GROUP 1 AUTOMOTIVE INC - 10-Q Quarterly Report

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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 March 31, 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 22,453,424

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

(dollars in thousands)

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

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GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands, except per share amounts)

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

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GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

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

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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

These interim financial statements are unaudited, and certain
information normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States has not been
included herein. In the opinion of management, all adjustments necessary to
fairly present the financial position, results of operations and cash flows with
respect to the interim financial statements, have been properly included and are
of a normal recurring nature. 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.

Stock-Based Compensation Plans

In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," which, if fully adopted, requires the Company to
record stock-based compensation at fair value. The Company has adopted the
disclosure requirements of SFAS No. 123 and has elected to record employee
compensation expense in accordance with 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.

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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:

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 certain states. The contracts were sold to our retail vehicle customers
and, typically, have terms between two and 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
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 are 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.

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.

Reclassifications

Certain reclassifications have been made in the 2002 financial
statements to conform to the current year presentation.

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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:

4. BUSINESS COMBINATIONS AND DISPOSITIONS:

During the first three months of 2003, the Company purchased three
franchises from Robert E. Howard II, a director of the Company, and sold one
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 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 $3.6 million and its intangible asset for
franchise value increased $0.9 million. Additionally, during the first three
months of 2003, the Company opened a new add-point Ford dealership in Pensacola,
Florida.

5. SENIOR SUBORDINATED NOTES:

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
may redeem all or part of the Notes at redemption prices of 105.438%, 103.625%,
101.813% and 100.000% of the principal amount plus accrued interest during the
twelve-month periods beginning March 1, of 2004, 2005, 2006 and 2007 and
thereafter, respectively. The Notes are jointly and severally and fully and
unconditionally guaranteed, on an unsecured senior subordinated basis, by all
subsidiaries of the Company (the "Subsidiary Guarantors"), other than certain
minor subsidiaries. All of the Subsidiary Guarantors are wholly-owned
subsidiaries of the Company.

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6. COMPREHENSIVE INCOME:

7. 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 and believes that the terms
of the lease are at fair market value.

8. 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. Currently, no legal
proceedings are pending against or involve 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.

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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 114 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 25 collision service centers.

We have diverse sources of revenues, including: new car sales, new
truck sales, used car sales, used truck sales, manufacturer remarketed vehicle
sales, parts sales, service sales, collision repair service sales, 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 various 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.

SELECTED OPERATIONAL AND FINANCIAL DATA FOR THE THREE MONTH PERIODS ENDED MARCH
31, 2003 AND MARCH 31, 2002

NEW VEHICLE DATA

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USED VEHICLE DATA

- ----------

(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 are 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 are included in this number, as these
transactions facilitate retail vehicle sales and are not expected to
generate profit.

PARTS AND SERVICE DATA

FINANCE AND INSURANCE DATA

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SAME STORE REVENUES COMPARISON (1)

(dollars in thousands)

- ----------

(1) Includes only those dealerships owned during all of the months of both
periods in the comparison.

THREE MONTHS ENDED MARCH 31, 2003 COMPARED WITH THREE MONTHS ENDED MARCH 31,
2002

REVENUES. Revenues increased $83.7 million, or 8.8%, to $1,029.8
million for the three months ended March 31, 2003, from $946.1 million for the
three months ended March 31, 2002. The growth in total revenues came from
acquisitions, which were partially offset by a same store revenues decline of
$72.0 million.

New vehicle revenues increased $41.2 million, as acquired operations
offset a same store revenues decline of $55.7 million. The same store revenues
decreased, reflecting a less robust vehicle market in the first three months of
2003, as compared to the near-record new vehicle sales in the first three months
of 2002, for automobile retailers in the United States.

Our used vehicle retail revenues increased $7.3 million as revenues
from acquired operations were partially offset by a $19.0 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
$9.9 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.

The increase in parts and service revenues of $19.4 million included a
same store revenues increase of $3.1 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 $1.8 million, with a $1.0 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.

Vehicle service contract fee revenues increased $3.7 million, with same
store sales decreasing $0.2 million. During the three months ended March 31,
2003, we earned and recognized approximately $1.5 million of previously deferred
revenues. 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 annual incentives on vehicle service
contract sales.

Other finance and insurance revenues increased $0.4 million, with same
store sales declining $0.6 million. The same store decreases were caused by the
decline in retail unit sales.

