<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, 1999
Commission file number: 1-13461
GROUP 1 AUTOMOTIVE, INC.
(Exact name of Registrant as specified in its charter)
Delaware 76-0506313
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
950 Echo Lane, Suite 100
Houston, Texas 77024
(Address of principal executive offices) (Zip code)
(713) 647-5700
(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 21,245,551
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................... $ 103,947 $ 66,443
Accounts and notes receivable, net .................. 32,370 21,373
Inventories, net .................................... 289,314 219,176
Deferred income taxes ............................... 13,028 11,212
Other assets ........................................ 3,445 8,718
------------- -------------
Total current assets ......................... 442,104 326,922
------------- -------------
PROPERTY AND EQUIPMENT, net ........................... 36,492 21,960
GOODWILL, net ......................................... 200,468 123,587
OTHER ASSETS .......................................... 10,201 5,241
------------- -------------
Total assets ................................. $ 689,265 $ 477,710
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Floorplan notes payable ............................. $ 246,241 $ 193,405
Current maturities of long-term debt ................ 1,101 2,966
Accounts payable and accrued expenses ............... 100,228 82,300
------------- -------------
Total current liabilities .................... 347,570 278,671
------------- -------------
DEBT, net of current maturities ....................... 4,177 42,821
SENIOR SUBORDINATED NOTES ............................. 97,855 --
OTHER LIABILITIES ..................................... 19,368 20,034
STOCKHOLDERS' EQUITY:
Preferred stock, 1,000,000 shares authorized, none
issued or outstanding ............................. -- --
Common stock, $.01 par value, 50,000,000 shares
authorized, 21,261,366 and 18,267,515 issued ...... 213 183
Additional paid-in capital .......................... 176,412 118,469
Retained earnings ................................... 44,042 18,190
Treasury stock, at cost, 14,522 and 37,366 shares ... (372) (658)
------------- -------------
Total stockholders' equity ................... 220,295 136,184
------------- -------------
Total liabilities and stockholders' equity ... $ 689,265 $ 477,710
============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
2
<PAGE> 3
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,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
New vehicle .............................. $ 418,244 $ 273,282 $ 1,050,771 $ 662,323
Used vehicle ............................. 203,059 142,351 554,398 363,096
Parts and service ........................ 58,188 41,542 153,460 97,264
Other dealership revenues, net ........... 22,299 14,875 57,911 34,833
------------ ------------ ------------ ------------
Total revenues .................... 701,790 472,050 1,816,540 1,157,516
COST OF SALES:
New vehicle .............................. 382,941 251,038 963,229 609,918
Used vehicle ............................. 187,070 130,722 508,855 335,180
Parts and service ........................ 26,684 19,327 69,511 45,081
------------ ------------ ------------ ------------
Total cost of sales ............... 596,695 401,087 1,541,595 990,179
GROSS PROFIT ............................... 105,095 70,963 274,945 167,337
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES .................... 76,558 52,502 203,457 125,282
DEPRECIATION EXPENSE ....................... 1,220 1,127 3,397 2,650
AMORTIZATION EXPENSE ....................... 1,605 913 4,028 1,725
------------ ------------ ------------ ------------
Income from operations ............ 25,712 16,421 64,063 37,680
OTHER INCOME AND EXPENSES:
Floorplan interest expense ............... (5,438) (3,690) (13,623) (8,994)
Other interest expense, net .............. (2,904) (1,767) (7,705) (2,705)
Other income (expense), net .............. 104 40 209 (8)
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES ................. 17,474 11,004 42,944 25,973
PROVISION FOR INCOME TAXES ................. 6,955 4,489 17,092 10,723
------------ ------------ ------------ ------------
NET INCOME ................................. $ 10,519 $ 6,515 $ 25,852 $ 15,250
============ ============ ============ ============
Earnings per share:
Basic .................................... $ 0.49 $ 0.36 $ 1.27 $ 0.90
Diluted .................................. $ 0.48 $ 0.35 $ 1.21 $ 0.87
Weighted average shares outstanding:
Basic .................................... 21,253,799 18,199,646 20,383,000 16,957,327
Diluted .................................. 22,106,027 18,855,004 21,359,645 17,538,446
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE> 4
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................... $ 25,852 $ 15,250
Adjustments to reconcile net income to net cash provided
by operating activities -
Depreciation and amortization ............................... 7,425 4,375
Deferred income taxes ....................................... (800) (6,127)
Provision for doubtful accounts and uncollectible notes ..... 862 219
Gain on sale of assets ...................................... (67) (123)
Changes in assets and liabilities -
Accounts receivable ....................................... (10,241) (6,210)
Inventories ............................................... 120 25,864
