Selling, general and administrative or “SG&A” expenses increased $179.1 million, or 17.5%, from 2004 to 2005 and increased $183.1 million, or 21.9%, from 2003 to 2004. The aggregate increase from 2004 to 2005 is primarily due to an $87.8 million, or 9.1%, increase in same store SG&A expenses coupled with an $91.3 million increase from net dealership acquisitions during the year. The aggregate increase in SG&A expenses from 2003 to 2004 is primarily due to a $80.5 million, or 10.3%, increase in same store SG&A expenses, coupled with a $102.6 million increase from net dealership acquisitions during the year. The increase in same store SG&A expenses is due in large part to (1) increased variable selling expenses, including increases in variable compensation, as a result of the 8.8% and 10.8% increase in retail gross profit over the prior year in 2005 and 2004, respectively, (2) increased rent and related costs in both years due in part to our facility improvement and expansion program, (3) increased advertising and promotion caused by the overall competitiveness of the retail vehicle market, and (4) $1.9 million of severance charges in 2005. Such increases were offset in part in 2004 by an $8.4 million refund of U.K. consumption taxes. SG&A expenses as a percentage of total revenue were 11.9%, 11.5% and 11.4% in 2005, 2004 and 2003, respectively and as a percentage of gross profit were 78.3%, 77.6% and 77.8% in 2005, 2004 and 2003, respectively.
Depreciation and amortization increased $1.3 million, or 3.4%, from 2004 to 2005 and increased $10.8 million, or 40.6%, from 2003 to 2004. The increase from 2004 to 2005 is due to a $2.7 million increase from net dealership acquisitions during the year, offset by a $1.4 million, or 3.7%, decrease in same store depreciation and amortization. The same store decrease is due primarily to the effect of costs recognized in 2004 related to the relocation of certain U.K. franchises, offset by increases due in large part to our facility improvement and expansion program. The increase from 2003 to 2004 is due to an $8.9 million, or 34.4%, increase in same store depreciation and amortization, coupled with a $1.9 million increase from net dealership acquisitions during the year. The same store increase is due in large part to our facility improvement and expansion program.
Floor plan interest expense increased $7.3 million, or 16.6%, from 2004 to 2005 and increased $6.0 million, or 15.8%, from 2003 to 2004. The increase from 2004 to 2005 is due to a $2.7 million, or 6.5%, increase in same store floor plan interest expense, coupled with a $4.5 million increase from net dealership acquisitions during the year. The same store increase is due primarily to a net increase in our weighted average borrowing rate during 2005 compared to 2004. The increase from 2003 to 2004 is due to a $2.5 million, or 6.9%, increase in same store floor plan interest expense, coupled with a $3.5 million increase from net dealership acquisitions during the year. The same store increase is due primarily to a net increase in our weighted average borrowing rate during 2004 compared to 2003, offset by a decrease in average floor plan notes outstanding.
Other interest expense increased $6.4 million, or 14.9%, from 2004 to 2005 and increased $0.2 million, or 0.5%, from 2003 to 2004. The increase from 2004 to 2005 is due primarily to an increase in our weighted average borrowing rate during 2005 compared to 2004.
Income taxes increased $2.3 million, or 3.4%, from 2004 to 2005 and increased $15.3 million, or 29.2%, from 2003 to 2004. The increase from 2004 to 2005 is due primarily to our increase in pre-tax income versus the prior year, offset in part by a reduction in our effective state income tax rate. The increase from 2003 to 2004 is due primarily to an increase in pre-tax income versus the prior year, offset in part by a reduction in our effective rate resulting from an increase in the relative proportion of our income from our U.K. operations, which are taxed at a lower rate, coupled with a reduction in our effective state income tax rate.
Our cash requirements are primarily for working capital, inventory financing, the acquisition of new dealerships, the improvement and expansion of existing facilities, the construction of new facilities and dividends. Historically, these cash requirements have been met through cash flow from operations, borrowings under our credit agreements and floor plan arrangements, the issuance of debt securities, sale-leaseback transactions or the issuance of equity securities. As of December 31, 2005, we had working capital of $217.6 million, including $9.0 million of cash available to fund our operations and capital commitments. In addition, we had $314.5 million and £57.0 million ($98.0 million) available for borrowing under our U.S. credit agreement and our U.K. credit agreement, respectively, each of which are discussed below.
