-----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, JeJOHefwnipqYiIknxWfT9IWRf1DmMvsKDw0Ok1Q5w4Y4DiM1qwWXikMDsYNLsSh Qg/fh2KAxwY7ob4tHQlZpw== 0000950129-03-005279.txt : 20031031 0000950129-03-005279.hdr.sgml : 20031031 20031031141622 ACCESSION NUMBER: 0000950129-03-005279 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031031 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: 1934 Act SEC FILE NUMBER: 001-13461 FILM NUMBER: 03969374 BUSINESS ADDRESS: STREET 1: 950 ECHO LANE STREET 2: STE 100 CITY: HOUSTON STATE: TX ZIP: 77024 BUSINESS PHONE: 7134676268 MAIL ADDRESS: STREET 1: 950 ECHO LANE STREET 2: STE 100 CITY: HOUSTON STATE: TX ZIP: 77024 10-Q 1 h10064e10vq.txt GROUP 1 AUTOMOTIVE, INC. - DATED 9/30/2003 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). 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 22,685,171
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands)
SEPTEMBER 30, DECEMBER 31, 2003 2002 ---- ---- (unaudited) ASSETS CURRENT ASSETS: Cash.............................................................................. $ 27,498 $ 24,333 Contracts-in-transit and vehicle receivables, net................................. 136,281 178,623 Accounts and notes receivable, net................................................ 66,976 58,194 Inventories, net.................................................................. 602,099 622,205 Deferred income taxes ............................................................ 11,858 10,793 Other assets...................................................................... 8,503 8,890 ----------- ---------- Total current assets....................................................... 853,215 903,038 ----------- ---------- PROPERTY AND EQUIPMENT, net......................................................... 124,887 116,270 GOODWILL............................................................................ 310,422 307,907 INTANGIBLE ASSETS................................................................... 67,885 60,879 INVESTMENTS RELATED TO INSURANCE POLICY SALES....................................... 19,413 15,813 DEFERRED COSTS RELATED TO INSURANCE POLICY AND VEHICLE SERVICE CONTRACT SALES....... 13,350 16,824 OTHER ASSETS........................................................................ 8,402 3,034 ----------- ---------- Total assets............................................................... $ 1,397,574 $1,423,765 =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Floorplan notes payable........................................................... $ 388,635 $ 652,538 Current maturities of long-term debt.............................................. 1,002 997 Accounts payable.................................................................. 99,911 90,809 Accrued expenses.................................................................. 83,310 64,939 ----------- ---------- Total current liabilities.................................................. 572,858 809,283 ----------- ---------- DEBT, net of current maturities..................................................... 13,077 9,073 SENIOR SUBORDINATED NOTES........................................................... 221,785 74,149 DEFERRED INCOME TAXES............................................................... 15,229 7,651 OTHER LIABILITIES................................................................... 28,078 31,005 ----------- ---------- Total liabilities before deferred revenues................................. 851,027 931,161 ----------- ---------- DEFERRED REVENUES FROM INSURANCE POLICY SALES....................................... 22,126 24,637 DEFERRED REVENUES FROM VEHICLE SERVICE CONTRACT SALES............................... 18,565 24,550 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, 1,000,000 shares authorized, none issued or outstanding.......... -- -- Common stock, $.01 par value, 50,000,000 shares authorized 23,454,046 and 23,183,226 issued............................................................... 235 232 Additional paid-in capital........................................................ 255,322 254,145 Retained earnings ................................................................ 271,514 215,024 Accumulated other comprehensive loss ............................................. (1,742) (3,359) Treasury stock, at cost, 790,744 and 942,419 shares............................... (19,473) (22,625) ----------- ---------- Total stockholders' equity................................................. 505,856 443,417 ----------- ---------- Total liabilities and stockholders' equity................................. $ 1,397,574 $1,423,765 =========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 2 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (dollars in thousands, except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED ------------------ ----------------- SEPTEMBER 30, SEPTEMBER 30, ------------- ------------- 2003 2002 2003 2002 ---- ---- ---- ---- REVENUES: New vehicle retail sales.............................. $ 772,632 $ 739,193 $ 2,059,840 $ 1,907,248 Used vehicle retail sales............................. 230,978 255,228 687,132 703,869 Used vehicle wholesale sales.......................... 69,102 58,574 195,551 165,673 Parts and service sales............................... 121,792 108,295 349,184 295,497 Retail finance fees................................... 17,111 16,577 48,474 44,349 Vehicle service contract fees......................... 17,170 14,201 47,804 38,016 Other finance and insurance revenues, net............. 10,705 10,520 29,176 27,114 ---------- ---------- ----------- ----------- Total revenues..................................... 1,239,490 1,202,588 3,417,161 3,181,766 COST OF SALES: New vehicle retail sales.............................. 716,014 686,312 1,909,026 1,764,269 Used vehicle retail sales............................. 203,428 227,120 603,268 623,637 Used vehicle wholesale sales.......................... 71,373 60,797 201,832 170,618 Parts and service sales............................... 54,228 47,851 154,924 130,462 ---------- ---------- ----------- ----------- Total cost of sales................................ 1,045,043 1,022,080 2,869,050 2,688,986 ---------- ---------- ----------- ----------- GROSS PROFIT............................................ 194,447 180,508 548,111 492,780 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES............ 147,913 137,137 422,930 374,787 DEPRECIATION AND AMORTIZATION EXPENSE................... 3,623 3,299 10,564 8,920 ---------- ---------- ----------- ----------- Income from operations ................................. 42,911 40,072 114,617 109,073 OTHER INCOME AND (EXPENSE): Floorplan interest expense, excludes manufacturer interest assistance................................. (4,811) (5,082) (16,493) (13,814) Other interest expense, net........................... (3,915) (2,424) (8,618) (7,615) Other expense, net.................................... (18) (80) (107) (190) ---------- ---------- ----------- ----------- INCOME BEFORE INCOME TAXES.............................. 34,167 32,486 89,399 87,454 PROVISION FOR INCOME TAXES.............................. 12,473 12,345 32,909 32,683 ---------- ---------- ----------- ----------- NET INCOME.............................................. $ 21,694 $ 20,141 $ 56,490 $ 54,771 ========== ========== =========== =========== EARNINGS PER SHARE: Basic................................................. $ 0.96 $ 0.88 $ 2.51 $ 2.38 Diluted............................................... $ 0.92 $ 0.84 $ 2.42 $ 2.26 WEIGHTED AVERAGE SHARES OUTSTANDING: Basic................................................. 22,642,168 23,018,226 22,499,158 23,013,492 Diluted............................................... 23,611,631 24,026,015 23,299,130 24,222,717
The accompanying notes are an integral part of these consolidated financial statements. 3 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
NINE MONTHS ENDED ----------------- SEPTEMBER 30, ------------- 2003 2002 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................................................................... $ 56,490 $ 54,771 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................................... 10,564 8,920 Deferred income taxes....................................................... 7,167 5,087 Provision for doubtful accounts and uncollectible notes..................... (146) 687 Loss on sale of assets...................................................... 164 102 Gain on sale of franchises.................................................. -- (414) Changes in operating assets and liabilities, net of effects of acquisitions and dispositions: Contracts-in-transit and vehicle receivables............................. 43,683 (15,678) Accounts receivable...................................................... (4,463) (764) Inventories.............................................................. 59,539 (23,188) Prepaid expenses and other assets........................................ (1,007) (7,190) Floorplan notes payable.................................................. (112,214) 32,634 Accounts payable, accrued expenses and deferred revenues................. 12,697 4,155 ---------- --------- Total adjustments..................................................... 15,984 4,351 ---------- --------- Net cash provided by operating activities..................... 72,474 59,122 ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Increase in notes receivable................................................. (3,570) (8,079) Collections on notes receivable.............................................. 1,027 978 Purchases of property and equipment.......................................... (23,999) (30,472) Proceeds from sales of property and equipment................................ 10,925 1,028 Proceeds from sales of franchises............................................ 7,414 7,430 Cash paid in acquisitions, net of cash received.............................. (22,889) (78,517) ---------- --------- Net cash used by investing activities......................... (31,092) (107,632) ---------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (payments) borrowings on revolving credit facility....................... (185,242) 64,230 Principal payments of long-term debt......................................... (787) (1,600) Repurchase of senior subordinated notes...................................... -- (6,800) Proceeds from issuance of senior subordinated notes.......................... 143,480 -- Proceeds from issuance of common stock to benefit plans, including tax benefit..................................................................... 9,088 9,043 Repurchase of common stock, amounts based on settlement date................. (4,756) (11,082) ---------- --------- Net cash (used) provided by financing activities.............. (38,217) 53,791 ---------- --------- NET INCREASE IN CASH ........................................................... 3,165 5,281 CASH, beginning of period....................................................... 24,333 16,861 ---------- --------- CASH, end of period............................................................. $ 27,498 $ 22,142 ========== ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for- Interest..................................................................... $ 30,209 $ 20,668 Taxes........................................................................ $ 14,959 $ 21,931
