UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 20032004
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)
Registrant's telephone number including area code (713) 647-5700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of exchange on which Registered
------------------- ------------------------------------
COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None.
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
State the aggregate market value of voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was last sold, as of the last business day of the registrant's most
recently completed second fiscal quarter: $604.2$666.5 million.
As of March 1, 2004,February 28, 2005, there were 22.6 million23,499,805 shares of our common stock,
par value $.01 per share, outstanding.
Documents incorporated by reference: Proxy Statement of Group 1
Automotive, Inc. for the Annual Meeting of Stockholders to be held on May 19,
2004,18,
2005, which is incorporated into Part III of this Form 10-K.
2
TABLE OF CONTENTS
PART I ..................................................................................................... 5................................................................................................. 1
Item 1. Business............................................................................................. 5Business......................................................................................... 1
Item 2. Properties...........................................................................................Properties....................................................................................... 22
Item 3. Legal Proceedings....................................................................................Proceedings................................................................................ 22
Item 4. Submission of Matters to a Vote of Security Holders..................................................Holders.............................................. 22
PART II ...................................................................................................................................................................................................... 23
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................................Matters............................ 23
Item 6. Selected Financial Data..............................................................................Data.......................................................................... 24
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................Operations............ 25
Item 7A. Quantitative and Qualitative Disclosures about Market Risk........................................... 39Risk....................................... 42
Item 8. Financial Statements and Supplementary Data.......................................................... 40Data...................................................... 43
Item 9. Changes in and Disagreements on Accounting and Financial Disclosure.................................. 40Disclosure.............................. 43
Item 9A. Controls and Procedures.............................................................................. 40Procedures.......................................................................... 43
PART III ..................................................................................................... 40................................................................................................. 46
Item 10. Directors and Executive Officers of the Registrant................................................... 40Registrant............................................... 46
Item 11. Executive Compensation............................................................................... 40Compensation........................................................................... 46
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters....... 40Matters... 46
Item 13. Certain Relationships and Related Transactions....................................................... 40Transactions................................................... 46
Item 14. Principal Accountant Fees and Services............................................................... 40Services........................................................... 46
PART IV ..................................................................................................... 40................................................................................................. 46
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................................... 40Exhibits......................................................................................... 46
3
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
This annual 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 ofour future acquisitionsoperating performance;
- our ability to improve our margins;
- operating cash flows and availability of capitalcapital;
- the completion of future acquisitions;
- the future revenues of acquired dealerships;
- future stock repurchasesrepurchases;
- capital expendituresexpenditures;
- changes in sales volumes in the new and used vehicle and parts and
service marketsmarkets;
- business trends in the retail automotive industry, including the
level of manufacturer incentives, product cyclesnew and used vehicle retail sales
volume, customer demand, interest rates and changes in industrywide
inventory levels; and
- availability of financing for inventory and working capital
- inventory levels
- year-end used vehicle valuation reservescapital.
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, replacement parts, maintenance and
partsrepair services and service salesfinance and insurance products;
- the effect of adverse international developments such as war, terrorism, political
conflicts or other hostilities may adversely affect the demand for
our products and services;
- the future regulatory environment, unexpected litigation or adverse
legislation, including changes in state franchise laws, may impose
additional costs on us or unexpected litigationotherwise adversely affect us;
- our principal automobile manufacturers, especially Toyota / Toyota/Lexus,
Ford, DaimlerChrysler, General Motors, Honda/Acura and
Nissan / Nissan/Infiniti, may not continue to produce or make available to us
vehicles that are in high demand by our customerscustomers;
- requirements imposed on us by our manufacturers may limit our
acquisitions and affectrequire us to increase the level of capital
expenditures related to our dealership facilitiesfacilities;
- our dealership operations may not perform at expected levels or
achieve expected improvementsimprovements;
- we may notour failure to achieve expected future cost savings and ouror future costs
could bebeing higher than we expectedexpect;
- available capital resources and various debt agreements may limit
our ability to complete acquisitions, complete construction of new
or expanded facilities and repurchase sharesshares;
- our cost of financing could increase significantlysignificantly;
- new accounting standards could materially impact our reported
earnings per shareshare;
- we may notour inability to complete additional acquisitions or changes in the
pace of acquisitions may changeacquisitions;
- we may not be ablethe inability to adjust our cost structure to offset any reduction
in the demand for our products and services;
- we may loseour loss of key personnelpersonnel;
- competition in our industry may impact our operations or our ability
to complete acquisitionsacquisitions;
- the failure to achieve expected sales volumes from our estimation of the realizable value of our inventories may be highnew
franchises;
- insurance costs could increase significantly - weand all of our losses
may not achieve expected sales volumes from the new franchises
grantedbe covered by insurance; and
- our inability 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 expectexpect.
The information contained in this annual report, including the information
set forth under the headingheadings "Business --- Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
identifies factors that could affect our operating results and performance. We
urge you to carefully consider those factors.
All forward-looking statements attributable to us are qualified in their
entirety by this cautionary statement. 4We undertake no responsibility to update
our forward-looking statements.
-ii-
PART I
ITEM 1. BUSINESS
GENERAL
Group 1 Automotive, Inc. ("Group 1," the "Company," "we" or "us") is a leading operator in the $1 trillion
automotive retailing industry. Through a
series of acquisitions, weWe own and operate 122142 dealership franchises and
32 collision centers primarily located in major metropolitan markets in
California, Colorado, Florida, Georgia, Louisiana, Massachusetts, New Jersey,
New Mexico, New York, Oklahoma and Texas. Through our dealerships and Internet
sites, wewe:
- 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.
OPERATING STRATEGY
We follow an operating strategy that focuses on decentralized
management of locally branded dealership operations, expansion of higher margin
businesses, superior customer service, effective asset management, development
of human capital and technology initiatives.
During the last five years we estimate that our parts and service
operations contributed approximately 41%Geographic diversity is one of our pretax income; finance and
insurance operations contributed approximately 27% of our pretax income; new
vehicle operations contributed approximately 17% of our pretax income; and used
vehicle operations contributed approximately 15% of our pretax income. During
2003, we achieved an operating margin of 3.3%. Since our inception in 1997, our
annual operating margin has ranged between 2.8% and 3.4%.
DECENTRALIZED OPERATIONS BRANDED LOCALLY. We believe that by managing
our dealerships on a decentralized basis, we provide superior customer service
and a focused, market-specific responsiveness to sales, service, marketing and
inventory control. Local decision-making and an in-depth knowledge of customers'
needs and preferences are important in maximizing financial performance. By
coordinating certain operations on a local basis, we believe that we achieve
cost savings in such areas as advertising, vendor consolidation, data processing
and personnel utilization.strengths. The following table sets
forth our geographic
diversity, based onplatforms and the states in which they operate, the percentage of new
vehicle retail sales,units sold at each platform in the year ended December 31, 2004,
and the number of dealerships and franchises we own:in each platform as of February 28,
2005:
PERCENTAGE OF OUR
NEW VEHICLE
RETAIL UNITS SOLD AS OF FEBRUARY 28, 2005
DURING THE TWELVE AS OF MARCH 1, 2004---------------------------
MONTHS ENDED ------------------------------------------------
MARKET AREANUMBER OF NUMBER OF
PLATFORM STATE DECEMBER 31, 2003 NUMBER OF2004 DEALERSHIPS NUMBER OF FRANCHISES
- ---------------------------------------------------------------------------------------------------------------------------------------- ------------------- ----------------- ----------- ----------
Oklahoma.............. 14.3% 13 22
Houston............... 12.7
Ira Motor Group Massachusetts 12.8% 11 14
Sterling McCall Automotive Group Texas 12.1 9 7
6
New England........... 12.7Bob Howard Auto Group Oklahoma 12.0 14 24
Miller Automotive Group California 11.3 8 9
Gene Messer Auto Group Texas 8.0 10 13
California............ 11.918
Maxwell Automotive Group Texas 7.9 8 11
Bohn Automotive Group Louisiana 6.4 7 7
Central Texas......... 7.6 7 9
Florida............... 7.610
Group 1 Florida Florida 6.1 4 4
West Texas............ 6.9 8 15
New Orleans........... 6.6 7 10
Atlanta............... 6.0Group 1 Atlanta Georgia 5.1 6 8
Dallas................ 6.0Peterson Automotive Group California 4.2 4 7
Beaumont.............. 3.39
Rocky Mountain Automotive Group Colorado/New Mexico 4.0 4 8
Courtesy Auto Group Texas 3.5 2 10
Albuquerque........... 3.2 3 7
Denver................ 1.2 1 14
David Michael Motor Cars New Jersey............ -Jersey 2.9 3 3
------------------------------------------------------------------
TOTAL..............Mike Smith Automotive Group Texas 2.6 2 9
Hassel Auto Group New York 1.1 4 4
----------------- ----------- ----------
Total 100.0% 82 122
==================================================================96 142
================= =========== ==========
EXPANDOPERATING STRATEGY
We follow an operating strategy comprised of the following elements:
- decentralized management of locally-branded operations;
- expansion of higher margin activities;
- commitment to customer service;
- effective capital and asset management;
- development and retention of human capital;
- technology initiatives; and
- cost and revenue synergies.
DECENTRALIZED MANAGEMENT OF LOCALLY-BRANDED OPERATIONS. Our 142 franchises
are organized into 15 platforms that are managed by local platform management
teams and, at the dealership level, by general managers who report to the
platform management. We believe our local management teams are in the best
position to
understand their markets and how to operate effectively within them, including
sales and marketing initiatives, inventory control and recruitment and retention
of dealership personnel. By managing our dealerships on a decentralized basis,
we seek to provide superior customer service and maintain a focused,
market-specific responsiveness in all areas of dealership operations. Our
market-specific approach to dealership management is especially important in
light of the diverse markets in which we operate. Further, we believe cost
savings are achieved in areas such as advertising and personnel utilization by
coordinating these activities on a local basis.
EXPANSION OF HIGHER MARGIN ACTIVITIES. We focus on expandingCertain sectors of our business
generate higher margin businesses such as used vehiclemargins than those generated by the retail sale of new vehicles.
These activities include:
- retail sales of used vehicles;
- sales of replacement parts,parts;
- sales of maintenance and repair servicesservices; and
arranging- arrangement of financing, vehicle service and insurance contracts.
While each of our local operations conducts business in a manner
consistent with its specific market's characteristics, 5
they also pursue an integrated companywide strategy designed to grow each ofgrowth
in these higher margin businesses to enhance profitability and stimulate
internal growth. With a competitive advantageIn conjunction with ongoing facility improvement and relocation
initiatives, we generally increase both the square footage and stall capacity of
our service departments in sourcing used vehicle inventoryorder to better service customers and synergies from new vehicle operations, new vehicle franchises are especially
well positioned to competecapture
additional business in the used vehicle market. In addition, each of our
dealerships offers an integrated parts and service department, which provides an
important source of recurring higher margin revenues. We also have the
opportunity on each sale of a new or used vehicle to generate incremental
revenues from arranging finance and lease contracts, vehicle service contracts
and insurance policies.marketplace.
COMMITMENT TO CUSTOMER SERVICE. We focus on providing high-quality
service to meet the needs of our customers. Our dealerships strive to cultivate
lasting relationships with their customers, andwhich we believe these efforts
increase our opportunities for significantis a key factor in
gaining repeat and referral business. ForAs one example theof our commitment in this
area, our dealerships regard their service and repair activities as an
integral partessential
elements of their overall approach tothe customer service. This approach
provides us with an opportunityservice experience that create additional opportunities
to foster ongoing relationships with customers and deepen customer loyalty. We
emphasize the importance of customer satisfaction to our key platform and
dealership personnel by basing a portion of their compensation, in most cases,
on the quality of customer service they provide in connection with vehicle sales
and service. In addition, our dealerships continually review their processes in
an effort to better meet the needs of their customers. We
believe that our ability to sharecustomers by implementing best
practices amongshared across our dealerships gives us
an advantage over smaller dealership groups. For example, our dealerships strive
to:
(1) employ more efficient selling approaches;
(2) utilize computer technology that decreases the time necessary to
purchase a vehicle;
(3) engage in extensive follow-up after a sale or service visit in order
to develop long-term relationships with customers; and
(4) extensively train their staffs to be able to meet the needs of the
customer.operations.
EFFECTIVE CAPITAL AND ASSET MANAGEMENT. We allocate discretionary capital
among competing investment opportunities based on expected returns on
investment. We also monitor our inventory and sales levels and sales. We targeton a 60-day new vehicle inventory supply and a 30-day used vehicle inventory
supply. Wecompanywide
basis. In addition, we monitor our investments in parts and receivables to
maximize our financial results.
We allocate capital among competing investment opportunities
in the entire company based on expected returns on invested capital.DEVELOPMENT AND RETENTION OF HUMAN CAPITAL. The success of our dealerships
is highly dependent on dealership personnel. We believe that our decentralized
operating approach, incentive compensation plans and training programs allow us
to attract, develop and retain top automotive retailing talent. Our platform
presidents have worked in their platform's operations an average of 16 years.
TECHNOLOGY INITIATIVES. WeOur dealerships continue to find new ways to
benefit our customers through the use of the Internet to communicate more
effectivelyInternet. The locally-branded Web
sites of each of our platforms provide customers with our customers. Customers can arrange service appointments,
search our inventory and receive notice of special offers. Our local operation
based portal Web pages furnish customers a direct one-stop shopping
experience in their local market, providing multiple brands andwith access to an extensive inventory of
vehicles. Also,multiple brands. New tools in use at our dealerships allow us to:
- display a distinctive look and feel to our customers that conveys
the "attitude" of the dealership while conforming to manufacturer
guidelines;
- display interactive new and used vehicle inventories with multiple
photographs and advanced search options;
- offer interactive online appraisal tools;
- offer customers an online credit application process;
- display and sell parts online;
- highlight dealership specials on new and used vehicles and services;
- display current dealership-specific advertising; and
-2-
- offer customers the convenience of online service scheduling,
progress monitoring, and completion notification.
In addition, we plan to use the Internet to enhance the interactive
service capabilities we offer our customers. During 2004, we sold more than
20,000 vehicles as a result of leads generated by our dealerships' dedicated
Internet sales departments. As franchised dealerships, we receive Internet leads
from manufacturers' e-commerce programs and,programs. We also receive leads from several
major portals through a contractual relationship with an e-commerce software
company,company. We continue to work with our vendors to ensure our dealerships have
access to current technology while remaining in compliance with manufacturer
brand imaging requirements.
COST AND REVENUE SYNERGIES. Our size and consolidated purchasing power
brings opportunities to benefit from cost and revenue synergies in some areas of
our business. For example, due to our expended access to capital, we receive Internet leadscan
generally obtain floorplan financing at rates significantly lower than those
received by smaller private dealerships. In addition, we have benefited from several major
portals. Lastly, at times, we use automotive Internet referral services to
provide incremental sales opportunities.the
consolidation of administrative functions such as risk management, employee
benefits and employee training, as well as the sharing of best practices across
our operations. We have also enhanced revenues by benchmarking our dealerships
and by establishing preferred providers for retail finance and vehicle service
contracts.
DEALERSHIP OPERATIONS
Each of our local operations has an establisheda management structure that promotes and
rewards entrepreneurial spirit and the achievement of team goals. The general
manager of each dealership, is ultimately responsible for the
operation, personnel and financial performance of the dealership. The general
manager is complemented with a management team consistingassistance from his managers of new vehicle
sales, used vehicle sales, parts and service, and finance and insurance, managers. Each
dealership is
ultimately responsible for the operation, personnel and financial performance of
the dealership. Our dealerships are operated as a distinct profit center, in which dealershipcenters, and our
general managers are givenhave a high degree of autonomy. The general managerautonomy within our organization. Our
platform presidents are responsible for the overall performance of their
platform and the other
members offor overseeing the dealership management team are generally long-time members of
their local communities and are typically best able to conduct day-to-day
operations basedgeneral managers.
To capitalize on theirthe combined experience in, and familiarity with, the local market.
On a monthly basis, each of our localdealership management, we
have formed brand-specific groups of general managers who meet regularly to
share best practices and identify incremental profit opportunities. The groups
meet in person and via teleconference at regular intervals to discuss
brand-specific trends and comparative rankings of operational results. We
believe the discussion and sharing of best practices that takes place among
these groups is a competitive advantage over smaller dealership groups that do
not have the diverse operations that we do. Each of our dealerships is also
compared to its monthly operating forecast and our other dealerships. Keydealerships on a monthly basis.
We also analyze our dealerships based on key operating, financial information and customer
satisfaction data is also analyzed by corporate management and followed
up as necessary.
6measures.
-3-
NEW VEHICLE SALES. We currently represent 30 American, Asian and
EuropeanSALES
In 2004, we sold or leased 117,971 new vehicles representing 33 brands in
retail transactions at our dealerships. Our retail sales of economy, family, sports and luxury cars, light trucks and
sport utility vehicles.new vehicles
accounted for approximately 28.5% of our gross profit in 2004. The following
table sets forth the brands we represented and the number and percentage of
total new vehicles of each brand that we sold at retail during 2003,in 2004, and the number of
franchises of each of the manufacturersbrand that we currently represent:owned at February 28, 2005:
YEARSYEAR ENDED DECEMBER 31, 2003
-------------------------------------
ACTUAL NUMBER PERCENTAGE OF NUMBER OF
OF NEW TOTAL NEW FRANCHISES OWNED
BRAND VEHICLES SOLD VEHICLES SOLD AS OF MARCH 1, 2004
---------------------------------------
Number of Percentage of
New Vehicles New Vehicles Franchises Owned as
Sold Sold of February 28, 2005
------------ ------------- ------------- ---------------------------------------
Ford................. 22,676 22.7% 14
Toyota / Scion....... 20,894 20.9Scion 27,166 23.0% 11
Ford 20,410 17.3 14
Nissan 11,207 9.5 10
Honda 9,312 7.9 6
Chevrolet 8,832 7.5 7
Dodge 7,993 6.8 11
Lexus 5,552 4.7 2
Chrysler 3,278 2.8 9
Nissan............... 8,336 8.3 10
Honda................ 8,019 8.0Jeep 3,050 2.6 8
Mercedes-Benz 2,361 2.0 3
GMC 2,220 1.9 5
Acura 1,941 1.7 2
BMW 1,809 1.5 4
Infiniti 1,702 1.4 1
Mitsubishi 1,482 1.3 5
Lincoln 1,220 1.1 6
Dodge................ 7,102 7.1 9
Chevrolet............ 6,430 6.4Mazda 1,088 0.9 2
Mercury 940 0.8 7
Lexus................ 5,259 5.3Subaru 860 0.7 2
Jeep................. 2,696 2.7 7
Mitsubishi........... 2,647 2.7 6
GMC.................. 2,227 2.2 4
Chrysler............. 2,181 2.2 7
Infiniti............. 1,897 1.9Volkswagen 859 0.7 2
Kia 753 0.6 3
Pontiac 737 0.6 5
Hyundai 661 0.6 2
Audi 634 0.5 1
Acura................ 1,762 1.8 2
Mazda................ 1,081 1.1 2
Lincoln.............. 1,006 1.0 6
Pontiac.............. 759 0.8 4
Mercury.............. 713 0.7 7
Subaru............... 705 0.7 1
Audi................. 703 0.7 1
Buick................ 564 0.6 4
BMW.................. 539 0.5 2
Cadillac............. 351Volvo 527 0.4 2
Volkswagen........... 341Buick 439 0.4 4
Cadillac 302 0.3 2
Hyundai.............. 332 0.3 1
Mercedes-Benz........ 272 0.3Isuzu 212 0.2 2
Porsche............... 158 0.2 1
Kia................... 131Mini 169 0.1 1
Hummer................ 129Porsche 156 0.1 1
Isuzu................. 38 0.0Hummer 94 0.1 1
Other................. 23 0.0Maybach 5 - --------- -------- ---------
TOTAL............ 99,9711
------- ----- ---
Total 117,971 100.0% 122
========= ======== =========142
======= ===== ===
Our dealerships'A typical new vehicle sale or lease transaction creates the following
profit opportunities for a dealership:
- from the retail sales include traditional new
vehicle retail lease transactions and lease-type transactions, bothtransaction itself;
- from the resale of which are
arrangedany trade-in purchased by the dealerships.dealership;
- from the sale of third-party finance, vehicle service and insurance
contracts in connection with the retail sale; and
- from the service and repair of the vehicle both during and after the
warranty period.
Some new vehicles we sell are purchased by customers under lease or
lease-type financing arrangements with third-party lenders. These transactions
are typically favorable from a dealership's perspective. New vehicle leases
generally have shortshorter terms, bringing the customer back to the market, and our
dealerships specifically, sooner than if the purchase was debt financed. In
addition, leases provide our dealerships with a steady source of late-model,
off-lease vehicles for theirsale as used vehicle inventory.vehicles. Generally, leased vehicles remain
under factory warranty for the term of the lease, allowing the dealerships to
provide repair services to the lessee throughout the lease term. We typically do
not guarantee residual values on lease transactions.
We acquire substantially our entire new vehicle inventory from our
manufacturers and do not have a cost advantage in purchasing new vehicle
inventory from them. Manufacturers allocate a limited inventory among their
franchised dealers based primarily on sales volume and input from dealers.-4-
Our dealerships finance their inventory purchases through the floorplan
portion of our revolving credit facility. At times,Subject to floorplan limitations
imposed by us and our days' supply guidelines, inventory selection and
management occurs at the platform level. From time to time, and consistently
over the past several years, manufacturers offerhave offered incentives to
the
dealerships to achieve the manufacturers' new vehicle sales goals set by them. These incentives
are recorded as a reduction of new vehicle cost of sales as the vehicles are
sold. Wegoals. Most
manufacturers also receiveoffer interest assistance from several of our manufacturers.
This assistance has ranged from approximately 80% to 160% of our totaloffset floorplan interest
expense over the past three years. During 2003, we recognized $27.4
million of assistance, which we accounted for as a vehicle purchase price
7
discount and reflected as a reduction of cost of salescharges incurred in the income statement
as vehicles were sold.connection with inventory purchases.
USED VEHICLE SALES.SALES
We sell used vehicles at each of our franchised dealerships. SalesIn 2004, we
sold or leased 66,336 used vehicles at our dealerships, and sold 49,372 used
vehicles in wholesale markets. Our retail sales of used vehicles are a significant sourceaccounted for
approximately 14.5% of our gross profit forin 2004, while losses from the dealerships.sale of
vehicles on wholesale markets reduced our gross profit by approximately 1.0%.
Used vehicles sold at retail typically generate higher gross margins on a
percentage basis than new vehicles because of their limited comparability and
the subjective nature of their valuation, which is dependent on a vehiclesvehicle's age,
mileage and condition, among other things. Valuations will also vary based on supply
and demand factors, the level of new vehicle incentives, the availability of
retail financefinancing, and general economic conditions. We intend to grow our used
vehicle retail sales operations by maintaining a high-quality inventory,
providing competitive prices, offering vehicle service contracts for our used
vehicles and continuing to promote used vehicle sales.
At times, manufacturer incentives, including below-market retail
financing rates on new vehicles, can resultbelieve that recent
downward trends in used vehicle buyers switching
from the used vehicle marketbusiness are due both to the relative
affordability of new vehiclevehicles, largely as a result of manufacturer incentive
programs, and the general tightening of credit standards by lenders in the
lower-tier and sub-prime segments of the credit market.
This results in a lower
sales volumeProfit from the sale of used vehicles and a higher sales volume of new vehicles. For
example, during 2002 and 2003, we experienced a decline in same store used
vehicle retail sales due to high levels of manufacturer incentives on new
vehicle sales. The incentives resulted in a reduction of the price difference to
the customer between a late model used vehicle and a new vehicle, thus driving
more customers to new vehicles.
Profits from sales of used vehicles dependdepends primarily on the
dealerships'a dealership's
ability to obtain a high-quality supply of used vehicles at reasonable prices
and to effectively manage that inventory. Our new vehicle operations provide theour
used vehicle operations with a large supply of high-quality trade-ins and
off-lease vehicles, which are the best sources of high-quality used vehicles. TheOur
dealerships supplement their used vehicle inventory with used vehicles purchasedfrom purchases at auctions,
including manufacturer-sponsored auctions available only to franchised dealers,
and from wholesalers. Each of our dealerships generally maintainsattempts to maintain no more than
a 30-days30 days' supply of used vehicles. We offer used vehicles and offersnot held for resale
to other dealers and wholesalers used vehicles that they do
not retail to customers.wholesalers. Sales to other dealers or wholesalers are
frequently close to, or below, our cost and therefore negatively affect our
gross margin on used vehicle sales. VehiclesWe may be transferredtransfer vehicles among our
dealerships, on a local basis, to provide balanced inventories of used vehicles
at each of our dealerships.
Our dealerships have taken several steps towards building customer
confidence in theirIn addition to active management of the quality and age of our used
vehicle inventory, including participationwe have attempted to increase the profitability of our used
vehicle operations by participating in manufacturer certification programs whichwhere
available. Manufacturer certified pre-owned vehicles typically sell at a premium
compared to other used vehicles and are available only tofrom franchised new
vehicle franchises. This process makes these useddealerships. Certified pre-owned vehicles are eligible for new vehicle
benefits such as new vehicle finance rates and, in some cases, extension of the
manufacturer warranty.
In addition, the dealerships offer vehicle service
contracts covering the used vehicles that they sell.
We believe that our franchised dealerships' strengths in offering used
vehicles include:
(1) access to trade-ins on new vehicle purchases, which are typically
lower mileage and higher quality relative to trade-ins on used car
purchases;
(2) access to late-model, low mileage off-lease vehicles;
(3) access to manufacturers' auctions available only to their respective
franchised dealers;
(4) the availability of manufacturer certification programs for our used
vehicles; and
(5) access to a large number of finance sources to arrange financing for
our customers.
PARTS AND SERVICE SALES.SALES
We sell replacement parts and provide maintenance and repair services at
each of our franchised dealerships primarilyand provide collision repair services at the
32 collision centers we own. Our parts and service business accounted for
the vehicle brands sold at that dealership.approximately 37.3% of our gross profit in 2004. We perform both warranty and
non-warranty service work. During 2003work at our dealerships, primarily for the vehicle brand(s)
sold at a particular dealership. We realize approximately the same gross margin
on warranty repairs and customer-paid repairs. Warranty work accounted for
approximately 17%20.0% of our parts, service and collision service revenues. Additionally,the revenues from our parts and service business in 2004.
Our parts and service departments also perform used vehicle reconditioning and
new vehicle preparation services. The profits from these services are realizedfor which they realize a profit when the vehicles area vehicle
is sold to a third parties. We also currently own 29 collision
service centers.
8
Historically, theparty.
The automotive repair industry has beenis highly fragmented. However, wefragmented, with a significant
number of independent maintenance and repair facilities in addition to those of
the franchised dealerships. We believe, however, that the increased useincreasing complexity
of advanced technology innew vehicles has made it difficult for many independent repair shops to
retain the expertise necessary to perform major or technical repairs. We have
made investments in obtaining and training qualified technicians to work in our
service and repair facilities. Additionally, manufacturers permit warranty work
to be performed only at franchised dealerships. Hence,
unlike independent service operations, our franchised dealerships, are qualified
to perform work covered by our manufacturers' warranties. Givenand there is a trend in the
increasing
technological complexity of motor vehicles and the trend toward extendedautomobile industry towards longer new vehicle warranty periods for new vehicles,periods. As a result, we
believe that an increasing percentage of all repair work will be performed at
our franchised dealerships each of whichthat have the sophisticated equipment and skilled
personnel necessary to perform complex
repairs and warranty repairs. We realize approximatelywork on today's complex
vehicles.
Our strategy to capture an increasing share of the same gross margin on
warranty repairs as we do on customer-paid repairs.
We attribute our profitability in parts and service work
performed by franchised dealerships includes the following elements:
- FOCUS ON CUSTOMER RELATIONSHIPS; EMPHASIZE PREVENTATIVE MAINTENANCE.
Our dealerships seek to a comprehensive
management system, including the use of variable rate pricing structures,
cultivation of strong customer relationships through an emphasis on preventive
maintenanceretain new and the efficient managementused vehicle customers as
customers of our parts inventory.
In chargingand service departments. To accomplish this
-5-
goal, we use systems that track customers' maintenance records and
notify owners of vehicles purchased or serviced at our dealerships
when their vehicles are due for periodic service. Vehicle service
contracts sold by our finance and insurance personnel also assist us
in the retention of customers after the manufacturer's warranty
expires. We believe our parts and service activities are an integral
part of the customer service experience, allowing us to create
ongoing relationships with our dealerships' customers thereby
deepening customer loyalty to the dealership as a whole.
- VARIABLE RATE PRICING STRUCTURE. The rates our dealerships charge
for their technicians' labor our dealerships use variable
rate structures designed to reflectvary based on the difficulty and
technical sophistication of different types of repairs. Thethe repairs being performed. Similarly,
the percentage mark-upsmarkups on parts are similarly
priced based on market conditions for
different parts. We believe thatthis variable rate pricing helpsallows our
dealerships to achieve overall gross margins in parts and service which aregross margins superior to
those of certainour competitors who rely on fixed labor rates and
percentage markups. Additionally, itIt also allows the dealershipsus to be competitive with
independent repair shops that provide discounted pricing on select
services.
- EFFICIENT MANAGEMENT OF PARTS INVENTORY. Our dealerships seek to retain each vehicle purchaser as a customer of
the dealership's parts and service departments. The dealerships have systems in
place that track their customers' maintenance records and notify owners of
vehicles purchased or serviced at the dealerships when their vehicles are due
for periodic services. The dealerships regard service and repair activities as
an integral part of their overall approach to customer service, providing an
opportunity to foster ongoing relationships with the dealership's customers and
deepen customer loyalty.
The dealerships' parts
departments support their respective sales and service departments. Each of the dealerships sellsdepartments, selling
factory-approved parts for the vehicle makes and models sold by thata
particular dealership. These partsParts are either used
either in repairs made byin the
dealership,service department, sold at retail to its customers, or sold at
wholesale to independent repair shops and other franchised
dealerships. TheOur dealerships employ a parts manager and independently controlmanagers who oversee parts
inventoryinventories and sales. Our dealerships also frequently share parts
with each other. In addition, we maintain a perpetual parts
inventory program, counting a percentage of our parts on a daily
basis. This allows us to monitor our parts inventories more closely
and make necessary adjustments more frequently.
FINANCE AND INSURANCE SALES. FinanceSALES
Revenues from our finance and insurance ("F&I") revenuesoperations consist primarily of
fees for arranging financing, vehicle service and insurance contracts. The dealerships arrange financing for their customers' vehicle
purchases, sell vehicle service contracts and arrange selected types of
insurance in
connection with the financingretail purchase of vehicle sales.a new or used vehicle. Our finance and
insurance business accounted for approximately 20.7% of our gross profit in
2004. We provide advanced
F&I trainingoffer a wide-variety of third-party finance and insurance products in a
convenient manner and at competitive prices. To increase transparency to our
F&I personnel.
Typically,customers, we offer all of our products on menus that display pricing and other
information, allowing customers to choose the dealerships forward proposedproducts that suit their needs.
FINANCING. We arrange third-party purchase and lease financing contracts tofor our
customers. In return, we receive a fee from the third-party lender upon
completion of the financing. These third-party lenders include manufacturers'
captive finance companies, selected commercial banks, and a variety of other
third-party lenders, including credit unions and regional auto finance lenders.
The fees we receive are subject to chargeback, or other
financing parties. The dealerships receive a financing fee fromrepayment to the lender, for
arrangingif a
customer defaults or prepays the financing and, for aloan, typically during some limited time may be assessed a chargeback
against a portionperiod
at the beginning of the financing fee.loan term. We recognize the expected net fee as
revenue at the time we complete the sale and financing of the vehicle.
Additionally, we have negotiated incentive programs with
several of the
financing institutionssome lenders pursuant to which we use that provide forreceive additional fees to be paid to us
when we achieveupon reaching a
certain volumesvolume of business with them.business. We do not own a finance company, and, generally, do
not retain substantial credit risk after a customer has received financing,
though we do retain limited credit risk in some circumstances.
EXTENDED WARRANTY, VEHICLE SERVICE AND INSURANCE PRODUCTS. We offer our
customers a variety of vehicle warranty and extended protection products in
connection with purchases of new and used vehicles, including:
- extended warranties;
- maintenance, or vehicle service, programs;
- guaranteed auto protection, or "GAP," insurance, which covers the
shortfall between a customer's loan is made.
Atbalance and insurance payoff in
the timeevent of a newtotal vehicle sale,loss;
- credit life and accident and disability insurance;
- lease "wear and tear" insurance; and
- theft protection.
The products our dealerships currently offer are generally underwritten
and administered by independent third parties, including the dealerships offer vehicle
service contractsmanufacturers' captive finance subsidiaries. Under our arrangements with the
providers of these products, we either sell these products on a straight
commission basis, or we sell the product, recognize commission and participate
in future underwriting profit, if any, pursuant to supplement the manufacturer warranty. Additionally, the
dealerships sell vehicle service contracts for used vehicles as the manufacturer
warranty perioda retrospective commission
arrangement. These commissions may have ended. Our dealerships sell service contracts of third
party vendors and our manufacturers, for which they receive a fee upon the sale
of the contract and are typically assessed abe subject to chargeback, against a portion of the
feein full or in part,
if the contract is terminated prior to its scheduled maturity. In
administrator-obligor states, which are
9
states where a third party, not our dealerships, has all responsibility for
claims made on the contract, we recognize the expected net fee as revenue at the
time we complete the sale of the contract, as the dealership has no future
liability. In dealer-obligor states, which are states where our dealership has
responsibility for claims made on the contract if the administrator is unable to
fulfill its obligation, the fees and related direct costs are deferred and
recognized over the life of the contracts. Due to a change in state law during
2002, we no longer sell dealer-obligor contracts as none of the states we
currently operate in are dealer-obligor states. We expect the deferred revenues
related to previously sold contracts, and the associated deferred costs, to be
recognized over the next four years.
The dealerships also offer selected types of insurance products to
customers who arrange the financing of their vehicle purchases through the
dealerships. The dealerships sell credit life insurance policies to these
customers, providing for repayment of the vehicle loan if the obligor dies while
the loan is outstanding. The dealerships also sell accident and disability
insurance policies, which provide payment of the monthly loan obligations during
a period in which the obligor is disabled. The dealerships sell this insurance
through third party vendors and we own a company
that reinsures the policies. As
such,third-party credit life and accident and disability insurance
policies we defer all of the revenues and direct costs related to the sales of
these policies and recognize them over the life of the policies. Additionally,
the dealerships sell a gap insurance product that, if the customer's loan
balance is greater than the value of the vehicle, will pay the difference if the
vehicle is stolen or damaged beyond repair. The dealerships sell the gap
insurance products of third party vendors, for which they receive a fee upon the
sale of the contract and are typically assessed a chargeback against a portion
of the fee if the contract is terminated prior to its scheduled maturity.sell.
-6-
ACQUISITION PROGRAM
WeSince our inception, we have a disciplined two-tierpursued an acquisition program that is designed to
enhancefocused on the
following objectives:
- enhancing brand and geographic diversity, creatediversity;
- creating economies of scale and deliverscale;
- delivering a targeted return on invested capital. Underinvestment; and
- enhancing stockholder value.
We have grown our business primarily through acquisitions. From January 1,
2000, through December 31, 2004, we:
- purchased 69 franchises with expected annual revenues, estimated at
the time of acquisition, program, we pursue:
(1) "platform" acquisitions of large, profitable and well-managed
multi-franchise dealership groups in large metropolitan and suburban
geographic markets that we do not currently serve, and
(2) "tuck-in" acquisitions, which are key, single-point dealerships that
are added to existing platforms. They allow us to increase brand
diversity, capitalize on economiesapproximately $2.8 billion;
- disposed of scale and offer a greater
breadth of products and services in each of the markets in which we
operate.
Over the past five years, we have purchased 79 dealership20 franchises with annual revenues of approximately
$2.5 billion, disposed of 22 dealership
franchises with annual revenues of approximately $277.2 million$267.2 million; and
been- were granted 12nine new dealership franchises by thevehicle manufacturers.
Our acquisition target for
2004 is to complete platform and tuck-inThese acquisitions included both "platform" acquisitions, which typically are
acquisitions of groups of dealerships thatin market areas where we previously
did not have approximately $1 billiona presence, and "tuck-in" acquisitions, which are acquisitions of
single-point dealerships in annual revenues.
ENTERING NEW GEOGRAPHIC MARKETS.our existing market areas.
PLATFORM ACQUISITIONS. We intend, over time,make platform acquisitions to expand into
geographic markets we do not currently serve by acquiring large, profitable,
and
well-established megadealers that are leaders in their regional markets. We
typically pursue megadealers that havewith superior operational and financial management
personnel whom we seek to retain. We believe that byBy retaining existing
high-quality management we will be able to effectively operate acquired
megadealers with management personnel who
understand thehave experience and in-depth knowledge of their local market, without
havingwe can more
readily transition to employour decentralized operating model while avoiding the risks
involved with employing and traintraining new and untested personnel.
EXPANDING WITHIN EXISTING MARKETS.TUCK-IN ACQUISITIONS. We intend to make tuck-in acquisitions to expand our brand,
product and service offerings and to capitalize on economies of additionalscale by
acquiring key single-point dealerships in the markets in which we operate,
includingour existing market areas. Tuck-in
acquisitions thatallow us to increase the brands, products and services offered
in these markets. We believe that these acquisitions will increase our operating efficienciesefficiency and cost savings on a
regionalplatform level in areas such as advertising, vendor consolidation,purchasing, data processing,
personnel utilization, and personnel utilization.the cost of floorplan financing.
RECENT ACQUISITIONS AND DISPOSITIONS. During 2003In 2004, we acquired or were
granted by the manufacturers, a total of 10 franchises. Also, we completed a
market consolidation project in conjunction23 franchises
with DaimlerChrysler's Alpha
Initiative in Dallas, Texas. We completed tuck-in
10
acquisitions of eight franchises, consisting of Ford, Lincoln and Mercury in
Oklahoma City, Dodge, Lincoln, Mercury and Mitsubishi in New Orleans and
Chevrolet in Lubbock, Texas. These tuck-in acquisitions haveexpected annual revenues of approximately $309.3 million.$1.2 billion, exceeding our
acquisition target of $1.0 billion for the year. Our 2004 acquisition program
included the acquisition of new platforms in California, New Jersey and New York
and seven tuck-in acquisitions added to our existing platforms in California,
Massachusetts and Texas. We also opened two previously announced Nissan
add-points in California and Massachusetts during 2004. The aggregate consideration paidfollowing table
contains information regarding the platforms and dealerships we acquired in
completing all2004, including the location of the 2003 acquisitions included approximately $35.4 million in cashoperations and the assumption of approximately $52.7 million of inventory financing.
Additionally, we were granted Lincoln and Mercury franchises in
Oklahoma City by the manufacturers during 2003, at no cost to us, and began
operations during 2003. During 2003 we openedacquired:
No. of
Platform Location Franchises Franchises Included Month Completed
- -------------------------------- ------------- ---------- ------------------------- ------------------
David Michael Motor Cars(1) New Jersey 3 Mercedes Benz, Honda, VW February
Maxwell Automotive Group Texas 3 Chevrolet, Pontiac, GMC February and April
Ira Motor Group Massachusetts 1 Toyota March
Sterling McCall Automotive Group Texas 1 BMW July
Miller Automotive Group California 2 Mercedes Benz and Maybach July
Peterson Automotive Group(1) California 9 Toyota, Kia (2), June
Chrysler, Dodge, Jeep,
Hyundai, Subaru, Isuzu
Hassel Auto Group(1) New York 4 BMW, Mini, Volvo (2) August
- ----------
(1) Platform acquisition
As a new add-point Ford dealership in
Pensacola, Florida that was previously granted to us.
Included in the acquisitions discussed above, are three franchises
purchased from Robert E. Howard II, oneresult of our directors. Additionally,2004 acquisition program, we sold
one franchiseexpanded into three
additional markets in which we previously had no presence, and shifted our brand
mix to include a company owned by Mr. Howard.greater percentage of import and luxury vehicles. We 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. All of the
franchises are located in Oklahoma City. In completing the acquisitions, the
aggregate consideration paid
by us consisted of $12.7 million of cash, net of
cash received and the assumption of approximately $22.9 million of inventory
financing. We received $7.4 million in cash from the sale of the Mercedes-Benz
dealership franchise and related assets, which exceeded our 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 Mr. Howard.
During 2003, we disposed of three dealership franchises in
Massachusetts, Oklahoma and Texas, with annual revenues of approximately $76.5
million. We realized no gain or loss on the Massachusetts and Texas disposals.
The Oklahoma transaction was the sale of the Mercedes-Benz franchise to Mr.
Howard discussed in the preceding paragraph.
Since December 31, 2003, we have completed acquisitions of four
franchises. One of the acquisitions, with three franchises, is a new platform in
New Jersey. The other franchise was acquired in a tuck-in acquisition, and will
complement platform operations in Central Texas. The aggregate consideration
paid in completing these acquisitions was approximately $38.6$221.7 million in cash, net of cash received, 54,372issued 394,313
shares of our common stock and the assumption of $29.8assumed approximately $109.7 million of inventory
financing.
COST AND REVENUE SYNERGIESfinancing in completing our 2004 acquisition program. We believedid not dispose of any
dealerships in 2004.
OUTLOOK. Our acquisition target for 2005 is to complete acquisitions of
dealerships that by consolidating the purchasing powerhave approximately $300 million in annual revenues.
-7-
COMPETITION
We operate in a highly competitive industry. In each of our dealerships on a centralized basis we have benefited from certain significant
cost savings. For example, since we began operations, we have significantly
reduced the interest rate on our floorplan financing through our consolidated
credit facility. Furthermore, we have benefited from the consolidation of
administrative functions such as risk management, employee benefits and employee
training. We have also enhanced revenues by benchmarking our dealerships and by
establishing preferred providers for retail finance and vehicle service
contracts.
COMPETITION
The automotive retailing industry is highly competitive. In large
metropolitan areasmarkets,
consumers have a number of choices in deciding where to purchase a new or used
vehicle andor where to have thea vehicle serviced. In the new vehicle market, ourAccording to various industry
sources, there are approximately 22,000 franchised automobile dealerships compete with other
franchised dealerships in their marketing areas. We also compete for vehicle
sales with auto brokers and
leasing companies, and with Internet companies that
provide customer referrals to other dealerships or who broker vehicle sales
between customers and other dealerships. Our dealerships do not have any cost
advantage in purchasing new vehicles from the manufacturers, and typically rely
on advertising and merchandising, sales expertise, service reputation and
location of the dealership to sell new vehicles.
In the used vehicle market, our dealerships compete with other
franchised dealers,approximately 54,000 independent used vehicle dealers automobile rental agencies
and private parties for supply and resale of used vehicles.
11
Inin the parts and service market, our dealerships compete against
franchised dealers to perform warranty repairs and against other automobile
dealers, franchised and independent service center chains and independent repair
shops for non-warranty repair and routine maintenance business. The dealerships
compete with other automobile dealers, service stores and auto parts retailers
in their parts operations. We believe that the principalretail automotive
industry.
Our competitive factors in
parts and service sales are the quality of customer service, the use of
factory-approved replacement parts, familiarity with a manufacturer's brands and
models, and price. A number of regional or national chains offer selected parts
and services at prices that may be lower than our dealerships' prices.
In arranging financing for our customers' vehicle purchases, we compete
with a broad range of financial institutions. In addition, financial
institutions are now offering F&I products through the Internet, which may
reduce our profits on these items. We believe that the principal competitive
factors in providing financing are convenience, interest rates and flexibility
in contract length.
Our success depends, in part, on national and regional
automobile-buying trends, local and regional economic factors, and other
regional competitive pressures. Conditions and competitive pressures affecting
the markets in which we operate, such as price-cutting by dealers in these areas, or in any new markets we enter, could adversely
affect us, although the retail automobile industry as a whole might not be
affected. Some of our competitors may have greater financial, marketing and
personnel resources, and lower overhead and sales costs.costs than we do. We cannot
guarantee that our strategy will be more effective than the strategies of our
competitors.
NEW AND USED VEHICLES. In the acquisition area,new vehicle market, our dealerships compete
with other franchised dealerships in their market areas, as well as auto
brokers, leasing companies, and Internet companies that provide referrals to or
broker vehicle sales with other dealerships or customers. We are subject to
competition from dealers that sell the same brands of new vehicles that we sell
and from dealers that sell other brands of new vehicles that we do not sell in a
particular market. Our new vehicle dealer competitors also have franchise
agreements with the various vehicle manufacturers and, as such, generally have
access to new vehicles on the same terms as we do. We do not have any cost
advantage in purchasing new vehicles from vehicle manufacturers, and our
franchise agreements do not grant us the exclusive right to sell a
manufacturer's product within a given geographic area. In the used vehicle
market, our dealerships compete with other franchised dealers, large
multi-location used vehicle retailers, local independent used vehicle dealers,
automobile rental agencies and private parties for the supply and resale of used
vehicles. We believe the principal competitive factors in the automotive
retailing business are location, the suitability of a franchise to the market in
which it is located, service, price and selection.
PARTS AND SERVICE. In the parts and service market, our dealerships
compete with other franchised dealers to perform warranty repairs and with other
automobile dealers, franchised and independent service center chains, and
independent repair shops for non-warranty repair and maintenance business. We
believe the principal competitive factors in the parts and service business are
the quality of customer service, the use of factory-approved replacement parts,
familiarity with a manufacturer's brands and models, convenience, the competence
of technicians, location, and price. A number of regional or national chains
offer selected parts and services at prices that may be lower than ours.
FINANCE AND INSURANCE. In addition to competition for vehicle sales and
service, we face competition in arranging financing for our customers' vehicle
purchases from a broad range of financial institutions. Many financial
institutions now offer finance and insurance products over the Internet, which
may reduce our profits from the sale of these products. We believe the
principal competitive factors in the finance and insurance business are
convenience, interest rates and flexibility in contract length.
ACQUISITIONS. We compete with other national dealer groups and individual
investors for acquisitions. Some of our competitors may have greater financial
resources and competition may increase acquisition pricing. We cannot guarantee
that we will be able to complete acquisitions on terms acceptable to us.