We paid dividends of five and one half cents per share on March 1, 2005, June 1, 2005 and September 1, 2005 and six cents per share on December 1, 2005 and March 1, 2006. Future quarterly or other cash dividends will depend upon our earnings, capital requirements, financial condition, restrictions on any then existing indebtedness and other factors considered relevant by our Board of Directors.
We have grown primarily through the acquisition of automotive dealerships. We believe that cash flow from operating activities and our existing capital resources, including the liquidity provided by our credit agreements and floor plan financing arrangements, will be sufficient to fund our operations and commitments for at least the next twelve months. To the extent we pursue additional significant acquisitions; we may need to raise additional capital either through the public or private issuance of equity or debt securities or through additional bank borrowings. We may not have sufficient availability under our credit agreements to finance significant additional acquisitions. In certain circumstances, a public equity offering could require the prior approval of certain automobile manufacturers. In connection with any potential significant acquisitions, there is no assurance that we would be able to access the capital markets or increase our borrowing capabilities on terms acceptable to us, if at all.
Inventory Financing
We finance substantially all of our new and a portion of our used vehicle inventories under revolving floor plan notes payable with various lenders. In the U.S., the floor plan arrangements are due on demand; however, we are generally not required to make loan principal repayments prior to the sale of the vehicles financed. We typically make monthly interest payments on the amount financed. In the U.K., substantially all of our floor plan arrangements are payable on demand or have an original maturity of 90 days or less and we are generally required to repay floor plan advances at the earlier of the sale of the vehicles financed or the stated maturity.
The floor plan agreements grant a security interest in substantially all of the assets of our dealership subsidiaries. Interest rates under the floor plan arrangements are variable and increase or decrease based on changes in the prime rate or LIBOR, as defined. The weighted average interest rate on floor plan borrowings was 5.4%, 5.1% and 4.5% for the years ended December 31, 2005, 2004 and 2003, respectively. We receive non-refundable credits from certain of our vehicle manufacturers, which are treated as a reduction of cost of goods sold as vehicles are sold. Such credits amounted to $32.1 million, $28.6 million and $26.1 million during the years ended December 31, 2005, 2004 and 2003, respectively.
U.S. Credit Agreement
Our credit agreement with DaimlerChrysler Services Americas LLC and Toyota Motor Credit Corporation, as amended effective October 1, 2004, provides for up to $600.0 million in revolving loans for working capital, acquisitions, capital expenditures, investments and for other general corporate purposes, and for an additional $50.0 million of availability for letters of credit, through September 30, 2008. The revolving loans bear interest between defined LIBOR plus 2.60% and defined LIBOR plus 3.75% .
The U.S. credit agreement is fully and unconditionally guaranteed on a joint and several basis by our domestic subsidiaries and contains a number of significant covenants that, among other things, restrict our ability to dispose of assets, incur additional indebtedness, repay other indebtedness, create liens on assets, make investments or acquisitions and engage in mergers or consolidations. We are also required to comply with specified financial and other tests and ratios, each as defined in the U.S. credit agreement, including: a ratio of current assets to current liabilities, a fixed charge coverage ratio, a ratio of debt to stockholders’ equity, a ratio of debt to earnings before income taxes, depreciation and amortization, or EBITDA, a ratio of domestic debt to domestic EBITDA, and a measurement of stockholders’ equity. A breach of these requirements would give rise to certain remedies under the agreement, the most severe of which is the termination of the agreement and acceleration of the amounts owed. As of December 31, 2005, we were in compliance with all covenants under the U.S. credit agreement, and we believe we will remain in compliance with such covenants for the foreseeable future. In making such determination, we have considered our current margin of compliance with the covenants and expected future results of operations, working capital requirements, acquisitions, capital expenditures and investments in the U.S. See “Risk Factors”.
The U.S. credit agreement also contains typical events of default, including change of control, non-payment of obligations and cross-defaults to our other material indebtedness. Substantially all of our domestic assets not pledged as security under floor plan arrangements are subject to security interests granted to lenders under the U.S. credit agreement. As of December 31, 2005, outstanding borrowings and letters of credit under the U.S. credit agreement amounted to $272.0 million and $13.5 million, respectively.