The accompanying notes are an integral part of these consolidated financial statements. 4 GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS AND ORGANIZATION: Group 1 Automotive, Inc., a Delaware corporation, is a leading operator in the automotive retailing industry. Group 1 Automotive, Inc. is a holding company with no independent assets or operations other than its investments in its subsidiaries, which are located in California, Colorado, Florida, Georgia, Louisiana, Massachusetts, New Mexico, Oklahoma and Texas. These subsidiaries sell new and used cars and light trucks through their dealerships and Internet sites; arrange related financing, vehicle service and insurance contracts; provide maintenance and repair services; and sell replacement parts. 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 All acquisitions of dealerships 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. All significant intercompany balances and transactions have been eliminated in consolidation. Interim Financial Information The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments of a normal and recurring nature considered necessary for a fair presentation have been 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. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2002. Stock-Based Compensation Plans In October 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," which, if fully adopted, requires the Company to record stock-based compensation at fair value. The Company has adopted the disclosure requirements of SFAS No. 123 and has elected to record employee compensation expense in accordance with APB No. 25, "Accounting for Stock Issued to Employees." Accordingly, compensation expense is recorded for stock options based on the excess of the fair market value of the common stock on the date the options were granted over the aggregate exercise price of the options. As the exercise price of options granted has been equal to or greater than the market price of the Company's stock on the date of grant, no compensation expense has been recorded. Additionally, no compensation expense is recorded for shares issued pursuant to the employee stock purchase plan as it is a qualified plan. 5 Had compensation expense for the stock incentive and employee stock purchase plans been determined based on the provisions of SFAS No. 123, the impact on the Company's net income would have been as follows:
THREE MONTHS ENDED NINE MONTHS ENDED ------------------ ----------------- SEPTEMBER 30, SEPTEMBER 30, ------------- ------------- 2003 2002 2003 2002 ---- ---- ---- ---- (dollars in thousands, except per share amounts) Net income as reported........................................... $ 21,694 $ 20,141 $ 56,490 $ 54,771 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects................. -- -- -- 120 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects............................................. (1,050) (1,535) (2,711) (3,829) -------- --------- --------- --------- Pro forma net income............................................. $ 20,644 $ 18,606 $ 53,779 $ 51,062 ======== ========= ========= ========= Pro forma earnings per share: Basic - as reported............................................. $ 0.96 $ 0.88 $ 2.51 $ 2.38 Basic - pro forma............................................... $ 0.91 $ 0.81 $ 2.39 $ 2.22 Diluted - as reported........................................... $ 0.92 $ 0.84 $ 2.42 $ 2.26 Diluted - pro forma............................................. $ 0.87 $ 0.77 $ 2.31 $ 2.11
Accounting for Guarantees In November 2002, FASB Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" was issued. FIN No. 45 enhances the disclosures to be made by a guarantor about its obligations under certain guarantees that it has issued. It also requires, on a prospective basis, beginning after January 1, 2003, that guarantors recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. While the Company is not an obligor under the vehicle service contracts it currently sells, it was an obligor under vehicle service contracts previously sold in two states. These contracts were sold to our retail vehicle customers with terms, typically, ranging from two to seven years. The purchase price paid by the customer, net of the fee the Company receives, was remitted to an administrator. The administrator set the pricing at a level adequate to fund expected future claims and their profit. Additionally, the administrator purchases insurance to further secure its ability to pay the claims under the contracts. The Company can become liable if the administrator and the insurance company are unable to fund future claims. Though the Company has never had to fund any claims related to these contracts, and reviews the credit worthiness of the administrator and the insurance company, it is unable to estimate the maximum potential claim exposure, but believes there will not be any future obligation to fund claims on the contracts. The Company's revenues related to these contracts were deferred at the time of sale and recognized over the life of the contracts. The amounts deferred are presented on the face of the balance sheets as deferred revenues from vehicle service contract sales. 6 Income Taxes The Company operates in nine different states, each of which has unique tax rates and payment calculations. As the amount of income generated in each state varies from period to period, the Company's effective tax rate will vary based on the proportion of taxable income generated in each state. Recent Accounting Pronouncements In January 2003, FIN No. 46, "Consolidation of Variable Interest Entities" was issued. FIN No. 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to variable interest entities, which are certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated support from other parties. The interpretation is intended to achieve more consistent application of consolidation policies to variable interest entities and thus, to improve comparability between enterprises engaged in similar activities even if some of those activities are conducted through variable interest entities. The interpretation is effective immediately for variable interest entities created after January 31, 2003, and to variable interest entities in which a company obtains an interest after that date. It applies in the first fiscal year or interim period ending after December 15, 2003, for variable interest entities in which a company holds a variable interest that it acquired before February 1, 2003. The Company is currently analyzing the impact this interpretation will have on its consolidated results of operations and its financial position, with respect to entities acquired before February 1, 2003. Reclassifications Certain reclassifications have been made in the 2002 financial statements to conform to the current period presentation. 3. EARNINGS PER SHARE: SFAS No. 128, "Earnings per Share" 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:
THREE MONTHS ENDED NINE MONTHS ENDED ------------------ ----------------- SEPTEMBER 30, SEPTEMBER 30, ------------- ------------- 2003 2002 2003 2002 ---- ---- ---- ---- Common stock issued, beginning of period......................... 23,454,046 23,125,031 23,183,226 23,029,853 Weighted average common stock issued- Employee Stock Purchase Plan................................ 55,397 30,842 101,850 67,648 Stock options exercised..................................... 77,941 5,009 242,718 259,436 Less: Weighted average treasury shares held and weighted average shares repurchased and cancelled ..................... (945,216) (142,656) (1,028,636) (343,445) ---------- ---------- ---------- ---------- Shares used in computing basic earnings per share................ 22,642,168 23,018,226 22,499,158 23,013,492 Dilutive effect of stock options, net of assumed repurchase of treasury stock................................................ 969,463 1,007,789 799,972 1,209,225 ---------- ---------- ---------- ---------- Shares used in computing diluted earnings per share.............. 23,611,631 24,026,015 23,299,130 24,222,717 ========== ========== ========== ==========