RELATIONSHIPS AND AGREEMENTS WITH OUR MANUFACTURERS
Each of our dealerships operates under a franchise agreement with a
vehicle manufacturer (or authorized distributor). The franchise agreements grant
the franchised automobile dealership a non-exclusive right to sell the
manufacturer's or distributor's brand of vehicles and offer related parts and
service within a specified market area. These franchise agreements grant our
dealerships the right to use the manufacturer's or distributor's trademarks in
connection with their operations, and impose numerous operational requirements
and restrictions relating to, among other things:
- inventory levels;
- working capital levels;
- the sales process;
- minimum sales performance requirements;
- customer satisfaction standards;
- marketing and branding;
- facilities and signage;
- personnel;
-8-
- changes in management; and
- monthly financial reporting.
Our dealerships' franchise agreements are for various terms, ranging from
one year to indefinite, and in most cases manufacturers have renewed such
franchises upon expiration so long as the dealership is in compliance with the
terms of the agreement. We generally expect our franchise agreements to survive
for the foreseeable future and, when the agreements do not have indefinite
terms, anticipate routine renewals of the agreements without substantial cost or
modification. Each of our franchise agreements may be terminated or not renewed
by the manufacturer for a variety of reasons, including unapproved changes of
ownership or management and performance deficiencies in such areas as sales
volume, sales effectiveness and customer satisfaction. However, in general, the
states in which we operate have automotive dealership franchise laws that
provide that, notwithstanding the terms of any franchise agreement, it is
unlawful for a manufacturer to terminate or not renew a franchise unless "good
cause" exists. It generally is difficult for a manufacturer to terminate, or not
renew, a franchise under these laws, which were designed to protect dealers. In
addition, in our experience and historically in the automotive retail industry,
dealership franchise agreements are rarely involuntarily terminated or not
renewed by the manufacturer. From time to time, certain manufacturers assert
sales and customer satisfaction performance deficiencies under the terms of our
framework and franchise agreements at a limited number of our dealerships. We
generally work with these manufacturers to address the asserted performance
issues.
In addition to the individual dealership franchise agreements discussed
above, we have entered into framework agreements with most major vehicle
manufacturers and distributors. These agreements impose a number of restrictions
on our operations, including on our ability to make acquisitions and obtain
financing, and on our management and the ownership of our common stock. For a
discussion of these restrictions and the risks related to our relationships with
vehicle manufacturers, please read "--Risk Factors."
The following table sets forth the percentage of our new vehicle retail
unit sales attributable to the manufacturers we represented during 20032004 that
accounted for 10% or more of our new vehicle retail unit sales:
PERCENTAGE OF
OUR
NEW VEHICLE
RETAIL UNITS
SOLD DURING THE TWELVE
MONTHS ENDED
MANUFACTURER DECEMBER 31, 2003
------------ -----------------2004
- -------------------------------- ----------------------
Toyota / Lexus .............................. 26.2%
Ford......................................... 25.5%
DaimlerChrysler.............................. 12.3%
General Motors............................... 10.5%................. 27.7%
Ford............................ 20.5%
DaimlerChrysler................. 14.2%
Nissan / Infiniti........................... 10.2%Infiniti............... 10.9%
General Motors.................. 10.8%
EachGOVERNMENTAL REGULATIONS
AUTOMOTIVE AND OTHER LAWS AND REGULATIONS
We operate in a highly regulated industry. A number of state and federal
laws and regulations affect our dealerships operates under abusiness. In every state in which we operate, we
must obtain various licenses in order to operate our businesses, including
dealer, sales and finance and insurance licenses issued by state regulatory
authorities. Numerous laws and regulations govern our conduct of business,
including those relating to our sales, operations, financing, insurance,
advertising and employment practices. These laws and regulations include state
franchise agreement with one
of our manufacturers (or authorized distributors). Under our dealership
franchise agreements, the manufacturers exert considerable influence over the
operations of our dealerships. Each of the franchise agreements may be
terminated or not renewed by the manufacturer forlaws and regulations, consumer protection laws and other extensive
laws and regulations applicable to new and used motor vehicle dealers, as well
as a variety of reasons,
including any unapproved changes of ownership or management. While we believe we
will be able to renew all of our franchise agreements, we cannot guarantee all
of our franchise agreements will be renewed or that the terms of the renewals
will be as favorable to us as our current agreements. Our franchise agreements
do not give us the exclusive right to sell a manufacturer's product within a
given geographic area.
Our agreements with our manufacturers impose a number of restrictions
on our operations, including our ability to make acquisitions and obtain
financing, and on our
12
management and ownership of our common stock. For a description of these
restrictions, please read "--Risk Factors."
GOVERNMENTAL REGULATIONS
A number of regulations affect our business of marketing, selling,
financing and servicing automobiles. We are also subject toother laws and regulations
relating to business corporations generally.
Typically, we must obtain a license in order to establish, operate or
relocate a dealership or provide certain automotive repair services.regulations. These laws also regulate the way we conduct our business, including our advertising and
sales practices.
We may be required to file applications and obtain clearances under
applicable federal antitrust laws before completing an acquisition. These
regulatory requirements may restrict or delay our acquisitions, and may increase
the cost of completing acquisitions.
Variousinclude federal and
state laws established to protect dealerships from
the general unequal bargaining power between the parties also govern the
automobile franchise relationship. The following discussion of state courtwage-hour, anti-discrimination and administrative holdings and various state laws is based on management's beliefs
and may not be an accurate description of the state court and administrative
holdings and various stateother employment practices laws. The state statutes generally provide that it is
a violation for a manufacturer to terminate or fail to renew a franchise without
good cause. These statutes also provide that the manufacturer is prohibited from
unreasonably withholding approval for a proposed change in ownership of the
dealership. Acceptable grounds for disapproval include material reasons relating
to the character, financial ability or business experience of the proposed
transferee. Accordingly, certain provisions of the franchise agreements,
particularly as they relate to a manufacturer's rights to terminate or fail to
renew the franchise, have repeatedly been held invalid by state courts and
administrative agencies.
Our financing activities with our customers are subject to federal
truth in lending,truth-in-lending, consumer leasing and equal credit opportunity laws and
regulations, as well as state and local motor vehicle finance laws, installment
finance laws, insurance laws, usury laws and other installment sales laws.laws and regulations. Some
states regulate finance fees and charges that may be paid as a result of vehicle
sales. Penalties
for violationClaims arising out of anyactual or alleged violations of these lawslaw may be asserted
against us or regulations may include revocation of
certain licenses, assessment of criminal and civil fines and penalties, and in
certain instances, create a private cause of action for individuals. We believe
that our dealerships comply substantially with all lawsby individuals or governmental entities and regulations
affecting their businessmay
expose us to significant damages or other penalties, including revocation or
suspension of our licenses to conduct dealership operations and do not have any material liabilities under such
laws and regulations.
ENVIRONMENTAL MATTERS
Wefines.
-9-
Our operations are subject to the National Traffic and Motor Vehicle
Safety Act, Federal Motor Vehicle Safety Standards promulgated by the United
States Department of Transportation and the rules and regulations of various
state motor vehicle regulatory agencies. The imported automobiles we purchase
are subject to United States customs duties and, in the ordinary course of our
business we may, from time to time, be subject to claims for duties, penalties,
liquidated damages or other charges.
Our operations are subject to consumer protection laws known as Lemon
Laws. These laws typically require a wide rangemanufacturer or dealer to replace a new
vehicle or accept it for a full refund within one year after initial purchase if
the vehicle does not conform to the manufacturer's express warranties and the
dealer or manufacturer, after a reasonable number of attempts, is unable to
correct or repair the defect. Federal laws require various written disclosures
to be provided on new vehicles, including mileage and pricing information.
ENVIRONMENTAL, HEALTH AND SAFETY LAWS AND REGULATIONS
Our operations involve the use, handling, storage and contracting for
recycling and/or disposal of materials such as motor oil and filters,
transmission fluids, antifreeze, refrigerants, paints, thinners, batteries,
cleaning products, lubricants, degreasing agents, tires and fuel. Consequently,
our business is subject to a complex variety of federal, state and local
environmental lawsrequirements that regulate the environment and regulations, including those governing discharges intopublic health and safety.
Most of our dealerships utilize aboveground storage tanks, and to a lesser
extent underground storage tanks, primarily for petroleum-based products.
Storage tanks are subject to periodic testing, containment, upgrading and
removal under the airResource Conservation and water, the storage of petroleum substancesRecovery Act and chemicals, the
handling and disposal of wastes, and the remediation of contamination arising
from spills and releases. These environmental laws and regulations have become
very complex and stringent over the years, and the task of achieving and
maintaining full compliance with all applicable environmental laws and
regulations has become much more rigorous. Failure to comply with these laws and
regulationsits state law
counterparts. Clean-up or other remedial action may resultbe necessary in the assessmentevent of
administrative, civilleaks or other discharges from storage tanks or other sources. In addition,
water quality protection programs under the federal Water Pollution Control Act
(commonly known as the Clean Water Act), the Safe Drinking Water Act and
criminal
penalties, impositioncomparable state and local programs govern certain discharges from some of injunctionsour
operations. Similarly, certain air emissions from operations such as auto body
painting may be subject to the federal Clean Air Act and related state and local
laws. Certain health and safety standards promulgated by the Occupational Safety
and Health Administration of the United States Department of Labor and related
state agencies also apply.
Some of our dealerships are parties to proceedings under the Comprehensive
Environmental Response, Compensation, and Liability Act, or CERCLA, typically in
connection with materials that limit were sent to former recycling, treatment and/or
prohibit certain activities,disposal facilities owned and operated by independent businesses. The
remediation or clean-up of facilities where the performancerelease of investigatorya regulated hazardous
substance occurred is required under CERCLA and remedial activities.other laws.
We believe that we
are in substantial compliance with current applicable environmental laws and
regulations and that continued compliance with these existing laws and
regulations will not have a material adverse effect on our operations, earnings
or competitive position. Moreover, we generally obtain environmental studies on dealerships to be acquired
and, as necessary, implement environmental management or remedial activities to
reduce the risk of noncompliance with environmental laws and regulations.
As with automobile dealerships generally, and parts, service and
collision service center operations in particular, our business involves the
generation, use, handling, storage, transport and disposal of hazardous or toxic
substances or wastes. Operations involving the management of hazardous and
nonhazardous wastes are subject to the requirements of the federal Resource
13
Conservation and Recovery Act ("RCRA") and comparable state statutes. Pursuant
to these laws, federal and state environmental agencies have established
approved methods for storage, treatment, and disposal of regulated wastes with
whichNevertheless, we must comply.
Our business involves the use of aboveground and underground storage
tanks. Under applicable laws and regulations, we are responsible for the proper
use, maintenance and abandonment of regulated storage tanks which we own or
operate, and for remediation of subsurface soils and groundwater impacted by
releases from such existing or abandoned aboveground or underground storage
tanks. In addition to these regulated tanks, we own, operate or have otherwise
abandoned, other underground and aboveground devices or containers (e.g.,
automotive lifts and service pits) that may not be classified as regulated
tanks, but which are capable of releasing stored materials into the environment,
thereby potentially obligating us to remediate any soils or groundwater
resulting from such releases.
We are also subject to laws and regulations governing remediation of
contamination at facilities we operate or to which we send hazardous or toxic
substances or wastes for treatment, recycling or disposal. The Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), also known as
the "Superfund" law, and analogous state laws impose liability, without regard
to fault or the legality of the original conduct, on certain classes of persons
that are considered to have contributed to the release of a "hazardous
substance" into the environment. These persons include the owner or operator of
the disposal site or sites where the release occurred and companies that
disposed or arranged for the disposal of the hazardous substances released at
such sites. Under CERCLA, these "responsible parties" may be subject to joint
and several liability for the costs of cleaning up the hazardous substances that
have been released into the environment, for damages to natural resources and
for the costs of certain health studies, and it is not uncommon for neighboring
landowners and other third parties to file claims for personal injury and
property damage allegedly caused by the release of hazardous substances.
We currently own or lease, and in connection with our acquisition
program will in the future own or lease, properties that in some instances have
been used for auto retailing and servicing for many years. Although we have
utilized operating and disposal practices that were standard in the industry at
the time, it is possible that environmentally sensitive materials such as new
and used motor oil, transmission fluids, antifreeze, lubricants, solvents and
motor fuels may have been spilled or released on or under the properties owned
or leased by us or on or under other locations where such materials were taken
for disposal. Further, we believe that structures found on some of these
properties may contain suspect asbestos-containing materials, albeit in an
undisturbed condition. In addition, many of these properties have been operated
by third parties whose use, handling and disposal of such environmentally
sensitive materials were not under our control.
These propertiesWe incur significant costs to comply with applicable environmental, health
and safety laws and regulations in the ordinary course of our business. We do
not anticipate, however, that the costs of such compliance will have a material
adverse effect on our business, results of operations, cash flows or financial
condition, although such outcome is possible given the nature of our operations
and the waste materials spilled, released or otherwise
found thereon may be subject to RCRA, CERCLAextensive environmental, public health and analogous state laws. Under
such laws, we could be required to remove or remediate previously spilled or
released waste materials (including such materials spilled or released by prior
owners or operators), or property contamination (including groundwater
contamination caused by prior owners or operators), or to perform monitoring or
remedial activities to prevent future contamination (including asbestos found to
be in a friable and disturbed condition).
In September 2001, we responded to a request for information from the
U.S. Environmental Protection Agency ("EPA") regarding materials sent by one of
our dealerships to the R&H Oil Company site in Bexar County, Texas, which site
currently has been proposed for inclusion on the EPA's National Priorities List
of Superfund sites. Our dealership apparently is one of some 300 or more parties
that may have contributed materials to the R&H site. We have received no
response from the EPA since our September 2001 correspondence. Our records
indicate that this dealership sent one 50-gallon barrel of used oil to the R&H
site. In other matters, five of our dealerships, as well as approximately 2,000
other parties, were notified in late December 2001, by the Georgia Department of
Natural Resources ("GDNR") of their identification as potentially responsible
parties ("PRPs") with respect to the M&J Solvents site in Atlanta, Georgia,
which is on the agency's Hazardous Site Inventory list. The GDNR has completed
its delineation of contamination at the M&J Solvents site and is currently
preparing a report summarizing the results of the field investigation. We
received no response from the GDNR in
14
follow-up to the initial notifications made in December 2001. No further
response is required from us with respect to either of these matters at this
time.safety regulatory framework.
In January 2003, we, along with some 100 other parties, received a letter
from a private party who is seeking all of our participation in a voluntary
mediation with the EPA and the U.S. Department of Justice regarding the remedial
liabilities of PRPspotentially responsible parties at the Double Eagle Refinery
Superfund site in Oklahoma City, Oklahoma. During 2003, we joined some 42 other
parties in a group that entered into negotiations with the EPA and DOJ regarding
potential liability for costs of remediating contamination and natural resource
damages at this Superfund site. Currently, negotiations between the parties are
at an advanced stage, with both sides having exchanged proposals for resolvingagreed in principle to a settlement
to resolve this matter. Based on the most recent set of proposals exchanged,agreement in principle, we believe our pro
rata share of any
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settlement would be no higher than $61,000.$50,000. However, because no agreement has
yet been reachedfinalized between the parties, we cannot make any assurances at this
time as to our potential liability with respect to this matter.
DuringINSURANCE AND BONDING
Our operations expose us to the last weekrisk of December 2001, the Miller dealerships (together
with all other new car dealerships in the State of California) received a 60-Day
Notice of Intent to Sue ("Notice") from Citizens for Responsible Business, Inc.
("CFRB") under California's Proposition 65. The Notice alleged that the
dealerships exposed itsvarious liabilities, including:
- claims by employees, and customers to a variety of harmful
chemicals without furnishing them with prior notice that those chemicals may
cause cancer, birth defects or other reproductive harm. Proposition 65 is
codified in California's Health & Safety Code, Sections 25249.5, et seq. On
January 28, 2002, California's Attorney General's Office sent a letter to CFRB's
attorneys, challenging their Notice on the basis that CFRB had no apparent
substantiationthird parties for personal
injury or property damage resulting from our operations; and
- fines and civil and criminal penalties resulting from alleged
violations of its various contentions. CFRB thereafter complied with the
Attorney General's request for substantiation by providing 14 binders of studiesfederal and test data, after which CFRB received a letter of September 25, 2002, from
the Attorney General's Office, confirming that CFRB could proceed with its
action. Thereafter, in December, 2002, CFRB sent a new round of 60-Day notices
under Proposition 65 to all California dealers, including the Miller
dealerships. Nonetheless, despite CFRB's issuance of notice in December 2002, we
were not served with a lawsuit by CFRB during 2003.
Further, the Federal Water Pollution Control Act, also known as the
Clean Water Act, and comparable state laws prohibit discharges of pollutants
into regulated waters without authorized National Pollution Discharge
Elimination System (NPDES) and similar state permits, require containment of
potential discharges of oil or hazardous substances, and require preparation of
spill prevention, control and countermeasure ("SPCC") plans. Currently, we are
evaluating and, as necessary, updating or otherwise implementing a number of our
SPCC plans to satisfy amended regulations that take effect in 2004. Some of our
operations involving the release of emissions, such as spray painting
activities, areregulatory requirements.
The automotive retailing business is also subject to regulationsubstantial risk of
property loss as a result of the significant concentration of property values at
dealership locations. Under self-insurance programs, we retain various levels of
aggregate loss limits, per claim deductibles and claims handling expenses as
part of our various insurance programs, including property and casualty and
employee medical benefits. In most cases, we insure costs in excess of our
retained risk per claim under various contracts with third party insurance
carriers. We estimate the costs of these retained insurance risks based on
historical claims experience, adjusted for current trends and changes in
claims-handling procedures. Risk retention levels may change in the future as a
result of changes in the insurance market or other factors affecting the
economics of our insurance programs. Although we have, subject to certain
limitations and exclusions, substantial insurance, we cannot assure you that we
will not be exposed to uninsured or underinsured losses that could have a
material adverse effect on our business, financial condition, results of
operations or cash flows.
We make provisions for retained losses and deductibles by reflecting
charges to expense based upon periodic evaluations of the estimated ultimate
liabilities on reported and unreported claims. The insurance companies that
underwrite our insurance require that we secure certain of our obligations for
self-insured exposures with collateral. Our collateral requirements are set by
the insurance companies and, to date, have been satisfied by posting surety
bonds, letters of credit and/or cash deposits. Our collateral requirements may
change from time to time based on, among other things, our total insured
exposure and the related self-insured retention assumed under the Clean Air Act and
comparable state and local requirements.policies. We
believe we areinclude additional details about our collateral requirements in substantial
compliance with these water and air related laws and regulations.the Notes to our
Consolidated Financial Statements.
EMPLOYEES
As of December 31, 2003,2004, we employed approximately 7,4008,800 people, of whom
approximately 890approximately:
- 1,100 were employed in managerial positions, 2,290positions;
- 2,600 were employed in non-managerial vehicle sales department
positions, 3,290positions;
- 4,100 were employed in non-managerial parts and service department
positionspositions; and
930- 1,000 were employed in administrative support positions.
We believe that our relationships with our employees are favorable. 71Sixty-six
of our current employees at one platform are represented by a labor union in our New Jersey
operations.union. Because of
our dependence on thevehicle manufacturers, we may be affected by labor strikes,
work slowdowns and walkouts at the manufacturers'vehicle manufacturing facilities. Additionally,
labor strikes, work slowdowns and walkouts at businesses participating in the
distribution of the manufacturers' products may also affect us.
15SEASONALITY
We generally experience higher volumes of vehicle sales and service in the
second and third calendar quarters of each year. This seasonality is generally
attributable to consumer buying trends and the timing of manufacturer new
vehicle model introductions. In addition, in some regions of the United States,
vehicle purchases decline during the winter months. As a result, our revenues,
cash flows and operating income are typically lower in the first and fourth
quarters and higher in the second and third quarters. Other factors unrelated to
seasonality, such as changes in economic condition and manufacturer incentive
programs, may cause counter-seasonal fluctuations in our revenues and operating
income.
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RISK FACTORS
IF WE FAIL TO OBTAIN A DESIRABLE MIX OF POPULAR NEW VEHICLES FROM MANUFACTURERS
OUR PROFITABILITY WILL BE NEGATIVELY AFFECTED.
We depend on the manufacturers to provide us with a desirable mix of new
vehicles. The most popular vehicles usually produce the highest profit margins
and are frequently difficult to obtain from the manufacturers. If we cannot
obtain sufficient quantities of the most popular models, our profitability may
be adversely affected. Sales of less desirable models may reduce our profit
margins. Several manufacturers generally allocate their vehicles among their
franchised dealerships based on the sales history of each dealership. If our
dealerships experience prolonged sales slumps, these manufacturers may cut back
their allotments of popular vehicles to our dealerships and new vehicle sales
and profits may decline. Similarly, the delivery of vehicles, particularly
newer, more popular vehicles, from manufacturers at a time later than scheduled
could lead to reduced sales during those periods.
IF WE FAIL TO OBTAIN RENEWALS OF ONE OR MORE OF OUR FRANCHISE AGREEMENTS ON
FAVORABLE TERMS OR SUBSTANTIAL FRANCHISES ARE TERMINATED, OUR OPERATIONS MAY BE
SIGNIFICANTLY IMPAIRED.
Each of our dealerships operates under a franchise agreement with one of
our manufacturers (or authorized distributors). UnderWithout a franchise agreement,
we cannot obtain new vehicles from a manufacturer. As a result, we are
significantly dependent on our dealership
franchise agreements, therelationships with these manufacturers, exert considerablewhich
exercise a great degree of influence over our operations through the operationsfranchise
agreements. Each of our dealerships. Each of the franchise agreements may be terminated or not renewed by
the manufacturer for a variety of reasons, including any unapproved changes of
ownership or management. Whilemanagement and other material breaches of the franchise agreements.
Manufacturers may also have a right of first refusal if we believe we
will be ableseek to renew all of our franchise agreements, wesell
dealerships. We cannot guarantee all of our franchise agreements will be renewed
or that the terms of the renewals will be as favorable to us as our current
agreements. In addition, actions taken by manufacturers to exploit their
bargaining position in negotiating the terms of renewals of franchise agreements
or otherwise could also have a material adverse effect on our revenues and
profitability. Our results of operations may be materially and adversely
affected to the extent that our franchise rights become compromised or our
operations restricted due to the terms of our franchise agreements or if we lose
substantial franchises.
Our franchise agreements do not give us the exclusive right to sell a
manufacturer's product within a given geographic area. As a result, a
manufacturer may grant another dealer a franchise which couldto start a new dealership near
one of our locations, or an existing dealership may move its dealership to a
location that would directly compete against usus. The location of new dealerships
near our existing dealerships could materially adversely affect our operations
and reduce the profitability of our existing dealerships.
MANUFACTURERS' RESTRICTIONS ON ACQUISITIONS MAY LIMIT OUR FUTURE GROWTH.
We must obtain the consent of the manufacturer prior to the acquisition of
any of its dealership franchises. Delays in obtaining, or failing to obtain,
manufacturer approvals for dealership acquisitions could adversely affect our
acquisition program. Obtaining the consent of a manufacturer for the acquisition
of a dealership could take a significant amount of time or might be rejected
entirely. In determining whether to approve an acquisition, manufacturers may
consider many factors, including the moral character and business experience of
the dealership principals and the financial condition, ownership structure,
customer satisfaction index scores and other performance measures of our
dealerships.
Our manufacturers attempt to measure customers' satisfaction with
automobile dealerships through systems generally known as the customer
satisfaction index or CSI. Manufacturers may use these performance indicators,
as well as sales performance numbers, as factors in evaluating applications for
additional acquisitions. The manufacturers have modified the components of their
CSI scores from time to time in the past, and they may replace them with
different systems at any time. From time to time, we may not meet all of the
manufacturers' requirements to make acquisitions. To date, we have not been
materially adversely affected by these standards and have not been denied
approval of any acquisition based on low CSI scores or other measures. However,
weWe cannot assure you that all
of our proposed future acquisitions will be approved.
In addition, a manufacturer may limit the number of its dealerships that
we may own or the number that we may own in a particular geographic area. If we
reach a limitation imposed by a manufacturer for a particular geographic market,
we will be unable to make additional tuck-in acquisitions in that market of that
manufacturer's franchises, which could limit our ability to grow in that
geographic area. In addition, geographic limitations imposed by manufacturers
could restrict our ability to acquire platforms whose markets overlap with those
already served by us. The following is a summary of the restrictions imposed by
thethose manufacturers that accounted for 10% or more of our new vehicle retail
unit sales in 2003.
FORD. Ford currently limits the number of dealerships that we may own
to the greater of (1) 15 Ford and 15 Lincoln and Mercury dealerships and (2)
that number of Ford, Lincoln and Mercury dealerships accounting for 5% of the
preceding year's total Ford, Lincoln and Mercury retail sales of those brands in
the United States. Currently, we own a total of 27 Ford, Lincoln and Mercury
dealership franchises and represent only approximately 0.7% of the national
retail
162004:
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sales of Ford, Lincoln and Mercury for 2003. In addition, Ford limits us to one
Ford dealership in a Ford-defined market area having two or less authorized Ford
dealerships and one-third of Ford dealerships in any Ford-defined market area
having more than three authorized Ford dealerships. In many of its dealership
franchise agreements Ford has the right of first refusal to acquire, subject to
applicable state law, a Ford franchised dealership when its ownership changes.
Currently, Ford is emphasizing increased sales performance from all of its
franchised dealers, including our Ford dealerships. To this end, Ford has
requested that we focus on the performance of owned dealerships as opposed to
acquiring additional Ford dealerships. We intend to comply with this request.
TOYOTA / LEXUS. Toyota restricts the number of dealerships that we may own
and the time frame over which we may acquire them. Under Toyota's standard
Multiple Ownership Agreement, we may acquire additional dealerships, over a
minimum of seven semi-annual periods, up to a maximum number of dealerships
equal to 5% of Toyota's aggregate national annual retail sales volume. In
addition, Toyota restricts the number of Toyota dealerships that we may acquire
in any Toyota-defined region and "Metro" market, as well as any contiguous
market. We may acquire only four primary Lexus dealerships or six outlets
nationally, including only two Lexus dealerships in any one of the four Lexus
geographic areas. Our Lexus companion dealership located south of Houston is not
considered by Lexus to be a primary Lexus dealership for purposes of the
restriction on the number of Lexus dealerships we may acquire. Currently, we own
nine11 Toyota and two primary Lexus dealership franchises. We representedfranchises, representing approximately 1.3%1.5% of the national
retail sales of Toyota for 2003.
GENERAL MOTORS. General Motors, or GM currently evaluates2004, and two primary Lexus dealership franchises.
Under the terms of our acquisitions of GM dealerships on a case-by-case basis. GM, however, limitscurrent agreement with Toyota, we own the maximum number
of GMToyota dealerships we are currently permitted to own in the Gulf states
region, which is comprised of Texas, Oklahoma, Louisiana, Mississippi and
Arkansas.
FORD. Ford currently limits the number of dealerships that we may acquire at any timeown to
50%the greater of (1) 15 Ford and 15 Lincoln and Mercury dealerships and (2) that
number of Ford, Lincoln and Mercury dealerships accounting for 5% of the
GM dealerships, by franchise line,preceding year's total Ford, Lincoln and Mercury retail sales of those brands in
a GM-defined geographic market area.the United States. Currently, we own 22 GMa total of 27 Ford, Lincoln and Mercury
dealership franchises, representing approximately 0.7% of the national retail
sales of Ford, Lincoln and could acquire approximately
6,800 GMMercury for 2004. In addition, Ford limits us to one
Ford dealership franchises nationally, dependent upon franchise line and
restrictions within particular GM-defined geographicin a Ford-defined market areas. Additionally,
our current agreement with GM does not include Saturnarea having two or less authorized Ford
dealerships and our future
acquisitionone-third of a SaturnFord dealerships in any Ford-defined market area
having more than three authorized Ford dealerships. In many of its dealership
will befranchise agreements Ford has the right of first refusal to acquire, subject to
GM approvalapplicable state law, a Ford franchised dealership when its ownership changes.
Currently, Ford is emphasizing increased sales performance from all of its
franchised dealers, including our Ford dealerships. To this end, Ford has
requested that we focus on a
case-by-case basis.the performance of owned dealerships as opposed to
acquiring additional Ford dealerships. We intend to comply with this request.
DAIMLERCHRYSLER. Currently, we have no agreement with Chrysler restricting
our ability to acquire Chrysler dealerships. However, we are in
discussions with them regarding the creation of a framework agreement that has
similar terms and conditions to our other agreements. Chrysler has advised us that in
determining whether to approve an acquisition of a Chrysler dealership, Chrysler
considers the number of Chrysler dealerships the acquiring company already owns.
Chrysler currently carefully considers, on a case-by-case basis, any acquisition
that would cause the acquiring company to own more than 10 Chrysler dealerships
nationally, six in the same Chrysler-defined zone and two in the same market.
Our agreement with Mercedes-Benz, in addition to limitations on the number of
dealership franchises in particular metropolitan markets and regions, limits us
to a maximum of the greater of four Mercedes-Benz dealership franchises or the
number of dealership franchises that would account for up to 3% of the preceding
year's total Mercedes-Benz retail sales. Currently, we own 2328 Chrysler
(including two acquired in January 2005), three Mercedes-Benz and twoone Maybach
dealership franchise. Our three Mercedes-Benz dealership franchises represented
approximately 1.1% of total Mercedes-Benz retail sales in 2004.
GENERAL MOTORS. General Motors, or GM, currently evaluates our
acquisitions of GM dealerships on a case-by-case basis. GM, however, limits the
maximum number of GM dealerships that we may acquire at any time to 50% of the
GM dealerships, by franchise line, in a GM-defined geographic market area.
Currently, we own 24 GM dealership franchises. Additionally, our current
agreement with GM does not include Saturn dealerships and any future acquisition
of a Saturn dealership will be subject to GM approval on a case-by-case basis.
NISSAN / INFINITI. Nissan currently limits the number of dealerships that
we may own up to a maximum number of dealerships that would equal 5% of Nissan's
(or Infiniti's, as applicable) aggregate national annual vehicle registrations.
In addition, Nissan restricts the number of dealerships that we may own in any
Nissan definedNissan-defined region to 20% of the aggregate regional registrations for the
applicable area. Currently we own 10 Nissan franchises and one Infiniti
franchise, and represent onlyrepresenting approximately 1.2% and 1.6%1.3% of the combined national vehicle
registrations for Nissan and Infiniti, respectively.Infiniti.
MANUFACTURERS' RESTRICTIONS COULD NEGATIVELY IMPACT OUR ABILITY TO OBTAIN
CERTAIN TYPES OF FINANCINGS.
Provisions in our agreements with our manufacturers may restrict, in the
future, our ability to obtain certain types of financing. A number of our
manufacturers prohibit pledging the stock of their franchised dealerships. For
example, our agreement contains provisions prohibiting pledging the stock of our
GM franchised dealerships. Our agreement with Ford permits pledging our Ford
17
franchised dealerships' stock and assets, but only for Ford dealership-related
debt. Moreover, our Ford agreement permits our Ford franchised dealerships to
guarantee, and to use Ford franchised dealership assets to secure our debt, but
only for Ford dealership-related debt. Ford waived that
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requirement with respect to our March 1999 and August 2003 senior subordinated
notes offerings and the subsidiary guarantees of those notes. Certain of our
manufacturers require us to meet certain financial ratios, which, if we fail to
meet these ratios the manufacturers may reject proposed acquisitions, and may
give them the right to purchase their franchises for fair value.
CERTAIN RESTRICTIONS RELATING TO OUR MANAGEMENT AND OWNERSHIP OF OUR COMMON
STOCK COULD DETER PROSPECTIVE ACQUIRERS FROM ACQUIRING CONTROL OF US AND
ADVERSELY AFFECT OUR ABILITY TO ENGAGE IN EQUITY OFFERINGS.
As a condition to granting their consent to our previous acquisitions and
our initial public offering, some of our manufacturers have imposed other
restrictions on us. These restrictions prohibit, among other things:
- any one person, who in the opinion of the manufacturer is
unqualified to own its franchised dealership or has interests
incompatible with the manufacturer, from acquiring more than a
specified percentage of our common stock (ranging from 20% to 50%
depending on the particular manufacturer's restrictions) and this
trigger level can fall to as low as 5% if another vehicle
manufacturer is the entity acquiring the ownership interest or
voting rights;
- certain material changes in our business or extraordinary corporate
transactions such as a merger or sale of a material amount of our
assets;
- the removal of a dealership general manager without the consent of
the manufacturer; and
- a change in control of our Board of Directors or a change in
management.
Our manufacturers may also impose additional similar restrictions on us in
the future. Actions by our stockholders or prospective stockholders that would
violate any of the above restrictions are generally outside our control. If we
are unable to comply with or renegotiate these restrictions, we generally mustmay be forced to
terminate or sell the assets of the dealerships to the manufacturerone or to a third party
acceptable to the manufacturer, or terminate the dealership agreements with the
manufacturer,more franchises, which maycould have a material adverse
effect on us. These restrictions may prevent or deter prospective acquirers from
acquiring control of us and, therefore, may adversely impact the value of our
common stock. These restrictions also may impede our ability to acquire
dealership groups, to raise required capital or to issue our stock as
consideration for future acquisitions.
IF MANUFACTURERS DISCONTINUE SALES INCENTIVES, WARRANTIES AND OTHER PROMOTIONAL
PROGRAMS, OUR RESULTS OF OPERATIONS MAY BE MATERIALLY ADVERSELY AFFECTED.
We depend on our manufacturers for sales incentives, warranties and other
programs that are intended to promote dealership sales or support dealership
profitability. Manufacturers historically have made many changes to their
incentive programs during each year. Some of the key incentive programs include:
- customer rebates;
- dealer incentives on new vehicles;
- below market financing on new vehicles and special leasing terms;
- warranties on new and used vehicles; and
- sponsorship of used vehicle sales by authorized new vehicle dealers.
A discontinuation or change in our manufacturers' incentive programs could
adversely affect our business. Moreover, some manufacturers use a dealership's
CSI scores as a factor for participating in incentive programs. Failure to
comply with the CSI standards could adversely affect our participation in
dealership incentive programs, which could have a material adverse effect on us.
OUR RELATIONSHIP WITH OUR MANUFACTURERS IMPOSES A NUMBER OF
RESTRICTIONS ON OUR OPERATIONS,REQUIRE US TO MEET CERTAIN IMAGE AND FACILITY GUIDELINES AND
TO MAINTAIN MINIMUM WORKING CAPITAL, WHICH MAY REQUIRE US TO DIVERT FINANCIAL
RESOURCES FROM USES THAT MANAGEMENT BELIEVES MAY BE OF BETTER VALUE TO US.OUR
STOCKHOLDERS.
Our manufacturerfranchise agreements specify that, in certain situations, we cannot
operate a dealership franchised by another manufacturer in the same building as
that manufacturer's franchised dealership. In addition, some manufacturers, like
GM, are in the process of realigning their franchised dealerships along defined
"channels," such as combining Pontiac, Buick and GMC in one dealership location.
As a result, GM, as well as other manufacturers, may require us to move or sell
some dealerships.
Our manufacturers generally require that the dealership premises meet
defined image and facility standards and may direct us to implement costly
capital improvements to dealerships as a condition for renewing certain
franchise agreements. All of these requirements could impose significant capital
expenditures on us in the future. 18We anticipate spending approximately $0.6
million in 2005 in connection with various manufacturers' required imaging
projects and approximately $23.5 million to expand or relocate existing
facilities as required by manufacturer facility guidelines.
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Pursuant to the automobile dealershipour franchise agreements, to which our
dealerships are subject, all dealerships are required to
maintain a certain minimum working capital, as determined by the manufacturers.
This requirement could requireforce us to utilize available capital to maintain
themanufacturer-required working capital levels ofat our dealerships thereby limiting
our ability to apply profits generated from one subsidiary for use in other
subsidiaries or, in some cases, at manufacturer-required levels.the parent company.
These factors, either alone or in combination, could cause us to divert
our financial resources to capital projects from uses that management believes
may be of higher long-term value to us.
OUR SUCCESS DEPENDS UPON THE CONTINUED VIABILITY AND OVERALL SUCCESS OF THE MANUFACTURERSA
LIMITED NUMBER OF THE VEHICLES THAT EACH OF OUR DEALERSHIPS SELLS.
DemandMANUFACTURERS.
Toyota / Lexus, Ford, DaimlerChrysler, Nissan / Infiniti and GM
dealerships represented approximately 84.1% of our total new vehicle retail
sales in 2004. As a result, demand for ourthese manufacturers' vehicles, as well as
the financial condition, management, marketing, production and distribution
capabilities, reputation and labor relations of ourthese manufacturers may have a
substantial affect our business. Our Toyota / Lexus, Ford,
DaimlerChrysler, GM and Nissan / Infiniti dealerships represented approximately
84.7% of our 2003 total new vehicle retail sales. Although we have attempted to
lessen our dependence on any one manufacturer by buying dealerships representing
a number of different domestic and foreign manufacturers, eventsEvents such as labor disputes and other
production disruptions that may adversely affect a
manufacturerone of these manufacturers may also
adverselyhave a material adverse affect on us. Similarly, the late delivery of vehicles
from manufacturers, which sometimes occurs during periods of new product
introductions, can lead to reduced sales during those periods. Moreover, any
event that causes adverse publicity involving any of our manufacturers may have
an adverse effect on us regardless of whether such event involves any of our
dealerships. Additionally, the inability of a manufacturer to continue
operations will not only impact our vehicle sales and profitability, but could
also result in the partial or complete impairment, and a corresponding
write-down, of our recorded goodwill and/or intangible assets recorded,
thus resulting in a write off of those assets.franchise rights.
GROWTH IN OUR REVENUES AND EARNINGS WILL BE IMPACTED BY OUR ABILITY TO ACQUIRE
AND SUCCESSFULLY INTEGRATE AND OPERATE DEALERSHIPS.
Growth in our revenues and earnings depends substantially on our ability
to acquire and successfully integrate and operate dealerships. We cannot
guarantee that we will be able to identify and acquire dealerships in the
future. In addition, we cannot guarantee that suchany acquisitions will be
successful or will be on terms and conditions consistent with past acquisitions.
Restrictions by our manufacturers, as well as covenants contained in our debt
instruments, may directly or indirectly limit our ability to acquire additional
dealerships. In addition, increased competition for acquisition candidatesacquisitions may develop,
which could result in fewer acquisition opportunities available to us and/or
higher acquisition prices. Some of our competitors may have greater financial
resources than us.
We will continue to need substantial capital in order to acquire
additional automobile dealerships. In the past, we have financed these
acquisitions with a combination of cash flow from operations, proceeds from
borrowings under our credit facility, bond issuances, and stock offerings, and issuancesthe
issuance of our common stock to the sellers of the acquired dealerships.
We currently intend to finance future acquisitions by using cash and
issuing shares of our common stock as partial consideration for acquired
dealerships. The use of common stock as consideration for acquisitions will
depend on twothree factors: (1) the market value of our common stock at the time of
the acquisition, and (2) the willingness of potential acquisition candidates to
accept common stock as part of the consideration for the sale of their
businesses.businesses, and (3) our determination of what is in our best interests. If
potential acquisition candidates are unwilling to accept our common stock, we
will rely solely on available cash or proceeds from debt or equity financing,financings,
which could adversely affect our acquisition program. Accordingly, our ability
to make acquisitions could be adversely affected if the price of our common
stock is depressed.
In addition, managing and integrating additional dealerships into our
existing mix of dealerships may result in substantial costs, diversion of our
management's attention, delays, or other operational or financial problems.
Acquisitions involve a number of special risks, includingincluding:
- incurring significantly higher capital expenditures and operating
expenses;
- failing to integrate the difficultiesoperations and personnel of managing operations located in geographic
areas wherethe acquired
dealerships;
- entering new markets with which we haveare not previously operated, possible diversion of resources and
management's attention, inabilityfamiliar;
- incurring undiscovered liabilities at acquired dealerships;
- disrupting our ongoing business;
- failing to retain key personnel atof the acquired entitydealerships;
- impairing relationships with employees, manufacturers and risks associated with unanticipated events or liabilities,customers;
and
- incorrectly valuing acquired entities,
some or all of which could have a material adverse effect on our business,
financial condition, cash flows and results of operations. Although we conduct
what we believe to be a prudent level of investigation regarding the operating
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condition of the businesses we purchase in light of the circumstances of each
transaction, an unavoidable level of risk remains regarding the actual operating
condition of these businesses.
Acquired entities may subject us to unforeseen liabilities that we are
unable to detect prior to completing the acquisition or liabilities that turn
out to be greater than those we had expected. These liabilities may include
liabilities that arise from non-compliance with environmental laws by prior
owners for which we, as a successor owner, will be responsible. Until we
actually assume operating control of such business assets, we may not be able to
ascertain the actual value of the acquired entity.
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THE LOSSIF STATE DEALER LAWS ARE REPEALED OR WEAKENED, OUR DEALERSHIPS WILL BE MORE
SUSCEPTIBLE TO TERMINATION, NON-RENEWAL OR RENEGOTIATION OF THEIR FRANCHISE
AGREEMENTS.
State dealer laws generally provide that a manufacturer may not terminate
or refuse to renew a franchise agreement unless it has first provided the dealer
with written notice setting forth good cause and stating the grounds for
termination or nonrenewal. Some state dealer laws allow dealers to file protests
or petitions or attempt to comply with the manufacturer's criteria within the
notice period to avoid the termination or nonrenewal. Though unsuccessful to
date, manufacturers' lobbying efforts may lead to the repeal or revision of
state dealer laws. If dealer laws are repealed in the states in which we
operate, manufacturers may be able to terminate our franchises without providing
advance notice, an opportunity to cure or a showing of good cause. Without the
protection of state dealer laws, it may also be more difficult for our dealers
to renew their franchise agreements upon expiration.
In addition, these state dealer laws restrict the ability of automobile
manufacturers to directly enter the retail market in the future. If
manufacturers obtain the ability to directly retail vehicles and do so in our
markets, such competition could have a material adverse effect on us.
IF WE LOSE KEY PERSONNEL OR ARE UNABLE TO ATTRACT ADDITIONAL QUALIFIED
PERSONNEL, OUR BUSINESS COULD BE ADVERSELY AFFECTAFFECTED BECAUSE WE RELY ON THE
INDUSTRY KNOWLEDGE AND RELATIONSHIPS OF OUR OPERATIONS AND
GROWTH.KEY PERSONNEL.
We dependbelieve our success depends to a largesignificant extent upon the abilitiesefforts
and continued effortsabilities of our executive officers, senior management and key employees,
including the principals of our dealerships. Furthermore, we will likely beAdditionally, our business is
dependent onupon our ability to continue to attract and retain qualified
personnel, such as managers, as well as our ability to retain the senior
management of any
dealerships acquired dealerships. The market for qualified employees in the
future. Effective March 31, 2004,industry and in the regions in which we employ twooperate, particularly for general
managers and sales and service personnel, is highly competitive and may subject
us to increased labor costs during periods of low unemployment. We do not have
employment agreements with most of our dealership general managers and other key
dealership personnel.
The unexpected or unanticipated loss of the services of one or more
members of our senior management team could have a material adverse effect on us
and materially impair the efficiency and productivity of our operations. We do
not have key man insurance for any of our executive officers or key personnel.
In addition, the loss of any of our Chairman, Presidentkey employees or the failure to attract
qualified managers could have a material adverse effect on our business and Chief Executive Officermay
materially impact the ability of our dealerships to conduct their operations in
accordance with our national standards.
THE IMPAIRMENT OF OUR GOODWILL, OUR INDEFINITE-LIVED INTANGIBLES AND OUR OTHER
LONG-LIVED ASSETS HAS HAD, AND MAY HAVE IN THE FUTURE, A MATERIAL ADVERSE EFFECT
ON OUR REPORTED RESULTS OF OPERATIONS.
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets,"
we assess goodwill and other indefinite-lived intangibles for impairment on an
annual basis, or more frequently when events or circumstances indicate that an
impairment may have occurred. We also assess the carrying value of our other
long-lived assets, in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," when events or circumstances
indicate that an impairment may have occurred. Based on the organization and
management of our business, we have determined that each of our platforms
currently qualify as reporting units for the purpose of assessing goodwill for
impairment. However, we are required to evaluate the carrying value of our
indefinite-lived, intangible franchise rights at a dealership level.
To determine the fair value of our reporting units in assessing the
carrying value of our goodwill for impairment, we use a discounted cash flow
approach. Included in this analysis are assumptions regarding revenue growth
rates, future gross margin estimates, future selling, general and administrative
expense rates and our Executive Vice President. Our Executive Vice President, Chief Financial
Officerweighted average cost of capital. We also must estimate
residual values at the end of the forecast period and Treasurer has resigned effective March 31, 2004. Our Senior Vice
President, Operations died tragicallyfuture capital expenditure
requirements. Each of these assumptions requires us to use our knowledge of (1)
our industry, (2) our recent transactions, and (3) reasonable performance
expectations for our operations. If any one of the above assumptions changes, in
an accidentsome cases insignificantly, or fails to materialize, the resulting decline in
November 2003. Weour estimated fair
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value could result in a material impairment charge to the goodwill associated
with the applicable platform(s), especially with respect to those platforms
acquired prior to July 1, 2001.
To test the carrying value of each individual franchise right for
impairment, we also use a discounted cash flow based approach. Included in this
analysis are currently conducting searchesassumptions, at a dealership level, regarding revenue growth rates,
future gross margin estimates and future selling, general and administrative
expense rates. Using our weighted average cost of capital, estimated residual
values at the end of the forecast period and future capital expenditure
requirements, we calculate the fair value of each dealership's franchise rights
after considering estimated values for tangible assets, working capital and
workforce. If any one of the above assumptions changes, in some cases
insignificantly, or fails to replace those persons. If either ofmaterialize, the resulting decline in our current
senior executives leave or if we failestimated
fair value could result in a material impairment charge to attract and retain other qualified
employees, our business could be adversely affected.the intangible
franchise right associated with the applicable dealership.
CHANGES IN INTEREST RATES COULD ADVERSELY IMPACT OUR PROFITABILITY.
All of the borrowings under our various credit facilityfacilities bear interest
based on a floating rate. A significant increaseTherefore, our interest expenses will rise with
increases in interest rates. Rising interest rates could causemay also have the effect of
depressing demand in the interest rate sensitive aspects of our business,
particularly new and used vehicle sales, because many of our customers finance
their vehicle purchases. As a substantial increaseresult, rising interest rates may have the effect
of simultaneously increasing our costs and reducing our revenues. We receive
credit assistance from certain automobile manufacturers, which is reflected as a
reduction in our cost of borrowing. At times, we managesales on our exposure
to interest rate volatility through the usestatements of interest rate swaps.operations. Please see
"Quantitative and Qualitative Disclosures about Market Risk" for a discussion
regarding our interest rate sensitivity.