U.K. Credit Agreement
Our subsidiaries in the U.K., referred to as our U.K. Subsidiaries, are party to a credit agreement with the Royal Bank of Scotland dated February 28, 2003, as amended, which provides for up to £65.0 million in revolving and term loans to be used for acquisitions, working capital, and general corporate purposes. Revolving loans under the U.K. credit agreement have an original maturity of 90 days or less and bear interest between defined LIBOR plus 0.85% and defined LIBOR plus 1.25% . The U.K. credit agreement also provides for an additional seasonally adjusted overdraft line of credit up to a maximum of £15.0 million. Term loan capacity under the U.K. credit agreement was originally £10.0 million, which is reduced by £2.0 million every six months. As of December 31, 2005, term loan capacity under the U.K. credit agreement amounted to £2.0 million. The remaining £55.0 million of revolving loan capacity matures on March 31, 2007.
The U.K. credit agreement is fully and unconditionally guaranteed on a joint and several basis by our U.K. Subsidiaries, and contains a number of significant covenants that, among other things, restrict the ability of our U.K. Subsidiaries to pay dividends, dispose of assets, incur additional indebtedness, repay other indebtedness, create liens on assets, make investments or acquisitions and engage in mergers or consolidations. In addition, our U.K. Subsidiaries are required to comply with specified ratios and tests, each as defined in the U.K. credit agreement, including: a measurement of net worth, a debt to capital ratio, an EBITDA to interest expense ratio, a measurement of maximum capital expenditures, a debt to EBITDA ratio, and a fixed charge coverage ratio. A breach of these requirements would give rise to certain remedies under the agreement, the most severe of which is the termination of the agreement and acceleration of the amounts owed. As of December 31, 2005, we were in compliance with all covenants under the U.K. credit agreement, and we believe that we will remain in compliance with such covenants for the foreseeable future. In making such determination, we have considered the current margin of compliance with the covenants and the expected future results of operations, working capital requirements, acquisitions, capital expenditures and investments in the U.K.
The U.K. credit agreement also contains typical events of default, including change of control and non-payment of obligations. Substantially all of our U.K. Subsidiaries’ assets not pledged as security under floor plan arrangements are subject to security interests granted to lenders under the U.K. credit agreement. The U.K. credit agreement also has cross-default provisions that trigger a default in the event of an uncured default under other material indebtedness of our U.K. Subsidiaries. As of December 31, 2005, there were no outstanding borrowings under the U.K. credit agreement.
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Senior Subordinated Notes
We have outstanding $300.0 million aggregate principal amount of 9.625% senior subordinated notes due 2012, referred to as the 9.625% Notes. The 9.625% Notes are unsecured senior subordinated notes and subordinate to all existing and future senior debt, including debt under our credit agreements and floor plan indebtedness. The 9.625% Notes are guaranteed by substantially all domestic subsidiaries on a senior subordinated basis. We can redeem all or some of the 9.625% Notes at our option beginning in 2007 at specified redemption prices. Upon a change of control, each holder of 9.625% Notes will be able to require us to repurchase all or some of the 9.625% Notes at a redemption price of 101% of their principal amount. The 9.625% Notes also contain customary negative covenants and events of default. As of December 31, 2005, we were in compliance with all negative covenants and there were no events of default.
3.5% Convertible Senior Subordinated Notes
On January 31, 2006, we issued $375.0 million of 3.50% senior subordinated convertible notes due 2026, referred to as the Convertible Notes, and related guarantees, which together with the Convertible Notes, are referred to as the Securities. In a private offering, referred to as the Offering, to qualified institutional buyers under Rule 144A of the Securities Act of 1933. The Securities bear interest at an annual rate of 3.50% . Interest is payable semiannually on April 1 and October 1 of each year, beginning on October 1, 2006. The Securities mature on April 1, 2026, unless earlier converted, redeemed or purchased by us. The Securities are our unsecured senior subordinated obligations and are guaranteed on an unsecured senior subordinated basis by our existing wholly owned domestic subsidiaries.
