-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EzhkNCQYET5rlbonZ4xVi8ZkRO4w6ICV1FWAyfW0IbkV23lK+MZZ0CbXJgTk2fNv T0FpSTgLi3jVMAg7QdMXJA== 0000950129-99-003735.txt : 19990817 0000950129-99-003735.hdr.sgml : 19990817 ACCESSION NUMBER: 0000950129-99-003735 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GROUP 1 AUTOMOTIVE INC CENTRAL INDEX KEY: 0001031203 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-AUTO DEALERS & GASOLINE STATIONS [5500] IRS NUMBER: 760506313 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13461 FILM NUMBER: 99691590 BUSINESS ADDRESS: STREET 1: 950 ECHO LANE STREET 2: STE 350 CITY: HOUSTON STATE: TX ZIP: 77024 BUSINESS PHONE: 7134676268 MAIL ADDRESS: STREET 1: 950 ECHO LANE STREET 2: STE 350 CITY: HOUSTON STATE: TX ZIP: 77024 10-Q 1 GROUP 1 AUTOMOTIVE, INC. - DATED 06/30/99 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 June 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 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 21,236,524
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands)
JUNE 30, DECEMBER 31, 1999 1998 --------- --------- (unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents ........................ $ 92,504 $ 66,443 Accounts and notes receivable, net ............... 28,335 21,373 Inventories, net ................................. 326,679 219,176 Deferred income taxes ............................ 13,592 11,212 Other assets ..................................... 7,250 8,718 --------- --------- Total current assets ...................... 468,360 326,922 --------- --------- PROPERTY AND EQUIPMENT, net ........................ 30,044 21,960 GOODWILL, net ...................................... 197,624 123,587 OTHER ASSETS ....................................... 7,239 5,241 --------- --------- Total assets .............................. $ 703,267 $ 477,710 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Floorplan notes payable .......................... $ 280,258 $ 193,405 Current maturities of long-term debt ............. 506 2,966 Accounts payable and accrued expenses ............ 93,316 82,300 --------- --------- Total current liabilities ................. 374,080 278,671 --------- --------- DEBT, net of current maturities .................... 1,366 42,821 SENIOR SUBORDINATED NOTES .......................... 97,823 -- OTHER LIABILITIES .................................. 19,788 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, 21,221,366 and 18,267,515 issued ... 212 183 Additional paid-in capital ....................... 176,759 118,469 Retained earnings ................................ 33,523 18,190 Treasury stock, at cost, 12,325 and 37,366 shares ......................................... (284) (658) --------- --------- Total stockholders' equity ................ 210,210 136,184 --------- --------- Total liabilities and stockholders' equity ................................... $ 703,267 $ 477,710 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 2 3 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (dollars in thousands, except per share amounts)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ----------------------------- ------------------------------ 1999 1998 1999 1998 ------------ ------------ ------------ ------------ REVENUES: New vehicle ...................... $ 362,409 $ 251,019 $ 632,527 $ 389,041 Used vehicle ..................... 191,560 133,625 351,339 220,745 Parts and service ................ 51,498 34,154 95,272 55,722 Other dealership revenues, net ... 19,932 12,733 35,612 19,958 ------------ ------------ ------------ ------------ Total revenues ............ 625,399 431,531 1,114,750 685,466 COST OF SALES: New vehicle ...................... 332,915 231,504 580,288 358,880 Used vehicle ..................... 175,636 123,898 321,785 204,458 Parts and service ................ 23,191 15,776 42,827 25,754 ------------ ------------ ------------ ------------ Total cost of sales ....... 531,742 371,178 944,900 589,092 GROSS PROFIT ....................... 93,657 60,353 169,850 96,374 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ............ 68,621 45,044 126,899 72,780 DEPRECIATION EXPENSE ............... 1,144 947 2,177 1,523 AMORTIZATION EXPENSE ............... 1,365 569 2,423 812 ------------ ------------ ------------ ------------ Income from operations .... 22,527 13,793 38,351 21,259 OTHER INCOME AND EXPENSES: Floorplan interest expense ....... (4,338) (3,479) (8,185) (5,304) Other interest expense, net ...... (3,015) (627) (4,801) (938) Other income (expense), net ...... 69 (24) 105 (48) ------------ ------------ ------------ ------------ INCOME BEFORE INCOME TAXES ......... 15,243 9,663 25,470 14,969 PROVISION FOR INCOME TAXES ......... 6,066 4,042 10,137 6,234 ------------ ------------ ------------ ------------ NET INCOME ......................... $ 9,177 $ 5,621 $ 15,333 $ 8,735 ============ ============ ============ ============ Earnings per share: Basic ............................ $ 0.44 $ 0.32 $ 0.77 $ 0.54 Diluted .......................... $ 0.42 $ 0.31 $ 0.73 $ 0.52 Weighted average shares outstanding: Basic ............................ 20,947,850 17,441,678 19,940,384 16,325,873 Diluted .......................... 21,960,640 18,128,366 20,980,269 16,869,256