Other assets .............................................. (1,360) (821)
Floorplan notes payable ................................... 5,254 (34,819)
Accounts payable and accrued expenses ..................... 21,048 12,208
------------ ------------
Total adjustments ..................................... 22,241 (5,434)
------------ ------------
Net cash provided by operating activities ..... 48,093 9,816
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable ................................. (1,900) (1,760)
Collections on notes receivable .............................. 772 947
Purchases of property and equipment .......................... (21,060) (7,218)
Proceeds from sales of property and equipment ................ 11,457 152
Cash paid in acquisitions, net of cash received .............. (82,775) (68,122)
------------ ------------
Net cash used in investing activities ......... (93,506) (76,001)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) borrowings under floorplan facilities
for acquisition financing .................................. (14,154) 33,523
Net (payments) borrowings on acquisition tranche of
revolving credit facility .................................. (42,000) 56,000
Principal payments of long-term debt ......................... (3,029) (2,632)
Borrowings of long-term debt ................................. 3,764 214
Proceeds from senior subordinated notes offering, net ........ 94,781 --
Proceeds from common stock offering, net ..................... 44,070 --
Proceeds from issuance of common stock to benefit plans ...... 3,075 1,128
Purchase of treasury stock ................................... (3,590) (1,737)
------------ ------------
Net cash provided by financing activities ..... 82,917 86,496
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS ....................... 37,504 20,311
CASH AND CASH EQUIVALENTS, beginning of period .................. 66,443 35,092
------------ ------------
CASH AND CASH EQUIVALENTS, end of period ........................ $ 103,947 $ 55,403
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for -
Interest ............................................... $ 20,886 $ 10,702
Taxes .................................................. $ 14,923 $ 12,293
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE> 5
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Group 1 Automotive, Inc. was founded to become a leading operator and
consolidator in the highly fragmented automotive retailing industry. Group 1
Automotive, Inc. is a holding company with its primary operations and assets
being its investments in its subsidiaries. These subsidiaries sell new and used
cars and light trucks through their dealerships and Internet sites, provide
maintenance and repair services and arrange finance, vehicle service and
insurance contracts. Group 1 Automotive, Inc. and its subsidiaries are herein
collectively referred to as the "Company" or "Group 1".
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation/Reclassifications
All acquisitions completed during the periods presented have been
accounted for using the purchase method of accounting and their results of
operations are included from the effective dates of the closings of the
acquisitions. The allocations of purchase price to the assets acquired and
liabilities assumed are 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.
Certain reclassifications have been made to prior year financial statements to
conform them to the current year presentation.
Interim Financial Information
These interim financial statements 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.
3. EARNINGS PER SHARE:
Statement of Financial Accounting Standards ("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:
5
<PAGE> 6
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Common stock outstanding, beginning of period ............ 21,221,366 17,759,531 18,267,515 14,673,051
Weighted average common stock issued -
Acquisitions ........................................ -- 386,025 556,560 2,280,121
Employee Stock Purchase Plan ........................ 59,982 61,546 89,839 58,259
Stock offering ...................................... -- -- 1,550,834 --
Stock options exercised ............................. 23,261 12,435 21,555 4,731
Less: Weighted average treasury shares repurchased ..... (50,810) (19,891) (103,303) (58,835)
------------- ------------- ------------- -------------
Shares used in computing basic earnings per share ........ 21,253,799 18,199,646 20,383,000 16,957,327
Dilutive effect of stock options, net of assumed
repurchase of treasury stock ........................ 852,228 655,358 976,645 581,119
------------- ------------- ------------- -------------
Shares used in computing diluted earnings per share ...... 22,106,027 18,855,004 21,359,645 17,538,446
============= ============= ============= =============
</TABLE>
4. BUSINESS COMBINATIONS:
During the first nine months of 1999, the Company acquired 23
automobile dealership franchises. These acquisitions were accounted for as
purchases. The aggregate consideration paid in completing these acquisitions and
satisfying certain contingent acquisition payment arrangements from previous
transactions included approximately $82.8 million in cash, net of cash received,
approximately 930,000 shares of restricted/unregistered common stock, the
assumption of an estimated $60.7 million of inventory financing and the
assumption of approximately $500,000 of notes payable. The consolidated balance