Additionally, aA DECLINE OF AVAILABLE FINANCING IN THE SUB-PRIME LENDING MARKET HAS, AND MAY
CONTINUE TO, ADVERSELY AFFECT OUR SALES OF USED VEHICLES.
A significant increaseportion of vehicle buyers, particularly in interest rates could adversely
impact our ability to arrangethe used car
market, finance their purchases of automobiles. Sub-prime lenders have
historically provided financing for consumers who, for a variety of reasons
including poor credit histories and lack of a down payment, do not have access
to more traditional finance sources. Our recent experience suggests that
sub-prime lenders have tightened their credit standards and may continue to
apply these higher standards in the future. This has adversely affected our used
vehicle sales at rates acceptablesales. If sub-prime lenders continue to apply these higher standards, if
there is any further tightening of credit standards used by sub-prime lenders,
or if there is any additional decline in the overall availability of credit in
the sub-prime lending market, the ability of these consumers to purchase
vehicles could be limited, which could have a material adverse effect on our
customersused car business, revenues, cash flows and the volume of fees we receive for arranging the financing.profitability.
OUR INSURANCE DOES NOT FULLY COVER ALL OF OUR OPERATIONAL RISKS, AND CHANGES IN
THE COST OF INSURANCE OR THE AVAILABILITY OF INSURANCE COULD MATERIALLY INCREASE
OUR INSURANCE COSTS OR RESULT IN A DECREASE IN OUR INSURANCE PROGRAMS COULD ADVERSELY IMPACT OUR
PROFITABILITY.
AutomobileCOVERAGE.
The operation of automobile dealerships require insurance coveringis subject to compliance with a
wide range of laws and regulations and is subject to a broad variety of risks.
WeWhile we have insurance on our real property, comprehensive coverage for our
vehicle inventory, general liability insurance, workers' compensation insurance,
employee dishonesty coverage, employment practices liability insurance,
pollution coverage and errors and omissions insurance in connection with vehicle
sales and financing activities.activities, we are self-insured for a portion of our
potential liabilities. Additionally, changes in the cost of insurance or the
availability of insurance in the future could substantially increase our costs
to maintain our current level of coverage or could cause us to reduce our
insurance includes umbrella policies with a $105.0
million aggregate limit, which covers losses in excesscoverage and increase the portion of our $1 million
self-insured retention on general liability claims.
Additionally,risks that we retain some risk of loss under our self-insured
medical and property / casualty programs. Changes in the insurance market could
impact our level of retained risk and our results of operations.self-insure.
WE ARE SUBJECT TO A NUMBER OF RISKS ASSOCIATED WITH IMPORTING INVENTORY.
A portion of our new vehicle business involves the sale of vehicles,
vehicle parts or vehicles composed of parts that are manufactured outside the
United States. As a result, our operations are subject to customary risks
associated with imported merchandise, including fluctuations in the value of
currencies, import duties, exchange controls, differing tax structures, trade
restrictions, transportation costs, work stoppages and general political and
economic conditions in foreign countries.
The United States or the countries from which our products are imported
may, from time to time, impose new quotas, duties, tariffs or other
restrictions, or adjust presently prevailing quotas, duties or tariffs on
imported merchandise. Any of those impositions or adjustments could affect our
operations and our ability to purchase imported vehicles and parts. This, in
turn,parts at reasonable
prices, which could have an adverse effect on our business.
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THE CYCLICALITY AND SEASONALITY OF VEHICLE SALES MAY ADVERSELY IMPACTTHE AUTOMOBILE RETAIL BUSINESS MAGNIFIES THE IMPORTANCE OF
OUR PROFITABILITY.
Our operations, like the automotive retailingSECOND AND THIRD QUARTER RESULTS.
The automobile industry in general, can
be impacted by a number of factors relating to general economic conditions,
including consumer business cycles, consumer confidence, economic conditions,
availability of consumer credit and interest rates.
Our operations are subject toexperiences seasonal variations in revenues.
Demand for automobiles is generally lower during the winter months than in other
seasons, particularly in regions of the United States with harsh winters. A
higher amount of vehicle sales generally occurs in the second and third fiscal
quarters generally contributing more operating profit than the first and
fourth quarters. Three primary forces drive this seasonality: (1)
manufacturer-relatedof each year due in part to weather-related factors, primarilyconsumer buying
patterns, the historical timing of major manufacturer incentive programs, and
model changeovers, (2) weather-related
factors and (3) consumer buying patterns.
20
the introduction of new vehicle models. Therefore, if conditions surface in the
second or third quarters that depress or affect automotive sales, such as major
geopolitical events, high fuel costs, depressed economic conditions or similar
adverse conditions, our revenues for the year will be disproportionately
adversely affected. Our dealerships located in the northeastern states are
affected by seasonality more than our dealerships in other regions.
OUR BUSINESS AND THE AUTOMOTIVE RETAILINGRETAIL INDUSTRY IS HIGHLY COMPETITIVE,IN GENERAL ARE SUSCEPTIBLE TO
ADVERSE ECONOMIC CONDITIONS, INCLUDING CHANGES IN CONSUMER CONFIDENCE, FUEL
PRICES AND CREDIT AVAILABILITY, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON
OUR BUSINESS, REVENUES AND PROFITABILITY.
We believe the automotive retail industry is influenced by general
economic conditions and particularly by consumer confidence, the level of
personal discretionary spending, interest rates, fuel prices, unemployment rates
and credit availability. Historically, unit sales of motor vehicles,
particularly new vehicles, have been cyclical, fluctuating with general economic
cycles. During economic downturns, retail new vehicle sales typically experience
periods of decline characterized by oversupply and weak demand. Although
incentive programs initiated by manufacturers in late 2001 abated these
historical trends, the automotive retail industry may experience sustained
periods of decline in vehicle sales in the future. Any decline or change of this
type could have a material adverse effect on our business, revenues, cash flows
and profitability.
In addition, local economic, competitive and other conditions affect the
performance of our dealerships. Our revenues, cash flows and profitability
depend substantially on general economic conditions and spending habits in those
regions of the United States where we maintain most of our operations.
SUBSTANTIAL COMPETITION IN AUTOMOTIVE SALES AND SERVICES MAY REDUCEADVERSELY AFFECT
OUR PROFITABILITY DUE TO OUR NEED TO LOWER PRICES TO SUSTAIN SALES AND
GROWTH.PROFITABILITY.
The automotive retail industry is highly competitive. Depending on the
geographic market, we compete with:
- franchised automotive dealerships in our markets that sell the same
or similar makes of new and used vehicles that we offer,
occasionally at lower prices than we do;
- other national or regional affiliated groups of franchised
dealerships;
- private market buyers and sellers of used vehicles;
- Internet-based vehicle brokers that sell vehicles obtained from
franchised dealers directly to consumers;
- service center chain stores; and
- independent service and repair shops.
We also compete with regional and national vehicle rental companies that
sell their used rental vehicles. In addition, automobile manufacturers may
directly enter the retail market in the future, which could have a material
adverse effect on us. As we seek to acquire dealerships in new markets, we may
face significant competition as we strive to gain market share. Some of our
competitors have greater financial, marketing and personnel resources and lower
overhead and sales costs than we have. We do not have any cost advantage in
purchasing new vehicles from vehicle manufacturers and typically rely on
advertising, merchandising, sales expertise, service reputation and dealership
location in order to sell new vehicles. Our franchise agreements do not grant us
the exclusive right to sell a manufacturer's product within a given geographic
area. Our revenues and profitability may be materially and adversely affected if
competing dealerships expand their market share or are awarded additional
franchises by manufacturers that supply our dealerships.
In addition to competition for vehicle sales, our dealerships compete with
franchised dealerships to perform warranty repairs and with other automotive
dealers, franchised and independent service center chains and independent
garages for non-warranty repair and routine maintenance business. Our
dealerships compete with other automotive dealers, service stores and auto parts
retailers in their parts operations. We believe that the principal competitive
factors in service and parts sales are the quality of customer service, the use
of factory-approved replacement parts, familiarity with a manufacturer's brands
and models, convenience, the competence of technicians, location, and price. A
number of regional or national chains offer selected parts and services at
prices that may be lower than our dealerships' prices. We also compete with a
broad range of financial institutions in arranging financing for our customers'
vehicle purchases.
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Some automobile manufacturers have in the past acquired and may in the
future attempt to acquire automotive dealerships in certain states. Our revenues
and profitability could be materially adversely affected by the efforts of
manufacturers to enter the retail arena.
In addition, the Internet is becoming a significant part of the sales
process in our industry. We believe that customers are using the Internet as
part of the sales process to compare pricing for cars and related finance and
insurance services, which may reduce gross profit margins for new and used cars
and profits for related finance and insurance services. Some websites offer
vehicles for sale over the Internet without the benefit of having a dealership
franchise, although they must currently source their vehicles from a franchised
dealer. If Internet new vehicle sales are allowed to be conducted without the
involvement of franchised dealers, or if dealerships are able to effectively use
the Internet to sell outside of their markets, our business and acquisition activity is subjectcould be materially
adversely affected. We would also be materially adversely affected to intense
competition.the extent
that Internet companies acquire dealerships or align themselves with our
competitors' dealerships.
Please see "Business-Competition""Business -- Competition" for amore discussion of competition in
our industry.
GOVERNMENTALDUE TO THE NATURE OF THE AUTOMOTIVE RETAILING BUSINESS, WE MAY BE INVOLVED IN
LEGAL PROCEEDINGS OR SUFFER LOSSES THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON
OUR BUSINESS.
We will continue to be involved in legal proceedings in the ordinary
course of business. A significant judgment against us, the loss of a significant
license or permit or the imposition of a significant fine could have a material
adverse effect on our business, financial condition and future prospects. In
addition, it is possible that we could suffer losses at individual dealerships
due to fraud or theft.
OUR AUTOMOTIVE DEALERSHIPS ARE SUBJECT TO SUBSTANTIAL REGULATION AND ENVIRONMENTAL REGULATION COMPLIANCE COSTSWHICH MAY
ADVERSELY AFFECT OUR PROFITABILITY.PROFITABILITY AND SIGNIFICANTLY INCREASE OUR COSTS IN THE
FUTURE.
A number of state and federal laws and regulations affect our business. We
are also subject to laws and regulations relating to business corporations
generally. In every state in which we operate, we must obtain various licenses
in order to operate our businesses, including dealer, sales, finance and
insurance-related licenses issued by state authorities. These laws also regulate
our conduct of business, including our advertising, operating, financing,
employment and sales practices. Other laws and regulations include state
franchise laws and regulations and other extensive laws and regulations
applicable to new and used motor vehicle dealers, as well as federal and state
wage-hour, anti-discrimination and other employment practices laws.
Our financing activities with customers are subject to federal
truth-in-lending, consumer leasing and equal credit opportunity laws and
regulations, as well as state and local motor vehicle finance laws, installment
finance laws, insurance laws, usury laws and other installment sales laws and
regulations. Some states regulate finance fees and charges that may be paid as a
result of vehicle sales. Claims arising out of actual or alleged violations of
law may be asserted against us or our dealerships by individuals or governmental
entities and may expose us to significant damages or other penalties, including
revocation or suspension of our licenses to conduct dealership operations and
fines.
Our operations are also subject to the National Traffic and Motor Vehicle
Safety Act, the Magnusson-Moss Warranty Act, Federal Motor Vehicle Safety
Standards promulgated by the United States Department of Transportation and
various state motor vehicle regulatory agencies. The imported automobiles we
purchase are subject to U.S. customs duties and, in the ordinary course of our
business, we may, from time to time, be subject to claims for duties, penalties,
liquidated damages, or other charges.
Our operations are subject to consumer protection laws known as Lemon
Laws. These laws typically require a manufacturer or dealer to replace a new
vehicle or accept it for a full refund within one year after initial purchase if
the vehicle does not conform to the manufacturer's express warranties and the
dealer or manufacturer, after a reasonable number of attempts, is unable to
correct or repair the defect. Federal laws require various written disclosures
to be provided on new vehicles, including mileage and pricing information.
Possible penalties for violation of any of these laws or regulations
include revocation or suspension of our licenses and civil or criminal fines and
penalties. In addition, many laws may give customers a private cause of action.
Violation of these laws, the cost of compliance with these laws, or changes in
these laws could result in adverse financial consequences to us.
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OUR AUTOMOTIVE DEALERSHIPS ARE SUBJECT TO FEDERAL, STATE AND LOCAL ENVIRONMENTAL
REGULATIONS THAT MAY RESULT IN CLAIMS AND LIABILITIES, WHICH COULD BE MATERIAL.
We are subject to a numberwide range of federal, state and local environmental
laws and regulations, that affectincluding those governing discharges into the air and
water, the operation and removal of underground and aboveground storage tanks,
the use, handling, storage and disposal of hazardous substances and other
materials and the investigation and remediation of contamination. As with
automotive dealerships generally, and service, parts and body shop operations in
particular, our business involves the complianceuse, storage, handling and contracting for
recycling or disposal of hazardous materials or wastes and other environmentally
sensitive materials. Operations involving the management of hazardous and
non-hazardous materials are subject to requirements of the federal Resource
Conservation and Recovery Act, or RCRA, and comparable state statutes. Most of
our dealerships utilize aboveground storage tanks, and to a lesser extent
underground storage tanks, primarily for petroleum-based products. Storage tanks
are subject to periodic testing, containment, upgrading and removal under RCRA
and its state law counterparts. Clean-up or other remedial action may be
necessary in the event of leaks or other discharges from storage tanks or other
sources. We may also have liability in connection with materials that were sent
to third-party recycling, treatment, and/or disposal facilities under the
Comprehensive Environmental Response, Compensation and Liability Act, and
comparable state statutes, which impose liability for investigation and
remediation of contamination without regard to fault or the legality of the
conduct that contributed to the contamination. Similar to many of our
competitors, we have incurred and will continue to incur, capital and operating
expenditures and other costs in complying with such laws and regulations.
Soil and groundwater contamination is known to exist at some of our
current or former properties. Further, environmental laws and regulations are
complex and subject to change. In addition, in connection with our acquisitions,
it is possible that we will assume or become subject to new or unforeseen
environmental costs or liabilities, some of which may impose substantialbe material. In connection
with our dispositions, or prior dispositions made by companies we acquire, we
may retain exposure for environmental costs on us.and liabilities, some of which may
be material. We may be required to make material additional expenditures to
comply with existing or future laws or regulations, or as a result of the future
discovery of environmental conditions. Please see "Business --- Governmental
Regulations"Regulations -- Environmental, Health and "Environmental Matters"Safety Laws and Regulations" for a
discussion of the effect of such regulations on us.
CHANGES IN ACCOUNTING ESTIMATES COULD ADVERSELY IMPACT OUR PROFITABILITY.
We are required to make estimates and assumptions in the preparation of
financial statements in conformity with accounting principles generally accepted
in the United States. Please see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Discussion of-- Critical Accounting Policies"Policies
and Accounting Estimates" for a discussion of what we believe are our critical
accounting policies.policies and accounting estimates.
OUR SIGNIFICANT INDEBTEDNESS AND LEASE OBLIGATIONS COULD MATERIALLY ADVERSELY
AFFECT OUR FINANCIAL HEALTH, LIMIT OUR ABILITY TO FINANCE FUTURE ACQUISITIONS
AND CAPITAL EXPENDITURES, AND PREVENT US FROM FULFILLING OUR FINANCIAL
OBLIGATIONS.
As of December 31, 2004, our total outstanding indebtedness and lease and
other obligations were approximately $1,711.2 million, including the following:
- $632.6 million under the floorplan portion of our revolving credit
facility;
- $562.3 million of future commitments under various operating leases;
- $195.5 million under our Ford Motor Credit floorplan facility;
- $144.7 million in 8-1/4% senior subordinated notes due 2013;
- $90.5 million under the acquisition portion of our revolving credit
facility; and
- $85.6 million of other short- and long-term commitments.
As of December 31, 2004, we had approximately $136.7 million available for
additional borrowings under the floorplan portion of our revolving credit
facility, $72.3 million available for additional borrowings under the
acquisition portion of our revolving credit facility, and $104.5 million
available for additional borrowings under the Ford Motor Credit floorplan
facility. In addition, the indenture relating to our senior subordinated notes
and other debt instruments allow us to incur additional indebtedness and enter
into additional operating leases.
Our significant amount of indebtedness and lease obligations could have
important consequences to us, including the following:
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- our ability to obtain additional financing for acquisitions, capital
expenditures, working capital or general corporate purposes may be
impaired in the future;
- a substantial portion of our current cash flow from operations must
be dedicated to the payment of principal and interest on our
indebtedness and the payment of lease obligations, thereby reducing
the funds available to us for our operations and other purposes;
- some of our borrowings are and will continue to be at variable rates
of interest, which exposes us to the risk of increasing interest
rates; and
- we may be substantially more leveraged than some of our competitors,
which may place us at a relative competitive disadvantage and make
us more vulnerable to changing market conditions and regulations.
In addition, our debt instruments contain numerous covenants that limit
our discretion with respect to business matters, including mergers or
acquisitions, paying dividends, incurring additional debt, making capital
expenditures or disposing of assets. A breach of any of these covenants could
result in a default under the applicable agreement or indenture. In addition, a
default under one agreement or indenture could result in a default and
acceleration of our repayment obligations under the other agreements or
indentures under the cross default provisions in those agreements or indentures.
If a default or cross default were to occur, we may not be able to pay our debts
or borrow sufficient funds to refinance them. Even if new financing were
available, it may not be on terms acceptable to us. As a result of this risk, we
could be forced to take actions that we otherwise would not take, or not take
actions that we otherwise might take, in order to comply with the covenants in
these agreements and indentures.
OUR STOCKHOLDER RIGHTS PLAN AND CERTAIN PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS
CONTAIN CERTAIN PROVISIONS THAT MAKE A TAKEOVER OF GROUP 1 DIFFICULT.
Our stockholder rights plan and certain provisions of our certificate of
incorporation and bylaws could make it more difficult for a third party to
acquire control of Group 1, even if such change of control would be beneficial
to our stockholders. These include provisions:
- providing for a board of directors with staggered, three-year terms,
permitting the removal of a director from office only for cause;
- allowing only the board of directors to set the number of directors;
- requiring super-majority or class voting to affect certain
amendments to our certificate of incorporation and bylaws;
- limiting the persons who may call special stockholders' meetings;
- limiting stockholder action by written consent;
- establishing advance notice requirements for nominations for
election to the board of directors or for proposing matters that can
be acted upon at stockholders' meetings; and
- allowing our board of directors to issue shares of preferred stock
without stockholder approval.
Certain of our dealerfranchise agreements prohibit the acquisition of more than
a specified percentage of our common stock without the consent of the relevant
manufacturer. These terms of our dealerfranchise agreements could also make it more
difficult for a third party to acquire control of Group 1.
INTERNET WEB SITE AND AVAILABILITY OF PUBLIC FILINGS
Our Internet address is www.group1auto.com. We make the following
information available free of charge on our Internet Web site:
- Annual Report on Form 10-K10-K;
- Quarterly Reports on Form 10-Q10-Q;
- Current Reports on Form 8-K8-K;
- Amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 19341934;
- Corporate Governance Guidelines
21
Guidelines;
- Charters for our Audit, Compensation and Nominating/Governance
CommitteesCommittees;
- Code of Conduct for Directors, Officers and EmployeesEmployees; and
- Code of Ethics for our Chief Executive Officer, Chief Financial
Officer, Controller, and all of our financial and accounting
officers.
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We make our SEC filings available on our Web site as soon as reasonably
practicable after we electronically file such material with, or furnish such
material to, the SEC. We make our SEC filings available via a link to our
filings on the SEC Web site. The above information is available in print to
anyone who requests it.
ITEM 2. PROPERTIES
We use a number of facilities to conduct our dealership operations. Each
of our dealerships may include facilities for (1) new and used vehicle sales,
(2) vehicle service operations, (3) retail and wholesale parts operations, (4)
collision service operations, (5) storage, and (6) general office use. We try to
structure our operations so as to avoid the ownership of real property. In
connection with our acquisitions, we generally seek to lease rather than acquire
the facilities on which the acquired dealerships are located. We generally enter
into lease agreements with respect to such facilities that have 30-year total
terms with 15-year initial terms and three five-year option periods, at our
option. As a result, we lease the majority of our facilities under long-term
operating leases.
ITEM 3. LEGAL PROCEEDINGS
From time to time, our dealerships are named as defendants in claims
involving the manufacture or sale of automobiles, contractual disputes, and
other matters arising in the ordinary course of business.
The Texas Automobile Dealers Association, ("TADA")or 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 as defendants 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. OnIn
October 25, 2002, the Texas Court of Appeals affirmed the trial court's order of
class certification in the state action and theaction. The defendants have requested that the Texas
Supreme Court review that decision, and the Court declined that request on appeal. On August 25, 2003,March
26, 2004. The defendants petitioned the Texas Supreme Court requested briefing in the state cases. Such briefingto reconsider its
denial, and that petition was completeddenied on February 6,September 10, 2004. In the otherfederal
antitrust action, onin March 26, 2003, the federal district court also certified a
class of consumers, but denied a requestconsumers. Defendants appealed the district court's certification 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 appealwhich on October 5, 2004, reversed the class
certification rulingorder and remanded the case back to the federal district court for
further proceedings. In February 2005, the plaintiffs in the federal action
sought a writ of certiorari to the United States Supreme Court in order to
obtain review of the lower federal court. Briefing onFifth Circuit's order. The defendants notified the merits of
defendants' appeal was completed on February 13, 2004. The parties participated
in mediation in 2003. That mediation resulted in a settlement proposal from the
plaintiff class representativesU.S
Supreme Court that they would not respond to the defendant dealers, includingwrit unless requested to do so
by the Court. Also in February 2005, settlement discussions with the plaintiffs
in the three cases culminated in formal settlement offers pursuant to which we
could settle the state and federal cases. We have not entered into the
settlements at this time, and, if we do, the settlements will be contingent upon
court approval. The proposed settlements contemplate our Texas
dealership subsidiaries. The proposal was contingentdealerships issuing
certificates for discounts off future vehicle purchases, refunding cash in some
circumstances, and paying attorneys' fees and certain costs. Dealers
participating in the settlements would agree to certain disclosures regarding
inventory tax charges when itemizing such charges on achieving a certain
minimum level of participation amongcustomer invoices. If we do
not enter into the defendant dealers based onsettlements, or if the number
of transactionssettlements are not approved, we will
continue to vigorously assert available defenses in which each dealer engaged. Because the participation
threshold was not satisfied, the proposal failed.connection with these
lawsuits. 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 on different terms or an adverse
resolution of this matter in litigation 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.position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
22-22-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock is listed on the New York Stock Exchange ("NYSE")
under
the symbol "GPI." There were 109104 holders of record of our common stock as of
March 1, 2004.February 28, 2005.
The following table presents the quarterly high and low sales prices for
our common stock for 20022003 and 2003,2004, as reported on the New York Stock Exchange
Composite Tape under the symbol "GPI."
HIGH LOW
---- ---------- -------
2002:
First Quarter............................. $43.69 $25.31
Second Quarter............................ 50.80 34.85
Third Quarter............................. 38.11 22.20
Fourth Quarter............................ 24.75 18.00
2003:
First Quarter.............................Quarter............... $ 27.35 $ 19.91
Second Quarter............................Quarter.............. 33.94 20.80
Third Quarter.............................Quarter............... 40.19 32.17
Fourth Quarter............................Quarter.............. 39.04 31.60
2004:
First Quarter............... $ 38.74 $ 34.30
Second Quarter.............. 37.83 29.18
Third Quarter............... 33.27 26.32
Fourth Quarter.............. 31.70 26.49
We have never declared or paid dividends on our common stock. Generally,
we have retained earnings to finance the development and expansion of our
business. Any decision to pay dividends will be made by our Board of Directors
after considering our results of operations, financial condition, cash flows,
capital requirements, outlook for our business, general business conditions and
other factors.
Certain provisionsProvisions of our credit facilities and our senior subordinated notes
require us to maintain certain financial ratios and limit the amount of
disbursements we may make outside the ordinary course of business, includingbusiness. These include
limitations on the payment of cash dividends and on stock repurchases, which are
limited to a percentage of cumulative net income.
We have entered into an agreement to purchase certain assets and assume
certain liabilities of various automobile dealerships for cash and shares of our
Common Stock. The following is the transaction in which stock has been issued:
Date Securities
Date of Agreement Issued Acquisition Shares
- ----------------- ------ ----------- ------
November 11, 2003 February 9, 2004 David Michael Motor Group 54,372
We relied on Section 4(2) under the Securities Act of 1933, as amended
(the "Securities Act"), as an exemption from the registration requirements of
the Securities Act relating to the issuance of the common stock in the
acquisition. We believe we are justified in relying on such exemption since only
one person received common stock in the transaction and such person is an
"accredited investor" as defined by Regulation D.
EQUITY COMPENSATION PLANS
InformationWe disclose information regarding our equity compensation plans as of
December 31, 2003, is disclosed2004, in Item 12.12 "Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters."
23-23-
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical financial data as of December 31, 2004,
2003, 2002, 2001 2000 and 1999,2000, and for the five years in the period ended December
31, 2003,2004 have been derived from our audited financial statements.statements, subject to
certain reclassifications to make prior years' conform to the current year
presentation. This selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and related notes included
elsewhere in this Form 10-K.
We have accounted for all of our dealership acquisitions using the
purchase method of accounting and, as a result, we do not include in our
financial statements the results of operations of these dealerships prior to the
date they werewe acquired by us.them. As a result of the effects of our acquisitions and other
potential factors in the future, the historical financial information described
in the selected financial data is not necessarily indicative of the results of
operations and financial position of Group 1 in the future or the results of
operations and financial position that would have resulted had such acquisitions
occurred at the beginning of the periods presented in the selected financial
data.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
1999
--------------------------------------------------------------------------------- ------------ ------------- ------------- ------------
(dollars in thousands, except per share amounts)
INCOME STATEMENT DATA:
INCOME STATEMENT DATA:
Revenues............................. $ 5,435,033 $ 4,518,560 $ 4,214,364 $ 3,996,374 $ 3,586,146
$ 2,508,324
Cost of sales........................ 4,603,267 3,795,149 3,562,069 3,389,122 3,058,709
2,131,967
----------- ----------- ----------- ----------- ----------------------- ------------ ------------- ------------- ------------
Gross profit...................... 831,766 723,411 652,295 607,252 527,437 376,357
Selling, general and
administrative expenses........... 672,068 561,698 502,732 458,546 393,679 279,791503,066 458,734 393,838
Depreciation and amortization........ 14,381 11,940 17,358 16,038 10,616
----------- ----------- ----------- ----------- -----------15,836 12,510 10,137 15,739 14,539
Impairment of assets................. 44,711 -- -- -- --
------------ ------------ ------------- ------------- ------------
Income from operations............ 147,332 137,623 131,348 117,720 85,95099,151 149,203 139,092 132,779 119,060
Other income (expense):
Floorplan interest expense........ (20,615) (19,371) (27,935) (37,536) (20,395)(25,349) (21,571) (20,187) (28,674) (38,219)
Other interest expense, net....... (14,276) (9,925) (13,863) (15,500) (10,052)(19,299) (15,191) (10,578) (14,555) (16,157)
Loss on redemption of senior
subordinated notes.............. (6,381) -- (1,173) -- --
Other income (expense), net....... (170) 631 (1,045)128 (128) 1,142
186
----------- ----------- ----------- ----------- ----------------------- ------------ ------------- ------------- ------------
Income before income taxes........ 47,952 113,072 107,282 89,422 65,826
55,689
Provision for income taxes........... 20,171 36,946 40,217 33,980 25,014
22,174
----------- ----------- ----------- ----------- ----------------------- ------------ ------------- ------------- ------------
Net income........................ $ 27,781 $ 76,126 $ 67,065 $ 55,442 $ 40,812
$ 33,515
=========== =========== =========== =========== ======================= ============ ============= ============= ============
Earnings per share:
Basic............................. $ 1.22 $ 3.38 $ 2.93 $ 2.75 $ 1.91
Diluted........................... $ 1.62
Diluted...........................1.18 $ 3.26 $ 2.80 $ 2.59 $ 1.88
$ 1.55
Weighted average shares outstanding:
Basic............................. 22,807,922 22,523,825 22,874,918 20,137,661 21,377,902
20,683,308
Diluted........................... 23,493,899 23,346,221 23,968,072 21,415,154 21,709,833 21,558,920
AS OF DECEMBER 31,
-------------------------------------------------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
1999
--------------------------------------------------------------------------------- ------------ ------------- ------------- ------------
(in thousands)
BALANCE SHEET DATA:
BALANCE SHEET DATA:
Working capital....................... $ 276,530155,453 $ 94,910275,582 $ 95,704 $ 154,361 $ 54,769
$ 80,128
Inventories, net...................... 877,575 671,279 622,205 454,961 527,101
386,255
Total assets.......................... 1,488,165 1,422,3931,947,220 1,502,445 1,437,590 1,052,823 1,097,721
840,848
Total long-termFloorplan notes payable............... 848,260 493,568 652,538 364,954 536,707
Acquisition line...................... 84,000 -- -- -- 35,250
Long-term debt, including current
portion....................portion............................ 157,801 231,088 82,847 95,584 140,067 112,188104,817
Stockholders' equity.................. 567,174 518,109 443,417 392,243 247,416
232,029
Long-term debt to capitalization......capitalization(1)... 30% 31% 16% 20% 36% 33%
24(1) Includes long-term debt and acquisition line
-24-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are a leading operatorYou should read the following discussion in conjunction with Part I,
including the matters set forth in the $1 trillion automotive retailing
industry. Through a series"Risk Factors" section of acquisitions,this Form 10-K,
and our Consolidated Financial Statements and notes thereto included elsewhere
in this Form 10-K.
OVERVIEW
During 2004, as throughout our seven-year history, we operate 122 dealership franchises
in California, Colorado, Florida, Georgia, Louisiana, Massachusetts, New Jersey,
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 29 collision service centers.
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, finance and general management
personnel, salaries for administrative personnel and expenses for rent,
marketing, insurance and utilities. We believe that a majority 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, which is generally based on
variable rates. 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 floorplan interest expense over the
past three years, mitigating the impact of interest rate changes on our
financial results.
We have growngrew our business
primarily through acquisitions. We typically seek to acquire large, profitable,
well-established and well-managed dealers that are leaders in their respective
market areas. Over the past five years, we have purchased 79acquired 69 dealership
franchises with annual revenues of approximately $2.5$2.8 billion, disposed of 2220
dealership franchises with annual revenues of approximately $277.2$267.2 million, and
been granted 12nine new dealership franchises by the manufacturers. Each
acquisition has been accounted for as a purchase and is included in our
financial statements from the date of acquisition. In the following discussion
and analysis, we report certain performance measures of our newly acquired
dealerships separately from those of our existing dealerships.
Our acquisition target for 2004 is to complete
platformoperating results reflect the combined performance of each of our
inter-related business activities, which include the sale of new vehicles, used
vehicles, finance and tuck-in acquisitionsinsurance products, and parts, service and collision
repair services. Each of dealerships that have approximately $1
billion in annual revenues.
CURRENT BUSINESS TRENDS
During the last three years,these activities has historically been directly or
indirectly impacted by a variety of supply / demand factors, including vehicle
inventories, consumer confidence, discretionary spending, availability and
affordability of consumer credit, manufacturer incentives, weather patterns, and
interest rates. For example, during periods of sustained economic downturn or
significant supply / demand imbalances, certain of these factors may negatively
impact new vehicle sales, have ranged between 16.7as consumers tend to shift their purchases to used
vehicles or less expensive new vehicles. Some consumers may even delay their
purchasing decisions altogether, electing instead to repair their existing
vehicles. In such cases, however, we believe the impact on our overall business
is mitigated due to our ability to offer other products and services, such as
used vehicles and parts, service and collision repair services.
For the years ended December 31, 2004, 2003 and 2002, we realized net
income of $27.8 million, $76.1 million and 17.2$67.1 million, unitsrespectively, and
diluted earnings per share of $1.18, $3.26 and $2.80, respectively. The
following factors impacted our financial condition and results of operations in
2004, 2003 and 2002, and may cause our reported financial data not to be
indicative of our future financial condition and operating results.
YEAR ENDED DECEMBER 31, 2004:
- IMPAIRMENT OF GOODWILL AND LONG-LIVED ASSETS: As a result of the
further deterioration of our Atlanta platform's financial results,
we concluded that the carrying amount of the reporting unit exceeded
its fair value as of September 30, 2004. Accordingly, in the United States. Industry analyst estimates
forthird
quarter, we recorded a total pretax charge of $41.4 million, or
$29.4 million on an after-tax basis or $1.25 per diluted share,
related to the impairment of the carrying value of its goodwill and
certain long-lived assets.
- LOSS ON REDEMPTION OF SENIOR SUBORDINATED NOTES: In March 2004, we
completed the redemption of all of our outstanding 10 7/8% senior
subordinated notes and incurred a $6.4 million pretax charge, or
$4.0 million on an after-tax basis or $0.17 per diluted share.
- IMPAIRMENT OF INDEFINITE-LIVED INTANGIBLE ASSET: During our annual
assessment of the carrying value of our goodwill and
indefinite-lived intangible assets in connection with our year-end
financial statement preparation process, we determined that the
carrying value of one of our dealership's intangible franchise
rights was in excess of its fair market value. Accordingly, we
recorded a pretax charge of $3.3 million, or $2.0 million on an
after-tax basis or $0.08 per diluted share.
YEAR ENDED DECEMBER 31, 2003:
- RESOLUTION OF TAX CONTINGENCIES: During 2003, we recognized a $5.4
million reduction, or $0.23 per diluted share, in our estimated tax
liabilities as a result of the favorable resolution of tax
contingencies at the conclusion of various state and federal tax
audits.
-25-
YEAR ENDED DECEMBER 31, 2002:
- LOSS ON REDEMPTION OF SENIOR SUBORDINATED NOTES: During 2002, we
repurchased $11.6 million of our 10 7/8% senior subordinated notes
and incurred a $1.2 million pretax charge, or $0.7 million on an
after-tax basis or $0.03 per diluted share.
These items, and other variances between the periods presented, are
predictingcovered in the following discussion.
KEY PERFORMANCE INDICATORS
The following table highlights certain of the key performance indicators
we use to manage our business:
CONSOLIDATED STATISTICAL DATA
FOR THE YEAR ENDED
------------------------------------
2004 2003 2002
---------- ----------- ---------
Unit Sales
Retail Sales
New Vehicle 117,971 99,971 95,005
Used Vehicle 66,336 62,721 65,698
---------- ----------- ---------
Total Retail Sales 184,307 162,692 160,703
Wholesale Sales 49,372 43,616 39,754
---------- ----------- ---------
Total Vehicle Sales 233,679 206,308 200,457
Gross Margin
New Vehicle Retail Sales 7.1% 7.3% 7.5%
Used Vehicle Total Adjusted Retail Sales(1) 11.3% 11.3% 10.4%
Parts and Service Sales 54.8% 55.7% 56.0%
Total Gross Margin 15.3% 16.0% 15.5%
SG&A(2) as a % of Gross Profit 80.8% 77.6% 77.1%
Operating Margin 1.8% 3.3% 3.3%
Operating Margin Excluding Impairment 2.6% 3.3% 3.3%
Pretax Margin 0.9% 2.5% 2.5%
Pretax Margin Excluding Impairment 1.7% 2.5% 2.5%
Finance and Insurance
Revenues per Retail Unit Sold $ 938 $ 1,003 $ 880
(1) We monitor a statistic we call "used vehicle total adjusted retail sales
gross margin" which equals total used vehicle gross profit, which includes
the total net loss from the wholesale sale of used vehicles, divided by
retail used vehicle sales revenues. The profit or loss on wholesale used
vehicle sales are included in this number, as these transactions
facilitate retail used vehicle sales and management of inventory levels.
(2) Selling, general and administrative expenses.
Our 2004 retail unit sales increased, as compared to 2003, as a result of
acquisitions, as same store new vehicle unit sales were relatively flat and same
store retail unit sales of approximately 17 million
units. The used vehicles decreased 4.5%.
Over the past three years, our new vehicle marketgross margin has beendeclined from
7.5% for the twelve months ended December 31, 2002, to 7.3% for 2003 and 7.1%
for 2004. At the same time, however, our consolidated gross profit per retail
unit sold has risen slightly from $1,996 per unit in 2002, to $2,001 per unit in
2003 and $2,007 per unit in 2004. During 2004, decreases in gross profit per
retail unit sold in our same store results were offset by increases attributable
to the impact of acquired luxury franchises. We believe our same store results
were negatively impacted by aggressiverising retail prices, without a corresponding
increase in gross profit, as a result of increased competition placing pressure
on realized margins. We expect margin pressures to continue in 2005.
Our used vehicle results are directly affected by the level of
manufacturer incentives on new vehicles, the number and quality of trade-ins and
lease turn-ins and the availability of consumer credit. Over the last three
years, we have seen a decline in same store retail sales of used vehicle units,
partially offset by the benefit received from
-26-
acquisitions. During this same time period, however, we have seen pricing begin
to stabilize and our adjusted retail sales margin has increased from 10.4% in
2002 to 11.3% in 2003 and 2004.
Our consolidated parts and service gross margin decreased to 54.8% in
2004, from 55.7% in 2003, as a result of an increase in contribution from our
parts business in relation to our service business. Since our parts business has
lower gross margins than our service business, this change in mix has caused our
overall parts and service gross margin to decline.
Our finance and insurance revenues decreased from $1,003 per retail unit
sold in 2003 to $938 in 2004, reflecting a decline in penetration rates of
finance and insurance products for new and used vehicle sales and the dilutive
effect of acquisitions, as their finance and insurance revenues per retail unit
sold were significantly below our average.
Our selling, general and administrative expenses (SG&A) increased as a
percentage of gross profit from 77.6% during 2003, to 80.8% in 2004. This
increase resulted primarily from increases in same store, non-variable costs.
Our same store variable costs, namely personnel-related items and 2002. Weadvertising,
decreased in approximately the same percentages as our gross profit.
Acquisitions also had a negative effect on our overall average, as their SG&A
levels were higher than our same store average.
The combination of the above factors, together with the impairment charges
recorded in 2004 and an increase in our floorplan and other net interest
expense, caused a decline in our operating margin to 1.8%, from 3.3% in 2003,
and in our pretax margin to 0.9%, from 2.5% in 2003. Our floorplan and other net
interest expense increased primarily as a result of higher average borrowings
due to acquisition activity and rising interest rates.
While we believe that the new vehicle market will remain extremely
competitive in 2005, we expect some improvement in the current oversupply of new
vehicles and also believe that manufacturers will continue providing
low-interest financing and other incentives in order to stimulate demand. These
incentives will also likely continue to negatively impact the used vehicle
market, as they serve to make new vehicles more affordable and, therefore, more
desirable than used vehicles. Tightened credit standards by lenders serving the
lower-tier and sub-prime markets may also continue to negatively affect the used
vehicle market.
A factor that will impact our financial performance in 2005 is the
adoption of a new accounting standard. Specifically, in accordance with SFAS
123(R), "Share-Based Payment," which was issued by the Financial Accounting
Standards Board in December 2004, we will begin recognizing compensation expense
related to stock option and employee stock purchase plan grants in our statement
of operations during the third quarter of 2005.
We believe that our future success depends, among other things, on our
ability to successfully acquire and integrate new dealerships, while at the same
time achieving optimum performance from our diverse franchise mix, attracting
and retaining high-caliber employees, and reinvesting as needed to maintain
top-quality facilities. During 2005, we expect to spend approximately $68.9
million to construct new facilities and upgrade or expand existing facilities,
although we expect to sell and lease back facilities accounting for
approximately $15.7 million of these expenditures, resulting in net expenditures
of $53.2 million. In addition, we expect to complete acquisitions of dealerships
with approximately $300 million in expected aggregate annual revenues.
CRITICAL ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES
Our consolidated financial statements are impacted by the accounting
policies we use and the estimates and assumptions we make during their
preparation. The following is a discussion of our critical accounting policies
and critical accounting estimates.
CRITICAL ACCOUNTING POLICIES
We have identified below what we believe to be stable in 2004 as we anticipate the new vehicle market
improving and increases in manufacturer incentives abating. Duemost pervasive
accounting policies that are of particular importance to the increaseportrayal of our
financial position, results of operations and cash flows. See Note 2 to our
Consolidated Financial Statements for further discussion of all our significant
accounting policies.
INVENTORIES. We carry our new, used and demonstrator vehicle inventories,
as well as our parts and accessories inventories, at the lower of cost or market
in our consolidated balance sheets. Vehicle inventory cost consists of the
amount paid to acquire the inventory, plus reconditioning cost, cost of
equipment added and transportation. Additionally, we receive interest assistance
from some of our manufacturers. This assistance is accounted for as a vehicle
purchase price discount and is reflected as a reduction to the inventory cost on
our balance sheets and as a reduction to cost of sales in our statements of
operation as the vehicles are sold. As the market value of our inventory
typically declines over time, we establish reserves based on our historical loss
experience and market
-27-
trends. These reserves are charged to cost of sales and reduce the carrying
value of our inventory on hand. Used vehicles are complex to value as there is
no standardized source for determining exact values and each vehicle and each
market in operation,which we operate is unique. As a result, the value of each used
vehicle taken at trade-in, or purchased at auction, is subjectively determined
based on the industry expertise of the responsible used vehicle manager. Our
valuation risk is mitigated, somewhat, by how quickly we turn this inventory. At
December 31, 2004, our used vehicle days' supply was 29 days.
RETAIL FINANCE, INSURANCE AND VEHICLE SERVICE CONTRACT REVENUES
RECOGNITION. We arrange financing for customers through various institutions and
receive financing fees based on the increasing complexitydifference between the loan rates charged to
customers and predetermined financing rates set by the financing institution. In
addition, we receive fees from the sale of insurance and vehicle service
contracts to customers.
We may be charged back for unearned financing, insurance contract or
vehicle service contract fees in the event of early termination of the contracts
by customers. Revenues from these fees are recorded at the time of the sale of
the vehicles we
expect to see growthand a reserve for future amounts which might be charged back is
established based on our historical charge back results and the termination
provisions of the applicable contracts. While our charge back results vary
depending on the type of contract sold, a 10% change in the partshistorical charge
back results used in determining our estimates of future amounts which might be
charged back would have changed our reserve at December 31, 2004, by
approximately $1.2 million.
CRITICAL ACCOUNTING ESTIMATES
The preparation of our financial statements in conformity with generally
accepted accounting principals requires management to make certain estimates and
service market for franchised automobile
dealers.assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosures of contingent assets and liabilities at
the balance sheet date and the amounts of revenues and expenses recognized
during the reporting period. We expect the interest rate environment in 2004analyze our estimates based on our historical
experience and various other assumptions that we believe to be flat atreasonable under
the beginning of the year with minor increases in the last six months of the year.
Forcircumstances. However, actual results could differ from such estimates. The
following is a discussion of other uncertaintiesour critical accounting estimates.
GOODWILL. Goodwill represents the excess of the purchase price of
businesses acquired over the fair value, at the date of acquisition, of the net
tangible and intangible assets acquired. In June 2001, the Financial Accounting
Standards Board, or FASB, issued SFAS No. 141, "Business Combinations." Prior to
our adoption of SFAS No. 141 on January 1, 2002, we recorded purchase prices in
excess of the net tangible assets acquired as goodwill and did not separately
record any intangible assets apart from goodwill as all were amortized over
similar lives. During 2001, the FASB also issued SFAS No. 142, "Goodwill and
Other Intangible Assets," which changed the treatment of goodwill to:
- no longer permit the amortization of goodwill and indefinite-lived
intangible assets;
- require goodwill and intangible assets, of which franchise rights is
our most significant, to be recorded separately; and
- require, at least annually, an assessment for impairment of goodwill
by reporting unit, which we currently define as each of our
platforms, using a fair-value based, two-step test.
We perform the annual impairment assessment at the end of each calendar
year, or more frequently if events or circumstances at a reporting unit occur
that maywould more likely than not reduce the fair value of the reporting unit
below its carrying value.
To determine the fair value of our reporting units, we use a discounted
cash flow approach. Included in this analysis are assumptions regarding revenue
growth rates, future gross margin estimates, future selling, general and
administrative expense rates and our weighted average cost of capital. We also
must estimate residual values at the end of the forecast period and future
capital expenditure requirements. Each of these assumptions requires us to use
our knowledge of (1) our industry, (2) our recent transactions, and (3)
reasonable performance expectations for our operations. If any one of the above
assumptions changes, in some cases insignificantly, or fails to materialize, the
resulting decline in our estimated fair value could result in a material
impairment charge to the goodwill associated with the applicable platform(s),
especially with respect to those platforms acquired prior to July 1, 2001.
INTANGIBLE FRANCHISE RIGHTS. Our only significant identified intangible
assets are rights under our franchise agreements with manufacturers. We expect
these franchise agreements to continue for an indefinite period but, when these
agreements do not have indefinite terms, we believe that renewal of these
agreements can be obtained without substantial cost. As such, we believe that
our franchise agreements will contribute to cash flows for an indefinite period.
Therefore, we do not amortize the carrying amount of our franchise rights.
Franchise rights
-28-
acquired in acquisitions prior to July 1, 2001, were not separately recorded,
but were recorded and amortized as part of goodwill and remain a part of
goodwill at December 31, 2004 and 2003 in the accompanying consolidated balance
sheets. Like goodwill, and in accordance with SFAS No. 142, we test our
franchise rights for impairment annually, or more frequently if events or
circumstances indicate possible impairment, using a fair-value method.
To test the carrying value of each individual franchise right for
impairment, we use a discounted cash flow based approach. Included in this
analysis are assumptions, at a dealership level, regarding revenue growth rates,
future gross margin estimates and future selling, general and administrative
expense rates. Using our weighted average cost of capital, estimated residual
values at the end of the forecast period and future capital expenditure
requirements, we calculate the fair value of each dealership's franchise rights
after considering estimated values for tangible assets, working capital and
workforce. If any one of the above assumptions changes, in some cases
insignificantly, or fails to materialize, the resulting decline in our estimated
fair value could result in a material impairment charge to the intangible
franchise right associated with the applicable dealership.