The accompanying notes are an integral part of these consolidated financial statements. 3 4 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
SIX MONTHS ENDED JUNE 30, ------------------------- 1999 1998 --------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ........................................................... $ 15,333 $ 8,735 Adjustments to reconcile net income to net cash provided by operating activities - Depreciation and amortization ...................................... 4,600 2,335 Deferred income taxes .............................................. (279) (2,356) Provision for doubtful accounts and uncollectible notes ............ 447 110 Gain on sale of assets ............................................. (38) (3) Changes in assets and liabilities - Accounts receivable .............................................. (5,907) (1,763) Inventories ...................................................... (42,098) 9,586 Other assets ..................................................... 843 46 Floorplan notes payable .......................................... 48,554 (17,268) Accounts payable and accrued expenses ............................ 15,319 9,922 -------- -------- Total adjustments ............................................ 21,441 609 -------- -------- Net cash provided by operating activities ............ 36,774 9,344 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Increase in notes receivable ........................................ (1,080) (1,180) Collections on notes receivable ..................................... 444 699 Purchases of property and equipment ................................. (12,798) (5,351) Proceeds from sales of property and equipment ....................... 5,743 15 Cash paid in acquisitions, net of cash received ..................... (76,541) (50,057) -------- -------- Net cash used in investing activities ................ (84,232) (55,874) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (payments) borrowings under floorplan facilities for acquisition financing .............................. (20,388) 33,523 Net (payments) borrowings on acquisition tranche of revolving credit facility ................................................... (42,000) 50,000 Principal payments of long-term debt ................................ (2,863) (2,020) Borrowings of long-term debt ........................................ 192 192 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 ............. 1,872 459 Purchase of treasury stock .......................................... (2,145) (1,145) -------- -------- Net cash provided by financing activities ............ 73,519 81,009 -------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS .............................. 26,061 34,479 CASH AND CASH EQUIVALENTS, beginning of period ......................... 66,443 35,092 -------- -------- CASH AND CASH EQUIVALENTS, end of period ............................... $ 92,504 $ 69,571 ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for - Interest ...................................................... $ 9,647 $ 5,428 Taxes ......................................................... $ 10,614 $ 6,801
The accompanying notes are an integral part of these consolidated financial statements. 4 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, provide maintenance and repair services and arrange finance, vehicle service and insurance contracts. Group 1 Automotive, Inc. and 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 6
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------------- ---------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Common stock outstanding, beginning of period............... 20,457,582 16,045,069 18,267,515 14,673,051 Weighted average common stock issued - Acquisitions .......................................... 476,193 1,349,995 366,820 1,664,241 Employee Stock Purchase Plan .......................... 52,006 56,140 46,589 28,382 Stock offering ........................................ -- -- 1,318,765 -- Stock options exercised ............................... 16,791 454 8,489 228 Less: Weighted average treasury shares repurchased ....... (54,722) (9,980) (67,794) (40,029) ----------- ----------- ----------- ----------- Shares used in computing basic earnings per share .......... 20,947,850 17,441,678 19,940,384 16,325,873 Dilutive effect of stock options, net of assumed repurchase of treasury stock .......................... 1,012,790 686,688 1,039,885 543,383 ----------- ----------- ----------- ----------- Shares used in computing diluted earnings per share ........ 21,960,640 18,128,366 20,980,269 16,869,256 =========== =========== =========== ===========
4. BUSINESS COMBINATIONS During the first six months of 1999, the Company acquired 22 automobile dealership franchises. These acquisitions were accounted for as purchases. The consideration paid in completing these acquisitions and relating to certain contingent acquisition payment arrangements from previous transactions included approximately $76.5 million in cash, net of cash received, approximately 930,000 shares of restricted/unregistered common stock, the assumption of an estimated $57.6 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 $76.0 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 June 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.