sheet includes preliminary allocations of the purchase price of the
acquisitions, which are subject to final adjustment. These allocations resulted
in recording approximately $80.2 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, 1999, assuming that they
occurred on January 1, 1998, (2) the completion of our March 1999 offerings of
two million shares of common stock and $100 million of senior subordinated notes
assuming they occurred on January 1, 1998, and (3) certain pro forma adjustments
discussed below.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 1998
------------- -------------
(in millions, except per share amounts)
<S> <C> <C>
Revenues ............................... $ 1,988,182 $ 1,755,391
Gross profit ........................... 300,675 256,547
Income from operations ................. 73,126 59,472
Net income ............................. 28,697 21,554
Basic earnings per share ............... 1.35 1.03
Diluted earnings per share ............. 1.29 1.00
</TABLE>
Pro forma adjustments included in the amounts above primarily relate
to: (a) increases in revenues related to changes in the contractual commission
arrangements on certain third-party products sold by the dealerships; (b) pro
forma goodwill amortization expense over an estimated useful life of 40 years;
(c) reductions in compensation expense and management fees to the level that
certain management employees and owners of the acquired companies will
contractually receive; (d) incremental corporate overhead costs related to
personnel costs, rents, professional service fees and directors and officers
liability insurance premiums; (e) increases in interest expense resulting from
borrowings to complete
6
<PAGE> 7
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. SENIOR SUBORDINATED NOTES:
The Company completed the offering of $100 million of its 10 7/8%
Senior Subordinated Notes due 2009 (the "Notes") on March 5, 1999. The Notes pay
interest semi-annually on March 1, and September 1, each year beginning
September 1, 1999. Before March 1, 2002, the Company may redeem up to $35
million of the Notes with the proceeds of certain public offerings of common
stock at a redemption price of 110.875% of the principal amount plus accrued
interest to the redemption date. Additionally, the Company may redeem all or
part of the Notes at redemption prices of 105.438%, 103.625%, 101.813% and
100.000% of the principal amount plus accrued interest during the twelve month
periods beginning March 1, of 2004, 2005, 2006, and 2007 and thereafter,
respectively. The Notes are jointly and severally guaranteed, on an unsecured
senior subordinated basis, by all subsidiaries of the Company (the "Subsidiary
Guarantors"), other than certain inconsequential subsidiaries. All of the
Subsidiary Guarantors are wholly owned subsidiaries of the Company. Certain
manufacturers have minimum working capital guidelines, which, under certain
circumstances, may impair a subsidiary's ability to make distributions to the
parent company. Separate financial statements of the Subsidiary Guarantors are
not included because (i) all Subsidiary Guarantors have jointly and severally
guaranteed the Notes on a full and unconditional basis, to the maximum extent
permitted by law, (ii) the aggregate assets, liabilities, earnings and equity of
the Subsidiary Guarantors are substantially equivalent to the assets,
liabilities, earnings and equity of the parent on a consolidated basis, and
(iii) management has determined that such information is not material to
investors.
6. SUBSEQUENT EVENT:
The Company closed an amendment to its syndicated credit facility,
effective November 1, 1999. The amendment increased the existing $500 million
credit facility to a $1 billion credit facility and extended the term from
December 2001 to December 2003. The credit facility consists of two tranches:
the floorplan and acquisition tranches. The acquisition tranche totals $220
million and, as of November 5, 1999, $220 million was available subject to a
cash flow calculation and the maintenance of certain financial ratios.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following should be read in conjunction with the response to Part
I, Item 1 of this Report and our other filings with the Securities and Exchange
Commission ("SEC").
OVERVIEW
We are a leading operator and consolidator in the highly fragmented
automotive retailing industry. We own automobile dealership franchises located
in Texas, Oklahoma, Florida, New Mexico, Georgia and Colorado. At all of our
dealerships, and through their Internet sites, we sell new and used cars and
light trucks, and provide maintenance and repair services. We also operate 15
collision service centers. We expect a significant portion of our future growth
to come from acquisitions of additional dealerships.
We have diverse sources of revenues, including: new car sales, new
truck sales, used car sales, used truck sales, manufacturer remarketed vehicle
sales, parts sales, service sales, collision repair service sales, finance fees,
insurance commissions, vehicle service contract commissions, documentary fees
and after-market product sales. Sales revenues from new and used vehicle sales
and parts and service sales include sales to retail customers, other dealerships
and wholesalers. Other dealership revenues includes revenues from arranging
financing, insurance and vehicle service contracts, net of a provision for
anticipated chargebacks, and documentary fees.