7 4. BUSINESS COMBINATIONS AND DISPOSITIONS: During the first nine months of 2003, the Company purchased seven automobile dealership franchises in New Orleans and Oklahoma, opened a new add-point Ford dealership in Pensacola, Florida and completed a market consolidation project in conjunction with DaimlerChrysler's Alpha Initiative in Dallas, Texas. The acquisitions were accounted for as purchases. The aggregate consideration paid in completing the acquisitions included approximately $22.9 million in cash, net of cash received, the assumption of an estimated $38.5 million of inventory financing and the assumption of $4.8 million of notes payable. The consolidated balance sheet includes preliminary allocations of the purchase price for all of the acquisitions, and the allocations are subject to final adjustment. These allocations resulted in recording approximately $7.0 million of franchise value intangible assets and $6.1 million of goodwill. Included in the acquisitions discussed above, the Company purchased three automobile dealership franchises from Robert E. Howard II, a director of the Company, and sold one automobile dealership franchise to a company owned by Mr. Howard. The Company acquired Ford, Lincoln and Mercury franchises, with $131.2 million in annual revenues, and sold a Mercedes-Benz franchise, with $47.4 million in annual revenues. In completing the acquisitions, the aggregate consideration paid by the Company consisted of $12.7 million of cash, net of cash received and the assumption of approximately $22.9 million of inventory financing. The Company received $7.4 million in cash from the sale of the Mercedes-Benz dealership franchise and related assets, including goodwill of approximately $3.6 million. The Company believes the sale of the Mercedes-Benz dealership was at fair market value. The proceeds received exceeded the Company's basis in the dealership by approximately $1.3 million. This excess sales price over cost was recorded as a reduction of the cost basis in the newly acquired Ford, Lincoln and Mercury dealerships. Additionally, the outstanding inventory financing for the Mercedes-Benz dealership was assumed by a company owned by Mr. Howard. As a result of the two transactions described above, the Company's goodwill was reduced by $3.5 million and its intangible asset for franchise value increased $0.5 million. 5. SENIOR SUBORDINATED NOTES: During August 2003, the Company issued 8 1/4% Senior Subordinated Notes due 2013 (the "8 1/4% Notes") with a face amount of $150.0 million. The 8 1/4% Notes pay interest semi-annually on February 15 and August 15, each year beginning February 15, 2004. The 8 1/4% Notes have the following redemption provisions: - The Company, before August 15, 2006, may redeem up to $52.5 million of the 8 1/4% Notes with the proceeds of certain public offerings of common stock at a redemption price of 108.250% of the principal amount plus accrued interest. - The Company may redeem all or a portion of the 8 1/4% Notes prior to August 15, 2008, at a redemption price equal to the principal amount plus a make-whole premium to be determined, plus accrued interest. - The Company may redeem all or a portion of the 8 1/4% Notes at redemption prices of 104.125%, 102.750%, 101.375% and 100.000% of the principal amount plus accrued interest during the twelve-month periods beginning August 15, 2008, 2009, 2010 and 2011 and thereafter, respectively. The 8 1/4% Notes are jointly and severally and fully and unconditionally guaranteed, on an unsecured senior subordinated basis, by all subsidiaries of the Company, other than certain minor subsidiaries (the "Subsidiary Guarantors"). All of the Subsidiary Guarantors are wholly-owned subsidiaries of the Company. Additionally, the 8 1/4% Notes are subject to various covenants, including financial ratios, and other requirements that must be maintained by the Company. The Company's 10 7/8% Senior Subordinated Notes due 2009 (the "Notes") pay interest semi-annually on March 1 and September 1, each year. The Company intends to redeem all or part of the Notes at a redemption price of 105.438% of the principal amount plus accrued interest on the initial redemption 8 date of March 1, 2004. The Notes are jointly and severally and fully and unconditionally guaranteed, on an unsecured senior subordinated basis, by all of the Subsidiary Guarantors. Additionally, the Notes are subject to various covenants, including financial ratios, and other requirements that must be maintained by the Company. 6. FLOORPLAN NOTES PAYABLE AND LONG-TERM DEBT: During June 2003, the Company completed an amendment to its existing $900.0 million credit facility and completed a new arrangement with Ford Motor Credit Company. The two facilities provide the Company with $1.075 billion of borrowing capacity. The amendment to the existing credit facility extended the term until June 2006 and provides $775.0 million of financing, consisting of two tranches: 75% of the facility is for floorplan financing (the "Floorplan Tranche") and 25% is for working capital and acquisition financing (the "Acquisition Tranche"). The Acquisition Tranche bears interest at a rate of LIBOR plus a margin varying between 175 and 325 basis points, determined based on a ratio of debt to equity. The Floorplan Tranche bears interest at rates of LIBOR plus 112.5 basis points for new vehicle inventory and LIBOR plus 125 basis points for used vehicle inventory. Other than the changes in the maturity date and the total amount available to be borrowed, there were no significant changes in the provisions of the agreement. Simultaneous with the amendment of the above described credit facility, the Company entered into a separate floorplan financing arrangement with Ford Motor Credit Company to provide financing for its entire Ford, Lincoln and Mercury new vehicle inventory. The arrangement provides for up to $300.0 million of financing for the inventory at an interest rate of Prime plus 100 basis points minus certain incentives and matures in June 2006. The Company expects the net cost of these borrowings, after all incentives, to approximate the floorplan cost under the $775.0 million credit facility. 7. COMPREHENSIVE INCOME:
THREE MONTHS ENDED NINE MONTHS ENDED ------------------ ----------------- SEPTEMBER 30, SEPTEMBER 30, ------------- ------------- 2003 2002 2003 2002 ---- ---- ---- ---- (dollars in thousands) Net income....................................................... $ 21,694 $ 20,141 $ 56,490 $ 54,771 Other comprehensive income (loss): Change in fair value of interest rate swaps, net of tax...... 580 (1,630) 1,617 (2,770) ---------- ---------- ---------- ---------- Comprehensive income ............................................ $ 22,274 $ 18,511 $ 58,107 $ 52,001 ========== ========== ========== ==========
8. RELATED PARTY TRANSACTIONS: In addition to the transactions discussed in Note 4, effective February 18, 2003, the Company sold certain dealership buildings in Oklahoma City to Mr. Howard for $4.5 million and leased them back on a 25-year lease. The sales price represents the Company's cost basis in recently constructed buildings and no gain or loss was recognized. The Company will pay Mr. Howard a market rental rate of $44,376 per month, under standard lease terms, for land owned by Mr. Howard and the buildings sold and leased back. The Company believes that the terms of the lease are at fair market value. 9 9. COMMITMENTS AND CONTINGENCIES: From time to time, the Company's dealerships are named in claims involving the manufacturer of automobiles, contractual disputes and other matters arising in the ordinary course of business. The Texas Automobile Dealers Association ("TADA") and certain new vehicle dealerships in Texas that are members of the TADA, including a number of the Company's Texas dealership subsidiaries, have been named in two state court class action lawsuits and one federal court class action lawsuit. The three actions allege that since January 1994, Texas dealers have deceived customers with respect to a vehicle inventory tax and violated federal antitrust and other laws. In April 2002, the state court in which two of the actions are pending certified classes of consumers on whose behalf the action would proceed. On October 25, 2002, the Texas Court of Appeals affirmed the trial court's order of class certification in the state action and the defendants have requested that the Texas Supreme Court review that decision on appeal. On August 25, 2003, the Texas Supreme Court requested briefing in the state cases. In the other action, on March 26, 2003, the federal court also certified a class of consumers, but denied a request to certify a defendants' class consisting of all TADA members. On May 19, 2003, the Fifth Circuit Court of Appeals granted a request for permission to appeal the class certification ruling of the lower federal court. Mediation has begun and has resulted in a settlement proposal from the plaintiff class representatives to the defendant dealers, including the Company's Texas dealership subsidiaries. The Company has not yet accepted or declined this proposal. While the Company does not believe this litigation will have a material adverse effect on its financial condition or results of operations, no assurance can be given as to its ultimate outcome. A settlement or an adverse resolution of this matter could result in the payment of significant costs and damages. In addition to the foregoing cases, there are currently no legal proceedings pending against or involving the Company that, in management's opinion, based on current known facts and circumstances, are expected to have a material adverse effect on the Company's financial position. 10 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 in the $1 trillion automotive retailing industry. Through a series of acquisitions, we operate 116 dealership franchises in California, Colorado, Florida, Georgia, Louisiana, Massachusetts, New Mexico, Oklahoma and Texas. Through our dealerships and Internet sites, we sell new and used cars and light trucks; arrange related financing, vehicle service and insurance contracts; provide maintenance and repair services; and sell replacement parts. We also operate 27 collision service centers. The following table sets forth our brand diversity, based on new vehicle retail unit sales, and the number of franchises we own:
NINE MONTHS ENDED SEPTEMBER 30, 2003 ------------------------------------ ACTUAL NUMBER PERCENTAGE OF NUMBER OF OF NEW TOTAL NEW FRANCHISES OWNED BRAND VEHICLES SOLD VEHICLES SOLD AS OF OCTOBER 31, 2003 ----- ------------- ------------- ---------------------- Ford........... 17,708 23.3% 14 Toyota......... 15,720 20.7 9 Honda.......... 6,386 8.4 5 Nissan......... 6,298 8.3 10 Dodge.......... 5,161 6.8 9 Chevrolet...... 4,847 6.4 5 Lexus.......... 3,751 4.9 2 Mitsubishi..... 2,140 2.8 7 Jeep........... 1,978 2.6 7 GMC............ 1,711 2.2 4 Chrysler....... 1,633 2.1 7 Infiniti....... 1,464 1.9 1 Acura.......... 1,294 1.7 2 Mazda.......... 856 1.1 2 Lincoln........ 706 0.9 5 Pontiac........ 603 0.8 4 Subaru......... 539 0.7 1 Audi........... 520 0.7 1 Mercury........ 516 0.7 6 Buick.......... 431 0.6 4 BMW............ 391 0.5 2 Volkswagen..... 282 0.4 1 Hyundai........ 270 0.4 1 Cadillac....... 259 0.3 2 Mercedes-Benz.. 216 0.3 1 Porsche........ 124 0.2 1 Kia............ 114 0.1 1 Hummer......... 95 0.1 1 Scion.......... 56 0.1 N/A Other.......... 48 0.0 1 ------ ----- --- TOTAL..... 76,117 100.0% 116 ====== ===== ===
11 The following table sets forth our geographic diversity, based on new vehicle retail unit sales, and the number of dealerships and franchises we own:
PERCENTAGE OF OUR NEW VEHICLE RETAIL UNITS AS OF OCTOBER 31, 2003 SOLD DURING THE NINE ---------------------- MONTHS ENDED NUMBER OF NUMBER OF MARKET AREA SEPTEMBER 30, 2003 DEALERSHIPS FRANCHISES ----------- -------------------- ----------- ---------- Oklahoma....... 14.3% 10 20 New England.... 12.7 10 13 Houston........ 12.5 7 6 California..... 12.1 7 7 Florida........ 7.8 4 4 Austin......... 7.6 6 9 West Texas..... 6.9 7 14 New Orleans.... 6.4 7 10 Atlanta........ 6.0 6 8 Dallas......... 6.0 4 7 Beaumont....... 3.3 2 10 Albuquerque.... 3.2 3 7 Denver......... 1.2 1 1 ----- -- --- TOTAL....... 100.0% 74 116 ===== == ===
We have diverse sources of automotive retailing 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, financing fees, vehicle service contract fees, insurance 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. Finance and insurance revenues include fees from arranging financing, vehicle service and insurance contracts, net of a provision for anticipated chargebacks. Our total gross margin varies as our merchandise mix (the mix between new vehicle sales, used vehicle sales (retail and wholesale), parts and service sales, collision repair service sales and finance and insurance revenues) changes. Our gross margin on the sale of products and services varies significantly, with new vehicle sales generally resulting in the lowest gross margin and finance and insurance 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 incentive-based compensation for sales, administrative, finance and general management personnel, rent, marketing, insurance and utilities. We believe that approximately 65% of our selling, general and administrative expenses are variable, allowing us to adjust our cost structure based on business trends. It takes several months to adjust our cost structure when business volume changes significantly. Interest expense consists of interest charges on interest-bearing debt, including floorplan inventory financing, net of interest income earned. We receive interest assistance from several of our manufacturers. This assistance, which is reflected as a reduction of cost of sales, has ranged between 80% and 160% of our floorplan interest expense over the past three years, mitigating the impact of interest rate changes on our financial results. 12 SELECTED OPERATIONAL AND FINANCIAL DATA FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002 NEW VEHICLE DATA
(dollars in thousands, PERCENT except per unit amounts) 2003 2002 INCREASE CHANGE ---- ---- -------- ------ Retail unit sales........................... 28,477 27,994 483 1.7% Retail sales revenues....................... $ 772,632 $ 739,193 $ 33,439 4.5% Gross profit (1)............................ $ 56,618 $ 52,881 $ 3,737 7.1% Average gross profit per retail unit sold... $ 1,988 $ 1,889 $ 99 5.2% Gross margin (1)............................ 7.3% 7.2% 0.1%
- ---------- (1) Interest assistance is recorded as a reduction of cost of sales, as the vehicles are sold to third parties. Interest assistance varies with changes in interest rates and will impact gross margin. USED VEHICLE DATA
(dollars in thousands, INCREASE/ PERCENT except per unit amounts) 2003 2002 (DECREASE) CHANGE ---- ---- ---------- ------ Retail unit sales........................... 16,521 18,194 (1,673) (9.2)% Wholesale unit sales........................ 11,985 10,926 1,059 9.7% Retail sales revenues....................... $ 230,978 $ 255,228 $ (24,250) (9.5)% Wholesale sales revenues.................... 69,102 58,574 10,528 18.0% ----------- ---------- ---------- Total revenues........................... $ 300,080 $ 313,802 $ (13,722) (4.4)% Total gross profit.......................... $ 25,279 $ 25,885 $ (606) (2.3)% Total gross margin (1)...................... 8.4% 8.2% 0.2% Average gross profit per retail unit sold (2)................................. $ 1,530 $ 1,423 $ 107 7.5% Retail gross margin (1)..................... 10.9% 10.1% 0.8% Wholesale gross loss ....................... $ (2,271) $ (2,223) $ (48) (2.2)% Average wholesale sales gross loss per wholesale unit sold...................... $ (189) $ (203) $ 14 6.9% Wholesale gross margin ..................... (3.3)% (3.8)% 0.5%
- ----------- (1) Total gross margin equals total gross profit divided by total revenues. Retail gross margin equals total gross profit, which includes wholesale gross loss, divided by retail sales revenues. The profit or loss on wholesale sales is included in this number, as these transactions facilitate retail vehicle sales and are not expected to generate profit. (2) Average gross profit per retail unit sold equals total gross profit, which includes wholesale gross loss, divided by retail unit sales. The profit or loss on wholesale sales is included in this number, as these transactions facilitate retail vehicle sales and are not expected to generate profit. PARTS AND SERVICE DATA
INCREASE/ PERCENT (dollars in thousands) 2003 2002 (DECREASE) CHANGE ---- ---- -------- ------ Sales revenues.............................. $ 121,792 $ 108,295 $ 13,497 12.5% Gross profit................................ $ 67,564 $ 60,444 $ 7,120 11.8% Gross margin................................ 55.5% 55.8% (0.3)%
13 FINANCE AND INSURANCE DATA
(dollars in thousands, INCREASE/ PERCENT except per unit amounts) 2003 2002 (DECREASE) CHANGE ---- ---- ---------- ------ Retail new and used unit sales.............. 44,998 46,188 (1,190) (2.6)% Retail finance fees......................... $ 17,111 $ 16,577 $ 534 3.2 % Vehicle service contract fees............... 17,170 14,201 2,969 20.9 % Other finance and insurance revenues........ 10,705 10,520 185 1.8 % ----------- ---------- ---------- Total finance and insurance revenues..... $ 44,986 $ 41,298 $ 3,688 8.9 % Finance and insurance, net per retail unit sold.................................. $ 1,000 $ 894 $ 106 11.9 %
SAME STORE REVENUES COMPARISON (1)
INCREASE/ PERCENT (dollars in thousands) 2003 2002 (DECREASE) CHANGE ---- ---- -------- ------ New vehicle retail sales.................... $ 638,690 $ 668,024 $ (29,334) (4.4)% Used vehicle retail sales................... 201,440 235,578 (34,138) (14.5)% Used vehicle wholesale sales................ 59,019 53,306 5,713 10.7 % Parts and service sales..................... 106,166 97,929 8,237 8.4 % Retail finance fees......................... 14,271 14,644 (373) (2.5)% Vehicle service contract fees............... 12,683 13,125 (442) (3.4)% Other finance and insurance revenues, net... 6,996 8,390 (1,394) (16.6)% ----------- ---------- ---------- Total same store revenues................ $ 1,039,265 $1,090,996 $ (51,731) (4.7)%
- ---------- (1) Includes only those dealerships owned during all of the months of both periods in the comparison. THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 2002 REVENUES. Revenues increased $36.9 million, or 3.1%, to $1,239.5 million for the three months ended September 30, 2003, from $1,202.6 million for the three months ended September 30, 2002. The growth in total revenues came from acquisitions, which were partially offset by a same store revenues decline of $51.7 million. New vehicle revenues increased $33.4 million, as acquired operations offset a same store revenues decline of $29.3 million. The same store revenues decreased, reflecting a less robust vehicle market for the three months ended September 30, 2003, particularly with respect to our Ford and Mitsubishi dealerships and our Toyota dealerships in Houston. Our used vehicle retail revenues decreased $24.3 million as revenues from acquired operations were offset by a $34.1 million decline in our same store sales. The same store sales decline was due to continued high levels of manufacturer incentives on new vehicle sales, which reduced the price difference to the customer between a late-model used vehicle and a new vehicle, thus switching more customers to new vehicles. Used vehicle wholesale sales increased $10.5 million as the decline in used vehicle retail sales required us to wholesale more used vehicles to keep inventory turns on target and inventory levels in line with expected retail sales volumes. The increase in parts and service revenues of $13.5 million included a same store revenues increase of $8.2 million. The same store revenues increase was driven by increased customer-pay parts and service sales and wholesale parts sales. 