SIX MONTHS ENDED JUNE 30, ------------------------- 1999 1998 ------ ------ (in millions, except per share amounts) Revenues ............................. $ 1,263.7 $ 1,117.7 Gross profit ......................... 192.2 161.1 Income from operations ............... 46.4 36.8 Net income ........................... 17.9 12.6 Basic earnings per share ............. 0.85 0.60 Diluted earnings per share ........... 0.81 0.59
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 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. 7 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 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 JUNE 30, 1999 AND JUNE 30, 1998 NEW VEHICLE DATA
THREE MONTHS ENDED (dollars in thousands, JUNE 30, except per unit amounts) ---------------------- INCREASE/ PERCENT 1999 1998 (DECREASE) CHANGE -------- -------- ---------- ------- Retail unit sales ....................... 15,046 10,767 4,279 39.7% Retail sales revenues ................... $362,409 $251,019 $111,390 44.4% Gross profit ............................ $ 29,494 $ 19,515 $ 9,979 51.1% Gross margin ............................ 8.1% 7.8% 0.3% 3.8% Average gross profit per retail unit sold ................................... $ 1,960 $ 1,812 $ 148 8.2%
8 9 USED VEHICLE DATA
THREE MONTHS ENDED (dollars in thousands, JUNE 30, except per unit amounts) ---------------------- INCREASE/ PERCENT 1999 1998 (DECREASE) CHANGE -------- -------- ---------- ------- Retail unit sales ............................ 11,651 7,991 3,660 45.8% Retail sales revenues (1) .................... $156,634 $106,578 $ 50,056 47.0% Gross profit ................................. $ 15,924 $ 9,727 $ 6,197 63.7% Gross margin ................................. 10.2% 9.1% 1.1% 12.1% Average gross profit per retail unit sold .... $ 1,367 $ 1,217 $ 150 12.3%
- --------- (1) Excludes wholesale revenues. PARTS AND SERVICE DATA
THREE MONTHS ENDED JUNE 30, (dollars in thousands) -------------------- INCREASE/ PERCENT 1999 1998 (DECREASE) CHANGE ------- ------- ---------- ------- Sales revenue ...... $51,498 $34,154 $17,344 50.8% Gross profit ....... $28,307 $18,378 $ 9,929 54.0% Gross margin ....... 55.0% 53.8% 1.2% 2.2%
OTHER DEALERSHIP REVENUES, NET
THREE MONTHS ENDED (dollars in thousands, JUNE 30, except per unit amounts) ------------------- INCREASE/ PERCENT 1999 1998 (DECREASE) CHANGE ------- ------- ---------- ------- Retail new and used unit sales ......... 26,697 18,758 7,939 42.3% Retail sales revenues .................. $19,932 $12,733 $ 7,199 56.5% Net revenues per retail unit sold ...... $ 747 $ 679 $ 68 10.0%
THREE MONTHS ENDED JUNE 30, 1999 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1998 REVENUES. Revenues increased $193.9 million, or 44.9%, to $625.4 million for the three months ended June 30, 1999, from $431.5 million for the three months ended June 30, 1998. New vehicle revenues increased primarily due to strong customer acceptance of our products, particularly Acura, Chevrolet, Honda and Toyota, 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 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, and an increase in the number of retail new and used vehicle sales. GROSS PROFIT. Gross profit increased $33.3 million, or 55.1%, to $93.7 million for the three months ended June 30, 1999, from $60.4 million for the three months ended June 30, 1998. The increase was attributable to increased revenues and an increased gross margin to 15.0% for the three months ended June 30, 1999, from 14.0% for the three months ended June 30, 1998. The increase in gross margin was 9 10 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 8.1% from 7.8%, 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 10.2% from 9.1% was primarily attributable to our dealership managers performing well in a favorable operating environment, our sales training programs and an emphasis on used vehicles, particularly inventory management. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased $23.6 million, or 52.4%, to $68.6 million for the three months ended June 30, 1999, from $45.0 million for the three months ended June 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 73.3% from 74.6% due primarily to increased operating leverage. INTEREST EXPENSE. Floorplan and other interest expense, net, increased $3.3 million, or 80.5%, to $7.4 million for the three months ended June 30, 1999, from $4.1 million for the three months June 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 SIX MONTH PERIODS ENDED JUNE 30, 1999 AND JUNE 30, 1998 NEW VEHICLE DATA