Our gross margin varies as our merchandise mix (the mix between new
vehicle sales, used vehicle sales, parts and service sales, collision repair
service sales and other dealership revenues) changes. Our gross margin on the
sale of 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
our new vehicle sales increase or decrease at a rate greater than our other
revenue sources, our gross margin responds inversely. Factors such as
seasonality, weather, cyclicality and manufacturers' advertising and incentives
may impact our merchandise mix and, therefore, influence our gross margin.
Selling, general and administrative expenses consist primarily of
compensation for sales, administrative, finance and general management
personnel, rent, marketing, insurance and utilities. Interest expense consists
of interest charges on interest-bearing debt, including floorplan inventory
financing, net of interest income earned.
SELECTED OPERATIONAL AND FINANCIAL DATA FOR THE THREE MONTH PERIODS ENDED
SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
NEW VEHICLE DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
(dollars in thousands, SEPTEMBER 30,
except per unit amounts) -------------------------- INCREASE/ PERCENT
1999 1998 (DECREASE) CHANGE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Retail unit sales ........................... 17,259 11,901 5,358 45.0%
Retail sales revenues ....................... $ 418,244 $ 273,282 $ 144,962 53.0%
Gross profit ................................ $ 35,303 $ 22,244 $ 13,059 58.7%
Average gross profit per retail unit sold ... $ 2,045 $ 1,869 $ 176 9.4%
Gross margin ................................ 8.4% 8.1% 0.3%
</TABLE>
8
<PAGE> 9
USED VEHICLE DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
(dollars in thousands, SEPTEMBER 30,
except per unit amounts) -------------------------- INCREASE/ PERCENT
1999 1998 (DECREASE) CHANGE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Retail unit sales ........................... 12,454 9,086 3,368 37.1%
Retail sales revenues (1) ................... $ 163,956 $ 121,963 $ 41,993 34.4%
Gross profit ................................ $ 15,989 $ 11,629 $ 4,360 37.5%
Average gross profit per retail unit sold ... $ 1,284 $ 1,280 $ 4 0.3%
Gross margin ................................ 9.8% 9.6% 0.2%
</TABLE>
- ------------------
(1) Excludes wholesale revenues.
PARTS AND SERVICE DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
(dollars in thousands) -------------------------- INCREASE/ PERCENT
1999 1998 (DECREASE) CHANGE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales revenues ............... $ 58,188 $ 41,542 $ 16,646 40.1%
Gross profit ................. $ 31,504 $ 22,215 $ 9,289 41.8%
Gross margin ................. 54.1% 53.5% 0.6%
</TABLE>
OTHER DEALERSHIP REVENUES, NET
<TABLE>
<CAPTION>
THREE MONTHS ENDED
(dollars in thousands, SEPTEMBER 30,
except per unit amounts) ------------------------- INCREASE/ PERCENT
1999 1998 (DECREASE) CHANGE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Retail new and used unit sales ......... 29,713 20,987 8,726 41.6%
Retail sales revenues .................. $ 22,299 $ 14,875 $ 7,424 49.9%
Net revenues per retail unit sold ...... $ 750 $ 709 $ 41 5.8%
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1998
REVENUES. Revenues increased $229.7 million, or 48.7%, to $701.8
million for the three months ended September 30, 1999, from $472.1 million for
the three months ended September 30, 1998. New vehicle revenues increased
primarily due to strong customer acceptance of our products, particularly
Chevrolet, Ford, and Honda, and the acquisitions of additional dealership
operations during 1998 and 1999. The growth in used vehicle revenues was
primarily attributable to an emphasis on used vehicle sales in the Houston,
Oklahoma and New Mexico markets, and the additional dealership operations
acquired. The increase in parts and service revenues was due to the additional
dealership operations acquired, coupled with strong organic growth in the
Denver, Houston and Beaumont markets. Other dealership revenues increased
primarily due to the implementation of our vehicle service contract and
insurance programs, and related training, which resulted in improved revenues
per unit, in addition to an increase in the number of retail new and used
vehicle sales.