14 Retail finance fee revenues increased $0.5 million, with a $0.4 million same store decrease partially offsetting the revenues contributed by acquisitions. The same store decline was caused primarily by a decline in retail unit sales. Vehicle service contract fee revenues increased $3.0 million, with same store sales decreasing $0.4 million. During the three months ended September 30, 2003, revenues recognized related to contracts requiring revenue deferral over the life of the contracts increased $1.6 million. The same store decline is due to the decline in retail unit sales, partially offset by increased revenues per unit sold. The increased revenues per unit sold was driven by increased sales training and our customers' increased ability and willingness to finance vehicle service contract purchases due to the low interest rates available. Other finance and insurance revenues increased $0.2 million, with same store sales declining $1.4 million. The same store decreases were caused primarily by the decline in retail unit sales and a decline in the sales of insurance contracts, as we emphasized the sales of products with a higher value to the customer. GROSS PROFIT. Gross profit increased $13.9 million, or 7.7%, to $194.4 million for the three months ended September 30, 2003, from $180.5 million for the three months ended September 30, 2002. The increase was attributable to an increase in gross margin to 15.7% for the three months ended September 30, 2003, from 15.0% for the three months ended September, 2002, and increased revenues derived from acquisitions. The gross margin increased as higher margin parts and service, and finance and insurance revenues increased as a percentage of total revenues, and increased gross margins on new and used vehicle sales, plus increased finance and insurance revenues, per retail unit sold, offset the slight decline in the parts and service gross margin. Our new vehicle gross profit per retail unit sold increased to $1,988 for the three months ended September 30, 2003, from $1,889 for the three months ended September 30, 2002. This increase is partially attributable to a $0.4 million adjustment to our valuation reserves on new vehicle inventory. The adjustment was made after a thorough analysis of our new vehicle inventory, and as we were able to reduce the days supply of inventory to 62 days at September 30, 2003, from 83 days at June 30, 2003. In reducing the inventory to our targeted levels we incurred $1.5 million in losses, which were previously reserved. The gross margin on new retail vehicle sales increased to 7.3% from 7.2%, primarily due to the valuation reserve adjustment, partially offset by an increase in the average selling price of vehicles sold. Our used vehicle gross profit per retail unit sold increased to $1,530 for the three months ended September 30, 2003, from $1,423 for the three months ended September 30, 2002. The increase per retail unit sold and the increase in our used vehicle retail gross margin improved primarily due to increased gross margins in the Austin and Florida markets. Our wholesale losses increased slightly as we wholesaled more vehicles in light of the decline in the used vehicle retail sales volume. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased $10.8 million, or 7.9%, to $147.9 million for the three months ended September 30, 2003, from $137.1 million for the three months ended September 30, 2002. The increase was primarily attributable to the additional operations acquired. Selling, general and administrative expenses increased slightly as a percentage of gross profit to 76.1% from 76.0% due primarily to below expected operating performance in our Atlanta operations. Excluding the gross profit and selling, general and administrative expenses of our Atlanta operations, our selling, general and administrative expenses as a percentage of gross profit would have been consistent when comparing the three months ended September 30, 2003, to the three months ended September 30, 2002. INTEREST EXPENSE. Floorplan and other interest expense, net, increased $1.2 million, or 16.0%, to $8.7 million for the three months ended September 30, 2003, from $7.5 million for the three months ended September 30, 2002. The increase was due to an increase in the average balance of debt outstanding, partially offset by lower interest rates. During October 2001, we completed a $98.5 million stock offering and initially used the proceeds to pay down borrowings under our credit facility, which resulted in a lower average balance of debt outstanding during the three months ended September 30, 2002. By the end of 15 2002, we had reborrowed the amounts used to pay down the floorplan portion of our credit facility. During August 2003, we completed an offering of $150.0 million of senior subordinated notes bearing interest at 8 1/4%. The proceeds from the offering have initially been used to pay down borrowings under our credit facility, which had an average interest rate of 2.25% during the three months ended September 30, 2003. Additionally, we have increased floorplan borrowings outstanding due to acquisitions completed during the past twelve months. During the three months ended September 30, 2003, there was an approximately 70 basis point reduction in our average floorplan financing rate as compared to the three months ended September 30, 2002. SELECTED OPERATIONAL AND FINANCIAL DATA FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002 NEW VEHICLE DATA
INCREASE/ PERCENT (dollars in thousands, 2003 2002 (DECREASE) CHANGE except per unit amounts) ---------- ---------- --------- ------- Retail unit sales ......................... 76,117 72,249 3,868 5.4% Retail sales revenues ..................... $2,059,840 $1,907,248 $ 152,592 8.0% Gross profit (1) .......................... $ 150,814 $ 142,979 $ 7,835 5.5% Average gross profit per retail unit sold.. $ 1,981 $ 1,979 $ 2 0.1% Gross margin (1) .......................... 7.3% 7.5% (0.2)%
- ---------- (1) Interest assistance is recorded as a reduction of cost of sales, as the vehicles are sold to third parties. Interest assistance varies with changes in interest rates and will impact gross margin. USED VEHICLE DATA
INCREASE/ PERCENT (dollars in thousands, 2003 2002 (DECREASE) CHANGE except per unit amounts) --------- --------- --------- ------- Retail unit sales ............. 49,000 50,574 (1,574) (3.1)% Wholesale unit sales .......... 32,796 29,834 2,962 9.9 % Retail sales revenues ......... $ 687,132 $ 703,869 $ (16,737) (2.4)% Wholesale sales revenues ...... 195,551 165,673 29,878 18.0 % --------- --------- --------- Total revenues ............. $ 882,683 $ 869,542 $ 13,141 1.5 % Total gross profit ............ $ 77,583 $ 75,287 $ 2,296 3.0 % Total gross margin (1) ........ 8.8 % 8.7% 0.1% Average gross profit per retail unit sold (2) ............... $ 1,583 $ 1,489 $ 94 6.3 % Retail gross margin (1) ....... 11.3% 10.7% 0.6% Wholesale gross loss .......... $ (6,281) $ (4,945) $ (1,336) (27.0)% Average wholesale gross loss per wholesale unit sold ..... $ (192) $ (166) $ (26) (15.7)% Wholesale gross margin ........ (3.2)% (3.0)% (0.2)%
- ---------- (1) Total gross margin equals total gross profit divided by total revenues. Retail gross margin equals total gross profit, which includes wholesale gross loss, divided by retail sales revenues. The profit or loss on wholesale sales is included in this number, as these transactions facilitate retail vehicle sales and are not expected to generate profit. (2) Average gross profit per retail unit sold equals total gross profit, which includes wholesale gross loss, divided by retail unit sales. The profit or loss on wholesale sales is included in this number, as these transactions facilitate retail vehicle sales and are not expected to generate profit. 16 PARTS AND SERVICE DATA
INCREASE/ PERCENT (dollars in thousands) 2003 2002 (DECREASE) CHANGE --------- --------- --------- ------- Sales revenues........................... $ 349,184 $ 295,497 $ 53,687 18.2% Gross profit............................. $ 194,260 $ 165,035 $ 29,225 17.7% Gross margin............................. 55.6% 55.8% (0.2)%
FINANCE AND INSURANCE, NET
(dollars in thousands, PERCENT except per unit amounts) 2003 2002 INCREASE CHANGE --------- --------- --------- ------- Retail new and used unit sales........... 125,117 122,823 2,294 1.9% Retail finance fees...................... $ 48,474 $ 44,349 $ 4,125 9.3% Vehicle service contract fees............ 47,804 38,016 9,788 25.7% Other finance and insurance revenues..... 29,176 27,114 2,062 7.6% ---------- --------- --------- Total finance and insurance revenues.. $ 125,454 $ 109,479 $ 15,975 14.6% Finance and insurance, net per retail unit sold....................... $ 1,003 $ 891 $ 112 12.6%
SAME STORE REVENUES COMPARISON (1)
INCREASE/ PERCENT (dollars in thousands) 2003 2002 (DECREASE) CHANGE ----------- ----------- ---------- ------- New vehicle retail sales................. $ 1,647,182 $ 1,765,804 $ (118,622) (6.7)% Used vehicle retail sales................ 577,874 652,516 (74,642) (11.4)% Used vehicle wholesale sales............. 162,236 152,828 9,408 6.2 % Parts and service sales.................. 286,004 270,064 15,940 5.9 % Retail finance fees...................... 38,807 40,956 (2,149) (5.2)% Vehicle service contract fees............ 33,559 34,923 (1,364) (3.9)% Other finance and insurance revenues, net 18,879 22,113 (3,234) (14.6)% ----------- ----------- ---------- Total same store revenues............. $ 2,764,541 $ 2,939,204 $ (174,663) (5.9)%
- ---------- (1) Includes only those dealerships owned during all of the months of both periods in the comparison. NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 2002 REVENUES. Revenues increased $235.4 million, or 7.4%, to $3,417.2 million for the nine months ended September 30, 2003, from $3,181.8 million for the nine months ended September 30, 2002. The growth in total revenues came from acquisitions, which were partially offset by a same store revenues decline of $174.7 million. New vehicle revenues increased $152.6 million, as acquired operations offset a same store revenues decline of $118.6 million. The same store revenues decreased, reflecting a less robust vehicle market for the nine months ended September 30, 2003, particularly with respect to our Ford and Mitsubishi dealerships and our Toyota dealerships in Houston. Our used vehicle retail revenues decreased $16.7 million as revenues from acquired operations were offset by a $74.6 million decline in our same store sales. The same store sales decline was due to high levels of manufacturer incentives on new vehicle sales, which reduced the price difference to the customer between a late-model used vehicle and a new vehicle, thus switching more customers to new vehicles. Used vehicle wholesale sales increased $29.9 million as the decline in used vehicle retail sales required us to wholesale more used vehicles to keep inventory turns on target and inventory levels in line with expected retail sales volumes. 