SIX MONTHS ENDED (dollars in thousands, JUNE 30, except per unit amounts) ---------------------------- INCREASE/ PERCENT 1999 1998 (DECREASE) CHANGE -------- -------- ---------- ------- Retail unit sales........................... 26,370 16,739 9,631 57.5% Retail sales revenues....................... $632,527 $389,041 $243,486 62.6% Gross profit................................ $ 52,239 $ 30,161 $ 22,078 73.2% Gross margin................................ 8.3% 7.8% 0.5% 6.4% Average gross profit per retail unit sold... $ 1,981 $ 1,802 $ 179 9.9%
10 11 USED VEHICLE DATA
SIX MONTHS ENDED (dollars in thousands, JUNE 30, except per unit amounts) ---------------------------- INCREASE/ PERCENT 1999 1998 (DECREASE) CHANGE -------- -------- ---------- ------- Retail unit sales........................... 21,672 13,345 8,327 62.4% Retail sales revenues (1)................... $288,347 $177,554 $110,793 62.4% Gross profit................................ $ 29,554 $ 16,287 $ 13,267 81.5% Gross margin................................ 10.2% 9.2% 1.0% 10.9% Average gross profit per retail unit sold... $ 1,364 $ 1,220 $ 144 11.8%
- ------------------ (1) Excludes wholesale revenues. PARTS AND SERVICE DATA
SIX MONTHS ENDED JUNE 30, (dollars in thousands) --------------------------- INCREASE/ PERCENT 1999 1998 (DECREASE) CHANGE ------- ------- ---------- ------- Sales revenue............................... $95,272 $55,722 $39,550 71.0% Gross profit................................ $52,445 $29,968 $22,477 75.0% Gross margin................................ 55.0% 53.8% 1.2% 2.2%
OTHER DEALERSHIP REVENUES, NET
SIX MONTHS ENDED (dollars in thousands, JUNE 30, except per unit amounts) --------------------------- INCREASE/ PERCENT 1999 1998 (DECREASE) CHANGE ------- ------- ---------- ------- Retail new and used unit sales.............. 48,042 30,084 17,958 59.7% Retail sales revenues....................... $35,612 $19,958 $15,654 78.4% Net revenues per retail unit sold........... $ 741 $ 663 $ 78 11.8%
SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1998 REVENUES. Revenues increased $429.3 million, or 62.6%, to $1,114.8 million for the six months ended June 30, 1999, from $685.5 million for the six months ended June 30, 1998. New vehicle revenues increased primarily due to strong customer acceptance of our products, particularly Chevrolet, Honda and Toyota, 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, and an increase in the number of retail new and used vehicle sales. GROSS PROFIT. Gross profit increased $73.5 million, or 76.2%, to $169.9 million for the six months ended June 30, 1999, from $96.4 million for the six months ended June 30, 1998. The increase was attributable to increased revenues and an increased gross margin to 15.2% for the six months ended June 30, 1999, from 14.1% for the six months ended June 30, 1998. The increase in gross margin was caused primarily by improvements in other dealership revenues per unit and increases in the gross margin 11 12 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 7.8%, 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 10.2% from 9.2% 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 $54.1 million, or 74.3%, to $126.9 million for the six months ended June 30, 1999, from $72.8 million for the six months ended June 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 74.7% from 75.5% due primarily to increased operating leverage. INTEREST EXPENSE. Floorplan and other interest expense, net, increased $6.8 million, or 109.7%, to $13.0 million for the six months ended June 30, 1999, from $6.2 million for the six months ended June 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 six months of 1999 we generated cash flow from operations of approximately $36.8 million, primarily from net income plus depreciation, an increase of $27.5 million compared to the same period in the prior year. Excluding working capital changes, cash flows from operating activities increased $11.2 million. INVESTING ACTIVITIES. During the first six months of 1999 we used approximately $84.2 million for investing activities, primarily related to cash paid in completing acquisitions, net of cash balances obtained in the acquisitions. Additionally, we paid $12.8 million for purchases of property and equipment, of which $9.5 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 $5.7 million from sales of property and equipment. The proceeds were received primarily from the sale of dealership properties to a REIT for approximately $5.5 million, and for which no gain or loss was recognized. FINANCING ACTIVITIES. During the first six months of 1999 we obtained approximately $73.5 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 proceeds of approximately $138.9 million were used to repay $59.0 million borrowed under the acquisition portion of the credit facility and approximately $79.9 million of floorplan notes payable. Approximately $59.5 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. 