GROSS PROFIT. Gross profit increased $34.1 million, or 48.0%, to $105.1
million for the three months ended September 30, 1999, from $71.0 million for
the three months ended September 30, 1998. The increase was attributable to
increased revenues as gross margin remained stable at 15.0% for the three
9
<PAGE> 10
months ended September 30, 1999, and for the three months ended September 30,
1998. The gross margin remained stable even though lower margin new vehicle
revenues increased as a percentage of total revenues, as improvements in other
dealership revenues per unit and increases in the gross margin on new and used
vehicle sales and parts and service sales offset the change in the merchandising
mix. The gross margin on new retail vehicle sales improved to 8.4% from 8.1%,
due to our dealership managers performing well in a favorable market and our
sales training programs. The increase in gross margin on used retail vehicle
sales to 9.8% from 9.6% was primarily attributable to our dealership managers
performing well in a favorable operating environment and our sales training
programs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $24.1 million, or 45.9%, to $76.6 million for
the three months ended September 30, 1999, from $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 gross profit
increased. Selling, general and administrative expenses decreased as a
percentage of gross profit to 72.8% from 74.0% due primarily to increased
operating leverage.
INTEREST EXPENSE. Floorplan and other interest expense, net, increased
$2.8 million, or 50.9%, to $8.3 million for the three months ended September 30,
1999, from $5.5 million for the three months September 30, 1998. The increase
was primarily attributable to the floorplan interest expense of the additional
dealership operations acquired and additional interest expense due to borrowings
to complete acquisitions. A portion of the increase is due to the completion of
our offering of $100 million of senior subordinated notes during the first
quarter of 1999. Until all the proceeds of the offering are utilized in
completing acquisitions, we are using the funds to temporarily pay down our
floorplan notes payable, which have a lower interest rate than the long-term
senior subordinated notes. Partially offsetting the increases was a cost
reduction realized from obtaining a lower interest rate on our floorplan notes
payable.
SELECTED OPERATIONAL AND FINANCIAL DATA FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
NEW VEHICLE DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
(dollars in thousands, SEPTEMBER 30,
except per unit amounts) -------------------------- INCREASE/ PERCENT
1999 1998 (DECREASE) CHANGE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Retail unit sales ........................... 43,629 28,640 14,989 52.3%
Retail sales revenues ....................... $1,050,771 $ 662,323 $ 388,448 58.6%
Gross profit ................................ $ 87,542 $ 52,405 $ 35,137 67.0%
Average gross profit per retail unit sold ... $ 2,007 $ 1,830 $ 177 9.7%
Gross margin ................................ 8.3% 7.9% 0.4%
</TABLE>
10
<PAGE> 11
USED VEHICLE DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
(dollars in thousands, SEPTEMBER 30,
except per unit amounts) -------------------------- INCREASE/ PERCENT
1999 1998 (DECREASE) CHANGE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Retail unit sales ........................... 34,126 22,431 11,695 52.1%
Retail sales revenues (1) ................... $ 452,303 $ 298,817 $ 153,486 51.4%
Gross profit ................................ $ 45,543 $ 27,916 $ 17,627 63.1%
Average gross profit per retail unit sold ... $ 1,335 $ 1,245 $ 90 7.2%
Gross margin ................................ 10.1% 9.3% 0.8%
</TABLE>
- ------------------
(1) Excludes wholesale revenues.
PARTS AND SERVICE DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
(dollars in thousands) -------------------------- INCREASE/ PERCENT
1999 1998 (DECREASE) CHANGE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales revenues .......................... $ 153,460 $ 97,264 $ 56,196 57.8%
Gross profit ............................ $ 83,949 $ 52,183 $ 31,766 60.9%
Gross margin ............................ 54.7% 53.7% 1.0%
</TABLE>
OTHER DEALERSHIP REVENUES, NET
<TABLE>
<CAPTION>
NINE MONTHS ENDED
(dollars in thousands, SEPTEMBER 30,
except per unit amounts) ------------------------- INCREASE/ PERCENT
1999 1998 (DECREASE) CHANGE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Retail new and used unit sales .......... 77,755 51,071 26,684 52.2%
Retail sales revenues ................... $ 57,911 $ 34,833 $ 23,078 66.3%
Net revenues per retail unit sold ....... $ 745 $ 682 $ 63 9.2%
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1998
REVENUES. Revenues increased $659.0 million, or 56.9%, to $1,816.5
million for the nine months ended September 30, 1999, from $1,157.5 million for
the nine months ended September 30, 1998. New vehicle revenues increased
primarily due to strong customer acceptance of our products, particularly
Chevrolet, Ford, and Honda, and the acquisitions of additional dealership
operations during 1998 and 1999. The growth in used vehicle revenues was
primarily attributable to an emphasis on used vehicle sales in the Oklahoma,
Houston, and New Mexico markets, and the additional dealership operations
acquired. The increase in parts and service revenues was due to the additional
dealership operations acquired, coupled with strong organic growth in the
Houston and Beaumont markets. Other dealership revenues increased primarily due
to the implementation of our vehicle service contract and insurance programs,
and related training, which resulted in improved revenues per unit, in addition
to an increase in the number of retail new and used vehicle sales.