Holders may convert the Securities based on a conversion rate of 42.2052 shares of our common stock per $1,000 principal amount of the Securities (which is equal to an initial conversion price of approximately $23.69 per share), subject to adjustment, only under the following circumstances: (1) if the closing price of our common stock reaches, or the trading price of the Securities falls below, specific thresholds, (2) if the Securities are called for redemption, (3) if specified distributions to holders of our common stock are made or specified corporate transactions occur, (4) if a fundamental change occurs, or (5) during the ten trading days prior to, but excluding, the maturity date. Upon conversion of the Securities, in lieu of shares of our common stock, for each $1,000 principal amount of the Securities, a holder will receive an amount in cash equal to the lesser of (i) $1,000 or (ii) the conversion value, determined in the manner set forth in the Indenture, of the number of shares of our common stock equal to the conversion rate. If the conversion value exceeds $1,000, we will also deliver, at our election, cash or common stock or a combination of cash and common stock with respect to the remaining value deliverable upon conversion. If a Holder elects to convert its Securities in connection with certain events that constitute a change of control on or before April 6, 2011, we will pay, to the extent described in the related indenture, a make-whole premium by increasing the conversion rate applicable to such Securities.
In addition, we will pay contingent interest in cash with respect to any six-month period from April 1 to September 30 and from October 1 to March 31, commencing with the six-month period beginning on April 1, 2011 and ending on September 30, 2011, if the average trading price of a Security for the five trading days ending on the third trading day immediately preceding the first day of the relevant six-month period equals 120% or more of the principal amount of the Security. On or after April 6, 2011, we may redeem the Securities, in whole at any time or in part from time to time, for cash at a redemption price of 100% of the principal amount of the Securities to be redeemed, plus any accrued and unpaid interest to the applicable redemption date. Holders of the Securities may require us to purchase all or a portion of their Securities for cash on each of April 1, 2011, April 1, 2016 and April 1, 2021 at a purchase price equal to 100% of the principal amount of the Securities to be purchased, plus accrued and unpaid interest, if any, to, the applicable purchase date. In addition, if we experience certain fundamental change events specified in the related indenture, holders of the Securities will have the option to require us to purchase for cash all or a portion of their Securities, subject to specified exceptions, at a price equal to 100% of the principal amount of the Securities, plus accrued and unpaid interest, if any, to the fundamental change purchase date.
In connection with the offering, we agreed to file with the Securities and Exchange Commission within 120 days after the date of original issuance of the Securities a shelf registration statement to register resales of the Securities and the shares of common stock issuable upon conversion of the Securities. We will use commercially reasonable efforts to (i) cause such shelf registration statement to become effective within 210 days after the original issuance of the Securities and (ii) to keep the shelf registration statement effective until the earlier of (1) two years from the date the shelf registration statement is declared effective by the SEC, (2) the sale pursuant to the shelf registration statement of the Securities and all of the shares of common stock issuable upon conversion of the Securities, and (3) the date when the holders, other than the holders that are our “affiliates,” of the Securities and the common stock issuable upon conversion of the Securities are able to sell or transfer all such securities immediately without restriction pursuant to Rule 144 (or any similar provision then in force) under the Securities Act. If we fail to comply with our obligations to register the Securities and the common stock issuable upon conversion of the Securities, the registration statement does not become effective within the specified time period, or the shelf registration statement ceases to be effective or fails to be usable for certain periods of time, in each case subject to certain exceptions provided in the registration rights agreement, we will be required to pay additional interest, subject to some limitations, to the holders of the securities.
Share Repurchase.
In connection with the Offering we repurchased 1,000,000 shares of our outstanding common stock on January 26, 2006 for $18.96 million, or $18.96 per share.
Interest Rate Swaps
We are party to an interest rate swap agreement through January 2008 pursuant to which a notional $200.0 million of our U.S. floating rate debt was exchanged for fixed rate debt. The swap was designated as a cash flow hedge of future interest payments of LIBOR based U.S. floor plan borrowings. As of December 31, 2005, we expect approximately $0.3 million associated with the swap to be recognized as a reduction of interest expense over the next twelve months.
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Other Financing Arrangements
In the past, we have entered into sale-leaseback transactions to finance certain property acquisitions and capital expenditures, pursuant to which we sell property and/or leasehold improvements to a third-party and agree to lease those assets back for a certain period of time. We believe we will continue to utilize these types of transactions in the future. Such sales generate proceeds which vary from period to period. Proceeds from sale-leaseback transactions were $118.5 million, $149.1 million and $133.4 million during the years ended December 31, 2005, 2004 and 2003, respectively. Commitments under such leases are included in the table of contractual payment obligations below.