GROSS PROFIT. Gross profit increased $17.9 million, or 11.8%, to $169.4
million for the three months ended March 31, 2003, from $151.5 million for the
three months ended March 31, 2002. The increase was

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attributable to an increase in gross margin to 16.5% for the three months ended
March 31, 2003, from 16.0% for the three months ended March 31, 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
declines in the new and used vehicle gross margins.

The gross margin on new retail vehicle sales declined to 7.2% from
7.7%, partially due to declines in new vehicle margins in the Houston market,
which accounted for 20 basis points of the overall decline. Additionally, new
vehicle margins declined due to market pressures to reduce higher inventory
levels, and reduced dealer-direct incentives, which are based on volume.

The gross margin on retail used vehicle sales increased slightly to
11.7% from 11.5%, and our wholesale losses increased, as we wholesaled more
vehicles, in light of the decline in the retail sales volume.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $17.9 million, or 15.3%, to $134.8 million for
the three months ended March 31, 2003, from $116.9 million for the three months
ended March 31, 2002. The increase was primarily attributable to the additional
operations acquired. Selling, general and administrative expenses increased as a
percentage of gross profit to 79.6% from 77.1% 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. Excluding the
gross profit and selling, general and administrative expenses of our Atlanta and
Dallas operations, our selling, general and administrative expenses as a
percentage of gross profit would have been 77.7% for the three months ended
March 31, 2003.

INTEREST EXPENSE. Floorplan and other interest expense, net, increased
$0.7 million, or 9.9%, to $7.8 million for the three months ended March 31,
2003, from $7.1 million for the three months ended March 31, 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 March 31, 2002. By the end of 2002, we
had reborrowed the amounts used to pay down the floorplan portion of our credit
facility. Additionally, we have increased floorplan borrowings outstanding due
to acquisitions completed during the past twelve months and higher overall
inventory levels. At March 31, 2003, we had an 83 day supply of new vehicle
inventory, which is higher than our targeted days supply of 60 days. With
respect to interest rates, during the three months ended March 31, 2003, there
was an approximately 50 basis point reduction in our floorplan financing rate as
compared to the three months ended March 31, 2002.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity are cash on hand, cash from
operations, our credit facility, which includes the floorplan tranche and the
acquisition tranche, and equity and debt offerings.

CASH FLOWS

Total cash at March 31, 2003, was $20.2 million.

OPERATING ACTIVITIES. During the first three months of 2003, we
generated $10.7 million of cash flow from operations, primarily driven by net
income plus depreciation and amortization, partially offset by amounts used to
fund inventory purchases. Amounts received from reduction of contracts in
transit and vehicle receivables outstanding were used to pay down the floorplan
balance.

INVESTING ACTIVITIES. During the first three months of 2003, we used
approximately $13.6 million in investing activities. We paid $12.2 million for
purchases of property and equipment, of which $9.8 million was used for the
purchase of land and construction of facilities for new or expanded operations.
We received $4.7 million in proceeds from the sales of property and equipment.
We have used $12.7 million in

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the acquisitions of three franchises and received $7.4 million from the sale of
one franchise, for which no gain was recognized.

FINANCING ACTIVITIES. During the first three months of 2003, we used
approximately $1.2 million in financing activities, primarily to repurchase
common stock, net of proceeds from issuances of stock to our benefit plans.

WORKING CAPITAL. At March 31, 2003, we had working capital of $104.8
million. 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 FACILITY

We have a $900 million credit facility, which matures in December 2003,
and are currently in discussions for a new long-term credit facility with our
current lender group. The credit facility consists of two tranches: the
floorplan and acquisition tranches. The acquisition tranche totals $198.0
million and, as of April 30, 2003, $193.9 million was available to be drawn for
working capital, acquisition or floorplan financing, under this tranche.

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 2003 is to complete platform and tuck-in
acquisitions that have approximately $800 million in annual revenues. We expect
the cash needed to complete our acquisitions will come from excess working
capital, operating cash flows of our dealerships and borrowings under our credit
facility. 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 approximately 33% of our cumulative net income to
repurchase stock and pay dividends. During the first three months of 2003 we
repurchased approximately 117,000 shares for approximately $2.5 million. As of
March 31, 2003, we had the capacity to repurchase an additional $22.5 million of
stock under the board of directors' authorization. We allocate resources based
on a risk-adjusted analysis of expected returns. As such, we may repurchase
shares of our common stock if market conditions allow us to receive an
acceptable return on investment.