GROSS PROFIT. Gross profit increased $107.6 million, or 64.3%, to
$274.9 million for the nine months ended September 30, 1999, from $167.3 million
for the nine months ended September 30, 1998. The increase was attributable to
increased revenues and an increased gross margin to 15.1% for the nine
11
<PAGE> 12
months ended September 30, 1999, from 14.5% for the nine months ended September
30, 1998. The increase in gross margin was caused primarily by improvements in
other dealership revenues per unit and increases in the gross margin on new and
used vehicle sales and parts and service sales. Additionally, changes in the
merchandising mix, higher margin parts and service sales and other dealership
revenues increased as a percentage of total revenues, added to the gross margin
improvement. The gross margin on new retail vehicle sales improved to 8.3% from
7.9%, due to our dealership managers performing well in a favorable market and
our sales training programs. The increase in gross margin on used retail vehicle
sales to 10.1% from 9.3% was primarily attributable to our dealership managers
performing well in a favorable operating environment, our sales training and an
emphasis on used vehicles, particularly inventory management.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $78.2 million, or 62.4%, to $203.5 million for
the nine months ended September 30, 1999, from $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 gross profit
increased. Selling, general and administrative expenses decreased as a
percentage of gross profit to 74.0% from 74.9% due primarily to increased
operating leverage.
INTEREST EXPENSE. Floorplan and other interest expense, net, increased
$9.6 million, or 82.1%, to $21.3 million for the nine months ended September 30,
1999, from $11.7 million for the nine months ended September 30, 1998. The
increase was primarily attributable to the floorplan interest expense of the
additional dealership operations acquired and additional interest expense due to
borrowings to complete acquisitions. A portion of the increase is due to the
completion of our offering of $100 million of senior subordinated notes during
the first quarter of 1999. Until all the proceeds of the offering are utilized
in completing acquisitions, we are using the funds to temporarily pay down our
floorplan notes payable, which have a lower interest rate than the long-term
senior subordinated notes. Partially offsetting the increases was a cost
reduction realized from obtaining a lower interest rate on our floorplan notes
payable.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity are cash on hand, cash from
operations, our credit facility, which includes the floorplan facility and the
acquisition facility, and equity and debt offerings.
CASH FLOWS
OPERATING ACTIVITIES. During the first nine months of 1999 we generated
cash flow from operations of approximately $48.1 million, primarily from net
income plus depreciation, an increase of $38.3 million compared to the same
period in the prior year. Excluding working capital changes, cash flows from
operating activities increased $19.7 million over the prior year period.
INVESTING ACTIVITIES. During the first nine months of 1999 we used
approximately $93.5 million for investing activities, primarily related to cash
paid in completing acquisitions, net of cash balances obtained in the
acquisitions. Additionally, we paid $21.1 million for purchases of property and
equipment, of which $15.2 million was used for the purchase of land and
construction of facilities for new or expanded operations, including the new
Lexus companion dealership located in south Houston. Partially offsetting these
uses of cash, we received $11.5 million from sales of property and equipment.
The proceeds were received primarily from the sale of dealership properties to a
REIT for approximately $11.2 million, and for which no gain or loss was
recognized.
FINANCING ACTIVITIES. During the first nine months of 1999 we obtained
approximately $82.9 million from financing activities. In March 1999, we
completed offerings of 2 million shares of common stock and $100 million of
senior subordinated notes with an interest rate of 10 7/8%. The net proceeds
from these offerings of approximately $138.9 million were used to repay $59.0
million borrowed under the acquisition
12
<PAGE> 13
portion of the credit facility and approximately $79.9 million of floorplan
notes payable. Approximately $65.7 million of the amount paid down on the
floorplan notes payable has been drawn to complete acquisitions. The remaining
amounts paid down on the credit facility are expected to be drawn in the future
to complete acquisitions. Additionally, in connection with the sale of the
properties to a REIT, we paid off mortgages of approximately $2.5 million.