Off-Balance Sheet Arrangements
We are not party to any off-balance sheet arrangements.
Capital Transaction
On March 26, 2004, we sold an aggregate of 8,100,000 shares of our common stock to Mitsui & Co., Ltd. and Mitsui & Co. (U.S.A.), Inc. for $119.4 million, or $14.75 per share. The proceeds of the sale were used for general corporate purposes, which included reducing outstanding indebtedness under our credit agreements.
Cash Flows
We have restated our 2004 and 2003 consolidated statements of cash flows to reflect the repayment of floor plan obligations in connection with acquisitions and dispositions as cash transactions to comply with guidance under SFAS No. 95, “Statement of Cash Flows.” More specifically, with respect to acquisitions, we have restated our consolidated statements of cash flows to reflect the repayment of seller floor plan notes payable obligations by our floor plan lender as additional cost of dealership acquisitions with corresponding borrowings of floor plan notes payable-non-trade. Similarly, with respect to dispositions, we have restated our consolidated statements of cash flows to reflect the repayment of our floor plan notes payable by the purchaser’s floor plan lender as additional transaction proceeds with corresponding repayments of floor plan notes payable trade or non-trade as appropriate.
Previously, all such activity was treated as a non-cash acquisition or disposition of inventory and floor plan notes payable. A summary of the significant effects of the restatement are as follows:
| | Year Ended December 31, |
| | 2004 | | 2003 |
| Net cash from continuing operating activities as previously reported | $ | 247,447 | | $ | 24,264 |
| Discontinued operations | | (12,464) | | | 35,151 |
| Recognition of floor plan balances as cash transactions | 40,751 | | 11,063 |
| Net cash from continuing operating activities, as restated | $ | 275,734 | | $ | 70,478 |
| |
| Net cash from continuing investing activities as previously reported | $ | (237,366) | | $ | (178,218) |
| Discontinued operations | | 3,444 | | | 3,597 |
| Recognition of floor plan balances as cash transactions | (40,751) | | (24,585) |
| Net cash from continuing investing activities, as restated | $ | (274,673) | | $ | (199,206) |
| |
| Net cash from continuing financing activities as previously reported | $ | (27,176) | | $ | 130,894 |
| Discontinued operations | | 4,277 | | | (44,642) |
| Recognition of floor plan balances as cash transactions | — | | 13,522 |
| Net cash from continuing financing activities, as restated | $ | (22,899) | | $ | 99,774 |
Cash and cash equivalents decreased by $14.6 million during the year ended December 31, 2005, and increased by $5.6 million and $6.1 million during the years ended December 31, 2004 and 2003, respectively. The major components of these changes are discussed below.
Cash Flows from Continuing Operating Activities
Cash provided by operating activities was $174.7 million, $275.7 million and $70.5 million during the years ended December 31, 2005, 2004 and 2003, respectively. Cash flows from operating activities include net income adjusted for non-cash items and the effects of changes in working capital.
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We finance substantially all of our new and a portion of our used vehicle inventories under revolving floor plan notes payable with various lenders. We report all cash flows arising in connection with floor plan notes payable to the manufacturer of a particular new vehicle as an operating activity in our statement of cash flows and all cash flows arising in connection with floor plan notes payable to a party other than the manufacturer of a particular new vehicle and all floor plan notes payable relating to pre-owned vehicles as a financing activity in our statement of cash flows in accordance with the guidance under SFAS No. 95, “Statement of Cash Flows.”
We believe that changes in aggregate floor plan liabilities are directly linked to changes in vehicle inventory and, therefore, are an integral part of understanding changes in our working capital and operating cash flow. Consequently, we have provided below a reconciliation of cash flow from operating activities as reported in our condensed consolidated statement of cash flows as if all changes in vehicle floor plan were classified as an operating activity.
