EXHIBIT 99.1
RISK FACTORS RELATING TO UNITED AUTO GROUP
AUTOMOBILE MANUFACTURERS EXERCISE SIGNIFICANT CONTROL OVER OUR OPERATIONS AND WE
DEPEND ON THEM IN ORDER TO OPERATE OUR BUSINESS.
Each of our dealerships operates pursuant to franchise agreements with
automobile manufacturers or manufacturer-authorized distributors. We are
dependent on our relationships with these automobile manufacturers because,
without a franchise agreement, we cannot obtain new vehicles from a manufacturer
or display vehicle manufacturer trademarks.
Manufacturers exercise a great degree of control over the operations of
our dealerships. For example, manufacturers can require our dealerships to meet
specified standards of appearance and quality, require individual dealerships to
meet specified financial criteria such as maintenance of minimum net working
capital and, in some cases, minimum net worth, impose minimum customer service
and satisfaction standards, set standards regarding the maintenance of
inventories of vehicles and parts and govern the extent to which our dealerships
can utilize the manufacturers' names and trademarks. In many cases the
manufacturer must consent to the replacement of the dealership principal.
Our franchise agreements worldwide may be terminated or not renewed by the
automobile manufacturers for a variety of reasons, including any unapproved
change of ownership or management and other material breaches of the franchise
agreements. We have from time to time been in non-compliance with various
provisions of some of our franchise agreements. Although we believe that we will
be able to renew at expiration all of our existing franchise agreements, if any
of our significant existing franchise agreements or a large number of franchise
agreements are not renewed or the terms of any such renewal are materially
unfavorable to us, there may be a material adverse effect on our results of
operations, financial condition or cash flows. 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 results of operations, financial condition or cash flows.
Our franchise agreements do not give us the exclusive right to sell a
manufacturer's product within a given geographic area. The location of new
dealerships near our existing dealerships could materially adversely affect our
operations, revenues and profitability.
WE DEPEND ON MANUFACTURERS TO PROVIDE US WITH POPULAR VEHICLES.
We depend on manufacturers to provide us with a desirable mix of popular
new vehicles, which tends to produce the highest profit margins and be the most
difficult to obtain from manufacturers. Manufacturers generally allocate their
vehicles among dealerships based on the sales history of each dealership. If we
cannot obtain sufficient quantities of the most popular models, whether due to
sales declines at our dealerships or otherwise, our new vehicle sales and
profitability may be adversely affected. Sales of less profitable models may
have a material adverse effect on our results of operations, financial condition
or cash flows.
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OUR VOLUMES AND PROFITABILITY MAY BE AFFECTED IF MANUFACTURERS DISCONTINUE THEIR
INCENTIVE PROGRAMS.
Our dealerships depend on the manufacturers for sales incentives,
warranties and other programs that are intended to promote and support new
vehicle sales at our dealerships. Some of these programs include customer
rebates on new vehicles, dealer incentives on new vehicles, special financing or
leasing terms, warranties on new and used vehicles and sponsorship of used
vehicle sales by authorized new vehicle dealers. Manufacturers have historically
made many changes to their incentive programs during each year. A reduction or
discontinuation of manufacturers' incentive programs could materially adversely
affect our results of operations, financial condition or cash flows
BECAUSE WE DEPEND ON THE SUCCESS AND POPULARITY OF THE BRANDS WE SELL, ADVERSE
CONDITIONS AFFECTING ONE OR MORE AUTOMOBILE MANUFACTURERS MAY NEGATIVELY IMPACT
OUR REVENUES AND PROFITABILITY.
Our success depends on the overall success of the line of vehicles that
each of our dealerships sells. As a result, our success depends to a great
extent on the automobile manufacturers' financial condition, marketing, vehicle
design, production and distribution capabilities, reputation, management and
labor relations. In 2004, Toyota/Lexus, DaimlerChrysler, BMW, Ford/Premier Auto
Group and Honda/Acura accounted for 22%, 15%, 15%, 12% and 11%, respectively, of
our total revenues. A significant decline in the sale of new vehicles
manufactured by these manufacturers, or the loss or deterioration of our
relationships with one or more of these manufacturers, could have a material
adverse effect on our results of operations, financial condition or cash flows
No other manufacturer accounted for more than 10% of our total 2004 revenues.
Events such as labor strikes that may adversely affect a manufacturer may
also adversely affect us. In particular, labor strikes at a manufacturer that
continue for a substantial period of time could have a material adverse effect
on our business. Similarly, the delivery of vehicles from manufacturers at a
time later than scheduled, which may occur particularly during periods of new
product introductions, could lead to reduced sales during those periods. This
has been experienced at some of our dealerships from time to time. In addition,
any event that causes adverse publicity involving one or more automobile
manufacturers or their vehicles may have a material adverse effect on our
results of operations, financial condition or cash flows regardless of whether
that event involves any of our dealerships.