WORKING CAPITAL. At September 30, 1999, we had working capital of $94.5
million. Historically, we have funded our operations with internally generated
cash flow and borrowings. Certain manufacturers have minimum working capital
guidelines, which, under certain circumstances, may impair a subsidiary's
ability to make distributions to the parent company. While we cannot guarantee
it, based on current facts and circumstances, we believe we have adequate cash
flows coupled with borrowings under our credit facility to fund our current
operations.
CREDIT FACILITY
We closed an amendment to our credit facility effective November 1,
1999, increasing the credit facility to $1 billion. The credit facility consists
of two tranches: the floorplan and acquisition tranches. The acquisition tranche
totals $220 million and, as of November 5, 1999, $220 million was available,
subject to a cash flow calculation and the maintenance of certain financial
ratios.
ACQUISITION FINANCING
We anticipate that our primary use of cash will be for the completion
of acquisitions. We expect the cash needed to complete our acquisitions will
come from the operating cash flows of our existing dealerships, borrowings under
our credit facilities, other borrowings, or equity or debt offerings. Although
we believe that we will be able to obtain sufficient capital to fund
acquisitions, we cannot guarantee that such capital will be available to us at
the time it is required or on terms acceptable to us.
YEAR 2000 CONVERSION
Year 2000 issues result from the inability of computer programs or
computerized equipment to accurately calculate, store or use a date subsequent
to December 31, 1999. The erroneous date can be interpreted in a number of
different ways; typically the year 2000 is represented as the year 1900. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
We have recognized the need to ensure that our computer systems,
equipment and operations will not be adversely impacted by the change to the
calendar year 2000. As such, we have taken steps to identify potential areas of
risk and are addressing these in our planning, purchasing and daily operations.
We have conducted a third party survey of all of the individual dealership
systems, equipment and operations and have developed an action plan, which is
currently being implemented, to correct deficiencies before year-end. The total
cost of converting all internal systems, equipment and operations for the year
2000 will not be material to our financial position. In connection with
acquisitions, we review and address each candidate's year 2000 readiness during
the due diligence process.
We have reviewed the potential adverse impact, resulting from the
failure of third party service providers and vendors to prepare for the year
2000. We are dependent upon our dealerships' computer systems in our daily
operations. All of our dealerships are using a computer system supported by a
major automobile dealership computer system provider. We have contacted each of
our providers and have received written assurance from them that their systems
are, or will be, year 2000 ready. We are dependent upon these providers, as are
most dealerships in the United States, to address the year 2000 issue.
13
<PAGE> 14
We are primarily dependent upon the manufacturers for the production
and delivery of new vehicles and parts. Although we have no reason to believe
that our manufacturers will not be year 2000 ready, we have been unable to
obtain written assurance from them that their systems are year 2000 ready.
While we are in the process of finalizing contingency plans, failure by
us, our manufacturers or third party service providers and vendors to adequately
address the year 2000 issue could have an adverse effect on us. If we or our
third party service providers do not adequately address the year 2000 issue, we
may be required to handle all business on a handwritten basis. While this would
reduce operational efficiency, we would still be able to continue our
operations. If our manufacturers fail to adequately address the year 2000 issue,
and do not correct the problems timely, we may experience shortages in new
vehicle and parts inventories.
CAUTIONARY STATEMENT ABOUT FORWARD LOOKING STATEMENTS
This quarterly report and Management's Discussion and Analysis of
Financial Condition and Results of Operations include certain "forward-looking
statements" within the meeting of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These statements include
statements regarding our plans, beliefs or current expectations, including those
plans, beliefs and expectations of our officers and directors with respect to,
among other things:
o future acquisitions;
o expected future cost savings;
o future capital expenditures;
o trends affecting our future financial condition or results of
operations; and
o our business strategy regarding future operations.
Any such forward-looking statements are not assurances of future
performance and involve risks and uncertainties. Actual results may differ
materially from anticipated results for a number of reasons, including;
o industry conditions;
o future demand for new and used vehicles;
o restrictions imposed on us by automobile manufacturers;
o the ability to obtain the consents of automobile manufacturers to
our acquisitions;
o the availability of capital resources; and
o the willingness of acquisition candidates to accept our common
stock as currency.