| | | Year Ended December 31, |
| | | 2005 | | 2004 | | 2003 |
| Net cash from operating activities as reported | | $ | 174,734 | | $ | 275,734 | | $ | 70,478 |
| Floor plan notes payable — non-trade as reported | | 17,641 | | (55,671) | | 119,496 |
| Net cash from operating activities including all floor plan notes payable | | $ | 192,375 | | $ | 220,063 | | $ | 189,974 |
Cash Flows from Continuing Investing Activities
Cash used in investing activities was $227.4 million, $274.7 million and $199.2 million during the years ended December 31, 2005, 2004 and 2003, respectively. Cash flows from investing activities consist primarily of cash used for capital expenditures, proceeds from sale-leaseback transactions and net expenditures for dealership acquisitions. Capital expenditures were $219.0 million, $227.3 million and $194.6 million during the years ended December 31, 2005, 2004 and 2003, respectively. Capital expenditures relate primarily to improvements to our existing dealership facilities and the construction of new facilities. Proceeds from sale-leaseback transactions were $118.5 million, $149.1 million and $133.4 million during the years ended December 31, 2005, 2004 and 2003, respectively. Cash used in business acquisitions, net of cash acquired, was $126.9 million, $210.0 million and $137.9 million during the years ended December 31, 2005, 2004 and 2003, respectively. Cash flows from investing activities include $13.6 million of proceeds received from the sale of an investment during the year ended December 31, 2004.
Cash Flows from Continuing Financing Activities
Cash provided by financing activities was $2.7 million and $99.8 million during the years ended December 31, 2005 and 2003, respectively, and cash used in financing activities was $22.9 million during the year ended December 31, 2004. Cash flows from financing activities include borrowings and repayments of long-term debt, net borrowings or repayments of floor plan notes payable non-trade, proceeds from the issuance of common stock, including proceeds from the exercise of stock options, repurchases of common stock and dividends. We had net borrowings of long-term debt of $2.4 million during the year ended December 31, 2005. We had net repayments of long-term debt of $74.3 million and $25.5 million during the years ended December 31, 2004 and 2003, respectively. We had net borrowings of floor plan notes payable non-trade of $17.6 million and $119.5 million during the years ended December 31, 2005 and 2003, respectively, and net repayments of floor plan notes payable non-trade of $55.7 million during the year ended December 31, 2004. During the years ended December 31, 2005, 2004 and 2003, we received proceeds of $3.5 million, $125.4 million and $9.9 million, respectively, from the issuance of common stock. During the years ended December 31, 2005, 2004 and 2003, we paid $20.8 million, $18.4 million and $4.1 million, respectively, of cash dividends to our stockholders.
Contractual Payment Obligations
The table below sets forth our best estimates as to the amounts and timing of future payments relating to our most significant contractual obligations as of December 31, 2005. The information in the table reflects future unconditional payments and is based upon, among other things, the terms of any relevant agreements. Future events, including acquisitions, divestitures, entering into new operating lease agreements, the amount of borrowings under our credit agreements and floor plan arrangements and purchases or refinancing of our securities, could cause actual payments to differ significantly from these amounts. See “Forward-Looking Statements.” Our obligation relating to the $375.0 million of 3.5% senior subordinated notes due 2026 issued on January 31, 2006 is not included in the table but are discussed above under “3.5% Convertible Senior Subordinated Notes.”
| | Payments due in |
| |
| | Total | | 2006 | | 2007 | | 2008 | | 2009 | | 2010 | | Thereafter |
| |
| | (in millions) |
| Floorplan Notes Payable(A) | $ | 1,172.9 | | $ | 1,172.9 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — |
| U.S. Credit Agreement(B) | $ | 272.0 | | $ | — | | $ | — | | $ | 272.0 | | $ | — | | $ | — | | $ | — |
| U.K. Credit Agreement(B) | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — |
| 9.625% Senior Subordinated Notes | $ | 300.0 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 300.0 |
| Other Debt | $ | 8.2 | | $ | 3.5 | | $ | 3.8 | | $ | 0.2 | | $ | 0.2 | | $ | 0.5 | | $ | — |
| Mandatory minority interest repurchase | $ | 2.7 | | $ | — | | $ | — | | $ | 2.7 | | $ | — | | $ | — | | $ | — |
| Scheduled Interest Payments(C) | $ | 202.9 | | $ | 29.2 | | $ | 29.2 | | $ | 28.9 | | $ | 28.9 | | $ | 28.9 | | $ | 57.8 |
| Operating Lease Commitments | $ | 1609.8 | | $ | 123.1 | | $ | 118.9 | | $ | 115.9 | | $ | 112.7 | | $ | 107.9 | | $ | 1,031.3 |
| | $ | 3,568.5 | | $ | 1,328.7 | | $ | 151.9 | | $ | 419.7 | | $ | 141.8 | | $ | 137.3 | | $ | 1,389.1 |
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| | |
| (A) | Floor plan notes payable are revolving financing arrangements. Payments are generally made as required pursuant to the floor plan borrowing agreements. |
| |
| (B) | Commitments under letters of credit expire concurrently with the expiration of our credit agreements. |
| |
| (C) | Estimates of future variable rate interest payments under floorplan notes payable and our credit agreements are excluded. |
| |
We expect that the amounts above will be funded through cash flow from operations. In the case of balloon payments at the end of the terms of our debt instruments, we expect to be able to refinance such instruments in the normal course of business.