OUR BUSINESS AND THE AUTOMOTIVE RETAIL INDUSTRY IN GENERAL ARE SUSCEPTIBLE TO
ADVERSE ECONOMIC CONDITIONS, INCLUDING CHANGES IN CONSUMER CONFIDENCE, FUEL
PRICES AND CREDIT AVAILABILITY WHICH MAY ADVERSELY EFFECT US.
We believe that 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 tend to experience
periods of decline characterized by oversupply and weak demand. The automotive
retail industry may experience sustained periods of decline in vehicle sales in
the future. In addition, changes in interest rates could significantly impact
our vehicle sales because a significant portion of vehicle buyers finance their
purchases. Any decline or change of this type could have a material adverse
effect on our results of operations, financial condition or cash flows.
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In addition, local economic, competitive and other conditions affect the
performance of our dealerships. Our revenues and profitability depend
substantially on general economic conditions and spending habits in those
regions where we maintain most of our operations.
SUBSTANTIAL COMPETITION IN AUTOMOTIVE SALES AND SERVICES MAY ADVERSELY AFFECT
OUR 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;
- 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 may have greater financial, marketing and personnel resources and
lower overhead and sales costs than us. We do not have any cost advantage in
purchasing new vehicles from the automobile manufacturers and typically rely on
advertising, merchandising, management experience, sales expertise, service
reputation and dealership location in order to sell new vehicles.
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 price, the use of factory-approved
replacement parts, the familiarity with a manufacturer's brands and models and
the quality of customer service. 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.
In addition, the Internet is 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 generated from the sale of finance and insurance products. 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
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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 could be materially
adversely affected. We could also be materially adversely affected to the extent
that Internet companies acquire dealerships or ally themselves with our
competitors' dealerships.
OUR CAPITAL COSTS AND OUR RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED BY A
RISING INTEREST RATE ENVIRONMENT.
We finance our purchases of new and, to a lesser extent, used vehicle
inventory using floor plan financing arrangements under which we are charged
interest at floating rates. In addition, we obtain capital for general corporate
purposes, dealership acquisitions and real estate purchases and improvements
under predominantly floating interest rate credit facilities. Therefore,
excluding the potential mitigating effects from interest rate hedging
techniques, our interest expenses will rise with increases in interest rates.
Rising interest rates are generally associated with increasing macroeconomic
business activity and improvements in gross domestic product. However, rising
interest rates may also have the effect of depressing demand in the interest
rate sensitive aspects of our business, particularly new and used vehicles
sales, because many of our customers finance their vehicle purchases. As a
result, rising interest rates may have the effect of simultaneously increasing
our costs and reducing our revenues.
OUR SUBSTANTIAL AMOUNT OF INDEBTEDNESS MAY LIMIT OUR ABILITY TO OBTAIN FINANCING
FOR ACQUISITIONS AND MAY REQUIRE THAT A SIGNIFICANT PORTION OF OUR CASH FLOW BE
USED FOR DEBT SERVICE.
We have a substantial amount of indebtedness. As of December 31, 2004, we
had approximately $586 million of total non-floor plan debt outstanding and $1.3
billion of floor plan notes payable outstanding. In addition, we had up to $440
million of additional debt capacity under our credit facilities.
Our substantial debt could have important consequences to you. For
example, it could:
- make it more difficult for us to obtain additional financing in the
future for our acquisitions and operations, working capital
requirements, capital expenditures, debt service or other general
corporate requirements;
- require us to dedicate a substantial portion of our cash flows from
operations to the repayment of our debt and the interest associated
with our debt rather than to other areas of our business;
- limit our operating flexibility due to financial and other
restrictive covenants, including restrictions on incurring
additional debt, creating liens on our properties, making
acquisitions or paying dividends;
- place us at a competitive disadvantage compared to our competitors
that have less debt; and
- make us more vulnerable in the event of adverse economic and
industry conditions or a downturn in our business.
Our ability to meet our debt service obligations depends on our future
financial and operating performance, which will be impacted by general economic
conditions and by
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financial, business and other competitive factors, many of which are beyond our
control. These factors could include operating difficulties, increased operating
costs, the actions of competitors, regulatory developments and delays in
implementing our growth strategies. Our ability to meet our debt service and
other obligations may depend in significant part on the extent to which we can
successfully implement our business strategy. We may not be able to implement
our business strategy and the anticipated results of our strategy may not be
realized.