SELF-INSURANCE PROPERTY AND CASUALTY INSURANCE RESERVES. We are
self-insured for a portion of the claims related to our property and casualty
insurance programs, requiring us to make estimates regarding expected claims to
be incurred. These estimates, for the portion of claims not covered by
insurance, are based primarily on our historical claims experience and projected
inflation in claims costs in future periods. Changes in the frequency or
severity of claims from historical levels could impact our reserve for claims
and our financial position, results of operations and cash flows. A 10% change
in the historical loss history used in determining our estimate of future losses
would have changed our reserve at December 31, 2004, by $1.8 million.
Our current total exposure under our self-insured property and casualty
plans totals approximately $40 million, before consideration of accruals we have
recorded related to our loss projections. After consideration of these accruals,
our remaining potential loss exposure under these plans totals approximately
$23.9 million at December 31, 2004.
FAIR VALUE OF ASSETS ACQUIRED AND LIABILITIES ASSUMED. We estimate the
values of assets acquired and liabilities assumed in business please reviewcombinations,
which involves the "Business-Risk Factors" sectionuse of this Form 10-K.
25
various assumptions. The most significant assumptions,
and those requiring the most judgment, involve the estimated fair values of
property and equipment and intangible franchise rights, with the remaining
attributable to goodwill, if any.
RESULTS OF OPERATIONS
SELECTED OPERATIONAL AND FINANCIAL DATA FOR THE YEARS ENDED DECEMBERThe following tables present comparative financial and non-financial data
of our "Same Store" locations, those locations acquired or disposed of
("Transactions") during the periods and the consolidated company for the twelve
months ended December 31, 2004, 2003 AND DECEMBER 31, 2002and 2002. Same Store amounts include the
results of dealerships for the identical months in each period presented in the
comparison, commencing with the first month in which the dealership was owned by
us and, in the case of dispositions, ending with the last month it was owned by
us. Same Store results also include the activities of the corporate office. This
presentation differs from prior years, in which Same Store amounts would have
included only those dealerships owned during all of the months of both periods
in the comparison, as well as the activities of the corporate office.
For example, using our prior methodology, a dealership acquired in June
2004 would not show up in our full-year Same Store results until 2006 when
comparing to 2005. This would be the earliest it would be owned by us for all of
the months of both periods in the annual comparison. However, under our current
methodology, the results from this dealership will now appear in our Same Store
comparison beginning in 2005, for the period July 2005 through December 2005,
when comparing to July 2004 through December 2004 results.
We believe our current methodology will enable readers of our financial
statements to assess the results of acquired operations on a more timely basis.
-29-
NEW VEHICLE RETAIL DATA
(dollars in thousands,
except per unit amounts)
INCREASE/ PERCENTFOR THE YEAR ENDED FOR THE YEAR ENDED
---------------------------------- -------------------------------------
2004 % CHANGE 2003 2003 % CHANGE 2002
(DECREASE) CHANGE
---- ---- ---------- ----------------- -------- ----------- ----------- -------- -----------
Retail unit sales...........................Unit Sales
Same Stores 99,862 0.6% 99,250 87,621 (6.4)% 93,645
Transactions 18,109 721 12,350 1,360
----------- ----------- ----------- -----------
Total 117,971 18.0% 99,971 99,971 5.2% 95,005
4,966 5.2 Retail Sales Revenues
Same Stores $ 2,783,249 2.4% $ 2,717,746 $ 2,415,231 (2.5)% Retail sales revenues....................... $2,739,315 $2,526,847 $ 212,468 8.4 2,477,654
Transactions 565,626 21,569 324,084 49,193
----------- ----------- ----------- -----------
Total $ 3,348,875 22.3% $ 2,739,315 $ 2,739,315 8.4% $ 2,526,847
Gross Profit
Same Stores $ 195,745 (1.5)% Gross profit (1)............................$ 198,745 $ 176,681 (4.7)% $ 185,330
Transactions 40,990 1,251 23,315 4,294
----------- ----------- ----------- -----------
Total $ 236,735 18.4% $ 199,996 $ 199,996 5.5% $ 189,624
Average Gross Profit
per Retail Unit Sold
Same Stores $ 10,372 5.5 1,960 (2.1)% Average gross profit per retail unit sold...$ 2,002 $ 2,016 1.9% $ 1,979
Transactions $ 2,264 $ 1,735 $ 1,888 $ 3,157
Total $ 2,007 0.3% $ 2,001 $ 2,001 0.3% $ 1,996
$ 5 0.3 Gross Margin
Same Stores 7.0% 7.3% 7.3% 7.5%
Transactions 7.2% 5.8% 7.2% 8.7%
Total 7.1% 7.3% 7.3% 7.5%
Inventory Days Supply (1)
Same Stores 72 (4.0)% Gross margin (1)............................ 7.3 75 73 (5.2)% 7.5 77
Transactions 64 103
Total 70 (6.7)% (0.2)75 75 (2.6)% 77
- ----------
(1) InterestInventory days supply equals units in inventory at the end of the
period, divided by units sales for the month then ended, multiplied by 30
days.
During 2004, as compared to 2003, our Same Store unit sales increased
slightly as significant declines in sales of Ford and Mitsubishi units were
offset by increases in sales of Toyota/Scion and Nissan models, in addition to
slight variances between other brands. We believe these changes are consistent
with industry trends for our brands and markets. Although Same Store unit sales
increased in 2004 from 2003, our Same Store average gross profit per retail unit
sold decreased, resulting in lower gross profit. We believe this decrease was
largely due to high industrywide inventory levels and intense competition. Our
total average gross profit per retail unit sold did benefit from the impact of
luxury franchises acquired this year, which generally yield higher gross profit
than domestic or import non-luxury franchises.
During 2003, as compared to 2002, we experienced significant declines in
Same Store sales of Ford, Mitsubishi and Toyota without any notable offsetting
increases from other brands. These decreases, which we also believe to be
consistent with industry trends for our brands and markets, were partially
offset by an increase in our Same Store average gross profit per retail unit
sold.
Most manufacturers offer interest assistance is recordedto offset floorplan interest
charges incurred in connection with inventory purchases. For us, this assistance
has ranged from approximately 105% to 160% of our total floorplan interest
expense over the past three years. We record these incentives as a reduction of
new vehicle cost of sales as the vehicles are sold, which therefore impact the
gross profit and gross margin detailed above. The total assistance recognized in
cost of goods sold during the years ended December 31, 2004, 2003 and 2002, was
$33.2 million, $27.4 million and $26.7 million, respectively.
Finally, our days' supply of new vehicle inventory continues to third parties. Interest assistance varies with
changesdecrease,
from 77 days' supply at December 31, 2002, to 75 days' supply at December 31,
2003, and 70 days' supply at December 31, 2004, as we work towards our target
level of 60 days' supply. Our 70 days' supply at December 31, 2004, was heavily
weighted
-30-
toward our domestic inventory, which stood at 104 days' supply, versus our
import brands in interest rates and will impact gross margin.which we had a 50 days' supply.
USED VEHICLE RETAIL DATA
(dollars in thousands,
except per unit amounts)
FOR THE YEAR ENDED FOR THE YEAR ENDED
----------------------------- ---------------------------------
2004 % CHANGE 2003 2003 % CHANGE 2002
--------- -------- --------- --------- -------- ---------
Retail Unit Sales
Same Stores 59,358 (4.5)% 62,177 56,546 (12.7)% 64,737
Transactions 6,978 544 6,175 961
--------- --------- --------- ---------
Total 66,336 5.8% 62,721 62,721 (4.5)% 65,698
Retail Sales Revenues
Same Stores $ 870,301 (0.7)% $ 876,864 $ 798,583 (11.6)% $ 903,672
Transactions 118,496 7,955 86,236 17,687
--------- --------- --------- ---------
Total $ 988,797 11.8% $ 884,819 $ 884,819 (4.0)% $ 921,359
Gross Profit
Same Stores $ 106,601 0.8% $ 105,783 $ 97,197 (4.9)% $ 102,236
Transactions 13,845 770 9,356 1,738
--------- --------- --------- ---------
Total $ 120,446 13.0% $ 106,553 $ 106,553 2.5% $ 103,974
Average Gross Profit
per Retail Unit Sold
Same Stores $ 1,796 5.6% $ 1,701 $ 1,719 8.9% $ 1,579
Transactions $ 1,984 $ 1,415 $ 1,515 $ 1,809
Total $ 1,816 6.9% $ 1,699 $ 1,699 7.3% $ 1,583
Gross Margin
Same Stores 12.2% 12.1% 12.2% 11.3%
Transactions 11.7% 9.7% 10.8% 9.8%
Total 12.2% 12.0% 12.0% 11.3%
USED VEHICLE WHOLESALE DATA
(dollars in thousands,
except per unit amounts)
FOR THE YEAR ENDED FOR THE YEAR ENDED
----------------------------- ------------------------------
2004 % CHANGE 2003 2003 % CHANGE 2002
--------- -------- --------- --------- --------- ---------
Wholesale Unit Sales
Same Stores 43,276 (0.2)% 43,362 39,003 0.0% 38,996
Transactions 6,096 254 4,613 758
--------- --------- --------- ---------
Total 49,372 13.2% 43,616 43,616 9.7% 39,754
Wholesale Sales Revenues
Same Stores $ 310,202 17.9% $ 263,055 $ 237,948 10.3% $ 215,637
Transactions 49,045 2,132 27,239 6,892
--------- --------- --------- ---------
Total $ 359,247 35.5% $ 265,187 $ 265,187 19.2% $ 222,529
Net Loss
Same Stores $ (7,740) (27.2)% $ (6,083) $ (5,434) 27.2% $ (7,469)
Transactions (526) (58) (707) (426)
--------- --------- --------- ---------
Total $ (8,266) (34.6)% $ (6,141) $ (6,141) 22.2% $ (7,895)
Average Wholesale Loss per
Wholesale Unit Sold
Same Stores $ (179) (27.9)% $ (140) $ (139) 27.6% $ (192)
Transactions $ (86) $ (228) $ (153) $ (562)
Total $ (167) (18.4)% $ (141) $ (141) 29.1% $ (199)
Gross Margin
Same Stores (2.5)% (2.3)% (2.3)% (3.5)%
Transactions (1.1)% (2.7)% (2.6)% (6.2)%
Total (2.3)% (2.3)% (2.3)% (3.5)%
-31-
TOTAL USED VEHICLE DATA
(dollars in thousands,
except per unit amounts)
INCREASE/ PERCENTFOR THE YEAR ENDED FOR THE YEAR ENDED
---------------------------------- -----------------------------------
2004 % CHANGE 2003 2003 % CHANGE 2002
(DECREASE) CHANGE
---- ---- ----------- -------- ----------- ----------- -------- -----------
Retail unit sales........................... 62,721 65,698 (2,977) (4.5)
Used Vehicle Unit Sales
Same Stores 102,634 (2.8)% Wholesale unit sales........................ 43,616 39,754 3,862 9.7 105,539 95,549 (7.9)% Retail sales revenues.......................103,733
Transactions 13,074 798 10,788 1,719
----------- ----------- ----------- -----------
Total 115,708 8.8% 106,337 106,337 0.8% 105,452
Sales Revenues
Same Stores $ 884,8191,180,503 3.6% $ 921,3591,139,919 $ (36,540) (4.0)1,036,531 (7.4)% Wholesale sales revenues.................... 265,187 222,529 42,658 19.2 $ 1,119,309
Transactions 167,541 10,087 113,475 24,579
----------- ----------- ----------- -----------
Total $ 1,348,044 17.2% $ 1,150,006 $ 1,150,006 0.5% $ 1,143,888
Gross Profit
Same Stores $ 98,861 (0.8)% ---------- ---------- ---------$ 99,700 $ 91,763 (3.2)% $ 94,767
Transactions 13,319 712 8,649 1,312
----------- ----------- ----------- -----------
Total revenues............................ $1,150,006 $1,143,888 $ 6,118 0.5 %
Total gross profit..........................112,180 11.7% $ 100,412 $ 100,412 4.5% $ 96,079
Gross Margin
Same Stores 8.4% 8.7% 8.9% 8.5%
Transactions 7.9% 7.1% 7.6% 5.3%
Total 8.3% 8.7% 8.7% 8.4%
Average Gross Profit per
Used Vehicle Unit Sold
Same Stores $ 4,333 4.5 963 1.9% $ 945 $ 960 5.0% $ 914
Transactions $ 1,019 $ 892 $ 802 $ 763
Total $ 970 2.8% $ 944 $ 944 3.6% $ 911
Inventory Days Supply (1)
Same Stores 29 (6.5)% 31 31 (3.1)% 32
Transactions 32 34
Total gross margin (1)...................... 8.7 29 (6.5)% 8.4 31 31 (3.1)% 0.3 % -32
Adjusted Retail Gross Margin (2)
Same Stores 11.4% 11.4% 11.5% 10.5%
Transactions 11.2% 9.0% 10.0% 7.4%
Total 11.3% 11.3% 11.3% 10.4%
Average gross profitAdjusted Gross Profit
per retail unit
sold (2).................................Retail Unit Sold (3)
Same Stores $ 1,666 3.9% $ 1,603 $ 1,623 10.9% $ 1,464
Transactions $ 1,909 $ 1,309 $ 1,401 $ 1,365
Total $ 1,691 5.6% $ 1,601 $ 1,4621,601 9.5% $ 139 9.5 %
Retail gross margin (1)..................... 11.3 % 10.4 % 0.9 % -
Net wholesale loss.......................... $ (6,141) $ (7,895) $ 1,754 (22.2)%
Average wholesale loss per
wholesale unit sold...................... $ (141) $ (199) $ 58 (29.1)%
Wholesale gross margin...................... (2.3)% (3.5)% 1.2 %1,462
- ----------
(1) Total gross marginInventory days supply equals total gross profitunits in inventory at the end of the
period, divided by total
revenues. Retailunits sales for the month then ended, multiplied by 30
days.
(2) Adjusted retail gross margin equals total gross profit, which includes net
wholesale 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)management of inventory levels.
(3) Average adjusted gross profit per retail unit sold equals total used
vehicle gross profit, which includes net wholesale 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
(dollars in thousands)
INCREASE/ PERCENT
2003 2002 (DECREASE) CHANGE
---- ---- ---------- ------
Sales revenues.............................. $465,989 $402,169 $ 63,820 15.9 %
Gross profit................................ $259,753 $225,132 $ 34,621 15.4 %
Gross margin................................ 55.7 % 56.0 % (0.3) % -
26
FINANCE AND INSURANCE DATA
(dollars in thousands,
except per unit amounts)
PERCENT
2003 2002 INCREASE CHANGE
---- ---- -------- ------
Retail new and used unit sales.............. 162,692 160,703 1,989 1.2 %
Retail finance fees......................... $ 63,210 $ 58,869 $ 4,341 7.4 %
Vehicle service contract fees............... 61,315 52,346 8,969 17.1 %
Other finance and insurance revenues........ 38,725 30,245 8,480 28.0 %
-------- -------- --------
Total finance and insurance revenues...... $163,250 $141,460 $ 21,790 15.4 %
Finance and insurance revenues, per
retail unit sold.......................... $ 1,003 $ 880 $ 123 14.0 %
SAME STORE REVENUES COMPARISON (1)
(dollars in thousands)
INCREASE/ PERCENT
2003 2002 (DECREASE) CHANGE
---- ---- ---------- ------
New vehicle retail sales.................... $2,192,028 $2,283,499 $(91,471) (4.0)%
Used vehicle retail sales................... 741,650 838,668 (97,018) (11.6)%
Used vehicle wholesale sales................ 220,047 198,656 21,391 10.8 %
Parts and service sales..................... 380,669 357,893 22,776 6.4 %
Retail finance fees......................... 50,311 52,603 (2,292) (4.4)%
Vehicle service contract fees............... 42,692 45,111 (2,419) (5.4)%
Other finance and insurance
revenues, net............................ 24,377 27,978 (3,601) (12.9)%
------ ------ -------
Total same store revenues.............. $3,651,774 $3,804,408 $(152,634) (4.0)%
(1) Includes only those dealerships ownedmanagement of inventory levels.
At times, including during all of the months of both
periods in the comparison.
YEAR ENDED DECEMBER 31,2004 and 2003, COMPARED WITH YEAR ENDED DECEMBER 31, 2002
OVERVIEW. Net income increased $9.0 million, or 13.4%, to $76.1 million
for the year ended December 31, 2003, from $67.1 million for the year ended
December 31, 2002. Diluted earnings per share increased $0.46, or 16.4%, to
$3.26 from $2.80. The increase in net incomemanufacturer incentives such as
significant rebates and diluted earnings per share was
primarily the result of the accretive impact of acquisitions, organic growth in
parts and service, improved used vehicle inventory valuations, whichbelow-market retail financing rates on new vehicles,
have resulted in lower expected losses being reserved, and a reduction in our tax liability as we
successfully resolved certain tax contingencies. Offsetting these positives were
negative new and used vehicle same store revenues, higher interest expense from
our new 8 1/4% senior subordinated note issuance and very unfavorable results
from our Atlanta operations.
REVENUES. Revenues increased $304.2 million, or 7.2%, to $4,518.6
million for the year ended December 31, 2003, from $4,214.4 million for the year
ended December 31, 2002. The growth in total revenues came from acquisitions,
which were partially offset by a same store revenues decline of $152.6 million.
New vehicle revenues increased $212.5 million, as acquired operations
offset a same store decline of $91.5 million. The same store revenues decreased
reflecting a less robust vehicle market in 2003, particularly with respect to
our Ford and Mitsubishi dealerships, as these manufacturers lost market share
nationally during 2003. Additionally, revenues were down at a Toyota dealership
in Houston due to increased competitive pressures in that market.
Our used vehicle retail revenues declined $36.5 million as revenues
from acquired operations were offset by a $97.0 million decline in our same
store sales. The same store sales decline was due primarily 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 switchingdriving more customers to new
vehicles.
WholesaleOver the last three years, we have experienced declines in our Same Store
used vehicle sales increased $42.7
million.volume. The declineimpact of these declines in retail sales required us to wholesale more 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 $63.8 million included a
same store revenues increase of $22.8 million. The same store revenues increasevolume was driven by increased
27
customer-pay parts and service sales and wholesale parts sales, which were
driven by expanded wholesale parts operations in Oklahoma City.
Retail finance fee revenues increased $4.3 million, with a $2.3 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, partially
offset by increases in both the impact of a favorable interest rate
environment.
Vehicle service contract fee revenues increased $9.0 million, of which
$4.6 million wasaverage gross profit from the recognition of revenues related to contracts requiring
revenue deferral over the life of the contracts. During 2003 we did not sell any
contracts requiring revenue and cost deferral. We expect the deferred revenues
balance at December 31, 2003, and the associated deferred costs, to be
recognized over the next four years. The increases were partially offset by same
store sales decreases of $2.4 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 $8.5 million, of which
$4.7 million was from the recognition of revenues related to contracts requiring
revenue deferral over the life of the contracts. The deferred revenues consist
primarily of amounts related to sales of credit life and accident and health
insurance contracts, which are reinsured by a company we own. The remainder is
related to certain products soldused
vehicles as well as overall increases in two platforms in prior years. The platforms
did not sell a significant number of contracts requiring revenue and cost
deferral during 2003, thus, we expect the majority of the remaining deferred
revenues, and associated deferred costs, to be recognized over the next four
years. The increases were partially offset by same store sales declines of $3.6
million. The same store decrease is driven primarily by a decline in retail unit
sales.
GROSS PROFIT. Gross profit increased $71.1 million, or 10.9%, to $723.4
million for the year ended December 31, 2003, from $652.3 million for the year
ended December 31, 2002. The increase was attributable to an increase in the
gross margin from 15.5% for the year ended December 31, 2002, to 16.0% for the
year ended December 31, 2003, and increased revenues.
The gross margin increased, as lower margin new and used vehicle
revenues decreased as a percentage of total revenues, and finance and insurance
revenues, per retail unit sold, increased.
Although our new vehicle gross profit per retail unit remained
consistent with the prior year, the gross margin on new vehicle retail sales
declined to 7.3% from 7.5% due to an increase in the average selling price of
vehicles sold.
Our used vehicle gross profit per retail unit sold
increased to $1,601
for(including the yearimpact on total used vehicle gross profit from the losses
incurred on wholesale vehicle transactions).
-32-
For the twelve months ended December 31, 2004, compared to 2003, our Same
Store locations sold 4.5% fewer retail used vehicles, but realized 5.6% higher
average gross profit per retail unit sold. We believe that our decline in retail
unit sales volume is consistent with overall results for used vehicles in the
markets we operate. The increase in our average gross profit per retail unit
sold was the result of an increase in our gross profit from $1,462 forboth the year ended December
31, 2002.sale of
used cars and trucks and an increase in the number of used trucks sold in
proportion to used cars. Our average gross profit from the sale of used trucks
is generally higher than our average gross profit from the sale of used cars.
Although we had a $95.00 increase in our Same Store average gross profit per
retail unit sold, we also had an increase of $39.00 in average wholesale loss
per wholesale unit sold, which when taken together resulted in a slight increase
of $18.00 in our Same Store average gross profit per used vehicle sold.
The dealerships we acquired during 2004, although yielding a lower used
vehicle retail gross margin increasedthan our Same Stores, realized a higher average
gross profit per retail vehicle sold than our Same Stores. We believe both of
these factors result from the impact of luxury dealerships acquired, whose used
vehicle businesses typically have higher retail sales prices and higher gross
profit per unit. These dealerships also realized a lower average loss per
vehicle sold in the wholesale market bringing our total gross margin from
acquired dealerships to 11.3 % fora point comparable to our existing stores.
For the yeartwelve months ended December 31, 2003, from 10.4%compared to 2002, our Same
Store locations sold 12.7% fewer retail used vehicles, but realized an 8.9%
higher average gross profit per retail unit sold. We believe our decline in used
vehicle unit sales between 2003 and 2002 was also consistent with the overall
results for used vehicles in the year ended December 31, 2002.markets we operated during that time period.
The increase in our average gross profit between these periods was also the
result of an increase in our gross profit from the sale of used cars and trucks
and an increase in the number of used trucks sold in proportion to used cars. In
addition to the $140.00 increase in our Same Store average gross profit per
retail unit sold, and thewe also saw a decrease of $53.00 in average wholesale loss per
wholesale unit sold, which when taken together resulted in an increase of $46.00
in our Same Store average gross profit per used vehicle sold. In addition, as a
result of continued weakness in the retail gross margin were
due primarily to increased gross margins in the Florida market and improved used vehicle valuationsmarket at year end, which resulted in reduced valuation reserves.
Our used vehicle inventory is required to be carried at the lower of
cost or estimated market value at the end of each reporting period. Valuation
reserves are provided against the inventory balance based on a detailed review
of our inventory, actual subsequent sales of the inventory, our historical loss
experience and our consideration of current market trends. As a result, a $1.1December 31, 2002, we
had reserved approximately $6.6 million reserve for estimated used vehicle losses to be
incurred during 2003. This reserve was established at December
31, 2003, as compared to a $6.6 million reserve at December 31, 2002. The net
decline of $5.5 million in the used vehicle valuation reserve, based on $1.2
billion of used vehicle sales, was due to the application ofapplied against losses incurred retailing
and wholesaling used vehicles during 2003 against the reserve.2003. Based on a detailed review of our
used vehicle inventory at December 31, 2003, subsequent sales of this inventory
and economic trends indicating an improved used vehicle market, we determined
that a $1.1 million reserve at December 31, 2003, was the appropriate used
vehicle valuation reserve in
28
the current environment, and it was not necessary to charge used vehicle cost of sales to
establish the used vehicle valuation reserve at the same level as at December 31, 2002.
Finally, our days' supply of used vehicle inventory has continued to
decrease, from 32 days' supply at December 31, 2002, to 31 days' supply at
December 31, 2003, and 29 days' supply at December 31, 2004, as we target 30
days' supply.
PARTS AND SERVICE DATA
(dollars in thousands)
FOR THE YEAR ENDED FOR THE YEAR ENDED
------------------------------- ------------------------------
2004 % CHANGE 2003 2003 % CHANGE 2002
--------- -------- --------- --------- -------- ---------
Parts and Service Revenues
Same Stores $ 477,558 3.2% $ 462,579 $ 419,747 6.6% $ 393,775
Transactions 87,655 3,410 46,242 8,394
--------- --------- --------- ---------
Total $ 565,213 21.3% $ 465,989 $ 465,989 15.9% $ 402,169
Parts and Service Gross Profit
Same Stores $ 262,211 1.6% $ 258,006 $ 233,495 5.7% $ 220,869
Transactions 47,739 1,747 26,258 4,263
--------- --------- --------- ---------
Total $ 309,950 19.3% $ 259,753 $ 259,753 15.4% $ 225,132
Gross Margin
Same Stores 54.9% 55.8% 55.6% 56.1%
Transactions 54.5% 51.2% 56.8% 50.8%
Total 54.8% 55.7% 55.7% 56.0%
-33-
Our consolidated parts and service gross margin decreased to 54.8% in
2004, from 55.7% in 2003 and 56.0% in 2002, as a result of an increase in
contribution from the lower margin parts and collision service businesses in
relation to our higher margin customer pay and warranty service business, as
well as a slight decline attributable to the impact from acquisitions and
recently opened operations.
Our Same Store parts and service revenues have increased, primarily, as a
result of our expanding wholesale parts business. This business has increased
from 18.8% of our Same Store parts and service sales in 2002, to 23% of our
sales in 2003 and 24.3% in 2004. Although this business has contributed to a
large part of our overall parts and service revenue growth, our margins in this
line of business are significantly lower than those in our retail parts and
service operations.
FINANCE AND INSURANCE DATA
(dollars in thousands,
except per unit amounts)
FOR THE YEAR ENDED FOR THE YEAR ENDED
------------------------------- ------------------------------
2004 % CHANGE 2003 2003 % CHANGE 2002
--------- -------- --------- --------- -------- ---------
Retail New and Used
Unit Sales
Same Stores 159,220 (1.4)% 161,427 144,167 (9.0)% 158,382
Transactions 25,087 1,265 18,525 2,321
--------- --------- --------- ---------
Total 184,307 13.3% 162,692 162,692 1.2% 160,703
Retail Finance Fees
Same Stores $ 60,053 (4.3)% $ 62,738 $ 56,179 (3.0)% $ 57,916
Transactions 8,484 472 7,031 953
--------- --------- --------- ---------
Total $ 68,537 8.4% $ 63,210 $ 63,210 7.4% $ 58,869
Vehicle Service Contract Fees
Same Stores $ 58,827 (3.7)% $ 61,064 $ 54,498 5.1% $ 51,842
Transactions 6,911 251 6,817 504
--------- --------- --------- ---------
Total $ 65,738 7.2% $ 61,315 $ 61,315 17.1% $ 52,346
Insurance and Other
Same Stores $ 35,006 (9.1)% $ 38,526 $ 32,849 9.5% $ 30,003
Transactions 3,620 199 5,876 242
--------- --------- --------- ---------
Total $ 38,626 (0.3)% $ 38,725 $ 38,725 28.0% $ 30,245
Total
Same Stores $ 153,886 (5.2)% $ 162,328 $ 143,526 2.7% $ 139,761
Transactions 19,015 922 19,724 1,699
--------- --------- --------- ---------
Total $ 172,901 5.9% $ 163,250 $ 163,250 15.4% $ 141,460
========= ========= ========= =========
Finance and Insurance
Revenues per Unit Sold
Same Stores $ 966 (4.0)% $ 1,006 $ 996 12.9% $ 882
Transactions $ 758 $ 729 $ 1,065 $ 732
Total $ 938 (6.5)% $ 1,003 $ 1,003 14.0% $ 880
Our finance and insurance revenues per retail unit sold decreased 6.5% in
2004, as compared to 2003, as a result of lower Same Store penetration of
products on both new and used vehicles and the impact from current year
acquisitions, which generally had lower penetration of finance and insurance
products on sales of new and used vehicles than our existing stores. Our finance
and insurance revenues per retail unit increased 14% in 2003, as compared to
2002, as a result of increases in vehicle service contracts and other finance
and insurance revenues, discussed in more detail below.
Our 2004 Same Store retail finance fees decreased 4.3%, as compared to
2003, due to a 1.4% decrease in unit sales and a 2.5% decline in penetration
on total unit sales. This decline in penetration was primarily attributable to a
decrease in penetration on unit sales of used vehicles as a result of an overall
challenging credit market for these vehicles. Our 2003 Same Store retail finance
fees decreased 3.0%, when compared to 2002, primarily due to our decrease in
unit sales.
-34-
Our 2004 Same Store vehicle service contract fees decreased 3.7%, as
compared to 2003, primarily as a result of the decrease in used vehicles sold,
as well as a decline in the amount of previously deferred revenue recognized on
contracts sold in prior years. The 5.1% increase in Same Store vehicle service
contract fees during 2003, as compared to 2002, was primarily a result of the
increase in deferred revenue recognized on contracts sold in prior years
partially offset by a decrease in Same Store insurance revenues attributable to
the decline in retail unit sales. This increase was partially offset by the
impact of the decline in retail unit sales.
The decline in our Same Store other finance and insurance revenues from
$38.5 million in 2003, to $35.0 million in 2004, was primarily the result of
higher chargebacks and a reduction of revenue from ancillary service products.
The increase in our Same Store other finance and insurance revenues from $30.0
million in 2002, to $32.8 million in 2003, was primarily attributable to certain
products sold in two of our platforms in prior years, partially offset by a
decrease in Same Store insurance revenues attributable to the decline in retail
unit sales. In December 2002, we increased our revenue and cost deferrals
related to these products to properly reflect our future obligations not
previously accounted for, thereby reducing our net revenues for the period by
$4.3 million.
We have not sold a significant number of contracts requiring revenue and
cost deferral since 2002, thus, we expect the majority of the remaining deferred
revenues, and associated deferred costs, to be recognized over the next three
years.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling,DATA
(dollars in thousands)
FOR THE YEAR ENDED FOR THE YEAR ENDED
------------------------------- --------------------------------
2004 % CHANGE 2003 2003 % CHANGE 2002
--------- -------- --------- --------- -------- ---------
Personnel
Same Stores $ 339,625 (0.4)% $ 340,843 $ 305,922 (0.8)% $ 308,495
Transactions 59,089 2,220 37,141 5,103
--------- --------- --------- ---------
Total $ 398,714 16.2% $ 343,063 $ 343,063 9.4% $ 313,598
Advertising
Same Stores $ 57,582 (4.1)% $ 60,046 $ 52,388 8.4% $ 48,350
Transactions 9,990 489 8,147 1,245
--------- --------- --------- ---------
Total $ 67,572 11.6% $ 60,535 $ 60,535 22.1% $ 49,595
Rent and Facility Costs
Same Stores $ 67,523 4.9% $ 64,380 $ 56,798 4.2% $ 54,490
Transactions 12,598 439 8,021 1,141
--------- --------- --------- ---------
Total $ 80,121 23.6% $ 64,819 $ 64,819 16.5% $ 55,631
Other SG&A
Same Stores $ 108,480 17.5% $ 92,320 $ 82,767 0.7% $ 82,196
Transactions 17,181 961 10,514 2,046
--------- --------- --------- ---------
Total $ 125,661 34.7% $ 93,281 $ 93,281 10.7% $ 84,242
Total SG&A
Same Stores $ 573,210 2.8% $ 557,589 $ 497,875 0.9% $ 493,531
Transactions 98,858 4,109 63,823 9,535
--------- --------- --------- ---------
Total $ 672,068 19.6% $ 561,698 $ 561,698 11.7% $ 503,066
========= ========= ========= =========
Total Gross Profit
Same Stores $ 710,704 (1.1)% $ 718,779 $ 645,466 0.7% $ 640,727
Transactions 121,062 4,632 77,945 11,568
--------- --------- --------- ---------
Total $ 831,766 15.0% $ 723,411 $ 723,411 10.9% $ 652,295
========= ========= ========= =========
SG&A as % of Gross Profit
Same Stores 80.7% 77.6% 77.1% 77.0%
Transactions 81.7% 88.7% 81.9% 82.4%
Total 80.8% 77.6% 77.6% 77.1%
Our selling, general and administrative expenses consist primarily of
salaries, commissions and incentive-based compensation, as well as rent,
advertising, insurance, benefits, utilities and other fixed expenses. We believe
that our personnel and advertising expenses are variable and can be adjusted in
response to changing business conditions. In such a case, however, it may take
us several months to adjust our cost structure, or we may elect not to fully
adjust a variable component, such as advertising expenses.
-35-
The decreases in Same Store personnel related costs from 2002 to 2003, and
also from 2003 to 2004, are consistent with the changes noted in Same Store
gross profit, as our commissioned salespeople and platform management
compensation is closely tied to dealership gross profit.
Advertising expense is managed locally and will vary period to period
based upon current trends, market factors and other circumstances in each
individual market.
The 4.9% increase in Same Store rent and facility costs when comparing
2004 to 2003 is primarily due to rent increases associated with new facilities
and scheduled rent increases, tied to changes in the consumer price or similar
index, on existing facilities. The 4.2% increase in Same Store rent and facility
costs when comparing 2003 to 2002 was primarily due to increased $59.0utilities and
real estate taxes.
Other SG&A consists primarily of insurance, freight, supplies,
professional fees, loaner car expenses, vehicle delivery expenses, software
licenses and other data processing costs, and miscellaneous other operating
costs not related to personnel, advertising or facilities. During 2004, as
compared to 2003, our Same Store items increased $16.2 million primarily as a
result of the following:
- We incurred $3.5 million of higher losses from our property and
casualty retained risk program, primarily from two significant
events: (1) a hailstorm that damaged or destroyed more than 1,000
vehicles, or about 95% of the inventory, at our Amarillo, Texas,
dealerships during the second quarter of 2004, and (2) the damage
sustained at our Florida dealerships from hurricanes during the
third quarter of 2004;
- We had a $2.9 million increase in professional fees, primarily
related to the assessment and testing of our internal control
environment in accordance with Section 404 of the Sarbanes-Oxley
Act;
- During 2003, as a result of favorable collection activity on a
portfolio of customer loans we guaranteed in prior years, we
realized a $2.9 million benefit related to the reduction of a
previously established required guarantee liability. During 2004, we
further reduced this guarantee liability by $0.3 million;
- We had a $1.8 million increase in vehicle delivery expenses,
primarily due to higher fuel costs; and
- We accrued an estimated $1.5 million for our expected settlement
costs based on the progression of settlement discussions in the
class action lawsuit regarding vehicle inventory tax charges to
which we are a party in Texas.
The remainder is attributable to numerous less significant items which in total
increased by approximately $3.9 million on a net basis, or an increase of 4.2%
as compared to Same Store other SG&A for 2003. This increase is, on a percentage
basis, approximately the same as our other less variable rent and facility
costs.
DEPRECIATION AND AMORTIZATION DATA
(dollars in thousands)
FOR THE YEAR ENDED FOR THE YEAR ENDED
---------------------------- ----------------------------
2004 % CHANGE 2003 2003 % CHANGE 2002
-------- -------- -------- -------- -------- --------
Same Stores $ 13,987 12.4% $ 12,441 $ 11,601 17.5% $ 9,876
Transactions 1,849 69 909 261
-------- -------- -------- --------
Total $ 15,836 26.6% $ 12,510 $ 12,510 23.3% $ 10,137
======== ======== ======== ========
Our Same Store depreciation and amortization expense increased between
each period presented primarily as a result of a number of facility additions,
including service bay expansions, facility upgrades and manufacturer required
image renovations.
IMPAIRMENT OF ASSETS
In accordance with SFAS No. 142, we assess goodwill and other
indefinite-lived intangibles for impairment on an annual basis, or more
frequently when events or circumstances indicate that an impairment may have
occurred. We also assess, when events or circumstances indicate that an
impairment may have occurred, the carrying value of our other long-lived assets,
primarily our property and equipment, in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." Based on the
organization and management of our business, we have determined that each of our
platforms currently qualify as reporting units for the purpose of assessing
-36-
goodwill for impairment. However, we are required to evaluate the carrying value
of our indefinite-lived intangible franchise rights at a dealership level.
During October 2004, in connection with the preparation and review of our
third-quarter interim financial statements, we determined that recent events and
circumstances at our Atlanta platform, including further deterioration of the
platform's financial results and recent changes in platform management,
indicated that an impairment of goodwill may have occurred in the three months
ended September 30, 2004. As a result, we performed an interim impairment
assessment of the Atlanta platform's goodwill in accordance with SFAS No. 142.
After analyzing the long-term potential of the Atlanta market and the expected
pretax income of its dealership franchises in Atlanta, we estimated the fair
value of the reporting unit as of September 30, 2004. As a result of the
required comparison, we determined that the carrying amount of the reporting
unit exceeded its fair value as of September 30, 2004, and recorded a pretax
goodwill impairment charge of $40.3 million.
In accordance with SFAS No. 144, we review long-lived assets for
impairment whenever there is evidence that the carrying amount of such assets
may not be recoverable. As a result of the factors noted above, we evaluated the
long-lived assets of the dealerships within our Atlanta platform for impairment
under the provisions of SFAS No. 144 and recorded a pretax impairment charge for
certain leasehold improvements of $1.1 million at September 30, 2004.
During our annual assessment of the carrying value of our goodwill and
indefinite-lived intangible assets as part of our year-end financial statement
preparation process, we determined that the carrying value of one of our
dealership's intangible franchise rights was in excess of its fair market value
and recorded a pretax impairment charge of $3.3 million at December 31, 2004.
FLOORPLAN INTEREST EXPENSE
(dollars in thousands)
FOR THE YEAR ENDED FOR THE YEAR ENDED
------------------ ------------------
2004 % CHANGE 2003 2003 % CHANGE 2002
-------- -------- ------------ ----------- ---------- -----------
Same Stores $ 21,832 2.0% $ 21,414 $ 19,503 (1.5)% $ 19,799
Transactions 3,517 157 2,068 388
-------- ------------ ----------- -----------
Total $ 25,349 17.5% $ 21,571 $ 21,571 6.9% $ 20,187
======== ============ =========== ===========
Our floorplan interest expense fluctuates based on changes in borrowings
outstanding and interest rates, which are based on LIBOR (or Prime in some
cases) plus a spread. Our Same Store floorplan interest expense increased during
the twelve months ended December 31, 2004, compared to 2003, as a result of an
approximate $58.6 million increase in weighted average borrowings outstanding
between the periods and an approximate 15 basis point increase in weighted
average interest rates. The increase in weighted average borrowings was
primarily a result of the use of the proceeds from our 8-1/4% senior
subordinated notes offering in August 2003 to temporarily pay down our floorplan
notes payable. These funds were partially redrawn in March 2004 to fund the
redemption of our 10 7/8% senior subordinated notes and in June 2004 to fund our
acquisition of the Peterson Automotive Group.
Our Same Store floorplan interest expense decreased during the twelve
months ended December 31, 2003, compared to 2002, as a result of an approximate
22 basis point decrease in weighted average interest rates, partially offset by
the impact of an approximate $27.9 million increase in weighted average
borrowings outstanding between the periods. The increase in weighted average
borrowings between 2003 and 2002 resulted primarily from an increase in our Same
Store average new vehicle inventory supply to 79 days during 2003 from 66 days
during 2002.
Also impacting Same Store floorplan expense between each of the periods
were changes attributable to our outstanding interest rate swaps. During 2002,
we had two interest rate swaps outstanding the entire year, each with notional
amounts of $100.0 million and converting 30-day LIBOR to a fixed rate. One of
the swaps expired in July 2003 (and therefore was outstanding for only seven
months of 2003) and the second expired in October 2004 (and therefore was
outstanding for only 10 months of 2004). As a result of their staggered
expiration dates, and the impact on the expense attributable to the swaps
resulting from changes in interest rates, our swap expense decreased from $4.6
million for the twelve months ended December 31, 2002, to $4.3 million and $2.1
million for the twelve months ended December 31, 2003 and 2004, respectively.
-37-
OTHER INTEREST EXPENSE, NET
Other net interest expense, which consists of interest charges on our
long-term debt and our acquisition line partially offset by interest income,
increased $4.1 million, or 11.7%27.0%, to $561.7$19.3 million for the year ended December
31, 2003,2004, from $502.7$15.2 million for the year ended December 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 77.6% from 77.1% due primarily to below expected
operating performance in our Atlanta and Dallas operations and adjustments to
variable expenses lagging the decline in sales volume.
INTEREST EXPENSE. Floorplan and other interest expense, net, increased
$5.6 million, or 19.1%, to $34.9 million for the year ended December 31, 2003,
from $29.3 million for the year ended December 31, 2002. The2003. This increase
was due to an approximate $78.3 million increase in weighted average borrowings
outstanding between the average balance of debt outstandingperiods, partially offset by a
declinean approximate 183 basis
point decrease in weighted average interest rates. During 2003,2004, our average debt
outstanding increased, dueas compared to increased
floorplanthe average for the twelve months ended
December 31, 2003, as a result of borrowings under our acquisition line in 2004
and the issuance, in August 2003, of $150.0 million of 8
1/8-1/4% senior
subordinated notes.
Floorplan borrowings increased due to:
- acquisitions completed during 2002 andFor the twelve months ended December 31, 2003, and
- an increase in our average new vehicle inventory supply to
75 days during 2003 from 63 days during 2002.
Partially offsetting the factors increasing the average floorplan
borrowings outstanding was the use of the proceeds from our 8 1/4% senior
subordinated notes offering to temporarily pay down our floorplan notes payable.
Interest expense on our floorplan notes payable and acquisition
borrowings under the bank credit facility is based on LIBOR plus a spread.
During 2003, there was an approximately 56 basis point reduction in the average
LIBOR rate as compared to the prior year.
OTHER INCOME (EXPENSE)2002, other net
interest expense increased $4.6 million, or 43.4%, NET. Other income increased $1.6 million to $0.6$15.2 million for the year
ended December 31, 2003, from $(1.0)$10.6 million for the year ended December 31,
2002. This increase was due to an approximate $54.1 million increase in weighted
average borrowings outstanding between the periods, partially offset by an
approximate 116 basis point decrease in weighted average interest rates. The
increase is due primarilyin weighted average debt outstanding was attributable to the August
2003 issuance of our 8-1/4% senior subordinated notes
LOSS ON REDEMPTION OF SENIOR SUBORDINATED NOTES
On March 1, 2004, we completed the redemption of all of our 10 7/8% senior
subordinated notes. We incurred a net gain$6.4 million pretax charge in completing the
redemption, consisting of $0.6a $4.1 million redemption premium and a $2.3 million
non-cash write-off of unamortized bond discount and deferred cost.
During 2002, we realized a $1.2 million loss on the disposal of dealership assets in 2003, as compared to $1.2
million of losses recorded on the repurchasesrepurchase and
retirementsretirement of a portion of our 10 7/8% senior subordinated notes during 2002.notes.
PROVISION FOR INCOME TAXES. TheTAXES
Our provision for income taxes decreased $3.3$16.7 million to $20.2 million
for the year ended December 31, 2004, from $36.9 million for the year ended
December 31, 2003,2003. For the twelve months ended December 31, 2004, our effective
tax rate increased to 42.1%, from $40.2
million32.7% for the year ended December 31, 2002. The decrease is due2003.
Our 2004 effective tax rate was negatively impacted as a result of the
non-deductibility for tax purposes of certain portions of the goodwill
impairment charge we recorded in September 2004 related to our Atlanta platform,
and was positively impacted by adjustments to reconcile differences between the
tax and book basis of our assets. Excluding these items, our 2004 effective tax
would have been approximately 37.3%. Our 2003 effective tax rate benefited from
a $5.4 million reduction in our estimated tax liabilities as a result of the
favorable resolution of tax contingencies during 2003 aswhen various state and
federal tax audits were concluded, providing certainty and resolution on various
formation, financing, acquisition and structural matters. In addition, various
other tax exposures of acquired companies havehad been favorably resolved. Excluding
this benefit, our 2003 effective tax rate would have been 37.5%.
Our 2003 provision for income taxes decreased $3.3 million to $36.9
million from $40.2 million for the year ended December 31, 2002. This decrease
was due to the aforementioned $5.4 million reduction in our estimated tax
liabilities as a result of the favorable resolution of certain tax
contingencies, partially offset by higher taxable income. The impact of the
change in our reserve was to reduce our effective tax rate for 2003 to 32.7%, as
compared to 37.5% for 2002.
We expect our effective tax rate in future years2005 to be between 36.5% and 38.5%.
29
SELECTED OPERATIONAL AND FINANCIAL DATA FOR THE YEARS ENDED DECEMBER 31, 2002
AND DECEMBER 31, 2001
NEW VEHICLE DATA
(dollars in thousands,
except per unit amounts)
INCREASE/ PERCENT
2002 2001 (DECREASE) CHANGE
---- ---- ----------- ------
Retail unit sales........................... 95,005 90,615 4,390 4.8 %
Retail sales revenues....................... $2,526,847 $2,373,299 $153,548 6.5 %
Gross profit (1)............................ $ 189,624 $ 187,360 $ 2,264 1.2 %
Average gross profit per retail unit sold... $ 1,996 $ 2,068 $ (72) (3.5)%
Gross margin (1)............................ 7.5 % 7.9 % (0.4)% -
- ------------
(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,
except per unit amounts)
INCREASE/ PERCENT
2002 2001 (DECREASE) CHANGE
---- ---- ---------- ------
Retail unit sales........................... 65,698 67,927 (2,229) (3.3)%
Wholesale unit sales........................ 39,754 37,771 1,983 5.3 %
Retail sales revenues....................... $ 921,359 $ 949,086 $ (27,727) (2.9)%
Wholesale sales revenues.................... 222,529 190,565 31,964 16.8 %
------- ------- ------
Total revenues............................ $1,143,888 $1,139,651 $ 4,237 0.4 %
Total gross profit.......................... $ 96,079 $ 96,798 $ (719) (0.7)%
Total gross margin (1)...................... 8.4 % 8.5 % (0.1)% -
Average gross profit per retail unit $ 1,462 $ 1,425 $ 37 2.6 %
sold (2).................................