Commitments
We have entered into an agreement with a third party to jointly acquire and manage dealerships in Indiana, Illinois, Ohio, North Carolina and South Carolina. With respect to any joint venture relationship established pursuant to this agreement, we are required to repurchase our partner’s interest at the end of the five-year period following the date of formation of the joint venture relationship. Pursuant to this arrangement, we entered into a joint venture agreement with respect to our Honda of Mentor dealership in Ohio. We are required to repurchase our partners’ interest in this joint venture in July 2008. We expect this payment to be approximately $2.7 million.
Related Party TransactionsStockholders Agreement
Roger S. Penske, our Chairman of the Board and Chief Executive Officer, is also Chairman of the Board and Chief Executive Officer of Penske Corporation, and through entities affiliated with Penske Corporation, our largest stockholder owning approximately 41% of our outstanding common stock. Mitsui & Co., Ltd. and Mitsui & Co. (USA), Inc. (collectively, “Mitsui”) own approximately 15% of our outstanding common stock. Mitsui, Penske Corporation and certain other affiliates of Penske Corporation are parties to a stockholders agreement pursuant to which the Penske affiliated companies agreed to vote their shares for one director who is a representative of Mitsui. In turn, Mitsui agreed to vote their shares for up to fourteen directors voted for by the Penske affiliated companies. This agreement terminates in March 2014, upon the mutual consent of the parties or when either party no longer owns any of our common stock.
Mitsui Transaction
On March 26, 2004, we sold an aggregate of 8,100,000 shares of common stock to Mitsui for $119.4 million. Proceeds from the sale were used for general corporate purposes, which included reducing outstanding indebtedness under our credit agreements.
Other Related Party Interests
James A. Hislop, one of our directors, is the President, Chief Executive Officer and a managing member of Penske Capital Partners, a director of Penske Corporation and a managing director of Transportation Resource Partners, an organization that undertakes investments in transportation-related industries. Roger S. Penske also is a managing member of Penske Capital Partners and Transportation Resource Partners. Richard J. Peters, one of our directors, is a director of Penske Corporation and a managing director of Transportation Resource Partners. Eustace W. Mita and Lucio A. Noto (two of our directors) are investors in Transportation Resource Partners. One of our directors, Mr. Hiroshi Ishikawa, serves as our Executive Vice President — International Business Development and serves in a similar capacity for Penske Corporation. Robert H. Kurnick, Jr., our Vice Chairman, is also the President and a director of Penske Corporation and Paul F. Walters, our Executive Vice President — Human Resources serves in a similar human resources capacity for Penske Corporation.
Other Transactions
We are currently a tenant under a number of non-cancelable lease agreements with Automotive Group Realty, LLC and its subsidiaries (together “AGR”), which are subsidiaries of Penske Corporation. From time to time, we may sell AGR real property and improvements that are subsequently leased by AGR to us. The sale of each parcel of property is valued at a price that is independently confirmed by a third party appraiser. During 2005 and 2004, we paid $4.7 million and $5.6 million, respectively, to AGR under these lease agreements. In addition, in 2005 and 2004, we sold AGR real property and improvements for $43.9 and $30.8 million, respectively, which were subsequently leased by AGR to us. There were no gains or losses associated with these sales.
We sometimes pay to and/or receive fees from Penske Corporation and its affiliates for services rendered in the normal course of business, or to reimburse payments made to third parties on each others’ behalf. These transactions are reviewed annually by our Audit Committee and reflect the provider’s cost or an amount mutually agreed upon by both parties, which we believe represent terms at least as favorable as those that could be obtained from an unaffiliated third party negotiated on an arm’s length basis.
