentary fees.
The Company's gross margin will vary as the 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 Company on the sale of its products and services
generally varies between approximately 7.5% and 85.0%, with new vehicle sales
generally resulting in the lowest gross margin and other dealership revenues
generally resulting in the highest gross margin. When the Company's new vehicle
sales increase or decrease at a rate greater than the Company's other revenue
sources, the Company's gross margin will respond inversely. Factors such as
seasonality, weather, cyclicality and manufacturers' advertising and incentives
may impact the Company's merchandise mix and, therefore, influence the 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 of interest income earned.
10
<PAGE> 11
SELECTED OPERATIONAL AND FINANCIAL DATA
NEW VEHICLE DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(dollars in thousands, --------------------------- ----------------------------
except per unit amounts) 1998 1997 1998 1997
---------- --------- ---------- ---------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Retail unit sales........................... 11,901 6,298 28,640 17,923
Retail sales revenue........................ $273,282 $140,098 $662,323 $391,928
Gross profit................................ $22,244 $11,294 $52,405 $32,765
Gross margin................................ 8.1% 8.1% 7.9% 8.4%
Average gross profit per retail unit sold... $1,869 $1,793 $1,830 $1,828
</TABLE>
USED VEHICLE DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(dollars in thousands, --------------------------- ----------------------------
except per unit amounts) 1998 1997 1998 1997
---------- --------- ---------- ---------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Retail unit sales........................... 9,086 4,720 22,431 13,923
Retail sales revenue (1).................... $121,263 $59,496 $298,817 $180,350
Gross profit................................ $11,629 $5,526 $27,916 $16,181
Gross margin................................ 9.6% 9.3% 9.3% 9.0%
Average gross profit per retail unit sold... $1,280 $1,171 $1,245 $1,162
</TABLE>
- ------------------
(1) Excludes wholesale revenues.
PARTS AND SERVICE DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ----------------------------
(dollars in thousands) 1998 1997 1998 1997
---------- --------- ---------- ---------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Sales revenue............................... $41,542 $19,988 $97,264 $58,389
Gross profit................................ $22,215 $10,426 $52,183 $30,656
Gross margin................................ 53.5% 52.2% 53.7% 52.5%
</TABLE>
11
<PAGE> 12
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH PRO FORMA THREE MONTHS ENDED
SEPTEMBER 30, 1997
REVENUES. Revenues increased $233.4 million, or 97.8%, from $238.7
million for the three months ended September 30, 1997 to $472.1 million for the
three months ended September 30, 1998. New vehicle revenues increased $133.2
million, or 95.1% from $140.1 million for the three months ended September 30,
1997 to $273.3 million for the three months ended September 30, 1998. The
increase in revenue was primarily attributable to strong customer acceptance of
the Company's products, particularly Toyota and Lexus, and the acquisition of
additional dealership operations during 1998. Used vehicle revenues increased
$70.2 million, or 97.2%, from $72.2 million for the three months ended September
30, 1997 to $142.4 million for the three months ended September 30, 1998. The
increase was primarily attributable to an emphasis on used vehicle sales in the
Oklahoma market and by the General Motors dealerships, as new vehicle
inventories ran low during the General Motors strike, and the additional
franchise operations acquired. Parts and service sales increased $21.5 million,
or 107.5%, from $20.0 million for the three months ended September 30, 1997 to
$41.5 million for the three months ended September 30, 1998. The increase was
primarily attributable to the additional dealership operations acquired. Other
dealership revenues increased $8.4 million or 129.2% from $6.5 million for the
three months ended September 30, 1997 to $14.9 million for the three months
ended September 30, 1998. The increase was due primarily to an increase in the
number of retail new and used vehicle sales and the implementation of the
Company's vehicle service contract and insurance programs, which resulted in
improved revenue per unit.
GROSS PROFIT. Gross profit increased $37.3 million, or 110.7%, from
$33.7 million for the three months ended September 30, 1997 to $71.0 million for
the three months ended September 30, 1998. The increase was attributable to
increased revenues and an increased gross margin from 14.1% for the three months
ended September 30, 1997 to 15.0% for the three months ended September 30, 1998.