12 13 Additionally, in connection with the sale of the properties to a REIT, we paid off mortgages of approximately $2.5 million. WORKING CAPITAL. At June 30, 1999, we had working capital of $94.3 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 on May 11, 1999, increasing the credit facility to $500 million. The credit facility consists of two tranches: the floorplan tranche and the acquisition tranche. The acquisition tranche totals $110 million and, as of August 13, 1999, $110 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 has not been fully quantified, but is not expected to 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 are currently reviewing 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, or are expected, by year-end, to be, 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. 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. 13 14 While we are in the process of developing 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. 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 14 15 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 June 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:
DATE SECURITIES DATE OF AGREEMENT ISSUED ACQUISITION SHARES - ----------------------------- ------------------------ ---------------------------------------- ----------- November 25, 1998 April 14, 1999 Tidwell Ford 346,558 January 25, 1999 June 9, 1999 Messer Automotive Group 393,226
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 but two stockholders of the groups who have received shares of our common stock are "accredited investors" under Regulation D, and we have otherwise complied with Regulation D. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the May 12, 1999 Annual Meeting of Stockholders, our stockholders voted on four matters. (1) Election of two Directors: The stockholders elected the two nominees as directors for three-year terms based on the following voting results:
VOTES CAST: ------------------------------------- AGAINST OR NOMINEE ELECTED FOR WITHHELD ------------------------------ ---------------- ---------------- John H. Duncan 18,996,008 16,474 Charles M. Smith 18,995,016 17,466
15 16 (2) Approval of amendment to 1996 Stock Incentive Plan: The stockholders approved the amendment to the 1996 Stock Incentive Plan. The results of the voting were as follows: For 15,844,162 Against 1,567,637 Abstain 4,772 (3) Approval of amendment to 1998 Employee Stock Purchase Plan: The stockholders approved the amendment to the 1998 Employee Stock Purchase Plan. The results of the voting were as follows: For 17,323,840 Against 70,533 Abstain 3,297 (4) Appointment of Independent Public Accountants: The stockholders ratified the appointment of Arthur Andersen LLP as the Company's independent public accountants for 1999. The results of the voting were as follows: For 18,731,673 Against 1,120 Abstain 279,689 ITEM 5. OTHER INFORMATION None. 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 April 6, 1999, the Company filed a Current Report of Form 8-K reporting under Item 5 thereof and including exhibits under Item 7 thereof. On April 28, 1999, the Company filed a Current Report of Form 8-K reporting under Item 5 thereof and including exhibits under Item 7 thereof. On May 25, 1999, the Company filed a Current Report of Form 8-K reporting under Item 5 thereof and including exhibits under Item 7 thereof. 16 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. August 16, 1999 By:/s/ Scott L. Thompson Date ------------------------------------------ Scott L. Thompson, Senior Vice President, Chief Financial Officer and Treasurer 17 18 EXHIBIT INDEX Exhibit Number Description - ------- ----------- 27.1 Financial Data Schedule EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 92,504 0 28,335 0 326,679 468,360 30,044 0 703,267 374,080 98,189 0 0 212 209,998 703,267 1,079,138 1,114,750 944,900 944,900 131,499 0 12,881 25,470 10,137 15,333 0 0 0 15,333 .77 .73
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