17 The increase in parts and service revenues of $53.7 million included a same store revenues increase of $15.9 million. The same store revenues increase was driven by increased customer-pay parts and service sales and wholesale parts sales, partially offset by reduced warranty sales. Retail finance fee revenues increased $4.1 million, with a $2.1 million same store decrease partially offsetting the revenues contributed by acquisitions. The same store decline was caused primarily by the decline in retail unit sales which was partially offset by the impact of a favorable interest rate environment. Vehicle service contract fee revenues increased $9.8 million, with same store sales decreasing $1.4 million. During the nine months ended September 30, 2003, revenues recognized related to contracts requiring revenue deferral over the life of the contracts increased approximately $4.6 million. The same store decline is due to the decline in retail unit sales, partially offset by increased revenues per unit sold. The increased revenues per unit sold was driven by the receipt of increased annual incentives on vehicle service contract sales, increased sales training and our customers' increased ability and willingness to finance vehicle service contract purchases due to the low interest rates available. Other finance and insurance revenues increased $2.0 million, with same store sales decreasing $3.2 million. The same store decline was caused primarily by the decline in retail unit sales. GROSS PROFIT. Gross profit increased $55.3 million, or 11.2%, to $548.1 million for the nine months ended September 30, 2003, from $492.8 million for the nine months ended September 30, 2002. The increase was attributable to an increase in gross margin to 16.0% for the nine months ended September 30, 2003, from 15.5% for the nine months ended September 30, 2002, and increased revenues derived from acquisitions. The gross margin increased as higher margin parts and service, and finance and insurance revenues increased as a percentage of total revenues, and increased finance and insurance revenues, per retail unit sold, offset the decline in the new gross margin. Although our new vehicle gross profit per retail unit sold remained consistent with the prior year, the gross margin on new retail vehicle sales declined to 7.3% from 7.5%, primarily due to an increase in the average selling price of vehicles sold. Our used vehicle gross profit per retail unit sold increased to $1,583 for the nine months ended September 30, 2003, from $1,489 for the nine months ended September 30, 2002. The increase per retail unit sold and the increase in our used vehicle retail gross margin improved primarily due to increased gross margins in the Florida and Oklahoma markets. Our wholesale losses increased as we wholesaled more vehicles in light of the decline in the used vehicle retail sales volume. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased $48.1 million, or 12.8%, to $422.9 million for the nine months ended September 30, 2003, from $374.8 million for the nine months ended September 30, 2002. The increase was primarily attributable to the additional operations acquired. Selling, general and administrative expenses increased as a percentage of gross profit to 77.2% from 76.1% due primarily to below expected operating performance in our Atlanta and Dallas operations, and adjustments to variable selling expenses lagging the decline in sales volume. INTEREST EXPENSE. Floorplan and other interest expense, net, increased $3.7 million, or 17.3%, to $25.1 million for the nine months ended September 30, 2003, from $21.4 million for the nine months ended September 30, 2002. The increase was due to an increase in the average balance of debt outstanding, partially offset by lower interest rates. During October 2001, we completed a $98.5 million stock offering and initially used the proceeds to pay down borrowings under our credit facility, which resulted in a lower average balance of debt outstanding during the nine months ended September 30, 2002. By the end of 2002, we had reborrowed the amounts used to pay down the floorplan portion of our credit facility. During August 2003, we completed an offering of $150.0 million of senior subordinated notes bearing interest at 8 1/4%. The proceeds from the offering have initially been used to pay down borrowings under our credit facility, which had an average interest rate of 2.25% during the three months ended September 30, 2003. Additionally, we have increased floorplan borrowings outstanding due to acquisitions completed during the past twelve months and higher overall inventory levels. During the nine months ended September 30, 18 2003, there was an approximately 60 basis point reduction in our average floorplan financing rate as compared to the nine months ended September 30, 2002. LIQUIDITY AND CAPITAL RESOURCES Our principal sources of liquidity are cash on hand; cash from operations; our credit facilities, which provide floorplan, working capital and acquisition financing; and future equity and debt offerings. CASH FLOWS Total cash at September 30, 2003, was $27.5 million. OPERATING ACTIVITIES. During the first nine months of 2003, we generated $72.5 million of cash flow from operations, primarily driven by net income plus depreciation and amortization. INVESTING ACTIVITIES. During the first nine months of 2003, we used approximately $31.1 million in investing activities. We paid $24.0 million for purchases of property and equipment, of which $16.0 million was used for the purchase of land and construction of facilities for new or expanded operations. We received $10.9 million in proceeds from the sales of property and equipment. We have used $22.9 million in the acquisitions of seven franchises and received $7.4 million from the sale of one franchise, for which no gain was recognized. FINANCING ACTIVITIES. During the first nine months of 2003, we used approximately $38.2 million in financing activities, primarily to pay down the floorplan portion of our revolving credit facility utilizing cash flows from operations, until the amounts are needed to finance other corporate activities. The proceeds from our offering of 8 1/4% senior subordinated notes were also utilized to pay down borrowings under our revolving credit facility. We intend to use a portion of the proceeds from our 8 1/4% senior subordinated notes offering to retire all of our 10 7/8% senior subordinated notes due 2009, on March 1, 2004, the initial redemption date. WORKING CAPITAL. At September 30, 2003, we had working capital of $280.4 million, which is approximately $190 million higher than we believe we need to operate our business. While we cannot guarantee it, based on current facts and circumstances, we believe we have adequate cash flows, coupled with borrowing capacity under our credit facility, to fund our current operations, capital expenditures and acquisitions budgeted for 2003. If our capital expenditure or acquisition plans, as outlined below, change, we may need to access the private or public capital markets to obtain additional funding. CREDIT FACILITIES During June 2003, we completed an amendment to our existing $900.0 million credit facility and completed a new arrangement with Ford Motor Credit Company. The two facilities provide us with $1.075 billion of borrowing capacity. The amendment to our existing credit facility extended the term until June 2006 and provides $775.0 million of financing, consisting of two tranches: 75% of the facility is for floorplan financing (the "Floorplan Tranche") and 25% is for working capital and acquisition financing (the "Acquisition Tranche"). The Acquisition Tranche, which bears interest at a rate of LIBOR plus a margin varying between 175 and 325 basis points, determined based on a ratio of debt to equity, totals $193.8 million and, as of October 30, 2003, $189.7 million was available, after deducting $4.1 million for outstanding letters of credit, to be drawn for working capital, acquisition or floorplan financing. At September 30, 2003, there was $212.0 million outstanding under the Floorplan Tranche, which bears interest at rates of LIBOR plus 112.5 basis points for new vehicle inventory and LIBOR plus 125 basis points for used vehicle inventory. Other than the changes in the maturity date and the total amount available to be borrowed, there were no significant changes in the provisions of the agreement. Simultaneous with the amendment of the above described credit facility, we entered into a separate floorplan financing arrangement with Ford Motor Credit Company to provide financing for our entire Ford, Lincoln and Mercury new vehicle inventory. The arrangement provides for up to $300.0 million of financing 19 for the inventory at an interest rate of Prime plus 100 basis points minus certain incentives and matures in June 2006. We expect the net cost of these borrowings, after all incentives, to approximate our floorplan cost under the $775.0 million credit facility. At September 30, 2003, there was $176.6 million outstanding under this floorplan financing arrangement. This floorplan financing arrangement matures in June 2006. On July 25, 2003, one of our interest rate swaps, with a notional amount of $100.0 million, reached its termination date. As such, at this time, we have one interest rate swap outstanding, with a notional amount of $100.0 million that converts the interest rate on a portion of our floorplan borrowings from the 30-day LIBOR-based rate to a fixed rate of 3.75% plus the applicable spread. SENIOR SUBORDINATED NOTES OFFERING During August 2003, we completed a private offering of $150.0 million of 8 1/4% senior subordinated notes due 2013. Net proceeds from the offering were $143.5 million and were used to temporarily pay down floorplan borrowings under our credit facilities, currently bearing interest at 2.25%. We intend to use the proceeds for general corporate purposes, including the retirement of $74.3 million of our outstanding 10 7/8% senior subordinated notes on March 1, 2004, the initial redemption date at a price of approximately $79.5 million, before accrued interest. During October 2003, we filed an exchange offer to exchange the outstanding 8 1/4% senior subordinated notes for new notes with substantially identical terms that have been registered under the Securities Act of 1933 and are freely tradeable. CAPITAL EXPENDITURES Our capital expenditures include expenditures to extend the useful life of current facilities and expenditures to