The increase in gross margin was caused by improvements in the gross margin
earned on used vehicle sales and parts and service sales and a change in the
merchandising mix, as higher margin parts and service sales and other dealership
revenues increased as a percentage of total revenues. The gross margin on new
retail vehicle sales remained stable at 8.1% for the three months ended
September 30, 1997 and for the three months ended September 30, 1998. The gross
margin on used retail vehicle sales increased from 9.3% for the three months
ended September 30, 1997 to 9.6% for the three months ended September 30, 1998.
The increase was primarily attributable to an emphasis on used vehicles,
especially by the General Motors dealerships, as new vehicle inventories ran low
during the General Motors strike. Parts and service gross margin increased from
52.2% for the three months ended September 30, 1997 to 53.5% for the three
months ended September 30, 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $26.9 million, or 105.1%, from $25.6 million
for the three months ended September 30, 1997 to $52.5 million for the three
months ended September 30, 1998. The increase was primarily attributable to the
additional dealership operations acquired and increased variable expenses,
particularly incentive pay to employees, which increased as revenues and gross
profit increased. Selling, general and administrative expenses increased as a
percentage of revenues from 10.7% for the three months ended September 30, 1997
to 11.1% for the three months ended September 30, 1998. The increase was
primarily attributable to increased incentive pay caused by the increase in
gross margin.
INTEREST EXPENSE. Floorplan and other interest expense, net, increased
$4.2 million, or 323.1%, from $1.3 million for the three months ended September
30, 1997 to $5.5 million for the three months ended September 30, 1998. The
increase was primarily attributable to the interest expense of the additional
dealership operations acquired, reduced interest earnings due to the utilization
of cash in completing the acquisitions and additional interest expense due to
borrowings on the Company's credit facility to complete acquisitions. Partially
offsetting the increases were cost reductions realized due to the lower interest
rates on floorplan notes payable obtained through the Company's credit facility.
12
<PAGE> 13
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH PRO FORMA NINE MONTHS ENDED
SEPTEMBER 30, 1997
REVENUES. Revenues increased $468.4 million, or 68.0%, from $689.1
million for the nine months ended September 30, 1997 to $1,157.5 million for the
nine months ended September 30, 1998. New vehicle revenues increased $270.4
million, or 69.0% from $391.9 million for the nine months ended September 30,
1997 to $662.3 million for the nine months ended September 30, 1998. The
increase in revenue was primarily attributable to strong customer acceptance of
the Company's products, particularly Toyota and Lexus, and the acquisition of
additional dealership operations during 1998. The increase was partially offset
by reduced sales at the Company's Nissan franchises, which declined due to
reduced manufacturer sales incentives as compared to the prior year. Used
vehicle revenues increased $142.4 million, or 64.5%, from $220.7 million for the
nine months ended September 30, 1997 to $363.1 million for the nine months ended
September 30, 1998. The increase was primarily attributable to an emphasis on
used vehicle sales in the Oklahoma market and the additional franchise
operations acquired. Parts and service sales increased $38.9 million, or 66.6%,
from $58.4 million for the nine months ended September 30, 1997 to $97.3 million
for the nine months ended September 30, 1998. The increase was primarily
attributable to the additional dealership operations acquired. Other dealership
revenues increased $16.8 million or 93.3% from $18.0 million for the nine months
ended September 30, 1997 to $34.8 million for the nine months ended September
30, 1998. The increase was due primarily to an increase in the number of retail
new and used vehicle sales and the implementation of the Company's vehicle
service contract and insurance programs, which resulted in improved revenues per
unit.
GROSS PROFIT. Gross profit increased $69.7 million, or 71.4%, from
$97.6 million for the nine months ended September 30, 1997 to $167.3 million for
the nine months ended September 30, 1998. The increase was attributable to
increased revenues and an increased gross margin from 14.2% for the nine months
ended September 30, 1997 to 14.5% for the nine months ended September 30, 1998.