We are currently a tenant under a number of non-cancelable lease agreements with Samuel X. DiFeo and members of his family. Mr. DiFeo served as our President and Chief Operating Officer until March 8, 2006. We paid $5.5 million during both 2005 and 2004 to Mr. DiFeo and his family under these lease agreements. We believe that when we entered into these transactions, their terms were at least as favorable as those that could be obtained from an unaffiliated third party negotiated on an arm’s length basis.
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We have entered into joint ventures with certain related parties as more fully discussed below.
Joint Venture Relationships
From time to time, we enter into joint venture relationships in the ordinary course of business, pursuant to which we acquire dealerships together with other investors. We may also provide these dealerships with working capital and other debt financing at costs that are based on our incremental borrowing rate. As of December 31, 2005, our joint venture relationships were as follows:
| | | | | Ownership |
| Location | | Dealerships | | Interest |
| | | | | |
| Fairfield, Connecticut | | Mercedes-Benz, Audi, Porsche | | 92.90% (A)(C) |
| Edison, New Jersey | | Ferrari | | 70.00% (C) |
| Tysons Corner, Virginia | | Mercedes-Benz, Maybach, | | 90.00% (B)(C) |
| | | Audi, Porsche, Aston Martin | | |
| Las Vegas, Nevada | | Ferrari, Maserati | | 50.00% (D) |
| Mentor, Ohio | | Honda | | 75.00% (C) |
| Munich, Germany | | BMW, MINI | | 50.00% (D) |
| Frankfurt, Germany | | Lexus, Toyota | | 50.00% (D) |
| Achen, Germany | | Audi, Volkswagen, Lexus, Toyota | | 50.00% (D) |
| Mexico | | Toyota | | 48.70% (D) |
| Mexico | | Toyota | | 45.00% (D) |
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| | |
| (A) | An entity controlled by one of our directors, Lucio A. Noto (the “Investor”), owns a 7.8% interest in this joint venture which entitles the Investor to 20% of the operating profits of the joint venture. In addition, the Investor has an option to purchase up to a 20% interest in the joint venture for specified amounts. |
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| (B) | Roger S. Penske, Jr. owns a 10% interest in this joint venture. |
| |
| (C) | Entity is consolidated in our financial statements |
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| (D) | Entity is accounted for under the equity method of accounting |
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Cyclicality
Unit sales of motor vehicles, particularly new vehicles, historically have been cyclical, fluctuating with general economic cycles. During economic downturns, the automotive retailing industry tends to experience periods of decline and recession similar to those experienced by the general economy. We believe that the industry is influenced by general economic conditions and particularly by consumer confidence, the level of personal discretionary spending, fuel prices, interest rates and credit availability.
Seasonality
Our business is modestly seasonal overall. Our U.S. operations generally experience higher volumes of vehicle sales in the second and third quarters of each year due in part to consumer buying trends and the introduction of new vehicle models. Also, demand for cars and light trucks is generally lower during the winter months than in other seasons, particularly in regions of the United States where dealerships may be subject to severe winters. The greatest U.S. seasonality exists at the dealerships we operate in northeastern and upper mid-western states, for which the second and third quarters are the strongest with respect to vehicle-related sales. Our U.K. operations generally experience higher volumes of vehicle sales in the first and third quarters of each year, due primarily to vehicle registration practices in the U.K. The service and parts business at all dealerships experiences relatively modest seasonal fluctuations.
Effects of Inflation
We believe that inflation rates over the last few years have not had a significant impact on revenues or profitability. We do not expect inflation to have any near-term material effects on the sale of our products and services. However, there can be no assurance that there will be no such effect in the future.
We finance substantially all of our inventory through various revolving floor plan arrangements with interest rates that vary based on the prime rate or LIBOR. Such rates have historically increased during periods of increasing inflation.
Risk Factors
This annual report on Form 10-K contains “forward-looking statements” which generally can be identified by the use of terms such as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “intend,” “plan,” “estimate,” “potential,” “continue” or variations of such terms. These forward-looking statements are only predictions and involve known and unknown risks and uncertainties and are not assurances of future performance. Actual results may differ materially from anticipated results due to a variety of factors, including those discussed under Item 1A — “Risk Factors,” which are incorporated by reference into this Item 7.
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