This information and additional factors that could affect our operating
results and performance are described in our filings with the SEC. We urge you
to carefully consider those factors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following information about our market sensitive financial
instruments updates the information provided as of December 31, 1998, in our
Annual Report on form 10-K and constitutes a "forward-looking statement". Our
major market risk exposure is changing interest rates. Our policy is to manage
interest rates through use of a combination of fixed and floating rate debt.
Interest rate swaps may be used to adjust interest rate exposures when
appropriate, based upon market conditions. These swaps are entered into with
financial institutions with investment grade credit ratings, thereby minimizing
the risk of credit loss. All items described are non-trading.
14
<PAGE> 15
Since December 31, 1998, our floorplan notes payable have increased due
primarily to acquisitions of additional dealership operations and increases in
inventory levels. Additionally, in March 1999, we completed offerings of two
million shares of common stock and $100 million of senior subordinated notes
with a fixed interest rate of 10 7/8%. The notes mature in March 2009 and no
principal payments are due prior to that date. The proceeds from the offerings
have been utilized to pay off borrowings under the credit facility and complete
acquisitions. As of September 30, 1999, there were no amounts outstanding under
the acquisition portion of the credit facility. Additionally, there have been no
changes in the interest swap positions held by us since December 31, 1998.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, our dealerships are named in claims involving the
manufacture of automobiles, contractual disputes and other matters arising in
the ordinary course of business. Currently, no legal proceedings are pending
against or involve us that, in our opinion, based on current known facts and
circumstances, could reasonably be expected to have a material adverse effect on
our financial position.
ITEM 2. CHANGES IN SECURITIES
We have entered into agreements to purchase all of the outstanding
capital stock or purchase certain assets and assume certain liabilities of
various automobile dealerships for cash and shares of our common stock. The
following is a summary of the transactions in which stock was or is to be
issued:
<TABLE>
<CAPTION>
DATE SECURITIES
DATE OF AGREEMENT ISSUED ACQUISITION SHARES
- ----------------------------- -------------------------- -------------------------------------- -----------
<S> <C> <C> <C>
July 28, 1999 November 12, 1999 Bohn Automotive Group 497,999
August 10, 1999 Pending Closing Ira Automotive Group 285,600
August 5, 1999 Pending Closing Alexander Automotive Group 382,300
</TABLE>
We are relying on Regulation D under the Securities Act of 1933, as amended, as
an exemption from registration of the Common Stock to be issued in the
acquisitions. We believe we are justified in relying on such exemption since all
of the stockholders of the groups who have received, or will receive, shares of
our common stock are "accredited investors" under Regulation D, and we have
otherwise complied with Regulation D.
ITEM 5. OTHER INFORMATION
None.
15
<PAGE> 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
11.1 Statement re: computation of earnings per share is included under
Note 3 to the financial statements.
27.1 Financial Data Schedule.
B. REPORTS ON FORM 8-K:
On July 27, 1999, the Company filed a Current Report of Form 8-K reporting
under Item 5 thereof and including exhibits under Item 7 thereof.
On August 23, 1999, the Company filed a Current Report of Form 8-K
reporting under Item 5 thereof and including exhibits under Item 7 thereof.
16
<PAGE> 17
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 15, 1999 By: /s/ Scott L. Thompson
- ------------------- --------------------------------------------
Date Scott L. Thompson, Senior Vice President,
Chief Financial Officer and Treasurer
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
11.1 Statement re: computation of earnings per share is included under
Note 3 to the financial statements.
27.1 Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 103,947
<SECURITIES> 0
<RECEIVABLES> 32,370
<ALLOWANCES> 0
<INVENTORY> 289,314
<CURRENT-ASSETS> 442,104
<PP&E> 36,492
<DEPRECIATION> 0
<TOTAL-ASSETS> 689,265
<CURRENT-LIABILITIES> 347,570
<BONDS> 102,032
0
0
<COMMON> 213
<OTHER-SE> 220,082
<TOTAL-LIABILITY-AND-EQUITY> 689,265
<SALES> 1,758,629
<TOTAL-REVENUES> 1,816,540
<CGS> 1,541,595
<TOTAL-COSTS> 1,541,595
<OTHER-EXPENSES> 210,882
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,328
<INCOME-PRETAX> 42,944
<INCOME-TAX> 17,092
<INCOME-CONTINUING> 25,852
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,852
<EPS-BASIC> 1.27
<EPS-DILUTED> 1.21
</TABLE>