This increase was caused by improvements in the gross margin earned on used
vehicle sales and parts and service sales and a change in the merchandising mix,
as higher margin other dealership revenues increased as a percentage of total
revenues. Partially offsetting the gross margin increases, the gross margin on
new retail vehicle sales declined from 8.4% for the nine months ended September
30, 1997 to 7.9% for the nine months ended September 30, 1998. The decline is
attributable primarily to reduced margins in the Nissan product line, due to
reduced manufacturer sales incentives in 1998. The gross margin for used retail
vehicle sales increased from 9.0% for the nine months ended September 30, 1997
to 9.3% for the nine months ended September 30, 1998. The increase was primarily
attributable to an emphasis on the used vehicle operations in the Oklahoma
platform. Parts and service gross margin increased from 52.5% for the nine
months ended September 30, 1997 to 53.7% for the three months ended September
30, 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $49.8 million, or 66.0%, from $75.5 million
for the nine months ended September 30, 1997 to $125.3 million for the nine
months ended September 30, 1998. The increase was primarily attributable to the
additional dealership operations acquired and increased variable expenses,
particularly incentive pay to employees, which increased as revenues and gross
profit increased. Selling, general and administrative expenses declined as a
percentage of revenues from 11.0% for the nine months ended September 30, 1997
to 10.8% for the nine months ended September 30, 1998. The decline is primarily
attributable to maintaining total expenses at a constant level by offsetting
increased variable expenses with cost reductions, such as the Company's risk
management program. Additionally, by implementing the Company's budgeting
process, the dealerships have improved their operating expense leverage.
INTEREST EXPENSE. Floorplan and other interest expense, net, increased
$7.1 million, or 154.3%, from $4.6 million for the nine months ended September
30, 1997 to $11.7 million for the nine months ended September 30, 1998. The
increase was primarily attributable to the interest expense of the additional
dealership operations acquired, reduced interest earnings due to the utilization
of cash in completing the acquisitions and additional interest expense due to
borrowings on the Company's credit
13
<PAGE> 14
facility to complete acquisitions. Partially offsetting the increases were cost
reductions realized due to the lower interest rates on floorplan notes payable
obtained through the Company's credit facility.
HISTORICAL RESULTS OF OPERATIONS - GROUP 1 AUTOMOTIVE, INC.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1997
REVENUES. Revenues increased $390.0 million, or 475.0%, from $82.1
million for the three months ended September 30, 1997 to $472.1 million for the
three months ended September 30, 1998. New vehicle revenues increased $226.7
million, or 486.5% from $46.6 million for the three months ended September 30,
1997 to $273.3 million for the three months ended September 30, 1998. Used
vehicle revenues increased $114.7 million, or 414.1%, from $27.7 million for the
three months ended September 30, 1997 to $142.4 million for the three months
ended September 30, 1998. Parts and service sales increased $36.1 million, or
668.5%, from $5.4 million for the three months ended September 30, 1997 to $41.5
million for the three months ended September 30, 1998. Other dealership revenues
increased $12.5 million or 520.8% from $2.4 million for the three months ended
September 30, 1997 to $14.9 million for the three months ended September 30,
1998. These increases were due primarily to the inclusion of the dealership
operations acquired since October 31, 1997 and the Company's focus on higher
margin activities.
GROSS PROFIT. Gross profit increased $60.2 million, or 557.4%, from
$10.8 million for the three months ended September 30, 1997 to $71.0 million for
the three months ended September 30, 1998. The increase was attributable to the
inclusion of the dealership operations acquired since October 31, 1997 and an
increased gross margin from 13.2% for the three months ended September 30, 1997
to 15.0% for the three months ended September 30, 1998. This increase was due
primarily to an increase in higher gross margin parts and service sales and
other dealership revenues as a percentage of total revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $44.2 million, or 532.5%, from $8.3 million
for the three months ended September 30, 1997 to $52.5 million for the three
months ended September 30, 1998. The increase was primarily attributable to the
additional dealership operations acquired.
INTEREST EXPENSE. Floorplan and other interest expense, net, increased
$4.7 million, or 587.5%, from $0.8 million for the three months ended September
30, 1997 to $5.5 million for the three months ended September 30, 1998. The
increase was primarily attributable to the interest expense of the additional
dealership operations acquired, reduced interest earnings due to the utilization
of cash in completing the acquisitions and additional interest expense due to
borrowings on the Company's credit facility to complete acquisitions. Partially
offsetting the increases were cost reductions realized due to the lower interest
rates on floorplan notes payable obtained though the Company's credit facility.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1997
REVENUES. Total revenues increased $921.4 million, or 390.3%, from
$236.1 million for the nine months ended September 30, 1997 to $1,157.5 million
for the nine months ended September 30, 1998. New vehicle revenues increased
$530.8 million, or 403.7%, from $131.5 million for the nine months ended
September 30, 1997 to $662.3 million for the nine months ended September 30,
1998. Revenues from used vehicle sales increased $281.1 million, or 342.8%, from
$82.0 million for the nine months ended September 30, 1997 to $363.1 million for
the nine months ended September 30, 1998. Parts and service sales increased
$81.1 million, or 500.6%, from $16.2 million for the nine months ended September
30, 1997 to $97.3 million for the nine months ended September 30, 1998. Other
dealership revenues increased $28.4 million, or 443.8%, from $6.4 million for
the nine months ended September 30, 1997 to $34.8 million for the nine months
ended September 30, 1998. These increases were due primarily to the inclusion of
the
14
<PAGE> 15
dealership operations acquired since October 31, 1997 and the Company's focus on
higher margin activities.