Retail gross margin (1)..................... 10.4 % 10.2 % 0.2 % -
Net wholesale loss.......................... $ (7,895) $ (6,707) $ (1,188) 17.7 %
Average wholesale loss per
wholesale unit sold...................... $ (199) $ (178) $ (21) 11.8 %
Wholesale gross margin...................... (3.5)% (3.5)% (0.0)% -
(1) Total gross margin equals total gross profit divided by total
revenues. Retail gross margin equals total gross profit, which
includes net wholesale 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 net wholesale 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
(dollars in thousands)
PERCENT
2002 2001 INCREASE CHANGE
---- ---- -------- ------
Sales revenues.............................. $402,169 $360,201 $41,968 11.7 %
Gross profit................................ $225,132 $199,871 $25,261 12.6 %
Gross margin................................ 56.0 % 55.5 % 0.5 % -
30
FINANCE AND INSURANCE DATA
(dollars in thousands,
except per unit amounts)
PERCENT
2002 2001 INCREASE CHANGE
---- ---- -------- ------
Retail new and used unit sales ........................ 160,703 158,542 2,161 1.4 %
Retail finance fees ................................... $ 58,869 $ 56,272 $ 2,597 4.6 %
Vehicle service contract fees ......................... 52,346 44,080 8,266 18.8 %
Other finance and insurance revenues .................. 30,245 22,871 7,374 32.2 %
-------- -------- --------
Total finance and insurance revenues ................ $141,460 $123,223 $ 18,237 14.8 %
Finance and insurance revenues, per
retail unit sold .................................... $ 880 $ 777 $ 103 13.3 %
SAME STORE REVENUES COMPARISON (1)
(dollars in thousands)
INCREASE/ PERCENT
2002 2001 (DECREASE) CHANGE
---------- ---------- ---------- ------
New vehicle retail sales .................... $2,279,737 $2,323,086 $ (43,349) (1.9)%
Used vehicle retail sales ................... 834,268 922,375 (88,107) (9.6)%
Used vehicle wholesale sales ................ 198,999 180,917 18,082 10.0 %
Parts and service sales ..................... 348,654 349,163 (509) (0.1)%
Retail finance fees ......................... 52,472 56,261 (3,789) (6.7)%
Vehicle service contract fees ............... 44,606 43,233 1,373 3.2 %
Other finance and insurance
revenues, net ............................ 27,693 22,138 5,555 25.1 %
---------- ---------- ----------
Total same store revenues .............. $3,786,429 $3,897,173 $ (110,744) (2.8)%
- ----------------
(1) Includes only those dealerships owned during all of the months
of both periods in the comparison.
YEAR ENDED DECEMBER 31, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001
REVENUES. Revenues increased $218.0 million, or 5.5%, to $4,214.4
million for the year ended December 31, 2002, from $3,996.4 million for the year
ended December 31, 2001. The growth in total revenues came from acquisitions,
which were partially offset by a same store revenues decline of $110.7 million.
New vehicle revenues increased $153.5 million, as acquired operations
offset a same store decline of $43.3 million. The same store revenues decreased
slightly, which reflected a less robust vehicle market in 2002, as compared to
the near-record new vehicle sales in 2001, for all automobile retailers in the
United States.
Our used vehicle retail revenues declined $27.7 million as revenues
from acquired operations were offset by an $88.1 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. Wholesale sales increased $32.0 million. The
decline in retail sales required us to wholesale more 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 $42.0 million was from
acquired operations as our same store sales declined $0.5 million. The primary
driver of the same store sales decline was the Ford / Firestone tire recall,
which caused a one-time increase in warranty and associated repairs at our Ford
dealerships during 2001. Also contributing to the decrease was increased
business during the summer months of 2001, due to the damage caused by tropical
storm Allison, in Houston. These declines offset the same store increases we had
in other areas of our operations.
Retail finance fee revenues increased $2.6 million, with a $3.8 million
same store decrease partially offsetting the revenues contributed by
acquisitions. The same store decline was caused primarily by zero percent
financing offered by many of the manufacturers for our
31
customers, which began late in 2001 and continued throughout 2002, which reduced
the amount of fees we earned for arranging the financing.
Vehicle service contract fee revenues increased $8.3 million, with same
store sales increasing $1.4 million. Included in the revenues from acquired
dealerships is $1.3 million of deferred revenues recognized on dealer-obligor
contracts written prior to our acquisitions of the dealerships. At the date of
acquisition, we moved the dealerships to administrator-obligor contracts.
Other finance and insurance revenues increased $7.4 million, with same
store sales contributing $5.6 million. The same store increases were driven by
the introduction and sale of new products, in addition to our training programs.
GROSS PROFIT. Gross profit increased $45.0 million, or 7.4%, to $652.3
million for the year ended December 31, 2002, from $607.3 million for the year
ended December 31, 2001. The increase was attributable to an increase in the
gross margin from 15.2% for the year ended December 31, 2001, to 15.5% for the
year ended December 31, 2002, and increased revenues.
The gross margin increased, as lower margin new and used vehicle
revenues decreased as a percentage of total revenues, and increased finance and
insurance revenues, per retail unit sold, offset the decline in the new and used
vehicle gross margins.
The gross margin on new retail vehicle sales declined to 7.5% from
7.9%, partially due to a reduction in floorplan assistance received from our
manufacturers as a result of the decline in interest rates during the year,
which reduced our gross profit by $3.8 million and our gross margin by 15 basis
points. Floorplan assistance is a purchase discount and is recorded as a
reduction of new vehicle cost of sales. Performance below expectations and prior
year levels in our Dallas operations accounted for approximately 10 basis points
of the decline in our new vehicle margin. Also, generally, the gross profit per
retail unit does not vary with changes in the selling prices of the vehicles. As
such, the 1.6% increase in our average selling price per new vehicle sold
negatively impacted our new vehicle gross margin by 10 basis points.
The gross margin on retail used vehicle sales increased to 10.4% from
10.2% as our dealerships worked to increase the gross profit per unit sold to
offset the impact of the reduction of retail used vehicle sales. 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 $44.2 million, or 9.6%, to $502.7 million for
the year ended December 31, 2002, from $458.5 million for the year ended
December 31, 2001. The increase was primarily attributable to the additional
operations acquired and increased compensation and benefits. Compensation and
benefits are largely incentive-based and constitute approximately 60% of total
expenses, and increased due to increased gross profit. Selling, general and
administrative expenses increased as a percentage of gross profit to 77.1% from
75.5% due primarily to below expected operating performance in our Atlanta and
Dallas operations. 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 75.1% in 2002.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense decreased $5.5 million, or 31.6%, to $11.9 million for the year ended
December 31, 2002, from $17.4 million for the year ended December 31, 2001. The
decline was due to the implementation of SFAS No. 142, which resulted in the
elimination of goodwill amortization expense.
INTEREST EXPENSE. Floorplan and other interest expense, net, decreased
$12.5 million, or 29.9%, to $29.3 million for the year ended December 31, 2002,
from $41.8 million for the year ended December 31, 2001. The decrease was due to
a decline in interest rates and a lower average balance of debt outstanding.
During the year ended December 31, 2002, there was an approximately 230 basis
point reduction in our floorplan financing rate as compared to the prior year.
During October 2001, we completed a $98.5 million stock offering and used the
proceeds initially to pay down borrowings under our credit facility. By the end
of the third quarter of 2002,
32
we had reborrowed the amounts used to pay down the floorplan portion of our
credit facility. We had no borrowings under the acquisition portion of our
credit facility during 2002.
OTHER INCOME (EXPENSE), NET. Other expense increased $917,000 to
$(1,045,000) for the year ended December 31, 2002, from $(128,000) for the year
ended December 31, 2001. The increase was due primarily to $1.2 million of
losses recorded on the repurchases and retirements of a portion of our senior
subordinated notes.37.5%.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity and capital resources are primarily derived from cash on
hand, cash from operations, borrowings under our credit facilities, (which includewhich
provide floorplan, facilitiesworking capital and an acquisition facility)financing, and proceeds from
debt and equity offerings. While we cannot guarantee it, based on current facts
and debt offerings.circumstances, including our recently obtained additional commitments under
our revolving credit agreement discussed below, we believe we have adequate cash
flow, coupled with available borrowing capacity, to fund our current operations,
capital expenditures and acquisition program for 2005. If our capital
expenditures or acquisition plans for 2005 change, we may need to access the
private or public capital markets to obtain additional funding.
-38-
SOURCES OF LIQUIDITY AND CAPITAL RESOURCES
CASH ON HAND. As of December 31, 2004, our total cash on hand was $37.8
million.
CASH FLOWS. The following table sets forth selected historical information
from our statementsstatement of cash flows:
YEAR ENDED DECEMBERYear Ended December 31,
-----------------------
2004 2003 2002
2001
---- ---- ------------- -------------- ----------
(in thousands)
Net cash provided by operating activities .................. $ 80,34582,341 $ 74,83988,171 $ 76,68779,256
Net cash used in investing activities ...................... (52,603) (122,295) (27,229)(250,389) (54,165) (123,756)
Net cash provided by (used in) financing activities ........ (26,634) 54,928 (55,844)179,315 (32,608) 52,724
--------- --------- ----------------------- ----------
Net increase (decrease) in cash and cash equivalents ....... $ 1,10811,267 $ 7,4721,398 $ (6,386)8,224
========= ========= ======================= ==========
CASH FLOWS
Total cash at December 31, 2003, was $25.4 million.
OPERATING ACTIVITIES.Operating activities. Net income, plusafter adding back depreciation,
amortization and amortizationother non-cash charges, is generally a good indicator of our
operating cash flow as revenues are converted into cash in a very short timeframe,time
frame, typically less than two weeks, and there
arewe have very few deferred expenses.
Additionally, while our inventory balances can
change dramatically from period to period, there is typically little impact on
cash flow from operations as changes in contracts-in-transit, vehicle
receivables and floorplan notes payable generally combine to offset the impact
of the inventory change. For the three-year periodyear ended December 31, 2003,2004, we generated $231.9$82.3 million in net
cash from operating activities, primarily driven by net income, plusafter adding
back depreciation and amortization and other non-cash charges, including the
$44.7 million of asset impairments, and adding back the $6.4 million pretax loss
on the redemption of our 10 7/8% senior subordinated notes in March 2004.
For the years ended December 31, 2003, and 2002, we generated $88.2
million and $79.3 million, respectively, of cash flow from operations, primarily
driven by net income, after adding back depreciation and amortization.
INVESTING ACTIVITIES.Investing activities. During 2004, we used approximately $250.4 million in
investing activities, of which $221.7 million was for acquisitions, net of cash
received, and $47.4 million was for purchases of property and equipment.
Approximately $22.3 million of the property and equipment purchases was for the
purchase of land and construction of new or expanded facilities. We also
received approximately $12.3 million in proceeds from sales of property and
equipment, primarily of dealership facilities which we then leased back.
During 2003, the $52.6$54.2 million of cash used for investing activities
was primarily attributable to the use ofincluded $35.4 million of cash used in acquisitions, net of cash balances obtained in the acquisitions,received, and
$34.6 million for purchases of property and equipment. Approximately $22.9
million of the property and equipment purchases were for the purchase of land
and construction of new or expanded facilities. Offsetting these uses was $11.6
million received from the sales of property and equipment, including dealership
facilities which we then leased back, and $7.4 million received from the sale of
one dealership franchise during 2003.
During 2002, the $122.3$123.8 million of cash used for investing activities
was primarily attributable to the use ofincluded $81.4 million of cash used in acquisitions, net of cash balances obtained in the acquisitions,received, and
$43.5 million for purchases of property and equipment. Approximately $32.4
million of the property and equipment purchases were for the purchase of land
and construction of new or expanded facilities. Offsetting these uses was $7.4
million received from the sales of three dealership franchises during 2002.
During 2001, $27.2Financing activities. We obtained approximately $179.3 million of cash was used for investingfrom
financing activities during 2004, primarily attributable to purchases of property and equipment and cash paid in
acquisitions, net of cash balances obtained in the acquisitions, partially
offset byfrom borrowings under our revolving
credit facility. The proceeds from salesthese borrowings were primarily used to fund
acquisitions and complete the redemption of franchises. During 2001,all of our 10 7/8% senior
subordinated notes in March 2004. Additionally, we used approximately
$20.9spent $7.0 million
in purchasing property and equipment, of which, approximately
$12.5 million was for the purchase of land and construction of new or expanded
facilities.
FINANCING ACTIVITIES.repurchasing our common stock.
We used approximately $26.6$32.6 million in financing activities during 2003,
primarily for payments on our credit facility, using the proceeds from our
issuance of 8 1/8-1/4% senior subordinated notes in August 2003 and cash flowsflow from
operations. Additionally, weWe spent an additional $14.4 million for
repurchases ofrepurchasing our common stock.
33
During 2002, we obtained approximately $54.9$52.7 million from financing
activities, primarily from borrowings under our credit facility. We reborrowed
amounts available under our credit facility that were paid down with the
proceeds from our stock offering in October 2001. Additionally,
we spent $11.6 million repurchasing a portion of our senior subordinated notes
and $23.8 million for repurchases of common stock.
During 2001, we used approximately $55.8 million in financing
activities. The uses were primarily attributable to payments made on our
revolving credit facility and repurchases of common stock, largely offset by the
proceeds of our common stock offering. In October 2001, we completed an offering
of 3.3 million shares of our common stock, with net proceeds from the offering,
after expenses, of approximately $98.5 million. The proceeds from the offering,
as well as cash flows from operations, were used to reduce the outstanding
balance under our credit facility by $121.0 million
WORKING CAPITAL. At December 31, 2003,2004, we had working capital of $276.5$155.5
million, which is approximately $160 million higher thanapproximating the amount we believe we needis necessary to operate our
existing business.
On March 1, 2004, we used approximately $79.5
million of this excess working capital to fund the redemption of our 10 7/8%
senior subordinated notes. We expect to use the remaining excess working capital
to fund acquisitions and anticipated capital expenditures. Historically, we have
funded our operations with internally generated cash flow and borrowings. While
we cannot guarantee it, based on current facts and circumstances, we believe we
have adequate cash flow coupled with borrowing capacity under our credit
facility to fund our current operations and capital expenditures and
acquisitions budgeted for 2004. If our capital expenditure or acquisition plans
for 2004 as outlined below change, we may need to access the private or public
capital markets to obtain additional funding.-39-
Changes in our working capital are driven primarily by changes in
floorplan notes payable outstanding. Borrowings on our new vehicle floorplan
notes payable, subject to agreed upon pay off terms, are equal to 100% of the
factory invoice of the vehicles. Borrowings on our used vehicle floorplan notes
payable, subject to agreed upon pay off terms, are limited to 55% of the
aggregate book value of our used vehicle inventory. At times, as at December 31,
2003, we have made
payments on our floorplan notes payable using excess cash flow from operations
and the proceeds of debt and equity offerings. As needed, we reborrow the
amounts later, up to the limits on the floorplan notes payable discussed above,below,
for working capital, acquisitions, capital expenditures or general corporate
purposes.
STOCK REPURCHASE
InCREDIT FACILITIES. Our various credit facilities are used to finance the
purchase of inventory, provide acquisition funding and provide working capital
for general corporate purposes. Our two facilities currently provide us with a
total of $1.2 billion of borrowing capacity.
Revolving Credit Facility. This facility matures in June 2006 and now
provides a total of $937.0 million of financing, after we exercised our option
to expand the facility by $162.0 million in July 2004. We can further expand the
facility to its maximum commitment of $1.0 billion, subject to participating
lender approval. This facility consists of two tranches: $769.2 million for
floorplan financing, which we refer to as the floorplan tranche, and $162.8
million for acquisitions, capital expenditures and general corporate purposes,
including the issuance of letters of credit. We refer to this tranche as the
acquisition line. The acquisition line bears interest at LIBOR plus a margin
that ranges from 175 to 325 basis points, depending on our leverage ratio. The
floorplan tranche bears interest at rates equal to LIBOR plus 112.5 basis points
for new vehicle inventory and LIBOR plus 125 basis points for used vehicle
inventory.
Our revolving credit facility contains various covenants including
financial ratios, such as fixed-charge coverage and interest coverage, and a
minimum net worth requirement, among others, as well as additional maintenance
requirements.
Our group of lenders is comprised of 13 major financial institutions,
including two manufacturer captive finance companies. As of February 28, 2005,
$65.8 million was available, after deducting $8.0 million for outstanding
letters of credit, to be drawn under the acquisition line, and $158.5 million
was available to be drawn under the floorplan tranche for inventory purchases.
Ford Motor Credit Facility. We have a separate floorplan financing
arrangement with Ford Motor Credit Company, which we refer to as the FMCC
facility, to provide financing for our entire Ford, Lincoln and Mercury new
vehicle inventory. The FMCC facility, which matures on June 2, 2006, provides
for up to $300.0 million of financing for inventory at an interest rate equal to
Prime plus 100 basis points minus certain incentives. As of February 28, 2005,
$85.0 million was available for inventory purchases. We expect the net cost of
our borrowings under the FMCC facility, after all incentives, to be slightly
higher than the cost of borrowing under the floorplan tranche of our revolving
credit facility.
-40-
The following table summarizes the current position of our credit
facilities as of December 31, 2004:
TOTAL
CREDIT FACILITY COMMITMENT OUTSTANDING AVAILABLE
- ------------------------- ---------- ------------ ---------
(in thousands)
Floorplan Tranche $ 769,247 $ 632,593 $ 136,654
Acquisition Line (1)(2) 162,753 90,519 $ 72,234
---------- ------------ ---------
Total Revolving
Credit Facility 932,000 723,112 208,888
FMCC Facility 300,000 195,498 $ 104,502
---------- ------------ ---------
Total Credit Facilities $1,232,000 $ 918,610 313,390
========== ============ =========
- ----------
(1) The outstanding balance at December 31, 2004 includes $6.5 million of
letters of credit.
(2) The total commitment reflects the aggregate commitment of $167.8 million
less $5.0 million of reserves as required by the lenders.
For a more detailed discussion of our credit facilities please see Note 7
to our consolidated financial statements.
SENIOR SUBORDINATED NOTES. During August 2003, we completed a private
offering of $150.0 million of 8 1/4% senior subordinated notes due 2013. The net
proceeds from the boardoffering of directors authorized$144.1 million were used to temporarily pay down
borrowings under the floorplan tranche of our revolving credit facility. During
2004, we reborrowed these amounts to fund acquisitions and to redeem all of our
outstanding 10 7/8% senior subordinated notes. The 8 1/4% senior subordinated
notes are fully and unconditionally guaranteed by our dealership subsidiaries
and contain various provisions that permit us to redeem the notes at our option
and a requirement that we repurchase up
to $25.0 millionall of ourthe notes upon a change of control.
Additionally, the notes contain various financial and other covenants, such as
limitations on the incurrence of debt, the payment of dividends, the repurchase
of stock, subject to management's judgment and the restrictionsdisposition 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 2003 we repurchased approximately
463,000 shares for approximately $14.4 million.assets, among others. As of December 31, 2003, $10.62004,
we were in compliance with these covenants. For a more detailed discussion of
our notes please see Note 8 to our consolidated financial statements.
USES OF LIQUIDITY AND CAPITAL RESOURCES
SENIOR SUBORDINATED NOTES REDEMPTION. On March 1, 2004, we completed the
redemption of all of our 10 7/8% senior subordinated notes. Total cash used in
completing the redemption, excluding accrued interest of $4.1 million, remained under the board of directors' authorization.was $79.5
million.
CAPITAL EXPENDITURESEXPENDITURES. 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.
ExpendituresIn general, expenditures relating to the construction or expansion of dealership
facilities
generally, are driven by new franchises being granted to us by a manufacturer,
significant growth in sales at an existing facility, or manufacturer imaging
programs. During 2004,2005, we plan to invest approximately $31.1$55.2 million to expand
or relocate 11 existing facilities, prepare foursix new facilities for operations,
perform manufacturer required imaging projects at four locations and purchase
equipment for new and expanded facilities. We have agreed to sell threeand leaseback
four of the new facilities completedprojects scheduled for completion during 2004.2005. Expected total
proceeds from the sales of these construction projects is estimated at
approximately $12.3$15.7 million, resulting in net capital expenditures for new and
expanded operations of $18.8$39.5 million. Upon sale we will begin leasing the
facilities from the buyer,buyers resulting in an estimated incremental annual rent
expense of $2.5$1.5 million per year.
34
ACQUISITION FINANCINGACQUISITIONS. From January 1, 2004, through December 31, 2004, we
completed acquisitions of 23 franchises with expected annual revenues of
approximately $1.2 billion. These acquisitions included a platform in New Jersey
with three franchises, a platform in California with nine franchises and one
collision center, and a platform in New York with four franchises and one
collision center. The remaining franchises were acquired in tuck-in acquisitions
that complement existing platform operations in California, Massachusetts, and
Texas. The aggregate consideration paid in completing these acquisitions was
approximately $221.7 million in cash, net of cash received, 394,313 shares of
common stock and the assumption of $109.7 million of inventory financing.
Our acquisition target for 20042005 is to complete platform and tuck-in acquisitions that have
approximately $1 billion$300.0 million in expected 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. We purchase
businesses based on expected return on investment. Generally, the purchase price
is approximately 15% to 20% of the annual revenue. Thus, our targeted
acquisition budget of $1 billion$300.0 million is expected to cost us between $150$45.0 and
$200 million, which
is expected to be funded with a blend of cash and the issuance of common stock.$60.0 million.
-41-
Since December 31, 2003,2004, we have completed tuck-in acquisitions of four
franchises. Onetwo
franchises, with expected annual revenues of the acquisitions, with three franchises, is a new$46.0 million, in Tulsa, Oklahoma
under our Bob Howard Auto Group platform, in
New Jersey. The other franchise was acquired in a tuck-in acquisition and will
complement platform operations in Central Texas. The aggregate consideration
paid in completing these acquisitions wasfor approximately $38.6$7.5 million in
cash, net of cash received, 54,372 shares of common stock and the assumption of $29.8$9.6 million of inventory
financing.
CREDIT FACILITIES
During June 2003, we completed an amendmentSTOCK REPURCHASES. In March 2004, our board of directors authorized us to
our existing $900.0
million credit facility and entered into a new credit facility with Ford Motor
Credit Company. The two facilities provide us with $1.075 billion of borrowing
capacity.
$775 MILLION CREDIT FACILITY. The amendmentrepurchase up to our existing credit
facility extended the term until June 2006 and provides $775.0$25.0 million of financing, consistingour stock, subject to management's judgment
and the restrictions of two tranches: 75%our various debt agreements. During 2004, we repurchased
approximately 195,000 shares of our common stock for approximately $7.0 million,
a portion of which was purchased under a previous board of directors'
authorization established in February 2003, with 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. The amount available to be borrowedremainder purchased under
the Acquisition Tranche is
dependent upon a calculation based on our cash flow. 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. The credit facility also
contains various covenants including financial ratios, such as fixed-charge
coverage, interest coverage and a minimum net worth requirement, among others,
as well as other requirements that must be maintained.March 2004 authorization. As of December 31, 2003,
we were in compliance with these covenants. The lending group is comprised of 14
major financial institutions, including two manufacturer captive finance
companies. As of February 29, 2004, $188.8$18.9 million was available, after
deducting $5.0 million for outstanding letters of credit, to be drawnremained
under the Acquisition Tranche for working capital, acquisition or floorplan financing and
lettersboard of credit. The credit facility allows up to 33% of net income to be used
for cash dividends and stock repurchases.
FORD MOTOR CREDIT FACILITY. Simultaneous withdirectors' March 2004 authorization. This amount is less than
the amendment of the
above described credit facility, we entered into a separate floorplan financing
arrangement with Ford Motor Credit Company ("FMCC Facility") to provide
financing for our 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. We expect the net cost of these borrowings, after all
incentives, to approximate our floorplan costamount permitted under the $775.0 million credit
facility.
35
The following table summarizesindenture governing our outstanding borrowings and total
commitments under our credit facilities:
OUTSTANDING UNUSED TOTAL
AT DECEMBER 31, 2003 COMMITMENTS COMMITMENT
-------------------- ----------- ----------
(in millions)
Floorplan Tranche $ 291.7 $ 289.5 $ 581.2
Acquisition Tranche (1) 5.0 188.8 193.8
-------- -------- ----------
Total Bank Facility 296.7 478.3 775.0
FMCC Facility 192.9 107.1 300.0
-------- -------- ----------
Total Credit Facilities $ 489.6 $ 585.4 $ 1,075.0
======== ======== ==========
- ----------------
(1) The outstanding balance at December 31, 2003 includes $5.0
million of letters of credit.
For a more detailed discussion of our credit facilities, please read
Notes 6 and 7 to our consolidated financial statements.
INTEREST RATE SWAPS. On July 25, 2003, one of our interest rate swaps,
with a notional amount of $100.0 million, reached its termination date.
Therefore, at this time, we have only 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 $143.3 millionour most restrictive agreement with respect to stock
repurchases. The amount we are able to repurchase under this indenture adjusts
based on future net income and were used to temporarily pay down floorplan borrowings
under the Floorplan Trancheissuances of our credit facility, currently bearing interest
at 2.25%. As of March 1, 2004, we have reborrowed approximately $38.6 million in
completing acquisitions and $79.5 million in the redemption of all of our
outstanding 10 7/8% senior subordinated notes. The 8 1/4% senior subordinated
notes are fully and unconditionally guaranteed by our dealership subsidiaries
and contain various provisions that permit us to redeem the notes at our option
and a requirement that we repurchase all of the notes upon a change of control.
Additionally, the notes contain various covenants, including financial ratios,
such as cash flow coverage, as well as other requirements that must be
maintained, such as limitations on the payment of dividends and repurchase of
stock, among others. For a more detailed discussion of our notes please read
Note 8 to our consolidated financial statements.
OFF-BALANCE SHEET ARRANGEMENTS ANDcommon stock.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The following is a summary of our off-balance sheet arrangements and
future contractual cash obligations as of December
31, 2003:2004:
2004 2005 2006 2007 2008 THEREAFTERPAYMENTS DUE BY PERIOD
CONTRACTUAL OBLIGATIONS TOTAL
---- ---- ---- ---- ---- ---------- -----
(in millions) < 1 YEAR 1-3 YEARS 3-5 YEARS THEREAFTER
- -------------------------------- ----------- --------- --------- --------- ----------
(in thousands)
Off-Balance Sheet Arrangements
Leases ............................... $ 49,203 $ 47,846 $ 47,494 $ 47,203 $ 41,501 $ 224,389 $ 457,636
Contractual Commitments
Capital expenditures ................. 17,098 2,581 -- -- -- -- 19,679
On-Balance Sheet Obligations
Debt (1) ............................. 910 935 732 707 775 234,934 238,993
Floorplan notes payable (1) .......... 493,568 -- -- -- -- -- 493,568
Other long-term obligations .......... 25 114 25 25 -- -- 189
---------- ---------- ---------- ---------- ---------- ----------payable(1) $ 848,260 $ 848,260 $ - $ - $ -
Long-term debt obligations(1)(2) 248,301 1,054 92,102 1,743 153,402
Operating leases 562,283 61,508 121,141 100,938 278,696
Purchase Commitments(3) 52,347 47,973 4,374
----------- --------- --------- --------- ----------
Total Obligations and Commitments ...... $ 560,8041,711,191 $ 51,476958,795 $ 48,251217,617 $ 47,935102,681 $ 42,276 $ 459,323 $1,210,065
========== ========== ========== ========== ========== ==========432,098
=========== ========= ========= ========= ==========
- -------------
(1) Excludes interest payments.payments
(2) Includes borrowings on the Acquisition Line and outstanding letters of
credit
(3) Includes capital expenditures, acquisition commitment and other
We lease various real estate, facilities and equipment under long-term
operating lease agreements. Generally, theour real estate and facility leases have
30-year total terms with initial terms of 15 years and three additional
five-year option periods,terms, at our option. Additionally, weWe generally do not have an option to purchase
the real estate and facilities at the end of the lease term, andbut generally have
a right of first refusal 36
givingthat gives us the opportunity to purchase the real
estate and facilities if the owner reaches an agreement to sell them to a third
party.
Our credit facilities are currently set to mature in June 2006. The
credit facilities provide commitments for inventory financing up to $881.2
million, of which we had borrowed $484.6 million at December 31, 2003. Payments,
generally, are required to be made on the floorplan notes payable as the
vehicles are sold. The Acquisition Tranche of our credit facility also provides
commitments for a revolving credit line for general corporate purposes,
including acquisitions, up to $193.8 million, of which $5.0 million was
outstanding under letters of credit at December 31, 2003.
On March 1, 2004, we completed the redemption of all of our 10 7/8%
senior subordinated notes. The amount necessary to complete the redemption was
obtained through borrowings under the Floorplan Tranche of our credit facility.
The face value of $75.4 million is included in the Debt line in the Thereafter
column in the preceding table.
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 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 for additional discussion regarding our
accounting policies.
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 some of our
manufacturers. The assistance is accounted for as a vehicle purchase price
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 historical loss
experience and market trends. Additionally, 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 we operate in, 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
37
and recognized over the life of the contracts. Due to changes in state law
during 2002, none of the states we currently operate in are dealer-obligor
states.
INTANGIBLE ASSETS
In June 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was
issued. SFAS No. 142 changes the treatment of goodwill by no longer amortizing
goodwill; however, other identifiable intangible assets are to be separately
recognized and amortized, as applicable. The statement requires, at least
annually, an assessment for impairment of goodwill and other indefinite life
intangible assets 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 or circumstances at a reporting unit indicating a potential reduction
of fair value below book value. In performing the assessment, we estimate the
fair value of our intangibles using a calculation based on the historical and
expected cash flows of the dealerships, market trends and conditions, review of
completed transactions and current market valuations. A portion of our
intangible assets relates to franchise value, which is considered to have an
indefinite life, with goodwill accounting for the remainder. We adopted this
statement effective January 1, 2002. Adoption did not result in an impairment of
any intangible assets, based on the new fair-value based test; however, changes
in facts and circumstances surrounding this estimate could result in an
impairment of intangible assets in the future.
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, could be expected to have a material
adverse effect on our business, financial condition or results of operations.
However, the results of these proceedings cannot be predicted with certainty,
and changes in facts and circumstances could impact our estimate for reserves
for legal proceedings.
SELF-INSURANCE RESERVES
We are self-insured for a portion of the claims related to our employee
medical benefits and property / casualty insurance programs, requiring us to
make estimates regarding expected claims to be incurred. These estimates, for
the portion of claims not covered by stop-loss insurance, are based on certain
actuarial assumptions, and our historical claims experience. Changes in the
frequency or severity of claims could impact our reserve for claims.
38
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The table below providesfollowing information about our market-sensitive financial instruments 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.
LIABILITY
EXPECTED MATURITY DATE FAIR VALUE AT
--------------------------------------------------------------------------------- DECEMBER 31,
(dollars in millions) 2004 2005 2006 2007 2008 Thereafter Total 2003
---- ---- ---- ---- ---- ---------- ----- ----
VARIABLE RATE DEBT
Current ................... $ 493.6 $ - $ - $ - $ - $ - $ 493.6 $493.6
Average interest rates
(1)(2) ................. 2.55% - - - - -
Non-current ............... $ - $ - $ - $ - $ - $ - $ - $ -
Average interest rates .. - - - -
-------- -------- -------- -------- -------- -------- --------
Total variable rate debt .. $ 493.6 $ - $ - $ - $ - $ - $ 493.6
Interest rate swaps ....... $ 100.0 $ - $ - $ - $ - $ - $ 100.0 $ 2.1
Average pay rate (fixed)
(2) ....................... 4.88% - - - - -
Average receive rate
(variable)
(1)(2)(3) ........... 2.25% - - - - -
-------- -------- -------- -------- -------- -------- --------
Net variable rate debt .... $ 393.6 $ - $ - $ - $ - $ - $ 393.6
======== ======== ======== ======== ======== ======== ======
- ---------------------
(1) Based on 30-day LIBOR and Prime as of December 31, 2003.
(2) The average rate shown includes the spread charged on our
floorplan notes payable.
(3) The swap's variable rate is based on 30-day LIBOR.
At December 31, 2003,2004, fixed rate debt, primarily consisting of our variable ratesenior
subordinated notes outstanding, totaled $157.8 million and had a fair value of
$172.5 million.
At December 31, 2004, we had $848.3 million of variable-rate floorplan
notes payable have
decreased since the prior year due to decreased leverageborrowings and $84.0 million of variable-rate acquisition line borrowings
outstanding. Based on the inventory
partially offset by increases in inventory levels. Athese amounts, a 100 basis point increasechange in interest rates
would have increased floorplan interest expense $5.5result in an approximate $9.3 million for
the year ended December 31, 2003, before the impact ofchange to 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 ourexpense. Our
exposure to interest rate fluctuations. Currently, we have one interest rate swap
outstanding, with a notional amount of $100 million and converting 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 increasechanges in interest rates would have reduced the cost of the swaps and, thus, would have reduced ourwith respect to vehicle floorplan
borrowings is partially mitigated by manufacturers' floorplan assistance, which
in some cases is based on variable interest expense by $1.6 million for the year ended December 31, 2003.
The swap currently outstanding expires at the end of October 2004. As such,
depending on interest rate levels during the last two months of 2004, and
whether we enter into other interest rate swaps, our floorplan interest expense
could be impacted.
The net result on floorplan interest expense of a 100 basis point
increase in interest rates would have been an increase of $3.9 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.rates. This assistance, which has
ranged from approximately 80%105% to 160% of our floorplan interest expense over
the past three years, totaled $33.2 million in 2004, $27.4 million duringin 2003, and
$26.7 million duringin 2002. We treat this interest assistance as a vehicle purchase
price 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 changesA 100 basis point change in interest rates and thus
mitigates the impact ofwould result
in an approximate $3.6 million change in floorplan assistance.
Interest rate swaps may be used to adjust our exposure to interest rate
changes.
39movements when appropriate based upon market conditions. These swaps are entered
into with financial institutions with investment grade credit ratings, thereby
minimizing the risk of credit loss.
-42-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See theour Consolidated Financial Statements beginning on page F-1 for the
information required by this Item.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer performed an
evaluation of our disclosure controls and procedures, which have been designed
to permit us to effectively identify and timely disclose important information.
They concluded that the controls and procedures were effective as of December
31, 20032004, to ensure that material information was accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.
During the three months ended December 31, 2003,2004, we have made no change in our
internal controls over financial reporting that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting.
-43-
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rules 13a - 15(f) and
15d - 15(f) under the Securities Exchange Act of 1934. The Company's internal
control over financial reporting was designed by management, under the
supervision of the Chief Executive Officer and Chief Financial Officer, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States, and includes
those policies and procedures that:
(i) pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the
assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
accounting principles generally accepted in the United States, and that
receipts and expenditures of the Company are being made only in accordance
with authorizations of management and directors of the Company; and
(iii)provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the Company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies and procedures may deteriorate.
Management assessed the effectiveness of the Company's internal control
over financial reporting as of December 31, 2004. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework.
In making its assessment of internal controls, the Company relied on the
relief provided by the Securities and Exchange Commission with respect to two
new platforms acquired during June and August of 2004. For the year ending
December 31, 2004, these operations represented, in the aggregate, 9.1% of total
assets, 11.3% of consolidated pretax income, and 4.7% of consolidated revenue.
Based on our evaluation under the framework in Internal Control-Integrated
Framework, management believes that the Company maintained effective internal
control over financial reporting as of December 31, 2004. Ernst & Young, the
Company's independent auditors, has issued a report on our assessment of the
Company's internal control over financial reporting. This report, dated March
10, 2005, appears on page 45.
/s/ B.B. Hollingsworth, Jr.
- ----------------------------------------
B.B. Hollingsworth, Jr.
Chairman and Chief Executive Officer
/s/ Robert T. Ray
- ----------------------------------------
Robert T. Ray
Chief Financial Officer
-44-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Group 1 Automotive, Inc.:
We have audited management's assessment, included in the accompanying
Management Report on Internal Controls over Financial Reporting, that Group 1
Automotive, Inc. maintained effective internal control over financial reporting
as of December 31, 2004, based on criteria established in Internal Control --
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). Group 1 Automotive, Inc.'s management
is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management Report on Internal Controls
over Financial Reporting, management's assessment of and conclusion on the
effectiveness of internal control over financial reporting did not include the
internal controls of two new platforms acquired during June and August of 2004,
which are included in the 2004 consolidated financial statements of Group 1
Automotive, Inc. and constituted 9.1% of total assets, 11.3% of consolidated
pretax income, and 4.7% of consolidated revenue for the year then ended. Our
audit of internal control over financial reporting of Group 1 Automotive, Inc.
also did not include an evaluation of the internal control over financial
reporting of these two new platforms acquired during June and August of
2004.
In our opinion, management's assessment that Group 1 Automotive, Inc.
maintained effective internal control over financial reporting as of December
31, 2004, is fairly stated, in all material respects, based on the COSO
criteria. Also, in our opinion, Group 1 Automotive, Inc. maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2004, based on the COSO criteria.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheets of Group 1 Automotive, Inc. as of December 31, 2004 and 2003, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2004, of
Group 1 Automotive, Inc. and our report dated March 10, 2005, expressed an
unqualified opinion thereon.
/s/ Ernst & Young LLP
Houston, Texas
March 10, 2005
-45-
PART III
Please see the definitive Proxy Statement of Group 1 Automotive, Inc. for
the Annual Meeting of Stockholders to be held on May 19, 2004,18, 2005, which will be
filed with the Securities and Exchange Commission and is incorporated herein by
reference for the information concerning:
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
The financial statements listed in the accompanying Index to
Financial Statements are filed as part of this Annual Report on Form
10-K.
(b) ReportsOther Information
None.
(c) Exhibits
-46-
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 -- Restated Certificate of Incorporation of the Company
(Incorporated by reference to Exhibit 3.1 of the Company's
Registration Statement on Form 8-K
On March 5, 2004,S-1 Registration No. 333-29893).
3.2 -- Certificate of Designation of Series A Junior Participating
Preferred Stock (Incorporated by reference to Exhibit 3.2 of the
Company's Registration Statement on Form S-1 Registration No.
333-29893).
3.3 -- Bylaws of the Company filed a(Incorporated by reference to Exhibit 3.3
of the Company's Registration Statement on Form S-1 Registration
No. 333-29893).
4.1 -- Specimen Common Stock Certificate (Incorporated by reference to
Exhibit 4.1 of the Company's Registration Statement on Form S-1
Registration No. 333-29893).
4.2 -- 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).
4.3 -- 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).
4.4 -- Form of Subordinated Debt Securities (included in Exhibit 4.3).
10.1* -- Employment Agreement between the Company and B.B. Hollingsworth,
Jr., effective March 1, 2002 (Incorporated by reference to
Exhibit 10.1 of the Company's Annual Report on Form 10-K for the
year ended December 31, 2001).
10.2* -- First Amendment to Employment Agreement between the Company
and B.B. Hollingsworth, Jr., effective March 1, 2002
(Incorporated by reference to Exhibit 10.40 of the Company's
Annual Report on Form 10-K for the year ended December 31,
2003).
10.3* -- Employment Agreement between the Company and John T. Turner
dated November 3, 1997 (Incorporated by reference to Exhibit
10.5 of the Company's Annual Report on Form 10-K for the year
ended December 31, 1997).
10.4 -- Rights Agreement between Group 1 Automotive, Inc. and
ChaseMellon Shareholder Services, L.L.C., as rights agent, dated
October 3, 1997 (Incorporated by reference to Exhibit 10.10 of
the Company's Registration Statement on Form S-1 Registration
No. 333-29893).
10.5* -- Split Dollar Life Insurance Agreement, dated as of January 23,
2002, between Group 1 Automotive, Inc., and Leslie Hollingsworth
and Leigh Hollingsworth Copeland, as Trustees of the
Hollingsworth 2000 Children's Trust (Incorporated by reference
to Exhibit 10.36 of the Company's Annual Report on Form 10-K for
the year ended December 31, 2002).
10.6* -- Group 1 Automotive, Inc. Deferred Compensation Plan, as Amended
and Restated (Incorporated by reference to Exhibit 4.1 of the
Company's Registration Statement on Form S-8 Registration No.
333-83260).
10.7* -- First Amendment to Group 1 Automotive, Inc. Deferred
Compensation Plan, as Amended and Restated (Incorporated by
reference to Exhibit 4.1 of the Company's Registration Statement
on Form S-8 Registration No. 333-115962).
10.8* -- 1996 Stock Incentive Plan (Incorporated by reference to Exhibit
10.7 of the Company's Registration Statement on Form S-1
Registration No. 333-29893).
10.9* -- First Amendment to 1996 Stock Incentive Plan (Incorporated by
reference to Exhibit 10.8 of the Company's Registration
Statement on Form S-1 Registration No. 333-29893).
10.10* -- Second Amendment to 1996 Stock Incentive Plan (Incorporated by
reference to Exhibit 10.1 of the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999).
10.11* -- Third Amendment to 1996 Stock Incentive Plan (Incorporated by
reference to Exhibit 4.1 of the Company's Registration Statement
on Form S-8 Registration No. 333-75784).
10.12* -- Fourth Amendment to 1996 Stock Incentive Plan (Incorporated by
reference to Exhibit 4.1 of the Company's Registration Statement
on Form S-8 Registration No. 333-115961).
10.13* -- Fifth Amendment to 1996 Stock Incentive Plan (Incorporated by
reference to Exhibit 10.1 of the Company's Current Report on
Form 8-K reporting under Item 9.
On February 26, 2004,dated March 9, 2005).
-47-
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.14* -- Form of Restricted Stock Agreement for Employees (Incorporated
by reference to Exhibit 10.2 of the Company filed aCompany's Current Report on
Form 8-K reporting under Items 7 and 12.
40
On February 18, 2004,dated March 9, 2005).
10.15* -- Form of Phantom Stock Agreement for Employees (Incorporated by
reference to Exhibit 10.3 of the Company filed aCompany's Current Report on
Form 8-K reporting under Item 9.
On February 5, 2004, the Company filed aCompany's Current Report on Form 8-K reporting under Item 9.
On January 29, 2004,dated March 9,
2005).
10.16* -- Form of Restricted Stock Agreement for Non-Employee Directors
(Incorporated by reference to Exhibit 10.4 of the Company filed aCompany's
Current Report on Form 8-K reporting under Item 9.
On January 27, 2004,dated March 9, 2005).
10.17* -- Form of Phantom Stock Agreement for Non-Employee Directors
(Incorporated by reference to Exhibit 10.5 of the Company filed aCompany's
Current Report on Form 8-K reporting under Items 5 and 7.
On January 27, 2004,dated March 9, 2005).
10.18* -- Annual Incentive Plan for Executive Officers of Group 1
Automotive, Inc. (Incorporated by reference to the Company filed asection
titled "Executive Officer Compensation - Adoption of Bonus
Plan" in Item 1.01 of the Company's Current Report on Form 8-K
reporting under Items 5 and 7.
On December 4, 2003,dated March 9, 2005).
10.19* -- Group 1 Automotive, Inc. Director Compensation Plan
(Incorporated by reference to the Company filed aCompany's Current Report on
Form 8-K reporting under Items 5dated November 17, 2004, and 7.
On October 30, 2003,to the Company filed asection titled
"Director Compensation - Change in Director Compensation" in
Item 1.01 of the Company's Current Report on Form 8-K reporting under Items 7 and 12.
On October 14, 2003,dated
March 9, 2005).
10.20* -- Group 1 Automotive, Inc. 1998 Employee Stock Purchase Plan
(Incorporated by reference to Exhibit 10.11 of the Company filed a CurrentCompany's
Registration Statement on Form S-1 Registration No. 333-29893).
10.21* -- First Amendment to Group 1 Automotive, Inc. 1998 Employee
Stock Purchase Plan (Incorporated by reference to Exhibit 10.35
of the Company's Annual Report on Form 8-K reporting under Items 510-K for the year ended
December 31, 1998).
10.22* -- Second Amendment to Group 1 Automotive, Inc. 1998 Employee
Stock Purchase Plan (Incorporated by reference to Exhibit 4.1 of
the Company's Registration Statement on Form S-8 Registration
No. 333-75754).
10.23* -- Third Amendment to Group 1 Automotive, Inc. 1998 Employee
Stock Purchase Plan (Incorporated by reference to Exhibit 4.1 of
the Company's Registration Statement on Form S-8 Registration
No. 333-106486).
10.24* -- Fourth Amendment to Group 1 Automotive, Inc. 1998 Employee
Stock Purchase Plan (Incorporated by reference to Exhibit 4.2 of
the Company's Registration Statement on Form S-8 Registration
No. 333-106486).
10.25* -- Fifth Amendment to Group 1 Automotive, Inc. 1998 Employee
Stock Purchase Plan (Incorporated by reference to Exhibit 4.3 of
the Company's Registration Statement on Form S-8 Registration
No. 333-106486).
10.26 -- Fifth Amended and 7.
On October 8,Restated Revolving Credit Agreement, dated as
of June 2, 2003 (Incorporated by reference to Exhibit 10.1 of
the Company filed a CurrentCompany's Quarterly Report on Form 8-K reporting under Item 9.
(c) Other Information
None.
41
(d) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 -- Restated Certificate of Incorporation of the Company
(Incorporated by reference to Exhibit 3.1 of the Company's
Registration Statement on Form S-1 Registration No.
333-29893).
3.2 -- Certificate of Designation of Series A Junior Participating
Preferred Stock (Incorporated by reference to Exhibit 3.2
of the Company's Registration Statement on Form S-1
Registration No. 333-29893).
3.3 -- Bylaws of the Company (Incorporated by reference to Exhibit
3.3 of the Company's Registration Statement on Form S-1
Registration No. 333-29893).
4.1 -- Specimen Common Stock Certificate (Incorporated by
reference to Exhibit 4.1 of the Company's Registration
Statement on Form S-1 Registration No. 333-29893).
4.2 -- 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).
4.3 -- 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).
4.4 -- Form of Subordinated Debt Securities (included in
Exhibit 4.3).
10.1* -- Employment Agreement between the Company and B.B.
Hollingsworth, Jr. effective March 1, 2002 (Incorporated by
reference to Exhibit 10.1 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2001).
10.2* -- Employment Agreement between the Company and John T. Turner
dated November 3, 1997 (Incorporated by reference to
Exhibit 10.5 of the Company's Annual Report on Form 10-K
for the year ended December 31, 1997).
10.3* -- Employment Agreement between the Company and Scott L.
Thompson dated November 3, 1997 (Incorporated by reference
to Exhibit 10.6 of the Company's Annual Report on Form 10-K
for the year ended December 31, 1997).
10.4* -- 1996 Stock Incentive Plan (Incorporated by reference to
Exhibit 10.7 of the Company's Registration Statement on
Form S-1 Registration No. 333-29893).