start or expand operations. Historically, our annual capital expenditures, exclusive of new or expanded operations, have approximately equaled our annual depreciation charge. Expenditures relating to the construction or expansion of dealership facilities, generally, are driven by new franchises being awarded to us by a manufacturer, significant growth in sales at an existing facility or manufacturer imaging programs. ACQUISITIONS AND ACQUISITION FINANCING Our acquisition target for 2004 is to complete platform and tuck-in acquisitions that have approximately $1 billion in annual revenues. We expect the cash needed to complete our acquisitions will come from excess working capital, operating cash flows of our dealerships, borrowings under our credit facility and debt or equity offerings. Depending on the market value of our common stock, we may issue common stock to fund a portion of the purchase price of acquisitions. STOCK REPURCHASE In February 2003, the board of directors authorized us to repurchase up to $25.0 million of our stock, subject to management's judgment and the restrictions of our various debt agreements. Our agreements, subject to other covenants, allow us to use a percentage of our cumulative net income to repurchase stock and pay dividends. During the first nine months of 2003 we repurchased approximately 181,000 shares for approximately $4.8 million. As of September 30, 2003, $20.2 million remained under the board of directors' authorization. However, due to the completion of our 8 1/4% senior subordinated notes offering in August 2003, which is currently our most limiting agreement with respect to stock repurchases, our debt agreements limited our capacity to repurchase stock to $10.2 million as of September 30, 2003. DISCUSSION OF CRITICAL ACCOUNTING POLICIES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions in determining the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The significant estimates made by us in the accompanying consolidated financial statements relate to reserves 20 for inventory valuations and future chargebacks on finance and vehicle service contract fees, and valuation of intangible assets. Actual results could differ from those estimates. Critical accounting policies are those that are both most important to the portrayal of a company's financial position and results of operations, and require management's most difficult, subjective or complex judgments. Below is a discussion of what we believe are our critical accounting policies. See Note 2 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2002. INVENTORIES New, used and demonstrator vehicles are stated at the lower of cost or market. Vehicle inventory cost consists of the amount paid to acquire the inventory, plus reconditioning cost, cost of equipment added and transportation cost. Additionally, we receive interest assistance from most of our manufacturers. The assistance is accounted for as a purchase discount and is reflected as a reduction to the inventory cost on the balance sheet and as a reduction to cost of sales in the income statement as the vehicles are sold. Parts and accessories are stated at the lower of cost (determined on a first-in, first-out basis) or market. As the market value of our inventories typically declines with the passage of time, valuation reserves are provided against the inventory balances based on the agings of the inventories and market trends. In particular, used vehicles present added complexity to the inventory valuation process. There is no standardized source for determining exact values, as each vehicle and each market in which we operate, is unique. As such, these factors are also considered in determining the appropriate level of valuation reserves. RETAIL FINANCE AND VEHICLE SERVICE CONTRACT REVENUES RECOGNITION We arrange financing for customers through various institutions and receive financing fees based on the difference between the loan rates charged to customers over predetermined financing rates set by the financing institution. In addition, we receive fees from the sale of vehicle service contracts to customers. We may be charged back ("chargebacks") for unearned financing fees or vehicle service contract fees in the event of early termination of the contracts by customers. The revenues from financing fees and vehicle service contract fees in administrator-obligor states are recorded at the time of the sale of the vehicles and a reserve for future chargebacks is established based on historical operating results and the termination provisions of the applicable contracts. In dealer-obligor states, revenues from vehicle service contract fees and related direct costs are deferred and recognized over the life of the contracts. Currently, none of the states in which we operate are dealer-obligor states. INTANGIBLE ASSETS In June 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was issued. The statement requires, at least annually, an assessment for impairment of goodwill and other indefinite life intangible assets (franchise value) by applying a fair-value based test. We complete the required assessment at the end of each calendar year, and at such other times as required by events and circumstances at a reporting unit indicating a potential reduction of fair value below book value. In performing the assessment, we estimate fair value using a calculation based on historical and expected cash flows of the dealerships, market trends and conditions, review of completed transactions and current market valuations. Our fair value estimate requires numerous subjective assumptions and estimates to determine fair value. Depending on future levels of cash flows and other facts and circumstances, and changes in our estimates and assumptions, we could be required to recognize impairment charges in the future. 21 CAUTIONARY STATEMENT ABOUT FORWARD LOOKING STATEMENTS This quarterly report includes certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements include statements regarding our plans, goals, beliefs or current expectations, including those plans, goals, beliefs and expectations of our officers and directors with respect to, among other things: - the completion of future acquisitions - operating cash flows and availability of capital - future stock repurchases - capital expenditures - changes in sales volumes in the new and used vehicle and parts and service markets - business trends, including incentives, product cycles and interest rates - availability of financing for inventory and working capital - inventory levels - the early retirement of outstanding senior subordinated notes Any such forward-looking statements are not assurances of future performance and involve risks and uncertainties. Actual results may differ materially from anticipated results in the forward-looking statements for a number of reasons, including: - the future economic environment, including consumer confidence, interest rates, the price of gasoline, the level of manufacturer incentives and the availability of consumer credit may affect the demand for new and used vehicles and parts and service sales - the effect of adverse international developments such as war, terrorism, political conflicts or other hostilities - regulatory environment, adverse legislation, or unexpected litigation - our principal automobile manufacturers, especially Ford, Toyota, GM and DaimlerChrysler, may not continue to produce or make available to us vehicles that are in high demand by our customers - requirements imposed on us by our manufacturers may limit our acquisitions and affect capital expenditures related to our dealership facilities - our dealership operations may not perform at expected levels or achieve expected improvements - we may not achieve expected future cost savings and our future costs could be higher than we expected - available capital resources and various debt agreements may limit our ability to complete acquisitions, complete construction of new or expanded facilities and repurchase shares - our cost of financing could increase significantly - new accounting standards could materially impact our reported earnings per share - we may not complete additional acquisitions or the pace of acquisitions may change - we may not be able to adjust our cost structure - we may lose key personnel - competition in our industry may impact our operations or our ability to complete acquisitions - insurance costs could increase significantly - we may not achieve expected sales volumes from the new franchises granted to us - we may not obtain inventory of new and used vehicles and parts, including imported inventory, at the cost, or in the volume, we expect 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. All forward-looking statements attributable to us are qualified in their entirety by this cautionary statement. 22 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, 2002, 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 rate exposure through the use of a combination of fixed and floating rate debt. Additionally, interest rate swaps may be used to adjust our exposure to interest rate movements. These swaps are entered into with financial institutions with investment grade credit ratings, thereby minimizing the risk of credit loss. All interest rate swaps are non-trading and qualify for hedge accounting. Since December 31, 2002, our variable rate floorplan notes payable have decreased due to decreases in inventory levels and the use of proceeds from our August 2003 8 1/4% senior subordinated notes offering to pay down borrowings under our credit facility. A 100 basis point increase in interest rates would have increased floorplan interest expense approximately $4.5 million for the nine-month period ended September 30, 2003, before the impact of our interest rate swaps. We have had no other significant balances outstanding under variable rate borrowing agreements. At times, we have used interest rate swaps to reduce our exposure to interest rate fluctuations. Currently, we have one interest rate swap outstanding, with a notional amount of $100.0 million that converts 30-day LIBOR to a fixed rate. Another swap, with a notional amount of $100.0 million, expired at the end of July 2003. As the swaps hedged our floorplan interest rate exposure, the impact on interest expense is included in floorplan interest expense in our statements of operations. A 100 basis point increase in interest rates would have reduced the cost of our swaps and, thus, would have reduced our floorplan interest expense by $1.3 million for the nine-month period ended September 30, 2003. The net result on floorplan interest expense of a 100 basis point increase in interest rates would have been an increase of $3.2 million for the nine months ended September 30, 2003, after combining the increase in expense on our borrowings and the decrease in expense from our swaps. Additionally, we receive floorplan interest assistance from the majority of our manufacturers. This assistance, which has ranged from approximately 80% to 160% of our floorplan interest expense over the past three years, totaled $20.5 million during the first nine months of 2003 and $20.4 million during the first nine months of 2002. We treat this interest assistance as a purchase discount, and reflect it as a reduction of new vehicle cost of sales as new vehicles are sold. Approximately half of the assistance we receive varies with changes in interest rates. ITEM 4. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES As of the end of the period covered by this Report, the Company's principal executive officer and principal financial officer evaluated the effectiveness of the Company's disclosure controls and procedures. Based on the evaluation, the Company's principal executive officer and principal financial officer believe that: - the Company's disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports it files under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms; and - the Company's disclosure controls and procedures were effective to ensure such information was accumulated and communicated to the Company's management, including the Company's principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. 23 CHANGES IN INTERNAL CONTROLS There have been no significant changes in the Company's internal controls or in other factors that could significantly affect the Company's internal controls subsequent to their evaluation, nor have there been any corrective actions with regard to significant deficiencies or material weaknesses. 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. The Texas Automobile Dealers Association ("TADA") and certain new vehicle dealerships in Texas that are members of the TADA, including a number of our Texas dealership subsidiaries, have been named in two state court class action lawsuits and one federal court class action lawsuit. The three actions allege that since January 1994, Texas dealers have deceived customers with respect to a vehicle inventory tax and violated federal antitrust and other laws. In April 2002, the state court in which two of the actions are pending certified classes of consumers on whose behalf the action would proceed. On October 25, 2002, the Texas Court of Appeals affirmed the trial court's order of class certification in the state action and the defendants have requested that the Texas Supreme Court review that decision on appeal. On August 25, 2003, the Texas Supreme Court requested briefing in the state cases. In the other action, on March 26, 2003, the federal court also certified a class of consumers, but denied a request to certify a defendants' class consisting of all TADA members. On May 19, 2003, the Fifth Circuit Court of Appeals granted a request for permission to appeal the class certification ruling of the lower federal court. Mediation has begun and has resulted in a settlement proposal from the plaintiff class representatives to the defendant dealers, including our Texas dealership subsidiaries. We have not yet accepted or declined this proposal. While we do not believe this litigation will have a material adverse effect on our financial condition or results of operations, no assurance can be given as to its ultimate outcome. A settlement or an adverse resolution of this matter could result in the payment of significant costs and damages. In addition to the foregoing cases, there are currently no legal proceedings pending against or involving us that, in our opinion, based on current known facts and circumstances, are expected to have a material adverse effect on our financial position. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. 24 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. EXHIBITS: 4.1 Subordinated Indenture dated as of August 13, 2003 among Group 1 Automotive, Inc., the Subsidiary Guarantors named therein and Wells Fargo Bank, N.A., as Trustee (Incorporated by reference to Exhibit 4.6 of the Company's Registration Statement on Form S-4 Registration No. 333-109080). 4.2 First Supplemental Indenture dated as of August 13, 2003 among Group 1 Automotive, Inc., the Subsidiary Guarantors named therein and Wells Fargo Bank, N.A., as Trustee (Incorporated by reference to Exhibit 4.7 of the Company's Registration Statement on Form S-4 Registration No. 333-109080). 4.3 Form of Subordinated Debt Securities (Included in Exhibit 4.2). 11.1 Statement re: computation of earnings per share is included under Note 3 to the financial statements. 31.1 Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002. B. REPORTS ON FORM 8-K: On October 30, 2003, the Company filed a Current Report on Form 8-K reporting under items 7 and 12. On October 14, 2003, the Company filed a Current Report on Form 8-K reporting under items 5 and 7. On October 8, 2003, the Company filed a Current Report on Form 8-K reporting under Item 9. On September 19, 2003, the Company filed a Current Report on Form 8-K reporting under Item 9. On September 2, 2003, the Company filed a Current Report on Form 8-K reporting under Item 12. On August 27, 2003, the Company filed a Current Report on Form 8-K reporting under Item 9. On August 11, 2003, the Company filed a Current Report on Form 8-K reporting under Items 5 and 7. On August 4, 2003, the Company filed a Current Report on Form 8-K reporting under Item 12. 25 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. October 31, 2003 By: /s/ Scott L. Thompson - ---------------- -------------------------------------------- Date Scott L. Thompson, Executive Vice President, Chief Financial Officer and Treasurer 26 EXHIBIT INDEX A. EXHIBITS: 4.1 Subordinated Indenture dated as of August 13, 2003 among Group 1 Automotive, Inc., the Subsidiary Guarantors named therein and Wells Fargo Bank, N.A., as Trustee (Incorporated by reference to Exhibit 4.6 of the Company's Registration Statement on Form S-4 Registration No. 333-109080). 4.2 First Supplemental Indenture dated as of August 13, 2003 among Group 1 Automotive, Inc., the Subsidiary Guarantors named therein and Wells Fargo Bank, N.A., as Trustee (Incorporated by reference to Exhibit 4.7 of the Company's Registration Statement on Form S-4 Registration No. 333-109080). 4.3 Form of Subordinated Debt Securities (Included in Exhibit 4.2). 11.1 Statement re: computation of earnings per share is included under Note 3 to the financial statements. 31.1 Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002. 27 EX-31.1 3 h10064exv31w1.txt CERTIFICATION OF CEO UNDER SECTION 302 Exhibit 31.1 CERTIFICATION I, B.B. Hollingsworth, Jr., Chief Executive Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Group 1 Automotive, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 and 15d-15) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal controls over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected or is reasonably likely to materially affect, the registrant's internal controls over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: October 31, 2003 /s/ B.B. Hollingsworth, Jr. --------------------------- B.B. Hollingsworth, Jr. Chief Executive Officer EX-31.2 4 h10064exv31w2.txt CERTIFICATION OF CFO UNDER SECTION 302 Exhibit 31.2 CERTIFICATION I, Scott L. Thompson, Chief Financial Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Group 1 Automotive, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 and 15d-15) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal controls over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected or is reasonably likely to materially affect, the registrant's internal controls over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: October 31, 2003 /s/ Scott L. Thompson ----------------------- Scott L. Thompson Chief Financial Officer EX-32.1 5 h10064exv32w1.txt CERTIFICATION OF CEO UNDER SECTION 906 Exhibit 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER OF GROUP 1 AUTOMOTIVE, INC. PURSUANT TO 18 U.S.C. Section 1350 In connection with the accompanying report on Form 10-Q for the three month period ended September 30, 2003, and filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, B.B. Hollingsworth, Jr., Chief Executive Officer of Group 1 Automotive, Inc. (the "Company"), hereby certify, to the best of my knowledge, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: October 31, 2003 /s/ B.B. Hollingsworth, Jr. --------------------------- B.B. Hollingsworth, Jr. Chief Executive Officer A signed original of this written statement required by Section 906 has been provided to Group 1 Automotive, Inc. and will be retained by Group 1 Automotive, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 6 h10064exv32w2.txt CERTIFICATION OF CFO UNDER SECTION 906 Exhibit 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER OF GROUP 1 AUTOMOTIVE, INC. PURSUANT TO 18 U.S.C. Section 1350 In connection with the accompanying report on Form 10-Q for the three month period ended September 30, 2003, and filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Scott L. Thompson, Chief Financial Officer of Group 1 Automotive, Inc. (the "Company"), hereby certify, to the best of my knowledge, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: October 31, 2003 /s/ Scott L. Thompson ----------------------- Scott L. Thompson Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to Group 1 Automotive, Inc. and will be retained by Group 1 Automotive, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----