GROSS PROFIT. Gross profit increased $135.5 million, or 426.1%, from
$31.8 million for the nine months ended September 30, 1997 to $167.3 million for
the nine months ended September 30, 1998. The increase was attributable to the
inclusion of the dealership operations acquired since October 31, 1997 and an
increased gross margin from 13.5% for the nine months ended September 30, 1997
to 14.5% for the nine months ended September 30, 1998. This increase was due
primarily to an increase in higher gross margin parts and service sales and
other dealership revenues as a percentage of total revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $100.9 million, or 413.5%, from $24.4 million
for the nine months ended September 30, 1997 to $125.3 million for the nine
months ended September 30, 1998. The increase was primarily attributable to the
additional dealership operations acquired.
INTEREST EXPENSE. Floorplan and other interest expense, net, increased
$9.0 million, or 333.3%, from $2.7 million for the nine months ended September
30, 1997 to $11.7 million for the nine months ended September 30, 1998. The
increase was primarily attributable to the interest expense of the additional
dealership operations acquired, reduced interest earnings due to the utilization
of cash in completing the acquisitions and additional interest expense due to
borrowings on the Company's credit facility to complete acquisitions. Partially
offsetting the increases were cost reductions realized due to the lower interest
rates on floorplan notes payable obtained though the Company's credit facility.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are cash on hand, cash
from operations, floorplan financing, its credit facility and the issuance of
its common stock in acquisitions.
During the first nine months of 1998 the Company generated cash flow
from net income plus depreciation and amortization of approximately $19.6
million, of which, a portion was utilized to temporarily pay down floorplan
notes payable, resulting in net cash from operating activities of approximately
$9.8 million.
During the first nine months of 1998 the Company used approximately
$76.0 million for investing activities, primarily related to cash paid in
completing acquisitions offset by the cash balances obtained in the acquisitions
and for purchases of property and equipment. Of the $7.2 used in purchasing
property and equipment, approximately $4.6 million related to the purchase of
land and construction of facilities for new or expanded operations, including
the new Lexus companion dealership located in south Houston.
During the first nine months of 1998 the Company obtained
approximately $86.5 million from financing activities. The cash was generated
primarily from drawings on the Company's credit facility and was utilized in
completing acquisitions and supporting increased sales volumes.
At September 30, 1998, the Company had working capital of $44.8
million. Historically, the Company 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.
CREDIT FACILITY
The Company closed an amendment to its syndicated credit facility on
November 11, 1998, increasing its existing $345 million credit facility to a
$425 million credit facility and extending the term from December 2000 to
December 2001. The credit facility consists of two tranches: the floorplan
tranche and the acquisition tranche. The acquisition tranche totals $130 million
and, as of November 11, 1998, $74 million was available, subject to certain
financial ratios.
ACQUISITION FINANCING
The Company anticipates that its primary use of cash will be for the
completion of acquisitions. The Company expects the cash needed to complete its
acquisitions will come from the operating cash flows of the existing
dealerships, borrowings under its credit facility, other borrowings or
equity/debt offerings. Although the Company believes that it will be able to
obtain sufficient capital to fund acquisitions, there can
15
<PAGE> 16
be no assurance that such capital will be available to the Company at the time
it is required or on terms acceptable to the Company.