10.5* -- First Amendment to 1996 Stock Incentive Plan (Incorporated
by reference to Exhibit 10.8 of the Company's Registration
Statement on Form S-1 Registration No. 333-29893).
10.6 -- Lease Agreement between Howard Pontiac GMC and Robert E.
Howard II (Incorporated by reference to Exhibit 10.9 of the
Company's Registration Statement on Form S-1 Registration
No. 333-29893).
10.7 -- Lease Agreement between Bob Howard Motors and Robert E.
Howard II (Incorporated by reference to Exhibit 10.9 of the
Company's Registration Statement on Form S-1 Registration
No. 333-29893).
10.8 -- Lease Agreement between Bob Howard Chevrolet and Robert E.
Howard II (Incorporated by reference to Exhibit 10.9 of the
Company's Registration Statement on Form S-1 Registration
No. 333-29893).
10.9 -- Lease Agreement between Bob Howard Automotive-H and North
Broadway Real Estate (Incorporated by reference to Exhibit
10.9 of the Company's Registration Statement on Form S-1
Registration No. 333-29893).
10.10 -- Rights Agreement between Group 1 Automotive, Inc. and
ChaseMellon Shareholder Services, L.L.C., as rights agent
dated October 3, 1997 (Incorporated by reference to Exhibit
10.10 of the Company's Registration Statement on Form S-1
Registration No. 333-29893).
10.11* -- 1998 Employee Stock Purchase Plan (Incorporated by
reference to Exhibit 10.11 of the Company's Registration
Statement on Form S-1 Registration No. 333-29893).
10.1210-Q for the quarter
ended June 30, 2003).
10.27 -- First Amendment to Fifth Amended and Restated Revolving Credit
Agreement, dated as of July 25, 2003 (Incorporated by reference
to Exhibit 10.37 of the Company's Registration Statement on Form
S-4 Registration No. 333-109080).
10.28 -- Form of Ford Motor Credit Company Automotive Wholesale Plan
Application for Wholesale Financing and Security Agreement
(Incorporated by reference to Exhibit 10.2 of the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2003).
10.29 -- Form of Agreement between Toyota Motor Sales, U.S.A., and
Group 1 Automotive, Inc. (Incorporated by reference to Exhibit
10.12 of the Company's Registration Statement on Form S-1
Registration No. 333-29893).
4210.30 -- Form of Supplemental Agreement to General Motors Corporation
Dealer Sales and Service Agreement (Incorporated by reference to
Exhibit 10.13 of the Company's Registration Statement on Form
S-1 Registration No. 333-29893).
10.31 -- Supplemental Terms and Conditions between Ford Motor Company and
Group 1 Automotive, Inc. dated September 4, 1997 (Incorporated
by reference to Exhibit 10.16 of the Company's Registration
Statement on Form S-1 Registration No. 333-29893).
-48-
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.13 -- Form of Supplemental Agreement to General Motors
Corporation Dealer Sales and Service Agreement
(Incorporated by reference to Exhibit 10.13 of the
Company's Registration Statement on Form S-1 Registration
No. 333-29893).
10.14 -- Supplemental Terms and Conditions between Ford Motor
Company and Group 1 Automotive, Inc. dated September 4,
1997 (Incorporated by reference to Exhibit 10.16 of the
Company's Registration Statement on Form S-1 Registration
No. 333-29893).
10.15EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.32 -- Toyota Dealer Agreement between Gulf States Toyota, Inc. and
Southwest Toyota, Inc. dated April 5, 1993 (Incorporated by
reference to Exhibit 10.17 of the Company's Registration
Statement on Form S-1 Registration No. 333-29893).
10.16 -- Lexus Dealer Agreement between Toyota Motor Sales, U.S.A.,
Inc. and SMC Luxury Cars, Inc. dated August 21, 1995
(Incorporated by reference to Exhibit 10.18 of the
Company's Registration Statement on Form S-1 Registration
No. 333-29893).
10.17 -- Form of General Motors Corporation U.S.A. Sales and Service
Agreement (Incorporated by reference to Exhibit 10.25 of
the Company's Registration Statement on Form S-1
Registration No. 333-29893).
10.18 -- Fifth Amended and Restated Revolving Credit Agreement,
dated as of June 2, 2003 (Incorporated by reference to
Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2003).
10.19 -- Form of Ford Motor Credit Company Automotive Wholesale
Plan Application for Wholesale Financing and Security
Agreement (Incorporated by reference to Exhibit 10.2 of the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2003).
10.20 -- First Amendment to Fifth Restated Revolving Credit
Agreement, dated as of July 25, 2003 (Incorporated by
reference to Exhibit 10.37 of the Company's Registration
Statement on Form S-4 Registration No. 333-109080).
10.21 -- Stock Pledge Agreement dated December 19, 1997
(Incorporated by reference to Exhibit 10.54 of the
Company's Annual Report on Form 10-K for the year ended
December 31, 1997).
10.22* -- First Amendment to Group 1 Automotive, Inc. 1998 Employee
Stock Purchase Plan (Incorporated by reference to Exhibit
10.35 of the Company's Annual Report on Form 10-K for the
year ended December 31, 1998).
10.23 -- Form of Ford Motor Company Sales and Service Agreement
(Incorporated by reference to Exhibit 10.38 of the
Company's Annual Report on Form 10-K for the year ended
December 31, 1998).
10.24 -- Form of Chrysler Corporation Sales and Service Agreement
(Incorporated by reference to Exhibit 10.39 of the
Company's Annual Report on Form 10-K for the year ended
December 31, 1998).
10.25 -- Form of Nissan Division Dealer Sales and Service Agreement.
10.26 -- Form of Infiniti Division Dealer Sales and Service Agreement.
10.27* -- Second Amendment to the 1996 Stock Incentive Plan
(Incorporated by reference to Exhibit 10.1 of the Company's
Quarterly Report on Form 10-Q for the quarter ended March
31, 1999).
10.28* -- Group 1 Automotive, Inc. Deferred Compensation Plan, as
Amended and Restated (Incorporated by reference
to Exhibit 4.1 of the Company's Registration Statement on
Form S-8 Registration No. 333-83260).
10.29* -- Second Amendment to Group 1 Automotive, Inc. 1998 Employee
Stock Purchase Plan (Incorporated by reference to Exhibit
4.1 of the Company's Registration Statement on Form S-8
Registration No. 333-75754).
10.30* -- Third Amendment to Group 1 Automotive, Inc. 1996 Stock
Incentive Plan (Incorporated by reference to Exhibit 4.1 of
the Company's Registration Statement on Form S-8
Registration No. 333-75784).
10.31 -- ISDA Master Agreement (Incorporated by reference to Exhibit
10.33 of the Company's Annual Report on Form 10-K for the
year ended December 31, 2001).
10.32 -- Interest Rate Swap Confirmation, dated as of October 19,
2001 (Incorporated by reference to Exhibit 10.35 of the
Company's Annual Report on Form 10-K for the year ended
December 31, 2001).
43
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.33* -- Split Dollar Life Insurance Agreement between Group 1
Automotive, Inc., and Leslie Hollingsworth and Leigh
Hollingsworth Copeland, as Trustees of the Hollingsworth
2000 Children's Trust, dated as of January 23, 2002
(Incorporated by reference to Exhibit 10.36 of the
Company's Annual Report on Form 10-K for the year ended
December 31, 2002).
10.34 -- Lease Agreement between Bob Howard Automotive-East, Inc.
and REHCO East, L.L.C (Incorporated by reference to Exhibit
10.37 of the Company's Annual Report on Form 10-K for the
year ended December 31, 2002).
10.35 -- Lease Agreement between Howard-H, Inc. and REHCO, L.L.C
(Incorporated by reference to Exhibit 10.38 of the
Company's Annual Report on Form 10-K for the year ended
December 31, 2002).
10.36 -- Lease Agreement between Howard Pontiac-GMC, Inc. and North
Broadway Real Estate Limited Liability Company
(Incorporated by reference to Exhibit 10.39 of the
Company's Annual Report on Form 10-K for the year ended
December 31, 2002).
10.37* -- Employment Agreement between the Company and Kevin H.
Whalen dated November 3, 2002 (Incorporated by reference to
Exhibit 10.40 of the Company's Annual Report on Form 10-K
for the year ended December 31, 2002).
10.38 -- Lease Agreement between Howard-Ford, Inc. and REHCO EAST,
LLC dated as of February 28, 2003.
10.39 -- Amendment and Assignment of Lease between Howard Ford,
Inc., Howard-FLM, Inc. and REHCO EAST, LLC dated as of
November 1, 2003.
10.40* -- First Amendment to Employment Agreement between the Company
and B.B. Hollingsworth, Jr. effective March 1, 2002.
10.41* -- Split Dollar Life Insurance Payment Deferral Letter dated
January 28,10.33 -- Lexus Dealer Agreement between Toyota Motor Sales, U.S.A., Inc.
and SMC Luxury Cars, Inc. dated August 21, 1995 (Incorporated by
reference to Exhibit 10.18 of the Company's Registration
Statement on Form S-1 Registration No. 333-29893).
10.34 -- Form of General Motors Corporation U.S.A. Sales and Service
Agreement (Incorporated by reference to Exhibit 10.25 of the
Company's Registration Statement on Form S-1 Registration No.
333-29893).
10.35 -- Form of Ford Motor Company Sales and Service Agreement
(Incorporated by reference to Exhibit 10.38 of the Company's
Annual Report on Form 10-K for the year ended December 31,
1998).
10.36 -- Form of Chrysler Corporation Sales and Service Agreement
(Incorporated by reference to Exhibit 10.39 of the Company's
Annual Report on Form 10-K for the year ended December 31,
1998).
10.37 -- Form of Nissan Division Dealer Sales and Service Agreement
(Incorporated by reference to Exhibit 10.25 of the Company's
Annual Report on Form 10-K for the year ended December 31,
2003).
10.38 -- Form of Infiniti Division Dealer Sales and Service
Agreement (Incorporated by reference to Exhibit 10.26 of the
Company's Annual Report on Form 10-K for the year ended December
31, 2003).
10.39 -- Lease Agreement between Howard Pontiac GMC, Inc. and Robert E.
Howard II (Incorporated by reference to Exhibit 10.9 of the
Company's Registration Statement on Form S-1 Registration No.
333-29893).
10.40 -- Lease Agreement between Bob Howard Motors, Inc. and Robert E.
Howard II (Incorporated by reference to Exhibit 10.9 of the
Company's Registration Statement on Form S-1 Registration No.
333-29893).
10.41 -- Lease Agreement between Bob Howard Chevrolet, Inc. and Robert E.
Howard II (Incorporated by reference to Exhibit 10.9 of the
Company's Registration Statement on Form S-1 Registration No.
333-29893).
10.42 -- Lease Agreement between Bob Howard Automotive-East, Inc. and
REHCO East, L.L.C. (Incorporated by reference to Exhibit 10.37
of the Company's Annual Report on Form 10-K for the year ended
December 31, 2002).
10.43 -- Lease Agreement between Howard-H, Inc. and REHCO, L.L.C.
(Incorporated by reference to Exhibit 10.38 of the Company's
Annual Report on Form 10-K for the year ended December 31,
2002).
10.44 -- Lease Agreement between Howard Pontiac-GMC, Inc. and North
Broadway Real Estate Limited Liability Company (Incorporated by
reference to Exhibit 10.10 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2002).
10.45 -- Lease Agreement between Howard-Ford, Inc. and REHCO EAST, L.L.C.
(Incorporated by reference to Exhibit 10.38 of the Company's
Annual Report on Form 10-K for the year ended December 31,
2003).
10.46 -- Amendment and Assignment of Lease between Howard Ford, Inc.,
Howard-FLM, Inc. and REHCO EAST, L.L.C. (Incorporated by
reference to Exhibit 10.39 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2003).
10.47 -- Second Amendment to Fifth Amended and Restated Revolving Credit
Agreement, dated as of March 8, 2005.
10.48* -- Sixth Amendment to Group 1 Automotive, Inc. 1998 Employee Stock
Purchase Plan.
10.49* -- Form of Incentive Stock Option Agreement for Employees.
10.50* -- Form of Nonstatutory Stock Option Agreement for Employees.
11.1 -- Statement re: computation of earnings per share is included
under Note 2 to the financial statements.
14.1 -- Code of Ethics for Specified Officers of Group 1 Automotive,
Inc., dated as of May 16, 2004.
11.1 -- Statement re: computation of earnings per share is included
under Note 2 to the financial statements.
14.1 -- Code of Ethics for Specified Officers of Group 1
Automotive, Inc. dated as of May 14, 2003.
21.1 -- Group 1 Automotive, Inc. Subsidiary List.
23.1 -- Consent of Ernst & Young LLP.
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.
- --------------
* Management contract or compensatory plan 44or arrangement
-49-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 in the city of Houston,
Texas, on 11ththe 16th day of March, 2004.2005.
Group 1 Automotive, Inc.
By: /s/ B.B. Hollingsworth, Jr.
-----------------------------------------------------------------
B.B. Hollingsworth, Jr.
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on the 11th16th day of March, 2004.2005.
SIGNATURE TITLE
--------- -----
/s/ B.B. Hollingsworth, Jr. Chairman, President and Chief
- ---------------------------------------------------------------------------------- Executive Officer and Director (Principal
B.B. Hollingsworth, Jr. Executive Officer)
/s/ Scott L. Thompson ExecutiveRobert T. Ray Senior Vice President,
- ---------------------------------------------------------------------------------- Chief Financial Officer and Treasurer (Chief
Scott L. ThompsonRobert T. Ray Financial and Accounting Officer)
/s/ John L. Adams Director
- ----------------------------------------------------------------------------------
John L. Adams
/s/ Robert E. Howard II Director
- ----------------------------------------------------------------------------------
Robert E. Howard II
/s/ Louis E. Lataif Director
- ----------------------------------------------------------------------------------
Louis E. Lataif
/s/ Stephen D. Quinn Director
- ----------------------------------------------------------------------------------
Stephen D. Quinn
/s/ J. Terry Strange Director
- ----------------------------------------------------------------------------------
J. Terry Strange
/s/ Max P. Watson, Jr. Director
- ----------------------------------------------------------------------------------
Max P. Watson, Jr.
45-50-
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Group 1 Automotive, Inc. and Subsidiaries -- Consolidated Financial Statements
Report of Independent Auditors.................................................Registered Public Accounting Firm....................... F-2
Report of Independent Public Accountants.......................................Consolidated Balance Sheets................................................... F-3
Consolidated Balance Sheets....................................................Statements of Operations......................................... F-4
Consolidated Statements of Operations..........................................Stockholders' Equity............................... F-5
Consolidated Statements of Stockholders' Equity................................Cash Flows......................................... F-6
Consolidated Statements of Cash Flows.......................................... F-7
Notes to Consolidated Financial Statements..................................... F-8Statements.................................... F-7
F-1
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT AUDITORS
To theREGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Group 1 Automotive, Inc.
and
Subsidiaries:
We have audited the accompanying consolidated balance sheets of Group 1
Automotive, Inc. and
Subsidiaries as of December 31, 20032004 and 2002,2003, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
twothree years in the period ended December 31, 2003.2004. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
The financial
statements of Group 1 Automotive, Inc. and Subsidiaries as of December 31, 2001,
and for the year then ended were audited by other auditors who have ceased
operations and whose report dated February 14, 2002, expressed an unqualified
opinion on those statements before the reclassification adjustments described in
Note 14 and the transitional disclosures described in Note 5.
We conducted our audits in accordance with auditingthe standards generally accepted
inof the United States.Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the 2003 and 2002 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Group 1
Automotive, Inc. and Subsidiaries at December 31, 20032004 and 20022003, and the consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States.
As discussed in Note 5 to the consolidated financial statements, effective
January 1, 2002, the Company changed its method of accounting for goodwill.
As discussed above, the financial statements of Group 1 Automotive, Inc. and
Subsidiaries as of December 31, 2001, and for the year then ended were audited
by other auditors who have ceased operations. As described in Note 14, these
financial statements have been revised. We audited the reclassification
adjustments described in Note 14 that were applied to revise the 2001 financial
statements. In our opinion, such reclassification adjustments are appropriate
and have been properly applied. Additionally, as described in Note 5, these
financial statements were further revised to include the transitional
disclosures required by Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets, which was adopted by the Company on
January 1, 2002. Our audit procedures with respect to the disclosures in Note 5
for 2001 included (a) agreeing the previously reported net income to the
previously issued financial statements and the adjustments to reported net
income representing amortization expense, net of tax, recognized in those
periods related to goodwill and intangible assets that are no longer being
amortized to the Company's underlying records obtained from management, and (b)
testing the mathematical accuracy of the reconciliation of adjusted net income
to reported net income, and the related earnings-per-share amounts. In our
opinion, the disclosures for 2001 in Note 5 are appropriate. However, we were
not engaged to audit, review, or apply any procedures to the 2001 financial
statements of the Company other than with respect to such reclassification
adjustments and transitional disclosures and, accordingly, we do not express an
opinion or any other form of assurance on the 2001 financial statements taken as
a whole.
/s/ Ernst & Young LLP
Houston, Texas
February 26, 2004
F-2
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Group 1 Automotive, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Group 1
Automotive, Inc. (a Delaware corporation) and Subsidiaries (the "Company") as of
December 31, 2001 and 2000 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 2001 and 2000, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2001,2004, in conformity with accounting principlesU.S. generally accepted accounting
principles.
We also have audited, in accordance with the United States.
/s/ Arthur Andersen LLP
Houston, Texas
February 14, 2002
NOTE: This is a copystandards of the audit report previously issued by Arthur Andersen
LLP in connection withPublic Company
Accounting Oversight Board (United States), the effectiveness of Group 1
Automotive, Inc.'s filing on Form 10-K for the
year endedinternal control over financial reporting as of December 31,
2001. This audit2004, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report has not been reissued by Arthur
Andersendated March 10, 2005 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
in connection with this filing on Form 10-K.
F-3Houston, Texas
March 10, 2005
F-2
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------------------------------------
2004 2003
2002
----------- -----------
(in thousands)---------------- ------------------
(dollars in thousands, except share data)
ASSETS
CURRENT ASSETS:
Cash .........................................................and cash equivalents............................................ $ 25,44137,750 $ 24,33326,483
Contracts-in-transit and vehicle receivables, net ............net.................... 172,402 143,260 178,623
Accounts and notes receivable, net ........................... 63,604 58,194
Inventories, net .............................................net................................... 76,687 63,669
Inventories.......................................................... 877,575 671,279 622,205
Deferred income taxes ........................................taxes................................................ 14,755 11,163 10,793
Prepaid expenses and other assets ............................current assets............................ 26,046 16,176
8,890
----------- --------------------------- ------------------
Total current assets ....................................... 930,923 903,038
----------- -----------assets............................................... 1,205,215 932,030
---------------- ------------------
PROPERTY AND EQUIPMENT, net .....................................net............................................. 160,297 131,647
116,270
GOODWILL ........................................................ 314,211 307,907GOODWILL................................................................ 366,673 328,491
INTANGIBLE ASSETS ...............................................FRANCHISE RIGHTS............................................. 187,135 76,656 60,879
INVESTMENTS, AT MARKET VALUE, RELATED TO
INSURANCE POLICY SALES ....................................... 16,025 15,813
DEFERRED COSTS RELATED TO INSURANCE POLICY AND VEHICLE SERVICE
CONTRACT SALES ....................SALES.......................................................... 7,996 12,238
16,824
OTHER ASSETS .................................................... 6,465 1,662
----------- -----------ASSETS............................................................ 19,904 21,383
---------------- ------------------
Total assets ...............................................assets....................................................... $ 1,488,1651,947,220 $ 1,422,393
=========== ===========1,502,445
================ ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Floorplan notes payable ......................................payable.............................................. $ 493,568848,260 $ 652,538493,568
Current maturities of long-term debt .........................debt................................. 1,054 910
997
Accounts payable .............................................payable..................................................... 108,920 87,675
90,809
Accrued expenses ............................................. 72,240 63,784
----------- -----------expenses..................................................... 91,528 74,295
---------------- ------------------
Total current liabilities .................................. 654,393 808,128
----------- -----------liabilities.......................................... 1,049,762 656,448
---------------- ------------------
LONG-TERM DEBT, net of current maturities ................................. 12,703 9,073
SENIOR SUBORDINATED NOTES ....................................... 217,475 72,777maturities............................... 156,747 230,178
ACQUISITION LINE........................................................ 84,000 -
DEFERRED INCOME TAXES ........................................... 19,506 7,651TAXES................................................... 33,197 33,786
OTHER LIABILITIES ............................................... 25,224 29,927
----------- -----------LIABILITIES....................................................... 24,288 23,169
---------------- ------------------
Total liabilities before deferred revenues ................. 929,301 927,556
----------- -----------revenues......................... 1,347,994 943,581
---------------- ------------------
DEFERRED REVENUES FROM INSURANCE POLICY SALES ................... 24,984 24,637
DEFERRED REVENUES FROM VEHICLE SERVICE CONTRACT SALES ........... 12,952 24,550
DEFERRED REVENUES FROM VEHICLE MAINTENANCE AGREEMENT SALES ...... 2,819 2,233
COMMITMENTS AND CONTINGENCIESREVENUES....................................................... 32,052 40,755
STOCKHOLDERS' EQUITY:
Preferred stock, 1,000,000 shares authorized, none issued or
outstanding ...................................... -- --outstanding.......................................................... - -
Common stock, $.01 par value, 50,000,000 shares authorized,authorized;
23,916,393 and 23,454,046 and 23,183,226 issued, ..............respectively....................... 239 235 232
Additional paid-in capital ...................................capital........................................... 265,645 255,356
254,145
Retained earnings ............................................earnings.................................................... 318,931 291,150 215,024
Accumulated other comprehensive loss .........................loss................................. (173) (1,285) (3,359)
Treasury stock, at cost,cost; 606,588 and 1,002,506 and 942,419 shares, ........respectively.. (17,468) (27,347)
(22,625)
----------- --------------------------- ------------------
Total stockholders' equity .................................equity......................................... 567,174 518,109
443,417
----------- --------------------------- ------------------
Total liabilities and stockholders' equity .................equity......................... $ 1,488,1651,947,220 $ 1,422,393
=========== ===========1,502,445
================ ==================
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
2004 2003 2002
------------- ------------- -------------
(dollars in thousands, except per share amounts)
REVENUES:
New vehicle retail sales....................... $ 3,348,875 $ 2,739,315 $ 2,526,847
Used vehicle retail sales...................... 988,797 884,819 921,359
Used vehicle wholesale sales................... 359,247 265,187 222,529
Parts and service sales........................ 565,213 465,989 402,169
Retail finance fees............................ 68,537 63,210 58,869
Vehicle service contract fees.................. 65,738 61,315 52,346
Other finance and insurance revenues, net...... 38,626 38,725 30,245
------------- ------------- -------------
Total revenues.............................. 5,435,033 4,518,560 4,214,364
COST OF SALES:
New vehicle retail sales....................... 3,112,140 2,539,319 2,337,223
Used vehicle retail sales...................... 868,351 778,266 817,385
Used vehicle wholesale sales................... 367,513 271,328 230,424
Parts and service sales........................ 255,263 206,236 177,037
------------- ------------- -------------
Total cost of sales......................... 4,603,267 3,795,149 3,562,069
------------- ------------- -------------
GROSS PROFIT..................................... 831,766 723,411 652,295
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES..... 672,068 561,698 503,066
DEPRECIATION AND AMORTIZATION EXPENSE............ 15,836 12,510 10,137
ASSET IMPAIRMENTS................................ 44,711 -- --
------------- ------------- -------------
INCOME FROM OPERATIONS........................... 99,151 149,203 139,092
OTHER INCOME AND (EXPENSES):
Floorplan interest expense, excludes
manufacturer interest assistance............ (25,349) (21,571) (20,187)
Other interest expense, net.................... (19,299) (15,191) (10,578)
Loss on redemption of senior subordinated
notes....................................... (6,381) -- (1,173)
Other income (expense), net.................... (170) 631 128
------------- ------------- -------------
INCOME BEFORE INCOME TAXES....................... 47,952 113,072 107,282
PROVISION FOR INCOME TAXES....................... 20,171 36,946 40,217
------------- ------------- -------------
NET INCOME....................................... $ 27,781 $ 76,126 $ 67,065
============= ============= =============
EARNINGS PER SHARE:
Basic.......................................... $ 1.22 $ 3.38 $ 2.93
Diluted........................................ $ 1.18 $ 3.26 $ 2.80
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic.......................................... 22,807,922 22,523,825 22,874,918
Diluted........................................ 23,493,899 23,346,221 23,968,072
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONSSTOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31,
----------------------------------------------
2003 2002 2001
------------ ------------ ------------ACCUMULATED OTHER
COMPREHENSIVE LOSS
----------------------
UNREALIZED UNREALIZED
COMMON STOCK ADDITIONAL LOSSES ON LOSSES ON
---------------------- PAID-IN RETAINED INTEREST MARKETABLE TREASURY
SHARES AMOUNT CAPITAL EARNINGS RATE SWAPS SECURITIES STOCK TOTAL
----------- --------- ---------- ---------- ----------- ---------- ---------- ----------
(dollars in thousands, except per share amounts)data)
REVENUES:
New vehicle retail
BALANCE, December 31, 2001......... 23,029,853 $ 230 $ 251,145 $ 147,959 $ (807) - $ (6,284) $ 392,243
Comprehensive income:
Net income..................... - - - 67,065 - - - 67,065
Interest rate swap adjustment,
net of tax benefit of
$1,563...................... - - - - (2,552) - - (2,552)
----------
Total comprehensive
income.................... 64,513
Proceeds from sales ............................of common
stock under employee benefit
plans....................... 547,306 6 8,030 - - - - 8,036
Issuance of treasury stock to
employee benefit plans...... (393,933) (4) (7,427) - - - 7,431 -
Non-cash stock compensation..... - - 193 - - - - 193
Purchase of treasury stock...... - - - - - - (23,772) (23,772)
Tax benefit from options
exercised................... - - 2,204 - - - - 2,204
----------- --------- ---------- ---------- --------- ---------- ---------- ----------
BALANCE, December 31, 2002......... 23,183,226 232 254,145 215,024 (3,359) - (22,625) 443,417
Comprehensive income:
Net income..................... - - - 76,126 - - - 76,126
Interest rate swap adjustment,
net of taxes of $1,288.... - - - - 2,074 - - 2,074
----------
Total comprehensive
income.................... 78,200
Proceeds from sales of common
stock under employee benefit
plans......................... 673,572 7 8,984 - - - - 8,991
Issuance of treasury stock to
employee benefit plans........ (402,752) (4) (9,678) - - - 9,682 -
Purchase of treasury stock...... - - - - - - (14,404) (14,404)
Tax benefit from options
exercised................... - - 1,905 - - - - 1,905
----------- --------- ---------- ---------- --------- ---------- ---------- ----------
BALANCE, December 31, 2003......... 23,454,046 235 255,356 291,150 (1,285) - (27,347) 518,109
Comprehensive income:
Net income..................... - - - 27,781 - - - 27,781
Interest rate swap adjustment,
net of taxes of $771.... - - - - 1,285 - - 1,285
Unrealized losses on
investments, net of income tax
benefit of $104............... - - - - - $ 2,739,315(173) - (173)
----------
Total comprehensive
income................... 28,893
Proceeds from sales of common
stock under employee benefit
plans......................... 659,013 6 11,788 - - - - 11,794
Issuance of treasury stock to
employee benefit plans........ (590,979) (6) (16,892) - - - 16,898 -
Issuance of common stock in
connection with
acquisitions.................. 394,313 4 12,892 - - - - 12,896
Purchase of treasury stock...... - - - - - - (7,019) (7,019)
Tax benefit from options
exercised................... - - 2,501 - - - - 2,501
----------- --------- ---------- ---------- --------- ---------- ---------- ----------
BALANCE, December 31, 2004......... 23,916,393 $ 2,526,847239 $ 2,373,299
Used vehicle retail sales ........................... 884,819 921,359 949,086
Used vehicle wholesale sales ........................ 265,187 222,529 190,565
Parts and service sales ............................. 465,989 402,169 360,201
Retail finance fees ................................. 63,210 58,869 56,272
Vehicle service contract fees ....................... 61,315 52,346 44,080
Other finance and insurance revenues, net ........... 38,725 30,245 22,871
------------ ------------ ------------
Total revenues ................................... 4,518,560 4,214,364 3,996,374
COST OF SALES:
New vehicle retail sales ............................ 2,539,319 2,337,223 2,185,939
Used vehicle retail sales ........................... 778,266 817,385 845,581
Used vehicle wholesale sales ........................ 271,328 230,424 197,272
Parts and service sales ............................. 206,236 177,037 160,330
------------ ------------ ------------
Total cost of sales .............................. 3,795,149 3,562,069 3,389,122
------------ ------------ ------------
GROSS PROFIT .......................................... 723,411 652,295 607,252
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ............................ 561,698 502,732 458,546
DEPRECIATION AND
AMORTIZATION EXPENSE ............................... 14,381 11,940 17,358
------------ ------------ ------------
Income from operations ................................ 147,332 137,623 131,348
OTHER INCOME AND (EXPENSES):
Floorplan interest expense, excludes
manufacturer interest assistance ................. (20,615) (19,371) (27,935)
Other interest expense, net ......................... (14,276) (9,925) (13,863)
Other income (expense), net ......................... 631 (1,045) (128)
------------ ------------ ------------
INCOME BEFORE INCOME TAXES ............................ 113,072 107,282 89,422
PROVISION FOR INCOME TAXES ............................ 36,946 40,217 33,980
------------ ------------ ------------
NET INCOME ............................................265,645 $ 76,126318,931 - $ 67,065(173) $ 55,442
============ ============ ============
EARNINGS PER SHARE:
Basic ...............................................(17,468) $ 3.38 $ 2.93 $ 2.75
Diluted ............................................. $ 3.26 $ 2.80 $ 2.59
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic ............................................... 22,523,825 22,874,918 20,137,661
Diluted ............................................. 23,346,221 23,968,072 21,415,154567,174
=========== ========= ========== ========== ========= ========== ========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITYCASH FLOWS
COMMON STOCK ADDITIONAL
--------------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
----------- ----------- -----------YEAR ENDED DECEMBER 31,
------------------------------------
2004 2003 2002
--------- --------- ----------
(dollars in thousands)
BALANCE, December 31, 2000 ................. 21,260,227CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................... $ 21327,781 $ 170,68376,126 $ 92,517
Comprehensive income:
Net67,065
Adjustments to reconcile net income ...............................to net
cash provided by operating activities:
Impairment of assets............................................ 44,711 - -
- 55,442
Other accumulated comprehensive income:
Interest rate swap
adjustment .......................Depreciation and amortization................................... 15,836 12,510 10,137
Amortization of debt discount and issue costs................... 1,834 1,871 1,469
Deferred income taxes........................................... (4,701) 11,951 6,883
Tax benefit from options exercised.............................. 2,501 1,905 2,204
Provision for doubtful accounts and uncollectible notes......... 1,529 (631) 1,078
(Gain) loss on sale of assets................................... 142 (622) 483
Gain on sales of franchises..................................... - - (414)
Losses on repurchases of senior subordinated notes.............. 6,381 - 1,173
Changes in operating assets and liabilities, net of effects of
acquisitions and dispositions:
Contracts-in-transit and vehicle receivables.................. (28,902) 36,704 (37,750)
Accounts receivable........................................... (14,204) (2,799) (3,055)
Inventories................................................... (64,294) 4,709 (107,487)
Prepaid expenses and other assets............................. (2,015) (2,565) (6,063)
Floorplan notes payable....................................... 73,509 (41,438) 143,727
Accounts payable and accrued expenses ........................ 30,936 1,115 (6,768)
Deferred revenues ............................................ (8,703) (10,665) 6,574
--------- --------- ----------
Net cash provided by operating activities................... 82,341 88,171 79,256
--------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable..................................... - Tax benefit(2,958) (8,083)
Collections on interest
rate swap adjustment ............. - - - -
Total comprehensive income ...............
Common stock offering, net ............... 3,300,000 33 98,489 -notes receivable.................................. 5,367 1,388 1,303
Purchases of property and equipment.............................. (47,412) (34,627) (43,498)
Proceeds from sales of common
stock under employee benefit
plans ................................. 439,325 4 4,997 -
Issuance of treasury stock to
employee benefit plans ................ (390,254) (4) (4,669) -
Purchase of treasury stock ............... - - - -
Cancellation of treasury stock
purchased ............................. (1,579,445) (16) (18,990) -
Tax benefit from options
exercised ............................ - - 635 -
----------- ----------- ----------- ---------
BALANCE, December 31, 2001 ................. 23,029,853 230 251,145 147,959
Comprehensive income:
Net income ............................ - - - 67,065
Other accumulated
comprehensive income:
Interest rate swap
adjustment ....................... - - - -
Tax benefit on interest
rate swap adjustment ............. - - - -
Total comprehensive income ...............property and equipment.................... 12,329 11,598 1,975
Proceeds from sales of common
stock under employee benefit
plans ................................. 547,306 6 8,030franchises................................ - Issuance7,414 7,430
Purchases of treasury stock to
employee benefit plans ................ (393,933) (4) (7,427) -
Non-cash stock compensation ..............restricted investments.............................. (2,074) (5,520) (3,424)
Maturities of restricted investments............................. 1,027 1,991 2,307
(Increase) decrease in restricted cash........................... 2,095 1,967 (344)
Cash paid in acquisitions, net of cash received.................. (221,721) (35,418) (81,422)
--------- --------- ----------
Net cash used in investing activities....................... (250,389) (54,165) (123,756)
--------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) on revolving credit facility........... 255,447 (165,170) 82,022
Principal payments of long-term debt............................. (1,219) (1,253) (1,950)
Borrowings of long-term debt..................................... - - 193 -
Purchase of treasury stock ............... - - - -
Tax benefit from options
exercised ............................ - - 2,204 -
----------- ----------- ----------- ---------
BALANCE, December 31, 2002 ................. 23,183,226 232 254,145 215,024
Comprehensive income:
Net income ............................ - - - 76,126
Other accumulated
comprehensive income:
Interest rate swap
adjustment ....................... - - - -
Tax expense on interest
rate swap adjustment ............. - - - -
Total comprehensive income ...............17
Proceeds from salesissuance of senior subordinated notes.............. - 144,131 -
Debt issue costs................................................. (209) (4,903) -
Repurchase of senior subordinated notes.......................... (79,479) - (11,629)
Proceeds from issuance of common stock under employeeto benefit plans ................................. 673,572 7 8,984 -
Issuance of treasury stock to
employee benefit plans ................ (402,752) (4) (9,678) -
Purchase of treasury stock ............... - - - -
Tax benefit from options
exercised ............................ - - 1,905 -
----------- ----------- ----------- ---------
BALANCE, December 31, 2003 ................. 23,454,046 $ 235 $ 255,356 $ 291,150
=========== =========== =========== =========
ACCUMULATED
OTHER
COMPREHENSIVE TREASURY
LOSS STOCK TOTAL
----------- ----------- -----------
(dollars in thousands)
BALANCE, December 31, 2000 ................. $ - $ (15,997) $ 247,416
Comprehensive income:
Net income ............................... - - 55,442
Other accumulated comprehensive income:
Interest rate swap
adjustment ....................... (1,303) - (1,303)
Tax benefit on interest
rate swap adjustment ............. 496 - 496
------
Total comprehensive income ............... 54,635
Common stock offering, net ............... - - 98,522
Proceeds from salesplans.......... 11,794 8,991 8,036
Repurchase of common stock, under employee benefit
plans .................................amounts based on settlement
date............................................................ (7,019) (14,404) (23,772)
--------- --------- ----------
Net cash provided by (used in) financing activities......... 179,315 (32,608) 52,724
--------- --------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS............................ 11,267 1,398 8,224
CASH AND CASH EQUIVALENTS, beginning of period....................... 26,483 25,085 16,861
--------- --------- ----------
CASH AND CASH EQUIVALENTS, end of period............................. $ 37,750 $ 26,483 $ 25,085
========= ========= ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for -
- 5,001
Issuance of treasury stock to
employee benefit plans ................ - 4,673 -
Purchase of treasury stock ............... - (13,966) (13,966)
Cancellation of treasury stock
purchased ............................. - 19,006 -
Tax benefit from options
exercised ............................ - - 635
----------- ----------- -----------
BALANCE, December 31, 2001 ................. (807) (6,284) 392,243
Comprehensive income:
Net income ............................ - - 67,065
Other accumulated
comprehensive income:
Interest rate swap
adjustment ....................... (4,115) - (4,115)
Tax benefit on interest
rate swap adjustment ............. 1,563 - 1,563
------
64,513
Total comprehensive income ...............
Proceeds from sales of common
stock under employee benefit
plans ................................. - - 8,036
Issuance of treasury stock to
employee benefit plans ................ - 7,431 -
Non-cash stock compensation .............. - - 193
Purchase of treasury stock ............... - (23,772) (23,772)
Tax benefit from options
exercised ............................ - - 2,204
----------- ----------- -----------
BALANCE, December 31, 2002 ................. (3,359) (22,625) 443,417
Comprehensive income:
Net income ............................ - - 76,126
Other accumulated
comprehensive income:
Interest rate swap
adjustment ....................... 3,362 - 3,362
Tax expense on interest
rate swap adjustment ............. (1,288) - (1,288)
------
Total comprehensive income ............... 78,200
Proceeds from sales of common
stock under employee benefit
plans ................................. - - 8,991
Issuance of treasury stock to
employee benefit plans ................ - 9,682 -
Purchase of treasury stock ............... - (14,404) (14,404)
Tax benefit from options
exercised ............................ - - 1,905
----------- ----------- -----------
BALANCE, December 31, 2003 .................Interest........................................................ $ (1,285)43,521 $ (27,347)38,863 $ 518,109
=========== =========== ===========31,075
Income taxes.................................................... $ 23,949 $ 31,971 $ 36,632
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------------------
2003 2002 2001
--------- --------- ---------
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ....................................................... $ 76,126 $ 67,065 $ 55,442
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation and amortization ................................... 14,381 11,940 17,358
Deferred income taxes ........................................... 11,951 6,883 (1,225)
Provision for doubtful accounts and uncollectible notes ......... (631) 1,078 1,732
(Gain) loss on sale of assets ................................... (622) 483 120
Gain on sales of franchises ..................................... -- (414) --
Losses on repurchases of senior subordinated notes .............. -- 1,173 --
Changes in operating assets and liabilities, net of effects of
acquisitions and dispositions-
Contracts-in-transit and vehicle receivables .................. 36,704 (37,750) (12,720)
Accounts receivable ........................................... (2,799) (3,055) (4,996)
Inventories ................................................... 4,709 (107,487) 68,472
Prepaid expenses and other assets ............................. (8,486) (8,610) (6,689)
Floorplan notes payable ....................................... (41,438) 143,727 (78,707)
Accounts payable, accrued expenses and deferred revenues ...... (9,550) (194) 37,900
--------- --------- ---------
Total adjustments ............................................. 4,219 7,774 21,245
--------- --------- ---------
Net cash provided by operating activities ................... 80,345 74,839 76,687
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable ..................................... (2,958) (8,083) (2,678)
Collections on notes receivable .................................. 1,388 1,303 1,150
Purchases of property and equipment .............................. (34,627) (43,498) (20,857)
Proceeds from sale of property and equipment ..................... 11,598 1,975 818
Proceeds from sales of franchises ................................ 7,414 7,430 5,373
Cash paid in acquisitions, net of cash received .................. (35,418) (81,422) (11,035)
--------- --------- ---------
Net cash used in investing activities ....................... (52,603) (122,295) (27,229)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) on revolving credit facility ........... (165,170) 82,022 (120,991)
Principal payments of long-term debt ............................. (1,253) (1,950) (1,791)
Borrowings of long-term debt ..................................... -- 17 1,426
Proceeds from common stock offering, net ......................... -- -- 98,522
Proceeds from issuance of senior subordinated notes .............. 143,297 -- --
Repurchase of senior subordinated notes .......................... -- (11,629) (9,601)
Proceeds from issuance of common stock to benefit plans .......... 10,896 10,240 5,001
Repurchase of common stock, amounts based on settlement
date ............................................................ (14,404) (23,772) (28,410)
--------- --------- ---------
Net cash provided by (used in) financing activities ......... (26,634) 54,928 (55,844)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH ...................................... 1,108 7,472 (6,386)
CASH, beginning of period ............................................ 24,333 16,861 23,247
--------- --------- ---------
CASH, end of period .................................................. $ 25,441 $ 24,333 $ 16,861
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for -
Interest ........................................................ $ 38,863 $ 31,075 $ 44,647
Income taxes .................................................... $ 31,971 $ 36,632 $ 28,975
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
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 Jersey, New Mexico, New York, 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 assigned and recorded based on estimates of fair value.
All significant intercompany balances and transactions have been eliminated in
consolidation.
Revenue Recognition
Revenues from vehicle sales, parts sales and vehicle service are
recognized upon completion of the sale and delivery to the customer. Conditions
to completing a sale include having an agreement with the customer, including
pricing, and the sales price must be reasonably expected to be collected.
In accordance with Emerging Issues Task Force ("EITF") No. 00-21, "Revenue
Arrangements with Multiple Deliverables," the Company defers revenues received
for products and services to be delivered at a later date. This relates
primarily to the sale of various maintenance services, to be provided in the
future, at the time of the sale of a vehicle. The amount of revenues deferred is
based on the then current retail price of the service to be provided. The
revenues are recognized over the period during which the services are to be
delivered.
In accordance with EITF No. 99-19, "Reporting Revenue Gross as a Principal
versus Net as an Agent," the Company records the profit it receives for
arranging vehicle fleet transactions net in other finance and insurance
revenues, net. Since all sales of new vehicles must occur through franchised new
vehicle dealerships, the dealerships effectively act as agents for the
automobile manufacturers in completing sales of vehicles to fleet customers. As
these customers typically order the vehicles, the Company has no significant
general inventory risk. Additionally, fleet customers generally receive special
purchase incentives from the automobile manufacturers and the Company receives
only a nominal fee for facilitating the transactions.
Retail Finance, Vehicle Service and Insurance Contract Revenue
Recognition
The Company arranges financing for customers through various institutions
and receives financing fees based on the difference between the loan rates
charged to customers and predetermined financing rates set by the financing
institution. In addition, the Company receives fees from the sale of vehicle
service contracts to customers. The Company may be charged back ("chargebacks") a portion of the
financing, fees orinsurance contract and vehicle service contract fees in the event of
early termination of the contracts by customers. The revenuesRevenues from financingthese fees and
vehicle service contract fees in administrator-obligor states are
recorded at the time of the sale of the vehicles net ofand a reserve for estimated future
chargebacks is established based on the Company's 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.
The Company consolidates the operations of its reinsurance companies. The
Company reinsures the credit life and accident and health insurance policies
sold by its dealerships. All of
F-8
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS the revenues and related direct costs from the
sales of these policies are deferred and recognized over the life of the
policies, in accordance with Statement of Financial Accounting Standards
("SFAS") No. 60, "Accounting and Reporting by Insurance Enterprises." Investments related to insurance policy
salesInvestment
of the net assets of these companies are regulated by state insurance
commissions and consist of permitted investments, in general, government-backed
securities and obligations of government agencies. These investments are
classified as available-for-sale and are carried at market value. These
investments, along with restricted cash that is not invested, are classified as
other long-term assets in the accompanying consolidated balance sheets.
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits and various other
short-term investments with original maturities of three months or less at the
date of purchase.
F-7
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Contracts-in-Transit and Vehicle Receivables
Contracts-in-transit and vehicle receivables consist primarily of amounts
due from financing institutions on retail finance contracts from vehicle sales.
Also included are amounts receivable from vehicle wholesale sales.
Inventories
New, used and demonstrator vehicles are stated at the lower of specific
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, the Company receives interest assistance from
some of the automobile manufacturers. The assistance is accounted for as a
vehicle purchase price 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. At December 31, 20032004 and 2002,2003, inventory
cost had been reduced by $5.6$7.2 million and $5.2$5.6 million, respectively, for
interest assistance received from manufacturers. New vehicle cost of sales has
been reduced by $33.2 million, $27.4 $26.7million and $29.1$26.7 million for interest
assistance received related to vehicles sold for the years ended December 31,
2004, 2003 2002 and 2001,2002, respectively.
Parts and accessories are stated at the lower of cost (determined on a
first-in, first-out basis) or market.
Valuation reservesMarket adjustments are provided against the inventory balances based on
the historical loss experience and management's considerations of current market
trends.
Property and Equipment
Property and equipment are recorded at cost and depreciation is provided
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for major additions or improvements, which extend the useful
lives of assets, are capitalized. Minor replacements, maintenance and repairs,
which do not improve or extend the lives of the assets, are charged to
operations as incurred. Disposals are removed at cost less accumulated
depreciation, and any resulting gain or loss is reflected in current operations.
Intangible Assets and Goodwill
Intangible assets and goodwill representGoodwill represents the excess of the purchase price of businesses
acquired over the fair value of the net tangible and intangible assets acquired
at the date of acquisition. The Company has determined that, generally,
its only identifiable intangible asset is franchise value, which is an
indefinite-lived intangible. In June 2001, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 141, "Business Combinations." Prior to the
adoption of SFAS No. 141 on January 1, 2002, the Company did not separately
record intangible assets apart from goodwill as all were amortized over similar
lives. In 2001, the FASB also issued SFAS No. 142, "Goodwill and Other
Intangible Assets" was issued. SFAS No. 142 changesAssets," which changed the treatment of goodwill, by no longer
permitting the amortization of goodwill, or indefinite-lived intangible
assets, but requires,instead requiring, at least
annually, an assessment for impairment of goodwill and other indefinite-lived intangible assets by applyingreporting unit, defined by
the Company as each of its platforms, using a fair-value based two-step test.
The Company completesperforms the requiredannual impairment assessment at the end of each
calendar year, and at such other times as required byperforms an impairment assessment more frequently if events
or circumstances occur at a reporting unit indicating a potential reduction ofbetween annual assessments that would
more likely than not reduce the fair value of the reporting unit below bookits
carrying value. See Note 4.