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

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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.

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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:

o the completion of future acquisitions

o operating cash flows and availability of capital

o future stock repurchases

o capital expenditures

o changes in sales volumes in the new and used vehicle and parts
and service markets

o business trends, including incentives, product cycles and
interest rates

o availability of financing for inventory and working capital

o inventory levels

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:

o 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

o the effect of adverse international developments such as war,
terrorism, political conflicts or other hostilities

o regulatory environment, adverse legislation, or unexpected
litigation

o 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

o requirements imposed on us by our manufacturers may limit our
acquisitions and affect capital expenditures related to our
dealership facilities

o our dealership operations may not perform at expected levels
or achieve expected improvements

o we may not achieve expected future cost savings and our future
costs could be higher than we expected

o available capital resources and various debt agreements may
limit our ability to complete acquisitions, complete
construction of new or expanded facilities and repurchase
shares

o our cost of financing could increase significantly

o new accounting standards could materially impact our reported
earnings per share

o we may not complete additional acquisitions or the pace of
acquisitions may change

o we may not be able to adjust our cost structure

o we may lose key personnel

o competition in our industry may impact our operations or our
ability to complete acquisitions

o insurance costs could increase significantly

o we may not achieve expected sales volumes from the new
franchises granted to us

o 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.

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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
increased due to increases in inventory levels. A 100 basis point increase in
interest rates would have increased floorplan interest expense $1.6 million for
the three month period ended March 31, 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 two interest rate swaps
outstanding, each with notional amounts of $100 million and converting 30-day
LIBOR to a fixed rate. As these swaps are hedging 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 reduce the cost of the swaps and, thus, reduce our floorplan
interest expense by $0.5 million for the three-month period ended March 31,
2003. One of the swaps, with a notional amount of $100 million, expires at the
end of July 2003. As such, depending on interest rate levels during the last
five months of 2003, our floorplan interest expense could be impacted.

The net result on floorplan interest expense of a 100 basis point
increase in interest rates is an increase of $1.1 million, 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 $5.9 million during the first three months of 2003 and $5.7
million during the first three 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.

16

ITEM 4. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Within 90 days before the filing of 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:

o 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 or submits 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

o 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.

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. Currently, no legal proceedings are pending
against or involve 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.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

The certifications by our chief executive officer and chief financial
officer required by Section 1350 of Title 18 of the United States Code, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, have been
filed as exhibits 99.1 and 99.2, respectively, to this Quarterly Report on Form
10-Q.

17

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

A. EXHIBITS:

11.1 Statement re: computation of earnings per share is included
under Note 3 to the financial statements.

99.1 Certification of Chief Executive Officer of Group 1
Automotive, Inc., pursuant to 18 U.S.C. Section 1350.

99.2 Certification of Chief Financial Officer of Group 1
Automotive, Inc., pursuant to 18 U.S.C. Section 1350.

B. REPORTS ON FORM 8-K:

On May 1, 2003, the Company filed a Current Report on Form 8-K
reporting under Items 7, 9 and 12.

On April 10, 2003, the Company filed a Current Report on Form 8-K
reporting under Item 9.

On April 9, 2003, the Company filed a Current Report on Form 8-K
reporting under Item 9.

On April 7, 2003, the Company filed a Current Report on Form 8-K
reporting under Item 9.

18

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Group 1 Automotive, Inc.

May 7, 2003 By: /s/ Scott L. Thompson
- ----------- --------------------------------------
Date Scott L. Thompson,
Executive Vice President,
Chief Financial Officer and Treasurer

19

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-14 and 15d-14) for the registrant and
we have:

a) Designed such disclosure controls and procedures 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 as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and

c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, 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 in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; 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; and

6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

Date: May 7, 2003

/s/ B.B. Hollingsworth, Jr.
-----------------------------------
B.B. Hollingsworth, Jr.
Chief Executive Officer

20

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-14 and 15d-14) for the registrant and
we have:

a) Designed such disclosure controls and procedures 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 as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and

c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, 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 in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; 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; and

6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

Date: May 7, 2003

/s/ Scott L. Thompson
---------------------------------------
Scott L. Thompson
Chief Financial Officer

21

EXHIBIT INDEX