YEAR 2000 CONVERSION
Year 2000 issues result from the inability of computer programs or
computerized equipment to accurately calculate, store or use a date subsequent
to December 31, 1999. The erroneous date can be interpreted in a number of
different ways; typically the year 2000 is represented as the year 1900. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
Group 1 has recognized the need to ensure that its computer systems,
equipment and operations will not be adversely impacted by the change to the
calendar year 2000. As such, the Company has taken steps to identify potential
areas of risk and has begun addressing these in its planning, purchasing and
daily operations. The total cost of converting all internal systems, equipment
and operations for the year 2000 has not been fully quantified, but, based on
current facts and circumstances, is not expected to be material to Group 1's
financial position. With respect to acquisitions, the Company reviews an
acquisition's year 2000 readiness during the due diligence process. The Company
is currently reviewing the potential adverse impact resulting from the possible
failure of third party service providers and vendors to prepare for the year
2000.
The Company is dependent upon its dealerships' computer systems in its
daily operations. All of the Company's dealerships are, or are expected to be,
using a computer system supported by a major automobile dealership computer
system provider. The Company has contacted each of these providers and has
received assurance from the providers that their systems are, or will be, year
2000 ready. The Company is dependent upon these providers, as are most
dealerships in the United States, to address the year 2000 issue.
The Company is primarily dependent upon the Manufacturers for the
production and delivery of new vehicles and parts. Although the Company has no
reason to believe that the Manufacturers are not year 2000 ready, the Company
has been unable to obtain written assurance from them that their systems are
year 2000 ready.
Failure by the Company, the Manufacturers or the Company's third party
service providers and vendors to adequately address the year 2000 issue could
have a material adverse effect on the Company.
FORWARD LOOKING INFORMATION
This Quarterly Report and Management's Discussion and Analysis of
Results of Operations and Financial Condition include certain "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. All statements other than
statements of historical facts included in this document, including statements
regarding potential acquisitions, expected cost savings, planned capital
expenditures, the Company's future financial position, business strategy and
other plans and objectives for future operations are forward-looking statements.
Although the Company believes that the expectations reflected in such
forward-looking statements are
16
<PAGE> 17
reasonable, such statements are based upon assumptions and anticipated results
that are subject to numerous uncertainties. Actual results may vary
significantly from those anticipated due to many factors, including industry
conditions, future demand for new and used vehicles, the ability to obtain
manufacturer consents to acquisitions, the availability of capital resources and
the willingness of acquisition candidates to accept the Company's capital stock
as currency. These important factors, risks and uncertainties include, but are
not limited to, those described in the Company's filings with the Securities and
Exchange Commission. All subsequent written and verbal forward-looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by such factors.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company's dealerships are named in claims
involving the manufacture of automobiles, contractual disputes and other matters
arising in the ordinary course of business. Currently, no legal proceedings are
pending against or involve the Company that, in the opinion of management, based
on current known facts and circumstances, could reasonably be expected to have a
material adverse effect on the Company's financial position.
ITEM 5. OTHER INFORMATION
The Company's management will have discretionary authority with respect
to proxies submitted to the 1999 Annual Meeting of Stockholders on any matter
which the Company does not receive notice of by March 19, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
1. 11.1 Statement re: computation of earnings per share is included under
Note 3 to the financial statements.
2. 27.1 Financial Data Schedule.
B. REPORTS ON FORM 8-K:
None.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Group 1 Automotive, Inc.
November 13, 1998 By:/s/ Scott L. Thompson
- ----------------- -----------------------------------------
Date Scott L. Thompson, Senior Vice President,
Chief Financial Officer and Treasurer
18
<PAGE> 19
EXHIBIT INDEX
1. 11.1 Statement re: computation of earnings per share is included
under Note 3 to the financial statements.
2. 27.1 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 55,403
<SECURITIES> 0
<RECEIVABLES> 22,233
<ALLOWANCES> 0
<INVENTORY> 193,324
<CURRENT-ASSETS> 288,852
<PP&E> 44,741
<DEPRECIATION> 0
<TOTAL-ASSETS> 450,036
<CURRENT-LIABILITIES> 244,063
<BONDS> 65,393
0
0
<COMMON> 182
<OTHER-SE> 130,638
<TOTAL-LIABILITY-AND-EQUITY> 450,036
<SALES> 1,122,683
<TOTAL-REVENUES> 1,157,516
<CGS> 990,179
<TOTAL-COSTS> 990,179
<OTHER-EXPENSES> 129,657
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,707
<INCOME-PRETAX> 25,973
<INCOME-TAX> 10,723
<INCOME-CONTINUING> 15,250
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,250
<EPS-PRIMARY> .90
<EPS-DILUTED> .87
</TABLE>