In evaluating goodwill for impairment, the Company compares the carrying
value of the net assets of each reporting unit, its platforms, to each
platform's respective fair value. This represents the first step of the
impairment test. If the fair value of a platform is less than the carrying value
of the net assets of the platform, the Company is then required to proceed to
step two of the impairment test. The Company adopted this statement effective January 1, 2002,second step involves allocating the
calculated fair value to all of the tangible and adoption did not result in an impairment of anyidentifiable intangible assets
or goodwill,
based onof the fair-value based test. Additionally,respective platform as if the calculated fair value was the purchase
price of December 31, 2003 and
2002, no impairment of any intangible assets or goodwill resulted from the required assessment, based on the fair-value based test. However, changes in
facts and circumstances surrounding this estimatebusiness combination. This allocation could result in assigning
value to intangible assets not previously recorded separately from goodwill
prior to the adoption of SFAS No. 141, which could result in less implied
residual value assigned to goodwill (see discussion regarding franchise rights
acquired prior to July 1, 2001, in "Intangible Franchise Rights" below). The
Company then compares the value of the implied goodwill resulting from this
second step to the carrying value of the goodwill in the respective platform. To
the extent the carrying value of the goodwill exceeds the implied fair value, an
impairment charge is recorded for such difference.
The Company uses a discounted cash flow approach in estimating the fair
value of intangible assetseach platform in completing step one of the F-9impairment analysis.
Included in this analysis are assumptions regarding revenue growth rates,
F-8
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
future. Priorfuture gross margin estimates, future selling, general and administrative
expense rates and the Company's weighted average cost of capital. The Company
also estimates residual values at the end of the forecast period and future
capital expenditure requirements. At December 31, 2004, 2003 and 2002, the fair
value of each of the Company's platforms exceeded the carrying value of its net
assets (step one of the impairment test). As a result, the Company was not
required to conduct the second step of the impairment test described above.
However, if in future periods, the Company determines the carrying amount of its
net assets exceed the respective fair value as a result of step one, the Company
believes that the application of the second step of the impairment test could
result in a material impairment charge to the adoptiongoodwill associated with the
applicable platform(s), especially with respect to those platforms acquired
prior to July 1, 2001.
Intangible Franchise Rights
The Company's only significant identified intangible assets, other than
goodwill, are rights under franchise agreements with manufacturers, which are
recorded at an individual dealership level. The Company expects these franchise
agreements to continue for an indefinite period and, when these agreements do
not have indefinite terms, the Company believes that renewal of these agreements
can be obtained without substantial cost. As such, the Company believes that its
franchise agreements will contribute to cash flows for an indefinite period,
and, therefore, the carrying amount of franchise rights are not amortized.
Franchise rights acquired in acquisitions prior to July 1, 2001, were recorded
and amortized as part of goodwill and remain as part of goodwill at December 31,
2004 and 2003 in the accompanying consolidated balance sheets. Like goodwill,
and in accordance with SFAS No. 142, all purchase prices in excessthe Company evaluates these franchise
rights for impairment annually, or more frequently if events or circumstances
indicate possible impairment, using a fair value method. Unlike the goodwill
impairment analysis, however, the impairment analysis for the Company's
franchise rights is a single step approach comparing the fair value of each
franchise right with its recorded carrying value. To the extent the carrying
value of the netrespective intangible franchise right exceeds its fair value, an
impairment charge is recorded for such difference. See Note 4.
The Company uses a discounted cash flow based approach to test the
carrying value of each individual franchise right for impairment. Included in
this analysis are assumptions, at a dealership level, regarding revenue growth
rates, future gross margin estimates and future selling, general and
administrative expense rates. Using the Company's weighted average cost of
capital, estimated residual values at the end of the forecast period and future
capital expenditure requirements, the Company calculates the fair value of each
dealership's franchise rights after considering estimated values for tangible
assets, was recorded as goodwillworking capital and no intangible assets were
recognized.
Impairment ofworkforce.
Long-Lived Assets
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets"Assets," requires that long-lived assets be reviewed for impairment whenever
there is evidence that the carrying amount of such assets may not be
recoverable. This consists of comparing the carrying amount of the asset with
its expected future undiscounted cash flows without interest costs. If the asset
carrying amount is less than such cash flow estimate, then it is required to be
written down to its fair value. Estimates of expected future cash flows
represent management's best estimate based on currently available information
and reasonable and supportable assumptions. Any impairment recognized in accordance with SFAS No. 144 is
permanent and may not be restored. Through December 31, 2003, the Company has
not recorded any significant impairment writedowns of its long-lived assets.
Income Taxes
The Company follows the liability method of accounting for income taxes in
accordance with SFAS No. 109, "Accounting for Income Taxes." Under this method,
deferred income taxes are recorded based upon differences between the financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the underlying assets are
realized or liabilities are settled. A valuation allowance reduces deferred tax
assets when it is more likely than not that some or all of the deferred tax
assets will not be realized.
See Note 12 regarding income taxes.
Self-Insured Medical and Property / Casualty Plans
The Company is self-insured for a portion of the claims related to its
employee medical benefits and property / property/casualty insurance programs. Claims,
not subject to stop-loss insurance, are accrued based upon the Company's
estimates of the aggregate liability for claims incurred using certain actuarial
assumptions and the Company's
historical claims experience.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash equivalents,
contracts-in-transit, accounts receivable, investments in debt and equity
securities, accounts payable, floorplan notes payable and long-term debt.
Excluding the Company's senior subordinated
notes, the carrying amount of these financial instruments approximates fair
value due either to length of maturity or existence of variable interest rates
that approximate current market rates. The following table sets forth the
carrying values and fair values, based on market quotes, of the Company's
outstanding senior subordinated notes issuances as of December 31, 2003:
FACE CARRYING FAIR VALUE AT YIELD TO
NOTE DESCRIPTION VALUE DISCOUNT VALUE DECEMBER 31, 2003 MATURITY
- ---------------- ----- -------- ----- ----------------- --------
(in millions)
10 7/8% due 2009 $ 75.4 $2.2 $ 73.2 $ 80.3 4.1%
8 1/4% due 2013 $150.0 $5.7 $144.3 $160.5 7.2%
F-10F-9
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 2001,The fair values of cash equivalents, contracts-in-transit, accounts receivable,
accounts payable, floorplan notes payable and the Company entered into anacquisition line of credit
approximate their carrying values due to the short-term nature of these
instruments or the existence of variable interest rate swap
transaction.rates. The Company entered intoCompany's
investments in debt and equity securities are classified as available-for-sale
securities and thus are carried at fair market value. As of December 31, 2004,
the swap to mitigate its exposure to
fluctuations in interest rates8 1/4% Senior Subordinated Notes due 2013 had a carrying value, net of
applicable discount, of $144.7 million and has designated the swap as a cash flow hedge,
in accordance with SFAS No. 133. The details of the transaction are as follows:
FAIR VALUE
NOTIONAL RATE RATE AT DECEMBER 31, 2003
EXPIRATION DATE AMOUNT PAID RECEIVED LIABILITY
- --------------- ------ ---- -------- ---------
October 2004 $100 million 3.75% 30-day LIBOR $2.1 million
The net fair value, of the swap is included in other liabilities, with a
corresponding charge to other comprehensive income, net of tax. The fair value
is based on the settlement value obtained from the counter-party in the
transaction. If the interest rates at December 31, 2003 remain unchanged, the
cash flow settlements to be paid by the Company for the next ten months would
total approximately $2.2quoted market
prices, of $159.4 million. The Company intends to hold the swap to
maturity. There is no ineffectiveness in the transaction as the rate being
swapped is identical to the underlying rate on the floorplan notes payable.
Factory Incentives
In addition to the interest assistance discussed above, the Company
receives various incentive payments from certain of itsthe automobile
manufacturers. These incentive payments are typically received on parts
purchases from the automobile manufacturers and on new vehicle retail sales.
These incentives are reflected as reductions of cost of sales in the statement
of operations.
Advertising
The Company expenses production and other costs of advertising as
incurred. Advertising expense for the years ended December 31, 2004, 2003, and
2002, totaled $67.6 million, $60.5 million and 2001, totaled $60.5, $49.6 and $38.3 million, respectively.
Additionally, the Company receives advertising assistance from some of the
automobile manufacturers. The assistance is accounted for as an advertising
expense reimbursement and is reflected as a reduction of advertising expense in
the income statement as the vehicles are sold, and in other accruals on the
balance sheet for amounts related to vehicles still in inventory on that date.
Advertising expense has been reduced by $16.8 million, $13.9 $13.2million and $11.5$13.2
million for advertising assistance received related to vehicles sold for the
years ended December 31, 2004, 2003, 2002, and 2001,2002, respectively. At December 31,
20032004 and 2002,2003, accrued expenses included $2.9$4.0 million and $1.4$2.9 million,
respectively, related to deferrals of advertising assistance received from the
manufacturers.
Business Concentrations
The Company owns and operates franchised automotive dealerships in the
United States. Automotive dealerships operate pursuant to franchise agreements
with vehicle manufacturers. Franchise agreements generally provide the
manufacturers or distributors with considerable influence over the operations of
the dealership and generally provide for termination of the franchise agreement
for a variety of causes. The success of any franchised automotive dealership is
dependent, to a large extent, on the financial condition, management, marketing,
production and distribution capabilities of the vehicle manufacturers or
distributors of which the Company holds franchises. The Company purchases
substantially all of its new vehicles from various manufacturers or distributors
at the prevailing prices to all franchised dealers. The Company's sales volume
could be adversely impacted by the manufacturers'manufacturers or distributors' inability to
supply the dealerships with an adequate supply of vehicles.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management 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 management in the
F-11
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
accompanying consolidated financial statements relate to inventory market
adjustments, reserves for inventory
valuations, future chargebacks on finance and vehicle service
contract fees, self-insured property/casualty insurance exposure, the fair value
of assets acquired and self-insured medical, income taxesliabilities assumed in business combinations and property / casualty plans andthe
valuation of goodwill and intangible assets.franchise rights. Actual results could
differ from those estimates.
Statements of Cash Flows
For purposes of the statements of cash flows, the net change in floorplan
financing of inventory, which is a customary financing technique in the
industry, is reflected as an operating activity in the statements of cash
flows.
Related Partyactivity.
Related-Party Transactions
From time to time, the Company has entered into transactions with related
parties. Related parties include officers, directors, five percent or greater
stockholders and other management personnel of the Company.
At times, the Company has purchased its stock from related parties. These
transactions were completed at then current market prices. See Note 1112 for a
summary of our related party lease commitments. See Note 3 for
F-10
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
information regarding certain transactions that occurred during the year ended
December 31, 2003. There are no other significant related party transactions.
Earnings Per Share
SFASStock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic
value method prescribed by APB Opinion No. 128, "Earnings per Share" requires25, "Accounting for Stock Issued to
Employees" ("APB No. 25"). Accordingly, compensation expense for stock options
is measured as 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 are computed including the
impact of all potentially dilutive securities. The following table sets forth
the shares outstanding for the earnings per share calculations for the years
ended December 31, 2003, 2002 and 2001:
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2003 2002 2001
----------- ----------- -----------
Common stock issued, beginning of period .................................. 22,499,158 23,029,853 21,260,227
Weighted average common stock issued in offerings ...................... - - 605,753
Weighted average common stock issued to employee stock
purchase plan ....................................................... 124,336 76,914 180,034
Weighted average common stock issued in stock option exercises ......... 298,168 247,494 62,773
Less: Weighted average treasury shares purchased and weighted
average shares purchased and cancelled .............................. (397,837) (479,343) (1,971,126)
----------- ----------- -----------
Shares used in computing basic earnings per share ......................... 22,523,825 22,874,918 20,137,661
Dilutive effect of stock options, net of assumed repurchase
of treasury stock ................................................... 822,396 1,093,154 1,277,493
----------- ----------- -----------
Shares used in computing diluted earnings per share ....................... 23,346,221 23,968,072 21,415,154
=========== =========== ===========
Any options with an exercise price in excess, if any, of the averagequoted market price of the Company's
common stock duringat the periods presented, are not
considered when calculatingdate of grant over the dilutive effect of stock options for diluted
earnings per share calculations. The weighted average number of options not
included inamount an employee must pay to
acquire the calculation of the dilutive effect of stock options was 0.4, 0.4
and 0.7 million for the years ended December 31, 2003, 2002 and 2001,
respectively.
Stock Compensation
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-Based Compensation," which, if fully adopted,
requires the Company to record stock-based compensation at fair value.common stock. 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,
F-12
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
compensation expense is recorded for stockgrants 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 under the stock incentive plan has beenat prices equal to or greater than the
market price of the Company'sits common stock on the date of grant noand therefore do not
record compensation expense related to the stock incentive plan has been recorded.these grants. Additionally, no
compensation expense is recorded for shares issued pursuant to the employee
stock purchase plan as it is a qualified plan.
Had"noncompensatory" plan, as that term is defined
in APB No. 25.
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure, an Amendment of FASB Statement No. 123," requires companies that
continue to account for stock-based compensation expensein accordance with APB No. 25
to disclose certain information using a tabular presentation. The table
presented below illustrates the effect on net income and earnings per share as
if the fair value recognition provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation" had been applied to the stock incentive andCompany's stock-based employee
stock
purchase plans been determined based oncompensation plans. Under the provisions of SFAS No. 123, compensation cost for
stock-based compensation is determined based on fair values as of the impact ondates of
grant estimated using an option-pricing model such as the Company's net income would have been as follows:Black-Scholes
option-pricing model, and compensation cost is amortized over the applicable
option-vesting period.
FOR THE
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
2004 2003 2002
2001
---------- ---------- ------------------ ------- -------
(in thousands, except per share amounts)
Net income, as reported ........................reported......................... $ 76,126 $ 67,065 $ 55,44227,781 $76,126 $67,065
Add: Stock-based employee compensation expense
included in reported net income, net of
related tax effects ..........................effects........................... -- -- 120 -
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects ...................................... (3,576) (5,333) (3,728)
---------- ---------- ----------effects....................................... 4,015 3,576 5,333
-------- ------- -------
Pro forma net income ...........................income............................ $ 72,550 $ 61,852 $ 51,714
========== ========== ==========23,766 $72,550 $61,852
======== ======= =======
Earnings per share:
Basic - as reported ..........................reported........................... $ 1.22 $ 3.38 $ 2.93
$ 2.75
Basic - pro forma ............................forma............................. $ 1.04 $ 3.22 $ 2.70
$ 2.57
Diluted - as reported ........................reported......................... $ 1.18 $ 3.26 $ 2.80
$ 2.59
Diluted - pro forma ..........................forma........................... $ 3.111.01 $ 2.583.11 $ 2.412.58
The fair value of options granted is estimated on the date of grant using
the Black-Scholes option-pricing model. The Black-Scholes option-pricing model
is not designed to measure not-for-sale options, but is the most widely used
method for option valuation. The following table summarizes the weighted average
assumptions used in determining the fair value of the Company's stock-based
compensation during the years ended December 31, 2004, 2003 and 2002 and the
resulting weighted average fair values:
F-11
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2004 2003 2002
---- ---- ----
Risk-free interest rate................... 4.2% 3.8% 4.6%
Expected life of options.................. 7.1 years 8.0 years 8.0 years
Expected volatility....................... 47.7% 51.9% 52.5%
Expected dividend yield................... - - -
Fair value................................ $ 16.14 $ 18.02 $ 21.73
Business Segment Information
The Company, through its operating companies, operates in the automotive
retailing industry. All of the operating companies sell new and used vehicles,
arrange financing, vehicle service, and insurance contracts, provide
maintenance and repair services and sell replacement parts. The operating
companies are similar in that they deliver the same products and services to a
common customer group, their customers are generally individuals, they follow
the same procedures and methods in managing their operations, and they operate
in similar regulatory environments. Additionally, the Company's management
evaluates performance and allocates resources based on the operating results of
the individual operating companies. For the reasons discussed above, all of the
operating companies represent one reportable segment under SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
Accordingly, the accompanying consolidated financial statements reflect the
operating results of the Company's reportable segment.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment."
SFAS No. 123(R) requires that companies recognize compensation expense equal to
the fair value of stock options and other share-based payments. The standard is
effective beginning in the third quarter of 2005. The impact on the Company's
net income will include the remaining amortization of the fair value of existing
options currently disclosed as pro-forma expense above, and is contingent upon
the number of future options granted and the determination of the appropriate
valuation model. The Company is evaluating the requirements of SFAS No. 123(R),
has not yet determined the method of adoption or the effect of adopting SFAS No.
123(R), and has not determined whether the adoption will result in amounts that
are similar to the current pro forma disclosures required under SFAS No. 123
presented above.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29." SFAS No. 153 requires that
nonmonetary asset exchanges should be recorded and measured at the fair value of
the asset exchanged, with certain exceptions. This statement amends APB Opinion
29 to eliminate the exception for certain nonmonetary exchanges of similar
productive assets, although commercially substantive, to be recorded at
carryover basis and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. The provisions of SFAS
No. 153 are effective for nonmonetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. The adoption of SFAS No. 153 is not
expected to have a material impact on the Company's consolidated financial
position or results of operations.
In November 2004, the Emerging Issues Task Force provided additional
guidance regarding the application of SFAS No. 144 in Issue 03-13, "Applying the
Conditions in Paragraph 42 of FASB Statement No. 144, `Accounting for the
Impairment or Disposal of Long-Lived Assets', in Determining Whether to Report
Discontinued Operations." EITF 03-13 provides additional guidance regarding the
approach for evaluating whether the criteria in paragraph 42 of SFAS No. 144
have been met for purposes of classifying the results of operations of a
component of an entity that either has been disposed of or is classified as held
for sale as discontinued operations. The consensus is effective for components
classified as held for sale or disposed of in fiscal periods beginning after
December 15, 2004.
In September 2004, the Securities and Exchange Commission staff issued
Staff Announcement No. D-108. This announcement states that the "residual
method" should no longer be used to value intangible assets other than goodwill.
Rather, a "direct value method" should be used to determine the fair value of
all intangible assets required to be recognized under SFAS No. 141 for purposes
of impairment testing under SFAS No. 142, including those assets previously
valued using the residual method. Registrants who have applied the residual
method to the valuation of intangible assets for purposes of impairment testing
will be required to perform an impairment test using a direct value method on
all intangible assets that were previously valued using the residual method at
the
F-12
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
beginning of the first fiscal year beginning after December 15, 2004. The
Company believes its method of valuing its intangible franchise rights does not
differ materially from a direct value method. The Company is evaluating the
requirements of this announcement and has yet to determine its impact, if any,
on the Company's financial position or results of operations. Any impairment
resulting from application of a different valuation method will be reported as a
cumulative effect of a change in accounting principle during the first quarter
of 2005.
In January 2003, the FASB Interpretation ("FIN")issued FIN No. 46, "Consolidation of Variable
Interest Entities" was issued.Entities." FIN No. 46 clarifies the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," to variable interest
entities which("VIEs"). VIEs 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 interpretationFIN No. 46 is intended to
achieve more consistent application of consolidation policies to variable interest entitiesVIEs 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.VIEs. In December 2003, the
FASB issued a revision to FIN No. 46, ("FIN No. 46R"),46R, to clarify some of the
provisions of FIN No. 46 and to exempt certain entities from its requirements.
UnderThe Company adopted the new guidance, special effective date
provisions apply to enterprises that have fully or partially applied FIN No. 46
prior to issuance of this revised interpretation. Otherwise, applicationthe interpretation as of FIN
No. 46R is required in financial statements of public entities that have
interests in structures that are commonly referred to as special-purpose
entities for periods ending after December 15, 2003. Application by public
entities, other than small business issuers, for all other types of variable
interest entities is required in financial statements for periods ending after
March 15,31,
2004. The implementation of the interpretation did not require the Company is currently analyzingto
change its historical presentation for the impact this
interpretation will haveentities determined to be VIEs.
Certain wholly owned subsidiaries were determined to be VIEs due to their
capital structures. As the Company was determined to be the primary beneficiary,
the Company continues to consolidate the operations of these subsidiaries.
Additionally, the Company determined that certain arrangements that allow the
Company to participate in the residual profits on its consolidated results of operations and its
financial position,certain products sold are also
VIEs. However, with respect to entities created or acquired before February
1, 2003.
F-13
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Business Segment Information
Thethese arrangements, the Company through its operating companies, operatesdetermined that
it was not the primary beneficiary and it believes the Company has no exposure
to loss under these arrangements.
Reclassifications
Certain reclassifications have been made in the automotive retailing industry. All2003 and 2002 financial
statements to conform to the current year presentation.
3. BUSINESS COMBINATIONS:
During 2004, the Company acquired 23 automobile dealership franchises in
California, Massachusetts, New Jersey, New York and Texas. The accompanying
consolidated balance sheet as of December 31, 2004, includes preliminary
allocations of the operating companies sell new and used
vehicles, provide maintenance and repair services, sell replacement parts and
arrange financing, vehicle service and insurance contracts. For the reasons
discussed below,purchase price for all of our operating companies represent one reportable segment
under SFAS No. 131, "Disclosures about Segmentsthe acquired assets and liabilities
assumed based on their estimated fair market values at the dates of an Enterpriseacquisition
and Related
Information." Accordingly,are subject to final adjustment. As a result of these allocations, the
accompanying consolidated financial statements
reflectCompany has recorded the operating resultsfollowing (dollars in thousands):
Inventories..................................... $ 140,896
Property and equipment.......................... 11,085
Goodwill........................................ 79,172
Intangible franchise rights..................... 113,817
Other assets.................................... 6,328
Floorplan notes payable......................... (109,736)
Other liabilities............................... (6,945)
----------
Net assets acquired........................ 234,617
Less:
Fair value of 394,313 common shares issued.... 12,896
----------
Cash paid.................................. $ 221,721
==========
Approximately $75.2 million of the Company's reportable segment.
The Company's operating companies deliver the same products and
servicesacquired goodwill is expected to a common customer group. The Company's customers, generally, are
individuals. All of the operating companies, generally, follow the same
procedures and methods in managing their operations. Each operating company also
operates in a similar regulatory environment. The Company's management evaluates
performance and allocates resources based on the operating results of the
individual operating companies.
3. BUSINESS COMBINATIONS:be
deductible for tax purposes.
During 2003, the Company acquired eight automobile dealership franchises
in Louisiana, Oklahoma, and Texas, 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 $35.4 million in cash, net
of cash received, and the assumption of an estimated $52.7 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. TheseF-13
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
allocations resulted in recording approximately $15.8 million of franchise value
intangible assets, and $10.6$9.7 million of goodwill, of which $9.7$8.8 million is
deductible for tax purposes.
Additionally, during 2003, the Company disposed of the net assets,
including $3.6 million of goodwill, of three dealership franchises and received
$7.4 million in cash. No gain or loss was recognized on these transactions.
Included in the acquisitions and dispositions 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 $3.3$3.2 million and its intangible
asset for franchise valuerights increased $0.5 million.
Additionally, during 2003, the Company disposed of the net assets,
including $3.6 million of goodwill, of three dealership franchises and received
$7.4 million in cash. No gain or loss was recognized on these transactions. See
the discussion in the preceding paragraph regarding the accounting for the sale
of the Mercedes-Benz franchise.
During 2002, the Company acquired 15 automobile dealership franchises. The
acquisitions were accounted for as purchases. The aggregate consideration paid
in completing the acquisitions included approximately $81.4 million in cash, net
of cash and cash equivalents received, and the assumption of an estimated $59.0
million of inventory financing. The purchase price allocations resulted in
recording approximately $56.3 million of intangible franchise value intangible
assetsrights and
$37.0$52.2 million of goodwill, of which $17.2$16.6 million is deductible for tax
purposes.
F-14
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSAdditionally, during 2002, the Company disposed of the net assets,
including $4.2 million of goodwill, of five dealership franchises and received
$7.4 million in cash. A gain of $0.4 million was recognized on these sales and
is recorded in other income (expense), net in the statement of operations.
Six of the franchises acquired during 2002 were part of Miller Automotive
Group, a platform acquisition completed in August of 2002 in Southern California
and their results of operations have been included in ourthe consolidated financial
statements since that time. The acquisition expanded the Company's geographic
and brand diversity, and representsrepresented its first operations in California. All of
the businesses acquired are now 100% wholly-owned subsidiaries of the Company.
The Company paid $55.8 million in cash, net of cash and cash equivalents
received, and assumed $40.5 million of floorplan notes payable in completing
this acquisition. The purchase price was arrived at based on a calculation
including the tangible net worth of the companies acquired, plus an amount equal
to the estimated income before taxes timesmultiplied by an agreed upon multiple. The
total purchase price paid in excess of the net amounts assigned to the assets
acquired, including intangible franchise value
intangibles,rights, and liabilities assumed was
recognized as goodwill.
Additionally, during 2002,4. ASSET IMPAIRMENTS:
During 2004, the Company disposed ofrecorded three impairment charges, all reflected
in asset impairments in the net assets,
including $4.2 million of goodwill, of five dealership franchises and received
$7.4 million in cash. A gain of $0.4 million was recognized on these sales and
is recorded in Other Income (Expense), net in theaccompanying statement of operations.
During 2001,October 2004, in connection with the preparation and review of the
third-quarter interim financial statements, the Company acquired four automobile dealership
franchises. These acquisitions were accounted for as purchases. The aggregate
consideration paiddetermined that recent
events and circumstances at its Atlanta platform, including further
deterioration of the platform's financial results and recent changes in completing these acquisitions included approximately $11.0
millionplatform
management, indicated that an impairment of goodwill may have occurred in cash, netthe
three months ended September 30, 2004. As a result, the Company performed an
interim impairment assessment of cash received, the assumptionAtlanta platform's goodwill in accordance
with SFAS No. 142. After analyzing the long-term potential of an estimated $7.7
million of inventory financingthe Atlanta market
and the assumptionexpected future operating results of approximately $0.3 million
of notes payable. The purchase price allocations resultedits dealership franchises in
recording
approximately $8.5 million of intangible assets, a portion of which was
amortized during 2001. Additionally, during 2001,Atlanta, the Company sold eight
dealership franchises for $5.4 million in cash. No gain or loss was recognized
onestimated the fair value of the reporting unit as of
September 30, 2004. As a result of the required evaluation, the Company
determined that the carrying amount of the reporting unit's goodwill exceeded
its implied fair value as of September 30, 2004, and recorded a goodwill
impairment charge of $40.3 million. In connection with this evaluation, the
Company determined that impairment of certain long-lived assets of the Atlanta
platform may have occurred requiring an impairment assessment of these
sales as they were completed at net book value.
The following pro forma financial information consists of income
statement data from the consolidated financial statements plus (1) unaudited
income statement data for all acquisitions and dispositions completed between
January 1, 2002, and December 31, 2003, assuming that they occurred on January
1, 2002, and (2) certain pro forma adjustments discussed below:
2003 2002
---- ----
(in millions, except per share amounts)
(unaudited)
Revenues .................................... $ 4,568.9 $ 4,738.4
Gross profit ................................ 730.7 734.9
Income from operations ...................... 147.9 155.7
Net income .................................. 75.8 75.0
Basic earnings per share .................... 3.36 3.28
Diluted earnings per share .................. 3.25 3.13
Pro forma adjustments included in the amounts above primarily relate
to: (a) increases in revenues related to changes in the contractual commission
arrangements on certain third-party products sold by the dealerships; (b)
changes in interest expense resulting from net cash borrowings utilized to
complete acquisitions, net of interest rate reductions received; and (c)
incremental provisions for federal and state income taxes relating to the
compensation differential, S Corporation income and other pro forma adjustments.
F-15F-14
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4.assets in accordance with SFAS No. 144. As a result of this assessment, the
Company recorded a $1.1 million pretax impairment charge during the third
quarter of 2004.
As required by SFAS No. 142, the Company performed an annual review of the
fair value of its goodwill and indefinite-lived intangible assets at December
31, 2004. As a result of this assessment, the Company determined that the fair
value of indefinite-lived intangible franchise rights related to one of its
dealerships in the Miller Automotive Group platform did not exceed its carrying
value and an impairment charge was required. Accordingly, the Company recorded a
$3.3 million pretax impairment charge during the fourth quarter of 2004.
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts and notes receivable consist of the following:
DECEMBER 31,
------------------------------------------------
2004 2003 2002
-------- --------
(in thousands)
Amounts due from manufacturers ..............manufacturers............... $ 36,45849,285 $ 32,15636,458
Parts and service receivables ...............receivables................ 16,483 12,856 11,244
Finance and insurance receivables ...........receivables............ 8,808 7,439
7,531
Other ....................................... 9,121 10,012Other........................................ 4,286 9,186
-------- --------
Total accounts and notes receivable ...... 65,874 60,943receivable....... 78,862 65,939
Less - Allowance for doubtful accounts ...... (2,270) (2,749)accounts....... 2,175 2,270
-------- --------
Accounts and notes receivable, net .......net........ $ 63,60476,687 $ 58,19463,669
======== ========
Inventories net of valuation reserves, consist of the following:
DECEMBER 31,
-----------------------------------------------
2004 2003 2002
-------- --------
(in thousands)
New vehicles .....................vehicles................................. $699,238 $536,289
$500,842
Used vehicles ....................vehicles................................ 108,506 86,108
80,115
Rental vehicles ..................vehicles.............................. 24,085 10,744 11,254
Parts, accessories and other .....other................. 45,746 38,138 29,994
-------- --------
Total inventories .............Inventories......................... $877,575 $671,279 $622,205
======== ========
The Company provides valuation reserves against its used vehicle
inventories based on a detailed review of its inventory, actual subsequent sales
of the inventory, the Company's historical loss experience and consideration of
current market trends. At December 31, 2003, the Company established a $1.1
million reserve for estimated used vehicle losses, as compared to a $6.6 million
reserve at December 31, 2002. The net decline of $5.5 million in the used
vehicle valuation reserve, based on $1.2 billion of used vehicle sales, was due
to the application of losses incurred retailing and wholesaling used vehicles
during 2003 against the reserve. Based on a detailed review of the used vehicle
inventory at December 31, 2003, subsequent sales of the inventory and economic
trends indicating an improved used vehicle market, the Company determined that
$1.1 million was the appropriate used vehicle valuation reserve in the current
environment, and it was not necessary to charge used vehicle cost of sales to
establish the used vehicle valuation reserve at the same level as at December
31, 2002.
F-16
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and equipment consist of the following:
ESTIMATED DECEMBER 31,
USEFUL LIVES --------------------------------------------------------
IN YEARS 2004 2003
2002
-------------- -------- --------------------- ----------- ----------
(in thousands)
Land.................................. - $ 22,28228,417 $ 20,16822,282
Buildings............................. 30 to 40 35,297 29,672 22,958
Leasehold improvements................ 7 to 15 49,303 33,559 28,413
Machinery and equipment............... 7 to 20 38,220 32,450 30,044
Furniture and fixtures................ 3 to 10 49,524 42,328 35,808
Company vehicles...................... 3 to 5 7,318 5,879
5,285
-------- --------Construction in progress.............. 9,505 9,579
----------- ----------
Total............................... 166,170 142,676217,584 175,749
Less - Accumulated depreciation and
amortization........................ (44,102) (35,255)
Construction in progress.............. 9,579 8,849
-------- --------57,287 44,102
----------- ----------
Property and equipment, net......... $131,647 $116,270
======== ========$ 160,297 $ 131,647
=========== ==========
Depreciation and amortization expense totaled approximately $15.8 million,
$12.5 $10.1,million, and $8.2$10.1 million for the years ended December 31, 2004, 2003 and
2002, and 2001, respectively.
5.F-15
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INTANGIBLE ASSETSFRANCHISE RIGHTS AND GOODWILL:
The following is a roll forwardroll-forward of the Company's intangible assetfranchise
rights and goodwill accounts:
INTANGIBLE
FRANCHISE VALUE
INTANGIBLERIGHTS GOODWILL
---------- ------------------------ ------------
(in thousands)
Balance, December 31, 2000 ............................2002 ................. $ -60,879 $ 285,892323,104
Additions through acquisitions ..................... 4,614 3,861
Amortization expense ............................... - (7,488).......... 15,777 9,701
Reductions from sales of dealerships ............... - (4,352)
--------- ---------
Balance, December 31, 2001 ............................ 4,614 277,913
Additions through acquisitions ..................... 56,265 37,034
Reductions from sales of dealerships ............... - (4,161)
Realization of tax benefits ........................ - (2,879)
--------- ---------
Balance, December 31, 2002 ............................ 60,879 307,907
Additions through acquisitions .................... 15,777 10,618
Reductions from sales of dealerships .................. - (3,615)
Realization of tax benefits .................................... - (699)
--------- ------------------------ ------------
Balance, December 31, 2003 ............................................. 76,656 328,491
Additions through acquisitions .......... 113,817 79,172
Impairments ............................. (3,338) (40,255)
Realization of tax benefits ............. - (735)
--------------- ------------
Balance, December 31, 2004 ................. $ 76,656187,135 $ 314,211
========= =========366,673
=============== ============
The reduction in goodwill related to the realization of certain tax
benefits is due to differences between the book and tax bases of the goodwill.
The following table computes the impact on net income of the change in
accounting for intangible assets, required by SFAS No. 142:
YEAR ENDED
DECEMBER 31, 2001
----------------------
(dollars in thousands,
except per share amounts)
Net income .......................................... $55,442
Goodwill amortization expense, net of tax ........... 5,611
-------
Pro forma net income ................................ $61,053
=======
Pro forma earnings per share:
Basic ............................................ $ 3.03
Diluted .......................................... $ 2.85
F-17
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. FLOORPLAN NOTES PAYABLE:7. CREDIT FACILITIES:
The Company obtains its floorplan and acquisition financing through its Revolving
Credit Agreementa
$937.0 million revolving credit arrangement (the "Credit Facility") with a
lending group (the "Credit Facility"),comprised of 13 major financial institutions, including two
manufacturer captive finance companies. The Company also has a $300.0 million
floorplan financing arrangement with Ford Motor Credit Company (the "FMCC
Facility"), andas well as arrangements with several of theother automobile manufacturers
for financing of a portion of its rental vehicle inventory. The floorplanFloorplan notes
payable reflectreflects amounts payable for the purchase of specific vehicle inventory and consist ofinventory.
Payments on the following:floorplan notes payable are generally due as the vehicles are
sold. As a result, these obligations are reflected on the accompanying balance
sheets as current liabilities. The outstanding balances under these financing
arrangements are as follows:
DECEMBER 31,
----------------------------------------------
2004 2003 2002
-------- --------
(in thousands)
New vehicles-Credit Facility ............................... $565,902 $229,495 $585,204
New vehicles-FMCC Facility ................................... 195,498 192,897 --
Used vehicles-Credit Facility ............................. 63,053 60,570 56,164
Rental vehicles-Credit Facility .......................Facility... 3,638 1,682 1,220
Rental vehicles-others ........................................... 20,169 8,924 9,950
-------- --------
Total floorplanFloorplan notes payable ................payable.. $848,260 $493,568
$652,538
======== ========
Acquisition Line ................. $ 84,000 -
The Credit Facility lending group is comprised of 14 major financial
institutions, including two manufacturer captive finance companies. The
manufacturer captive finance companies are Toyota Motor Credit Corporation and
BMW Financial Services NA, LLC. The Credit Facilitycurrently provides $581.2$769.2 million of floorplan
financing capacity for new and used vehicles and maturesvehicles. After considering the above
outstanding balances, the Company had $136.7 million of available floorplan
capacity under the Credit Facility as of December 31, 2004. The Company pays a
commitment fee of 0.25% per annum on June 30, 2006, and
can be expanded to a maximum capacitythe unused portion of $800 million. The notes payableits floorplan
capacity. Floorplan borrowings under the Credit Facility bear interest at the
London Interbank OfferedOffer Rate ("LIBOR") plus 112.5 basis points for new vehicle
inventory and LIBOR plus 125 basis points for used vehicle inventory. As of
December 31, 2004 and 2003, and 2002, the weighted average interest rate on the
outstanding floorplan notes payable outstanding was 2.31%3.45% and 2.53%2.31%, respectively.
SeeThe Credit Facility also currently provides $162.8 million of acquisition
financing capacity (the "Acquisition Line"), which may be used to fund
acquisitions, capital expenditures and/or other general corporate purposes.
After considering the discussionabove outstanding balances, as well as $6.5 million of
outstanding letters of credit, there was $72.3 million available under the
Acquisition Line as of December 31, 2004. The Company pays a commitment fee of
0.425% per annum on the unused portion of the Acquisition Line. Borrowings under
the Acquisition Line bear interest based on LIBOR plus a margin that ranges from
175 to 325 basis points depending on the Company's leverage ratio. As of
December 31, 2004, the weighted average interest rate swapson borrowings under Note 2.the
Acquisition Line was 5.27%. No amounts were outstanding at December 31, 2003.
The Credit Facility contains various financial covenants that, among other
things, require the Company to maintain certain financial ratios, including
fixed-charge coverage, interest coverage and minimum equity, as well as place
limitations on the Company's ability to make capital expenditures, incur capital
lease and other debt obligations, pay cash dividends, and repurchase shares of
its common stock. As of December 31, 2004, the Company was in compliance with
these covenants. The Company's obligations under the Credit Facility are
F-16
collateralized by its entire inventory of new and used vehicles (other than its
Ford, Lincoln and Mercury new vehicle inventory), plus substantially all of its
land, buildings and other assets. The Credit Facility matures on June 30, 2006.
During 2003, the Company entered into the FMCC Facility for the financing
of its entire Ford, Lincoln and Mercury new vehicle inventory. TheThis arrangement
provides for $300.0 million of floorplan financing and matures on June 2, 2006.
The notes payable bearAfter considering the above outstanding balance, the Company had $104.5 million
of available floorplan capacity under the FMCC Facility as of December 31, 2004.
This facility bears interest at a rate of Prime plus 100 basis points minus
certain incentives. As of December 31, 2004 and 2003, the interest rate on the
notes payable outstandingFMCC Facility was 2.90%4.15% and 2.9%, respectively, before considering non-interest
related incentives. After considering all incentives received during 2004, the
effective interest rate under the FMCC Facility approximates the interest rate
onunder the floorplan portion of the Credit Facility. As discussed more fully in Note 2, the Company receives interest
assistance from certain automobile manufacturers. The assistance, has ranged
from approximately 80% to 160% of the Company's floorplan interest expense, over
the past three years.
The Credit Facility and FMCC Facility arrangements permit the Company
to borrow up to $881.2 million, dependent upon new and used vehicle inventory
levels. As of December 31, 2003, total available borrowingsobligations
under the arrangements were approximately $396.6 million.
Payments on the floorplan notes payable are due as the vehicles are
sold. The floorplan notes payableFMCC Facility are collateralized by substantially all of the Company's
Ford, Lincoln and Mercury new vehicle inventories of the Company.inventories. Additionally, under the FMCC
Facility, the Company is required to maintain a $1.5 million balance in a Ford
Money Market Account as additional collateral. This balance is reflected in
other long termlong-term assets on the accompanying balance sheet atsheets.
Taken together, the Credit Facility and FMCC Facility permit the Company
to borrow up to $1.2 billion for inventory purchases, acquisitions, capital
expenditures and/or other general corporate purposes. As of December 31, 2003.2004,
total available capacity under these arrangements was approximately $313.4
million.
Excluding rental vehicles financed through the Credit Facility, financing
for rental vehicles is typically obtained directly from the automobile
manufacturers. TheThese financing arrangements generally require small monthly
payments and mature in varying amounts between 2004 and 2006. The weighted
average interest rate charged as of December 31, 2004 and 2003, was 4.1% and
3.9%., respectively. Rental vehicles are typically moved to used vehicle
inventory when they are removed from rental service and repayment of the
borrowing is required at that time.
F-18As discussed more fully in Note 2, the Company receives interest
assistance from certain automobile manufacturers. The assistance has ranged from
approximately 105% to 160% of the Company's floorplan interest expense over the
past three years.
F-17
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7.8. LONG-TERM DEBT:
Long-term debt consists of the following:
DECEMBER 31,
----------------------------------------------------
2004 2003
2002
-------- ----------------- ---------
(in thousands)
Credit Facility (described below) ...............................8 1/4% Senior Subordinated Notes due 2013 ............. $ 144,704 $ 144,318
10 7/8% Senior Subordinated Notes due 2009 ............ -- $ --73,157
Various notes payable, maturing in varying amounts
through August 2018 with a weighted average interest
rate of 10.38% ................................................10.5% and 10.4%, respectively ............... 13,097 13,613
10,070
-------- --------
Total long-term debt ............................................ 13,613 10,070--------- ---------
157,801 231,088
Less - Current portion ........................................ (910) (997)
-------- --------
Long-term portion ...............................................maturities ........................... 1,054 910
--------- ---------
$ 12,703156,747 $ 9,073
======== ========230,178
========= =========
In addition to floorplan notes payable, the Credit Facility provides an
acquisition line of credit of up to $193.8 million for the financing of
acquisitions, general corporate purposes or capital expenditures. The
acquisition line can be expanded to a maximum capacity of $200.0 million. The
amount of funds available under the acquisition line is dependent upon a
calculation based on the Company's cash flow. Based on the December 31, 2003
financial statements, $188.8 million was available under the acquisition line,
after deducting $5.0 million for outstanding letters of credit. The acquisition
line of credit of the Credit Facility bears interest based on LIBOR plus a
margin varying from 175 to 325 basis points, determined based on a ratio of debt
to equity. Additionally, the Credit Facility contains various covenants
including financial ratios, such as, fixed-charge coverage, interest coverage
and a minimum net worth requirement, among others, and other requirements that
must be maintained by the Company. As of December 31, 2003, the Company was in
compliance with these requirements. The Credit Facility permits up to 33% of the
Company's net income to be used for cash dividends and stock repurchases. The
interest rate on borrowings under the acquisition line of credit of the Credit
Facility would have been 3.62% based on LIBOR at December 31, 2003, but there
were no amounts outstanding at that time. Land, buildings or other assets secure
all of the notes payable listed above.
Total interest incurred on long-term debt was approximately $2.8, $3.0
and $5.2 million for the years ended December 31, 2003, 2002 and 2001,
respectively, which included approximately $1.0, $1.3, and $0.9 million of
capitalized interest on construction projects in 2003, 2002 and 2001,
respectively. The aggregate maturities of long-term debt as of December 31,
2003, were as follows (in thousands):
2004 $ 910
2005 ..................... 935
2006 ..................... 732
2007 ..................... 707
2008 ..................... 775
Thereafter ............... 9,554
-------
Total long-term debt ... $13,613
=======
8. 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. Including the effects of discount and issue cost
amortization, the effective interest rate is approximately 8.9%. The 8 1/4%
Notes have the following redemption provisions:
- The Company beforemay, prior to 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, prior to August 15, 2008, 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.
F-19
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- The Company may, during the twelve-month periods beginning August
15, 2008, 2009, 2010 and 2011 and thereafter, redeem all or a
portion of the 8 1/4% Notes at redemption prices of 104.125%,
102.750%, 101.375% and 100.000%, respectively, of the principal
amount plus accrued interest during the
twelve-month periods beginning August 15, 2008, 2009, 2010 and
2011 and thereafter, respectively.interest.
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 requirementscovenants that must be maintained by the Company.
The Company'sOn March 1, 2004, the Company completed the redemption of all its 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 plusof the notes.
The Company incurred a $6.4 million pretax charge in completing the redemption,
consisting of a $4.1 million redemption premium and a $2.3 million non-cash
write-off of unamortized bond discount and deferred costs. Total cash used in
completing the redemption, excluding accrued interest on the initial redemption date of March 1, 2004. See further discussion of the redemption in Note 16. 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.$4.1 million, was $79.5
million.
During 2001 and 2002, the Company repurchased a portion of its 10 7/8% Notes. The
Company recorded a $1.2 million loss during 2002 related to the repurchases,
which is included in Other income (expense), net inloss on redemption of senior subordinated notes on the
accompanying statement of operations.
The purchases during 2001 were completed at or near the Company's carrying value
of the Notes.
At the time of the issuances of the 10 7/8% Notes and the 8 1/4% Notes,
the Company incurred certain costs, which arewere included as deferred financing
costs in long-term Other Assetsother assets on the accompanying balance sheets. The balances in theUnamortized
deferred cost accountsfinancing costs at December 31, 2004 and 2003, totaled $0.8 million and
2002, totaled $0.9 million, respectively. The Notes are recorded net of unamortized discount
of $5.3 million and $0.1$7.9 million as of December 31, 2004 and 2003, respectively.
Total interest expense on the Notessenior subordinated notes for the years
ended December 31, 2004, 2003 2002 and 2001,2002, was approximately $12.9, $8.8$14.4 million, $13.5
million and $10.1$9.2 million, respectively.
F-18
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total interest incurred on various other notes payable, which were included
in long-term debt on the accompanying balance sheets, was approximately $1.4
million, $1.7 million and $2.4 million for the years ended December 31, 2004,
2003 and 2002, respectively.
The Company capitalized approximately $0.6 million, $1.0 million, and $1.3
million of interest on construction projects in 2004, 2003 and 2002,
respectively.
The aggregate annual maturities of long-term debt for the next five years
are as follows (in thousands):
2005.................... $ 1,054
2006(1)................. 84,819
2007.................... 783
2008.................... 875
2009.................... 868
(1) Includes contractual maturity of Acquisition Line discussed in Note 7.
9. STOCK-BASED COMPENSATION PLANS:
In 1996, Group 1 adopted the 1996 Stock Incentive Plan, as amended, (the
"Plan"), which provides for the granting or awarding of stock options, stock
appreciation rights and restricted stock to employees and directors. The number
of shares authorized and reserved for issuance under the Plan is 4.5
million5,500,000
shares, of which 414,1481,336,448 are available for future issuance as of December 31,
2003.2004. The terms of the option awards (including vesting schedules) are
established by the Compensation Committee of the Company's Board of Directors.
All outstanding options are exercisable over a period not to exceed 10 years and
vest over three-periods ranging from three to six-year periods.
F-20eight years.
The following table summarizes the Company's outstanding stock options:
WEIGHTED
AVERAGE
NUMBER EXERCISE PRICE
--------- --------------
Options outstanding, December 31, 2001 ................ 3,585,309 $ 15.04
Grants (exercise prices between $19.47 and $44.96
per share)......................................... 505,950 34.61
Exercised ........................................... (383,245) 11.16
Forfeited ........................................... (189,665) 20.26
--------- --------------
Options outstanding, December 31, 2002 ................ 3,518,349 18.00
Grants (exercise prices between $22.93 and $34.85
per share)......................................... 176,000 29.78
Exercised ........................................... (482,509) 10.60
Forfeited ........................................... (374,205) 23.28
--------- --------------
Options outstanding, December 31, 2003 ................ 2,837,635 19.29
Grants (exercise prices between $28.20 and $29.94
per share) ........................................ 218,400 29.35
Exercised ........................................... (478,258) 14.52
Forfeited ........................................... (140,700) 26.52
--------- --------------
Options outstanding, December 31, 2004 ................ 2,437,077 $ 20.71
========= ==============
At December 31, 2004, 2003 and 2002, 1,707,950, 1,767,339 and 1,771,538
options, respectively, were exercisable at weighted average exercise prices of
$17.77, $15.44 and $13.49, respectively.
F-19
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the Company's outstanding stock options:
WEIGHTED
AVERAGE
NUMBER EXERCISE PRICE
---------- --------------
Options outstanding, December 31, 2000 ............... 3,542,129 $13.36
Grants (exercise prices between $11.31 and
$28.97 per share) ............................... 559,500 25.18
Exercised .......................................... (182,090) 12.29
Forfeited .......................................... (334,230) 15.75
---------- ------
Options outstanding, December 31, 2001 ............... 3,585,309 15.04
Grants (exercise prices between $19.47 and
$44.96 per share) ............................... 505,950 34.61
Exercised .......................................... (383,245) 11.16
Forfeited .......................................... (189,665) 20.26
---------- ------
Options outstanding, December 31, 2002 ............... 3,518,349 18.00
Grants (exercise prices between $22.93 and
$34.85 per share) ............................... 176,000 29.78
Exercised .......................................... (482,509) 10.60
Forfeited .......................................... (374,205) 23.28
---------- ------
Options outstanding, December 31, 2003 ............... 2,837,635 $19.29
========== ======
At December 31, 2003, 2002 and 2001, 1,767,339, 1,771,538 and 1,309,079
options, respectively, were exercisable at weighted average exercise prices of
$15.44, $13.49 and $13.02, respectively. The weighted average fair value per
share of options granted during the years ended December 31, 2003, 2002 and 2001
is $18.02, $21.73 and $18.67, respectively. The fair value of options granted is
estimated on the date of grant using the Black-Scholes option pricing model. The
Black-Scholes option pricing model is not designed to measure not-for-sale
options, but is the most widely used method for option valuation. The following
table summarizes the weighted average information used in determining the fair
value of the options granted during the years ended December 31, 2003, 2002 and
2001:
2003 2002 2001
------ ------- --------
Weighted average risk-free interest rate .............. 3.8% 4.6% 5.1%
Weighted average expected life of options ............. 8 years 8 years 10 years
Weighted average expected volatility .................. 51.9% 52.5% 57.7%
Weighted average expected dividends ................... -- -- --
The following table summarizes information regarding stock options
outstanding as of December 31, 2003:2004:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- ---------------------------------------------------------------------------------- -----------------------------
NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 12/31/0304 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/0304 EXERCISE PRICE
---------------- ---------------- ----------- ---------------- -------------- ----------- --------------
$ 2.90 26,000 3.22.23 years $ 2.90 26,000 $ 2.90
$9.00$ 9.00 to $13.99 988,915 5.6 11.11 759,475 11.09743,343 4.52 11.20 643,433 11.20
$14.00 to $19.99 946,813 5.6 17.08 761,763 16.83710,955 4.71 17.43 648,455 17.32
$20.00 to $24.99 342,307 7.3 24.49 106,569 24.58291,479 6.46 24.47 162,843 24.59
$25.00 to $44.99 533,600 8.4 35.85 113,532 29.44665,300 8.08 33.90 227,219 34.45
--------- ---------- -------------- --------- --------- --------- -----------------------
Total 2,837,635 6.32,437,077 5.76 years $ 19.29 1,767,33920.71 1,707,950 $ 15.4417.77
========= ========== ============== ========= ========= ========= =======================
In September 1997, Group 1 adopted the Group 1 Automotive, Inc. 1998
Employee Stock Purchase Plan, as amended (the "Purchase Plan"). The Purchase
Plan authorizes the issuance of up to 2.0 million shares of common stock and
provides that no options to purchase shares may be granted under the Purchase
Plan after June 30, 2007. As of December 31, 2003,2004, there were 628,272447,517 shares
remaining in reserve for future issuance under the Purchase Plan. The Purchase
F-21
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Plan is available to all employees of the Company and its participating
subsidiaries and is a qualified plan as defined by Section 423 of the Internal
Revenue Code. At the end of each fiscal quarter (the "Option Period") during the
term of the Purchase Plan, the employee contributions are used to acquire shares
of common stock at 85% of the fair market value of the common stock on the first
or the last day of the Option Period, whichever is lower. During 2004, 2003 2002 and
2001,2002, the Company issued 191,063, 153,954153,791, 173,114 and 257,235166,922 shares, respectively, of
common stock to employees participating in the Purchase Plan.
10. EMPLOYEE SAVINGS PLANS:
The Company has a deferred compensation plan to provide selectedselect employees
and members of the Company's Board of Directors with the opportunity to
accumulate additional savings for retirement on a tax-deferred basis.
Participants in the plan are allowed to defer receipt of a portion of their
salary and/or bonus compensation, or in the case of the Company's directors,
annual retainer and meeting fees, earned. The participants can choose from
various defined investment options to determine their earnings crediting rate,rate;
however, the Company has complete discretion over how the funds are utilized.
Participants in the plan are unsecured creditors of the Company. The balances
due to participants of the deferred compensation plan as of December 31, 2004
and 2003 were $15.4 million and 2002 were $12.3 million, respectively, and $7.5 million, respectively.are included in
other liabilities in the accompanying balance sheets.
The Company offers a 401k401(k) plan to all of its employees and provides a
matching contribution to those employees that participate. The matching
contributions paid by the Company totaled $3.7 million, $3.2 $2.7million and $2.2$2.7
million for the years ended December 31, 2004, 2003 and 2002, respectively.
F-20
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. EARNINGS PER SHARE:
Basic earnings per share is computed based on weighted average shares
outstanding and 2001,excludes dilutive securities. Diluted earnings per share is
computed including the impact of all potentially dilutive securities. The
following table sets forth the calculation of earnings per share for the years
ended December 31, 2004, 2003 and 2002:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2004 2003 2002
------------- ------------- -------------
(dollars in thousands)
Net income ...................................................... $ 27,781 $ 76,126 $ 67,065
Weighted average basic shares outstanding ....................... 22,807,922 22,523,825 22,874,918
Dilutive effect of stock options, net of assumed repurchase
of treasury stock ......................................... 685,977 822,396 1,093,154
------------- ------------- -------------
Weighted average diluted shares outstanding ..................... 23,493,899 23,346,221 23,968,072
============= ============= =============
Earnings per share:
Basic ..................................................... $ 1.22 $ 3.38 $ 2.93
Diluted ................................................... $ 1.18 $ 3.26 $ 2.80
Any options with an exercise price in excess of the average market price
of the Company's common stock, during the periods presented, are not considered
when calculating the dilutive effect of stock options for diluted earnings per
share calculations. The weighted average number of options not included in the
calculation of the dilutive effect of stock options was 0.4 million for each of
the years ended December 31, 2004, 2003 and 2002, respectively.
11.12. OPERATING LEASES:
The Company leases various facilities and equipment under long-term
operating lease agreements. TheseThe facility leases expire on various dates through
December 2031 and, in general,typically have renewal or cancellationa minimum term of
fifteen years with options atthat extend the Company's option, at various times during the lease term.term up to an additional fifteen
years.
Future minimum lease payments for operating leases as of December 31,
2003,2004, are as follows (in thousands):
RELATED THIRD
YEAR ENDED DECEMBER 31, PARTIES PARTIES TOTAL
- ------------------------------- ------- -------- ----------------- --------- ---------
2004........................... $10,3262005........................... $ 38,87714,547 $ 49,203
2005........................... 10,198 37,648 47,84646,961 $ 61,508
2006........................... 10,198 37,296 47,49414,385 46,545 60,930
2007........................... 10,078 37,125 47,20314,266 45,945 60,211
2008........................... 7,307 34,194 41,50111,495 42,488 53,983
2009........................... 11,495 35,460 46,955
Thereafter..................... 51,837 172,552 224,389
------- -------- --------84,915 193,781 278,696
--------- --------- ---------
Total.......................... $99,944 $357,692 $457,636
======= ======== ========$ 151,103 $ 411,180 $ 562,283
========= ========= =========
Total rent expense under all operating leases including operating
leases with related parties, was approximately $57.3
million, $46.5 $36.8million and $30.7$36.8 million for the years ended December 31, 2004,
2003 and 2002, and 2001, respectively. RentalRent expense on related party leases, which is
included in the above total rent expense amounts, totaled approximately $12.4
million, $9.5 $8.4million and $7.9$8.4 million for the years ended December 31, 2004,
2003 and 2002, respectively.
During 2004, the Company completed construction of three new facilities
and 2001, respectively.subsequently sold and leased these facilities back under long-term operating
lease agreements. These transactions were accounted for as sale-leasebacks. Two
of the transactions were conducted with third parties, with an aggregate sales
price of approximately $8.1 million. The resulting leases expire in 2019 and the
minimum lease payments total approximately $20.0 million, which is included in
the table above. The third property was sold to and leased back from one of the
Company's platform presidents. The total sales price was approximately $3.9
million, the lease expires in 2019 and the future minimum lease payments under
this lease are approximately $11.1 million, which is included in the table above
under the heading Related Parties. The Company believes that the terms of this
lease are at fair market value and are comparable to terms in leases executed
with third parties during the same time frame.
F-21
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition to the transactions discussed in Note 3, 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-year15-year lease. The lease has
two renewal options, each five years, solely at the Company's discretion. 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.
F-22
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12.13. INCOME TAXES:
Federal and state income taxes are as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
2004 2003 2002 2001
-------- -------- --------
(in thousands)
Federal -
Current ....................................................... $ 22,967 $ 22,837 $ 31,026
$ 32,514
Deferred ..................................................... (3,850) 11,091 6,336 (1,129)
State -
Current ....................................................... 1,904 2,158 2,308
2,691
Deferred ..................................................... (850) 860 547 (96)
-------- -------- --------
Provision for income taxes ..................... $ 20,171 $ 36,946 $ 40,217 $ 33,980
======== ======== ========
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 35% in 2004, 2003 2002 and
20012002 to income before income taxes as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
2004 2003 2002
2001
-------- -------- ----------------- --------- ---------
(in thousands)
Provision at the statutory rate ............................ $ 16,783 $ 39,575 $ 37,549 $ 31,298
Increase (decrease) resulting
from -
State income tax, net of benefit for
federal deduction .......................................... 647 2,058 1,856 1,669
Non-deductible portion of goodwill
amortization .......................impairment .......................... 3,253 - - 776
Resolution of tax contingencies ...................... - (5,423) -
-
Other ............................................................................ (512) 736 812
237
-------- -------- ----------------- --------- ---------
Provision for income taxes ...................................... $ 20,171 $ 36,946 $ 40,217
$ 33,980
======== ======== ================= ========= =========
During 2004, certain portions of the goodwill impairment charge recorded
in September 2004 related to the Atlanta platform were non-deductible for tax
purposes. In addition, certain other adjustments were made to reconcile
differences between the tax and book basis of the Company's assets and
liabilities. As a result of these items, the effective tax rate for 2004
increased to 42.1%, as compared to 32.7% for 2003.
During 2003, the Company resolved certain tax contingencies as various
state and federal tax audits were concluded providing certainty and resolution
on various formation, financing, acquisition, and structural matters. In
addition, various other tax exposures of acquired companies have been favorably
resolved. As a result, the Company recorded a reduction in its tax reserve,contingency
accrual, which reduced the effective tax rate for 2003 to 32.7% as compared to
37.5% for 2002.
F-22
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets (liabilities) result principally from the following:
DECEMBER 31,
---------------------------------------------------
2004 2003
2002
-------- ------------------ ----------
(in thousands)
Loss reserves and accruals ............................................... $ 25,158 $ 24,911
$ 27,150
Goodwill amortization ................................. (20,030) (13,855)and intangible franchise rights...... (31,690) (35,410)
Depreciation expense .................................. (9,583) (5,785)expense.......................... (9,870) (9,025)
State net operating loss (NOL) carryforwards.. 4,514 3,170
Reinsurance operations ................................operations........................ (1,180) (2,258) (2,490)
Interest rate swaps ...................................swaps........................... - 771
2,059
Other ................................................. (2,154) (3,937)
-------- --------Other......................................... (1,027) (1,612)
--------- ---------
Deferred tax liability..................... (14,095) (19,453)
Valuation allowance on state NOL's............ (4,347) (3,170)
--------- ---------
Net deferred tax asset (liability) .................liability................. $ (8,343)(18,442) $ 3,142
======== ========(22,623)
========= =========
F-23
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSAs of December 31, 2004, the Company had state net operating loss
carryforwards of $70.0 million that will expire between 2005 and 2024;
however, in certain state jurisdictions net income is not expected to be
sufficient to realize these net operating losses and as a result a valuation
allowance has been established.
The net deferred tax assets (liabilities) are comprised of the following:
DECEMBER 31,
-------------------------------------
2004 2003
2002
-------- ------------------ ----------
(in thousands)
Deferred tax assets -
Current ............................................Current.............................. $ 13,58516,679 $ 14,297
Long-term ..........................................13,584
Long-term............................ 11,464 19,302 24,264
Deferred tax liabilities -
Current ............................................Current.............................. (1,924) (2,421)
(3,504)
Long-term .......................................... (38,809) (31,915)
-------- --------Long-term............................ (44,661) (53,088)
--------- ---------
Net deferred tax asset (liability) ...................liability............. $ (8,343)(18,442) $ 3,142
======== ========(22,623)
========= =========
The Company believes it is more likely than not, that the net deferred tax
assets will be realized, based primarily on the assumption of future taxable
income.
13.14. COMMITMENTS AND CONTINGENCIES:
Legal Proceedings
From time to time, the Company's dealerships are named in claims involving
the manufacturermanufacture 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. OnIn
October 25, 2002, the Texas Court of Appeals affirmed the trial court's order of
class certification in the state action and theaction. The defendants have requested that the Texas
Supreme Court review that decision, and the Court declined that request on appeal. On August 25, 2003,March
26, 2004. The defendants petitioned the Texas Supreme Court requested briefing in the state cases. Such briefingto reconsider its
denial, and that petition was completeddenied on February 6,September 10, 2004. In the otherfederal
antitrust action, onin March 26, 2003, the federal district court also certified a
class of consumers, but denied a requestconsumers. Defendants appealed the district court's certification 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 appealwhich on October 5, 2004, reversed the class
certification rulingorder and remanded the case back to the federal district court for
further proceedings. In February 2005, the plaintiffs in the federal action
sought a writ of certiorari to the United States Supreme Court in order to
obtain review of the lower federal court. Briefing onFifth Circuit's order. The defendants notified the merits of
defendants' appeal was completed on February 13, 2004. The parties participated
in mediation in 2003. That mediation resulted in a settlement proposal from the
plaintiff class representativesU.S.
Supreme Court that they would not respond to the defendant dealers, includingwrit unless requested to do so
by the Court. Also in February 2005, settlement discussions with the plaintiffs
in the three cases culminated in formal settlement offers pursuant to which the
Company could settle the state and
F-23
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
federal cases. The Company has not entered into the settlements at this time,
and, if it does, the settlements will be contingent upon court approval. The
estimated expense of the proposed settlements includes the Company's Texas dealership subsidiaries.dealerships
issuing certificates for discounts off future vehicle purchases, refunding cash
in some circumstances, and paying attorneys' fees and certain costs. Dealers
participating in the settlements would agree to certain disclosures regarding
inventory tax charges when itemizing such charges on customer invoices. The
proposal was contingent on
achieving a certain minimum levelestimated expense of participation among the defendant dealers
based onproposed settlements of $1.5 million has been included
in accrued expenses in the number of transactionsaccompanying consolidated financial statements. If
the Company does not enter into the settlements, or if the settlements are not
approved, it will continue to vigorously assert available defenses in which each dealer engaged. Because the
participation threshold was not satisfied, the proposal failed.connection
with these lawsuits. 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
on different terms or an adverse resolution of this matter in litigation 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.position or results of
operations.
Insurance
Because of their vehicle inventory and nature of business, automobile
dealerships generally require significant levels of insurance covering a broad
variety of risks. The Company's insurance coverage includes umbrella policies, with a
$105.0 million aggregate limit,
as well as insurance on its real property, comprehensive coverage for its
vehicle inventory, general liability insurance, employee dishonesty coverage,
employment practices liability insurance, pollution coverage and errors and
omissions insurance in connection with its vehicle sales and financing
activities. F-24
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Additionally, the Company retains some risk of loss under its
self-insured medical and property / property/casualty plans. See further discussion under
Note 2. TheAs of December 31, 2004, the Company has a $4.9 million lettertwo letters of credit
outstanding totaling $6.4 million, supporting its obligations with respect to
its property/casualty insurance program.
Split Dollar Life Insurance
On January 23, 2002, the Company, with the approval of the Compensation
Committee of the Board of Directors, entered into an agreement with a trust
established by B.B. Hollingsworth, Jr., the Company's Chairman, President and
Chief Executive Officer, and his wife (the "Split-Dollar Agreement"). Under the
Split-Dollar Agreement, the Company committed to make advances of a portion of
the insurance premiums on a life insurance policy purchased by the trust on the
joint lives of Mr. and Mrs. Hollingsworth. Under the terms of the Split-Dollar
Agreement, the Company committed to pay the portion of the premium on the
policies not related to term insurance each year for a minimum of seven years.
The obligations of the Company under the Split-Dollar Agreement to pay premiums
on the split-dollar insurance are not conditional, contingent or terminable
under the express terms of the contract. Premiums to be paid by the Company are
approximately $300,000 per year. The face amount of the policy is $7.5$7.8 million.
The Company is entitled to reimbursement of the amounts paid, without interest,
upon the first to occur of (a) the death of the survivor of Mr. and Mrs.
Hollingsworth andor (b) the termination of the Split-Dollar Agreement. In no event
will the Company's reimbursement exceed the accumulated cash value of the
insurance policy, which will be less than the premiums paid in the early years.
The Split-Dollar Agreement terminates upon the later to occur of the following:
(a) the date that Mr. Hollingsworth ceases to be an officer, director,
consultant or employee of the Company for any reason other than total and
permanent disability andor (b) January 23, 2017. The insurance policy has been
assigned to the Company as security for repayment of the amounts which the
Company contributes toward payments due on such policy.
In accordance with the terms of the Split-Dollar Agreement, the Company
paid the 2002 premium in the amount of $299,697 in January and April 2002.
However, due to the uncertainty surrounding the applicability of the
Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act") to split-dollar life insurance
arrangements, the Company, Mr. and Mrs. Hollingsworth and the trustees of the
trust have agreed to the deferral of the Company's then-current obligations to pay
premiums in 2003 and 2004 on the split-dollar life insurance policies until
January 2005 or such earlier time as the parties mutually determinedetermined that such
payments arewere not prohibited by the Sarbanes-Oxley Act. Due toIn November 2004, after
consultation with, and receipt of an opinion from, legal counsel, the
uncertainty surroundingCompensation Committee of the resolutionCompany's Board of this matter, nothing has been recorded in the financial statements
for the premium payments scheduled, but deferred for 2003 and 2004, of
approximately $300,000 each. If the 2003 payment had been made as scheduled,Directors authorized the
Company would haveto resume the payment of premiums, including deferred premiums, as
contractually required under the terms of the Split-Dollar Agreement. In
November 2004, the Company paid deferred premiums totaling $600,000. The Company
has recorded approximately $26,000 as expense in the statement of
operations, with the remainder being recorded as an increase in the cash surrender value of the insurance policy which is reflected as ana long-term other asset
onin the accompanying balance sheet.sheets.
F-24
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Vehicle Service Contract Obligations
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 is an obligor under vehicle service contracts previously
sold in two states. The 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 received, 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
purchased 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 are being 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.
14. RECLASSIFICATIONS:
Certain reclassifications have been made in the 2002 and 2001 financial
statements to conform to the current year presentation. The following are the
reclassifications made:
- Documentary fees, which are fees charged to retail new and
used vehicle customers for processing vehicle purchase
documentation, were reclassified from other dealership
revenues, net to new vehicle retail sales and used vehicle
retail sales. The impact of this reclassification was as
follows:
F-25
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED
DECEMBER 31, 2001
---------------------
(dollars in thousands)
Increase new vehicle retail sales revenues ............ $ 8,291
Increase used vehicle retail sales revenues ........... 6,585
Decrease other dealership revenues, net ............... (14,876)
--------
Net impact on revenues ........................ $ -
========
- Used vehicle retail and used vehicle wholesale sales and their
respective cost of sales have been reclassified to separately
present them on the face of 2001 statements of operations. The
retail and wholesale amounts were combined in the used vehicle
sales and used vehicle cost of sales line items in the 2001
statements of operations.
- Retail finance fees, vehicle service contract fees and other
finance and insurance revenues, net have been reclassified to
separately present them on the face of the statements of
operations. The amounts were combined in the other dealership
revenues, net line item in the 2001 statements of operations.
- Contracts-in-transit were reclassified from the cash line to a
separate line item in the 2001 balance sheet. As a result of
this reclassification, contracts-in-transit are now presented
under changes in operating assets and liabilities in the
operating activities section of the 2001 statements of cash
flows. In 2001, the impact of this change was to reduce net
cash provided by operating activities and the net increase
(decrease) in cash by $12.7 million in the 2001 statement of
cash flows.
- Changes in the borrowings on the revolving credit facilities
resulting from cash flow from operating activities were
reclassified from changes in floorplan notes payable to be
presented as changes in net borrowings (payments) on revolving
credit facility in the 2002 and 2001 consolidated statements
of cash flows. The impact of the changes was to increase net
cash provided by operating activities and reduce net cash
provided by (used in) financing activities by $1.3 million and
$2.4 million in the 2002 and 2001 statements of cash flows,
respectively.
- Debt issue costs related to the underwriters' discount were
reclassified from long term other assets to be presented as a
reduction of senior subordinated notes on the December 31,
2002 balance sheet. The effect was to reduce the long term
other assets balance by $1.4 million and reduce the senior
subordinated notes balance by $1.4 million.
- Deferred revenues related to the sale of vehicle maintenance
agreements were reclassified from accrued expenses and long
term other liabilities to be presented separately as deferred
revenues from vehicle maintenance agreement sales on the
December 31, 2002 balance sheet. The effect of the reduction
was to reduce accrued liabilities and long term other
liabilities by $1.1 million each.
F-26
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSrevenues.
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
QUARTER
------------------------------------------------------------------------------------------------------------------- FULL
YEAR ENDED DECEMBER 31, FIRST SECOND THIRD FOURTH YEAR
- ----------------------- ----- ------ ----- ------ --------------- ----------- ------------- ----------- -----------
(in thousands, except per share data)
2004
Total revenues...................... $ 1,147,027 $ 1,314,901 $ 1,532,407 $ 1,440,698 $ 5,435,033
Gross profit........................ 183,428 198,510 229,884 219,944 831,766
Net income (loss)................... 10,487 15,714 (9,615) 11,195 27,781
Basic earnings (loss) per share..... 0.47 0.70 (0.42) 0.48 1.22
Diluted earnings (loss) per share... 0.45 0.67 (0.42) 0.47 1.18
2003
Total revenues .............................. $1,029,791 $1,147,880 $1,239,490 $1,101,399 $4,518,560revenues...................... $ 1,029,791 $ 1,147,880 $ 1,239,490 $ 1,101,399 $ 4,518,560
Gross profit ................................profit........................ 169,448 184,216 194,447 175,300 723,411
Net income ..................................income.......................... 14,816 19,980 21,694 19,636 76,126
Basic earnings per share ....................share............ 0.66 0.89 0.96 0.87 3.38
Diluted earnings per share .................. 0.64 0.86 0.92 0.84 3.26
2002
Total revenues .............................. $ 946,074 $1,033,104 $1,202,588 $1,032,598 $4,214,364
Gross profit ................................ 151,509 160,763 180,508 159,515 652,295
Net income .................................. 15,493 19,137 20,141 12,294 67,065
Basic earnings per share .................... 0.68 0.83 0.88 0.55 2.93
Diluted earnings per share ..................share.......... 0.64 0.780.86 0.92 0.84 0.53 2.803.26
During the first quarter of 2004, the Company incurred a $6.4 million loss
on the redemption of its outstanding 10 7/8% senior subordinated notes. See Note
8.
During the third quarter of 2004, the Company incurred goodwill and
long-lived asset impairment charges totaling $41.4 million. See Note 4.
During the fourth quarter of 2004, the Company incurred an intangible
franchise right impairment charge of $3.3 million. See Note 4.
During the fourth quarter of 2003, the Company realized a tax benefit from
the resolution of tax contingencies, resulting in a $4.8 million decrease in tax
expense. During the fourth quarter of 2002, the Company revised its estimates
related to certain exposures of its dealership properties resulting in a $2
million decrease in the estimate. The Company also increased its revenue
deferrals related to certain warranty contracts sold to its customers by $3.8
million and increased related deferred costs by $0.9 million.
16. SUBSEQUENT EVENTS (UNAUDITED):
Recent Acquisitions
Since December 31, 2003, the Company has completed acquisitions of four
franchises. One of the acquisitions, with three franchises, is a new platform in
New Jersey. The other franchise was acquired in a tuck-in acquisition and will
complement platform operations in Central Texas. The aggregate consideration
paid in completing these acquisitions was approximately $38.6 million in cash,
net of cash received, 54,372 shares of Common Stock and the assumption of $29.8
million of inventory financing.
Bond Redemption
On March 1, 2004, the Company completed the redemption of all of its 10
7/8% senior subordinated notes. The Company incurred a $6.4 million pretax
charge in completing the redemption, consisting of a $4.1 million redemption
premium and a $2.3 million non-cash write-off of unamortized bond discount and
deferred cost. Total cash used in completing the redemption, excluding accrued
interest of $4.1 million, totaled $79.5 million.
F-27See Note 13.
F-25
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 -- Restated Certificate of Incorporation of the Company
(Incorporated by reference to Exhibit 3.1 of the Company's
Registration Statement on Form S-1 Registration No.
333-29893).
3.2 -- Certificate of Designation of Series A Junior Participating
Preferred Stock (Incorporated by reference to Exhibit 3.2
of the Company's Registration Statement on Form S-1
Registration No. 333-29893).
3.3 -- Bylaws of the Company (Incorporated by reference to Exhibit
3.3 of the Company's Registration Statement on Form S-1
Registration No. 333-29893).
4.1 -- Specimen Common Stock Certificate (Incorporated by
reference to Exhibit 4.1 of the Company's Registration
Statement on Form S-1 Registration No. 333-29893).
4.2 -- 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).
4.3 -- 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).
4.4 -- Form of Subordinated Debt Securities (included in
Exhibit 4.3).
10.1* -- Employment Agreement between the Company and B.B.
Hollingsworth, Jr. effective March 1, 2002 (Incorporated by
reference to Exhibit 10.1 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2001).
10.2* -- Employment Agreement between the Company and John T. Turner
dated November 3, 1997 (Incorporated by reference to
Exhibit 10.5 of the Company's Annual Report on Form 10-K
for the year ended December 31, 1997).
10.3* -- Employment Agreement between the Company and Scott L.
Thompson dated November 3, 1997 (Incorporated by reference
to Exhibit 10.6 of the Company's Annual Report on Form 10-K
for the year ended December 31, 1997).
10.4* -- 1996 Stock Incentive Plan (Incorporated by reference to
Exhibit 10.7 of the Company's Registration Statement on
Form S-1 Registration No. 333-29893).
10.5* -- First Amendment to 1996 Stock Incentive Plan (Incorporated
by reference to Exhibit 10.8 of the Company's Registration
Statement on Form S-1 Registration No. 333-29893).
10.6 -- Lease Agreement between Howard Pontiac GMC and Robert E.
Howard II (Incorporated by reference to Exhibit 10.9 of the
Company's Registration Statement on Form S-1 Registration
No. 333-29893).
10.7 -- Lease Agreement between Bob Howard Motors and Robert E.
Howard II (Incorporated by reference to Exhibit 10.9 of the
Company's Registration Statement on Form S-1 Registration
No. 333-29893).
10.8 -- Lease Agreement between Bob Howard Chevrolet and Robert E.
Howard II (Incorporated by reference to Exhibit 10.9 of the
Company's Registration Statement on Form S-1 Registration
No. 333-29893).
10.9 -- Lease Agreement between Bob Howard Automotive-H and North
Broadway Real Estate (Incorporated by reference to Exhibit
10.9 of the Company's Registration Statement on Form S-1
Registration No. 333-29893).
10.10 -- Rights Agreement between Group 1 Automotive, Inc. and
ChaseMellon Shareholder Services, L.L.C., as rights agent
dated October 3, 1997 (Incorporated by reference to Exhibit
10.10 of the Company's Registration Statement on Form S-1
Registration No. 333-29893).
10.11* -- 1998 Employee Stock Purchase Plan (Incorporated by
reference to Exhibit 10.11 of the Company's Registration
Statement on Form S-1 Registration No. 333-29893).
10.12EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 -- Restated Certificate of Incorporation of the Company
(Incorporated by reference to Exhibit 3.1 of the Company's
Registration Statement on Form S-1 Registration No. 333-29893).
3.2 -- Certificate of Designation of Series A Junior Participating
Preferred Stock (Incorporated by reference to Exhibit 3.2 of the
Company's Registration Statement on Form S-1 Registration No.
333-29893).
3.3 -- Bylaws of the Company (Incorporated by reference to Exhibit 3.3
of the Company's Registration Statement on Form S-1 Registration
No. 333-29893).
4.1 -- Specimen Common Stock Certificate (Incorporated by reference to
Exhibit 4.1 of the Company's Registration Statement on Form S-1
Registration No. 333-29893).
4.2 -- 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).
4.3 -- 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).
4.4 -- Form of Subordinated Debt Securities (included in Exhibit 4.3).
10.1* -- Employment Agreement between the Company and B.B. Hollingsworth,
Jr., effective March 1, 2002 (Incorporated by reference to
Exhibit 10.1 of the Company's Annual Report on Form 10-K for the
year ended December 31, 2001).
10.2* -- First Amendment to Employment Agreement between the Company
and B.B. Hollingsworth, Jr., effective March 1, 2002
(Incorporated by reference to Exhibit 10.40 of the Company's
Annual Report on Form 10-K for the year ended December 31,
2003).
10.3* -- Employment Agreement between the Company and John T. Turner
dated November 3, 1997 (Incorporated by reference to Exhibit
10.5 of the Company's Annual Report on Form 10-K for the year
ended December 31, 1997).
10.4 -- Rights Agreement between Group 1 Automotive, Inc. and
ChaseMellon Shareholder Services, L.L.C., as rights agent, dated
October 3, 1997 (Incorporated by reference to Exhibit 10.10 of
the Company's Registration Statement on Form S-1 Registration
No. 333-29893).
10.5* -- Split Dollar Life Insurance Agreement, dated as of January 23,
2002, between Group 1 Automotive, Inc., and Leslie Hollingsworth
and Leigh Hollingsworth Copeland, as Trustees of the
Hollingsworth 2000 Children's Trust (Incorporated by reference
to Exhibit 10.36 of the Company's Annual Report on Form 10-K for
the year ended December 31, 2002).
10.6* -- Group 1 Automotive, Inc. Deferred Compensation Plan, as Amended
and Restated (Incorporated by reference to Exhibit 4.1 of the
Company's Registration Statement on Form S-8 Registration No.
333-83260).
10.7* -- First Amendment to Group 1 Automotive, Inc. Deferred
Compensation Plan, as Amended and Restated (Incorporated by
reference to Exhibit 4.1 of the Company's Registration Statement
on Form S-8 Registration No. 333-115962).
10.8* -- 1996 Stock Incentive Plan (Incorporated by reference to Exhibit
10.7 of the Company's Registration Statement on Form S-1
Registration No. 333-29893).
10.9* -- First Amendment to 1996 Stock Incentive Plan (Incorporated by
reference to Exhibit 10.8 of the Company's Registration
Statement on Form S-1 Registration No. 333-29893).
10.10* -- Second Amendment to 1996 Stock Incentive Plan (Incorporated by
reference to Exhibit 10.1 of the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999).
10.11* -- Third Amendment to 1996 Stock Incentive Plan (Incorporated by
reference to Exhibit 4.1 of the Company's Registration Statement
on Form S-8 Registration No. 333-75784).
10.12* -- Fourth Amendment to 1996 Stock Incentive Plan (Incorporated by
reference to Exhibit 4.1 of the Company's Registration Statement
on Form S-8 Registration No. 333-115961).
10.13* -- Fifth Amendment to 1996 Stock Incentive Plan (Incorporated by
reference to Exhibit 10.1 of the Company's Current Report on
Form 8-K dated March 9, 2005).
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.14* -- Form of Restricted Stock Agreement for Employees (Incorporated
by reference to Exhibit 10.2 of the Company's Current Report on
Form 8-K dated March 9, 2005).
10.15* -- Form of Phantom Stock Agreement for Employees (Incorporated by
reference to Exhibit 10.3 of the Company's Current Report on
Form 8-K dated March 9, 2005).
10.16* -- Form of Restricted Stock Agreement for Non-Employee Directors
(Incorporated by reference to Exhibit 10.4 of the Company's
Current Report on Form 8-K dated March 9, 2005).
10.17* -- Form of Phantom Stock Agreement for Non-Employee Directors
(Incorporated by reference to Exhibit 10.5 of the Company's
Current Report on Form 8-K dated March 9, 2005).
10.18* -- Annual Incentive Plan for Executive Officers of Group 1
Automotive, Inc. (Incorporated by reference to the section
titled "Executive Officer Compensation - Adoption of Bonus
Plan" in Item 1.01 of the Company's Current Report on Form 8-K
dated March 9, 2005).
10.19* -- Group 1 Automotive, Inc. Director Compensation Plan
(Incorporated by reference to the Company's Current Report on
Form 8-K dated November 17, 2004, and to the section titled
"Director Compensation - Change in Director Compensation" in
Item 1.01 of the Company's Current Report on Form 8-K dated
March 9, 2005).
10.20* -- Group 1 Automotive, Inc. 1998 Employee Stock Purchase Plan
(Incorporated by reference to Exhibit 10.11 of the Company's
Registration Statement on Form S-1 Registration No. 333-29893).
10.21* -- First Amendment to Group 1 Automotive, Inc. 1998 Employee
Stock Purchase Plan (Incorporated by reference to Exhibit 10.35
of the Company's Annual Report on Form 10-K for the year ended
December 31, 1998).
10.22* -- Second Amendment to Group 1 Automotive, Inc. 1998 Employee
Stock Purchase Plan (Incorporated by reference to Exhibit 4.1 of
the Company's Registration Statement on Form S-8 Registration
No. 333-75754).
10.23* -- Third Amendment to Group 1 Automotive, Inc. 1998 Employee
Stock Purchase Plan (Incorporated by reference to Exhibit 4.1 of
the Company's Registration Statement on Form S-8 Registration
No. 333-106486).
10.24* -- Fourth Amendment to Group 1 Automotive, Inc. 1998 Employee
Stock Purchase Plan (Incorporated by reference to Exhibit 4.2 of
the Company's Registration Statement on Form S-8 Registration
No. 333-106486).
10.25* -- Fifth Amendment to Group 1 Automotive, Inc. 1998 Employee
Stock Purchase Plan (Incorporated by reference to Exhibit 4.3 of
the Company's Registration Statement on Form S-8 Registration
No. 333-106486).
10.26 -- Fifth Amended and Restated Revolving Credit Agreement, dated as
of June 2, 2003 (Incorporated by reference to Exhibit 10.1 of
the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2003).
10.27 -- First Amendment to Fifth Amended and Restated Revolving Credit
Agreement, dated as of July 25, 2003 (Incorporated by reference
to Exhibit 10.37 of the Company's Registration Statement on Form
S-4 Registration No. 333-109080).
10.28 -- Form of Ford Motor Credit Company Automotive Wholesale Plan
Application for Wholesale Financing and Security Agreement
(Incorporated by reference to Exhibit 10.2 of the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2003).
10.29 -- Form of Agreement between Toyota Motor Sales, U.S.A., and
Group 1 Automotive, Inc. (Incorporated by reference to Exhibit
10.12 of the Company's Registration Statement on Form S-1
Registration No. 333-29893).
10.30 -- Form of Supplemental Agreement to General Motors Corporation
Dealer Sales and Service Agreement (Incorporated by reference to
Exhibit 10.13 of the Company's Registration Statement on Form
S-1 Registration No. 333-29893).
10.31 -- Supplemental Terms and Conditions between Ford Motor Company and
Group 1 Automotive, Inc. dated September 4, 1997 (Incorporated
by reference to Exhibit 10.16 of the Company's Registration
Statement on Form S-1 Registration No. 333-29893).
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.13 -- Form of Supplemental Agreement to General Motors
Corporation Dealer Sales and Service Agreement
(Incorporated by reference to Exhibit 10.13 of the
Company's Registration Statement on Form S-1 Registration
No. 333-29893).
10.14 -- Supplemental Terms and Conditions between Ford Motor
Company and Group 1 Automotive, Inc. dated September 4,
1997 (Incorporated by reference to Exhibit 10.16 of the
Company's Registration Statement on Form S-1 Registration
No. 333-29893).
10.15EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.32 -- Toyota Dealer Agreement between Gulf States Toyota, Inc. and
Southwest Toyota, Inc. dated April 5, 1993 (Incorporated by
reference to Exhibit 10.17 of the Company's Registration
Statement on Form S-1 Registration No. 333-29893).
10.16 -- Lexus Dealer Agreement between Toyota Motor Sales, U.S.A.,
Inc. and SMC Luxury Cars, Inc. dated August 21, 1995
(Incorporated by reference to Exhibit 10.18 of the
Company's Registration Statement on Form S-1 Registration
No. 333-29893).
10.17 -- Form of General Motors Corporation U.S.A. Sales and Service
Agreement (Incorporated by reference to Exhibit 10.25 of
the Company's Registration Statement on Form S-1
Registration No. 333-29893).
10.18 -- Fifth Amended and Restated Revolving Credit Agreement,
dated as of June 2, 2003 (Incorporated by reference to
Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2003).
10.19 -- Form of Ford Motor Credit Company Automotive Wholesale
Plan Application for Wholesale Financing and Security
Agreement (Incorporated by reference to Exhibit 10.2 of the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2003).
10.20 -- First Amendment to Fifth Restated Revolving Credit
Agreement, dated as of July 25, 2003 (Incorporated by
reference to Exhibit 10.37 of the Company's Registration
Statement on Form S-4 Registration No. 333-109080).
10.21 -- Stock Pledge Agreement dated December 19, 1997
(Incorporated by reference to Exhibit 10.54 of the
Company's Annual Report on Form 10-K for the year ended
December 31, 1997).
10.22* -- First Amendment to Group 1 Automotive, Inc. 1998 Employee
Stock Purchase Plan (Incorporated by reference to Exhibit
10.35 of the Company's Annual Report on Form 10-K for the
year ended December 31, 1998).
10.23 -- Form of Ford Motor Company Sales and Service Agreement
(Incorporated by reference to Exhibit 10.38 of the
Company's Annual Report on Form 10-K for the year ended
December 31, 1998).
10.24 -- Form of Chrysler Corporation Sales and Service Agreement
(Incorporated by reference to Exhibit 10.39 of the
Company's Annual Report on Form 10-K for the year ended
December 31, 1998).
10.25 -- Form of Nissan Division Dealer Sales and Service Agreement.
10.26 -- Form of Infiniti Division Dealer Sales and Service Agreement.
10.27* -- Second Amendment to the 1996 Stock Incentive Plan
(Incorporated by reference to Exhibit 10.1 of the Company's
Quarterly Report on Form 10-Q for the quarter ended March
31, 1999).
10.28* -- Group 1 Automotive, Inc. Deferred Compensation Plan, as
Amended and Restated (Incorporated by reference
to Exhibit 4.1 of the Company's Registration Statement on
Form S-8 Registration No. 333-83260).
10.29* -- Second Amendment to Group 1 Automotive, Inc. 1998 Employee
Stock Purchase Plan (Incorporated by reference to Exhibit
4.1 of the Company's Registration Statement on Form S-8
Registration No. 333-75754).
10.30* -- Third Amendment to Group 1 Automotive, Inc. 1996 Stock
Incentive Plan (Incorporated by reference to Exhibit 4.1 of
the Company's Registration Statement on Form S-8
Registration No. 333-75784).
10.31 -- ISDA Master Agreement (Incorporated by reference to Exhibit
10.33 of the Company's Annual Report on Form 10-K for the
year ended December 31, 2001).
10.32 -- Interest Rate Swap Confirmation, dated as of October 19,
2001 (Incorporated by reference to Exhibit 10.35 of the
Company's Annual Report on Form 10-K for the year ended
December 31, 2001).
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.33* -- Split Dollar Life Insurance Agreement between Group 1
Automotive, Inc., and Leslie Hollingsworth and Leigh
Hollingsworth Copeland, as Trustees of the Hollingsworth
2000 Children's Trust, dated as of January 23, 2002
(Incorporated by reference to Exhibit 10.36 of the
Company's Annual Report on Form 10-K for the year ended
December 31, 2002).
10.34 -- Lease Agreement between Bob Howard Automotive-East, Inc.
and REHCO East, L.L.C (Incorporated by reference to Exhibit
10.37 of the Company's Annual Report on Form 10-K for the
year ended December 31, 2002).
10.35 -- Lease Agreement between Howard-H, Inc. and REHCO, L.L.C
(Incorporated by reference to Exhibit 10.38 of the
Company's Annual Report on Form 10-K for the year ended
December 31, 2002).
10.36 -- Lease Agreement between Howard Pontiac-GMC, Inc. and North
Broadway Real Estate Limited Liability Company
(Incorporated by reference to Exhibit 10.39 of the
Company's Annual Report on Form 10-K for the year ended
December 31, 2002).
10.37* -- Employment Agreement between the Company and Kevin H.
Whalen dated November 3, 2002 (Incorporated by reference to
Exhibit 10.40 of the Company's Annual Report on Form 10-K
for the year ended December 31, 2002).
10.38 -- Lease Agreement between Howard-Ford, Inc. and REHCO EAST,
LLC dated as of February 28, 2003.
10.39 -- Amendment and Assignment of Lease between Howard Ford,
Inc., Howard-FLM, Inc. and REHCO EAST, LLC dated as of
November 1, 2003.
10.40* -- First Amendment to Employment Agreement between the Company
and B.B. Hollingsworth, Jr. effective March 1, 2002.
10.41* -- Split Dollar Life Insurance Payment Deferral Letter dated
January 28,10.33 -- Lexus Dealer Agreement between Toyota Motor Sales, U.S.A., Inc.
and SMC Luxury Cars, Inc. dated August 21, 1995 (Incorporated by
reference to Exhibit 10.18 of the Company's Registration
Statement on Form S-1 Registration No. 333-29893).
10.34 -- Form of General Motors Corporation U.S.A. Sales and Service
Agreement (Incorporated by reference to Exhibit 10.25 of the
Company's Registration Statement on Form S-1 Registration No.
333-29893).
10.35 -- Form of Ford Motor Company Sales and Service Agreement
(Incorporated by reference to Exhibit 10.38 of the Company's
Annual Report on Form 10-K for the year ended December 31,
1998).
10.36 -- Form of Chrysler Corporation Sales and Service Agreement
(Incorporated by reference to Exhibit 10.39 of the Company's
Annual Report on Form 10-K for the year ended December 31,
1998).
10.37 -- Form of Nissan Division Dealer Sales and Service Agreement
(Incorporated by reference to Exhibit 10.25 of the Company's
Annual Report on Form 10-K for the year ended December 31,
2003).
10.38 -- Form of Infiniti Division Dealer Sales and Service
Agreement (Incorporated by reference to Exhibit 10.26 of the
Company's Annual Report on Form 10-K for the year ended December
31, 2003).
10.39 -- Lease Agreement between Howard Pontiac GMC, Inc. and Robert E.
Howard II (Incorporated by reference to Exhibit 10.9 of the
Company's Registration Statement on Form S-1 Registration No.
333-29893).
10.40 -- Lease Agreement between Bob Howard Motors, Inc. and Robert E.
Howard II (Incorporated by reference to Exhibit 10.9 of the
Company's Registration Statement on Form S-1 Registration No.
333-29893).
10.41 -- Lease Agreement between Bob Howard Chevrolet, Inc. and Robert E.
Howard II (Incorporated by reference to Exhibit 10.9 of the
Company's Registration Statement on Form S-1 Registration No.
333-29893).
10.42 -- Lease Agreement between Bob Howard Automotive-East, Inc. and
REHCO East, L.L.C. (Incorporated by reference to Exhibit 10.37
of the Company's Annual Report on Form 10-K for the year ended
December 31, 2002).
10.43 -- Lease Agreement between Howard-H, Inc. and REHCO, L.L.C.
(Incorporated by reference to Exhibit 10.38 of the Company's
Annual Report on Form 10-K for the year ended December 31,
2002).
10.44 -- Lease Agreement between Howard Pontiac-GMC, Inc. and North
Broadway Real Estate Limited Liability Company (Incorporated by
reference to Exhibit 10.10 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2002).
10.45 -- Lease Agreement between Howard-Ford, Inc. and REHCO EAST, L.L.C.
(Incorporated by reference to Exhibit 10.38 of the Company's
Annual Report on Form 10-K for the year ended December 31,
2003).
10.46 -- Amendment and Assignment of Lease between Howard Ford, Inc.,
Howard-FLM, Inc. and REHCO EAST, L.L.C. (Incorporated by
reference to Exhibit 10.39 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2003).
10.47 -- Second Amendment to Fifth Amended and Restated Revolving Credit
Agreement, dated as of March 8, 2005.
10.48* -- Sixth Amendment to Group 1 Automotive, Inc. 1998 Employee Stock
Purchase Plan.
10.49* -- Form of Incentive Stock Option Agreement for Employees.
10.50* -- Form of Nonstatutory Stock Option Agreement for Employees.
11.1 -- Statement re: computation of earnings per share is included
under Note 2 to the financial statements.
14.1 -- Code of Ethics for Specified Officers of Group 1 Automotive,
Inc., dated as of May 16, 2004.
11.1 -- Statement re: computation of earnings per share is included
under Note 2 to the financial statements.
14.1 -- Code of Ethics for Specified Officers of Group 1
Automotive, Inc. dated as of May 14, 2003.
21.1 -- Group 1 Automotive, Inc. Subsidiary List.
23.1 -- Consent of Ernst & Young LLP.
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.
- --------------
* Management contract or compensatory plan or arrangement