If our business does not generate sufficient cash flow from operations or
future sufficient borrowings are not available to us under our credit agreements
or from other sources, we might not be able to service our debt or to fund our
other liquidity needs. If we are unable to service our debt, due to inadequate
liquidity or otherwise, we may have to delay or cancel acquisitions, sell equity
securities, sell assets or restructure or refinance our indebtedness. If we are
unable to service our debt, we might not be able to sell our equity securities,
sell our assets or restructure or refinance our debt on a timely basis or on
satisfactory terms or at all. In addition, the terms of our existing or future
franchise agreements, agreements with manufacturers or debt agreements may
prohibit us from adopting any of these alternatives.
IF WE ARE UNABLE TO COMPLETE ADDITIONAL ACQUISITIONS OR SUCCESSFULLY INTEGRATE
ACQUISITIONS, WE MAY NOT BE ABLE TO ACHIEVE DESIRED RESULTS FROM OUR ACQUISITION
STRATEGY.
Growth in our revenues and earnings depends substantially on our ability
to acquire and successfully operate dealerships. We cannot guarantee that we
will be able to identify and acquire dealerships in the future. Moreover,
acquisitions involve a number of risks, including:
- failure to integrate the operations and personnel of the acquired
dealerships;
- operating in new markets with which we are not familiar;
- incurring undiscovered liabilities at acquired dealerships;
- disruption to our existing businesses;
- failure to retain key personnel of the acquired dealerships;
- impairment of relationships with employees, manufacturers and
customers; and
- incorrectly valuing acquired entities.
In addition, integrating acquired dealerships into our existing mix of
dealerships may result in substantial costs, diversion of our management
resources or other operational or financial problems. Unforeseen expenses,
difficulties, complications and delays frequently encountered in connection with
the integration of acquired entities and the rapid expansion of operations could
inhibit our growth, result in our failure to achieve acquisition synergies and
require us to focus resources on integration rather than other more profitable
areas.
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 assume
operating control of acquired entities, we may not be able to ascertain the
actual value of the acquired entity.
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We may be unable to identify acquisition candidates that would result in
the most successful combinations, or unable to complete acquisitions on
acceptable terms on a timely basis. The magnitude, timing and nature of future
acquisitions will depend upon various factors, including the availability of
suitable acquisition candidates, the negotiation of acceptable terms, our
financial capabilities, the availability of skilled employees to manage the
acquired companies and general economic and business conditions. Further,
covenants contained in our debt instruments impose limitations on our ability to
acquire additional dealerships and future debt instruments may impose additional
restrictions.
MANUFACTURERS' RESTRICTIONS ON ACQUISITIONS MAY LIMIT OUR FUTURE GROWTH.
Our future growth via acquisition of automobile dealerships will depend on
our ability to obtain the requisite manufacturer approvals. We must obtain the
consent of a manufacturer prior to the acquisition of any of its dealership
franchises. We may be unable to obtain the consent of a manufacturer for the
acquisition of a dealership or it could take a significant amount of time. In
addition, under many franchise agreements or under local law, a manufacturer
will have a right of first refusal to acquire a dealership that we seek to
acquire.
Manufacturers also limit the total number of their dealerships that we may
own in a particular geographic area and, in some cases, the total number of
their vehicles that we may sell as a percentage of that manufacturer's overall
sales. Manufacturers may also limit the ownership of stores in contiguous
markets, the dueling of a franchise with another brand, along with the frequency
of acquisitions. Although to date we have only reached these ceilings with one
manufacturer, our growth strategy may be affected by these limits.
WE MAY NOT BE ABLE TO SATISFY OUR CAPITAL REQUIREMENTS FOR MAKING ACQUISITIONS,
FINANCING DEALERSHIP RENOVATION PROJECTS OR FINANCING THE PURCHASE OF OUR
INVENTORY WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATIONS AND
HINDER OUR ABILITY TO ACHIEVE OUR GROWTH STRATEGY.
We require substantial capital in order to acquire and renovate automobile
dealerships. This capital might be raised through public or private financing,
including through the issuance of our equity securities as full or partial
consideration for acquisitions, as well as borrowings and other sources.
Availability under our credit agreements may be limited by the covenants and
conditions of those facilities. We may not be able to find additional or
sufficient financing to raise additional funds. If we raise additional funds by
issuing our equity securities, dilution to then existing stockholders may
result, and the number of shares of common stock that we issue in connection
with acquisitions and renovations could be significant. In addition, a decline
in the market price of our common stock for any reason, including a perception
that sales of substantial amounts of common stock could occur, may increase the
amount of cash required by us to finance acquisitions and renovations. If
adequate funds are not available, we may be required to significantly curtail
our acquisition and renovation programs, which could materially and adversely
affect our growth strategy.
We depend to a significant extent on our ability to finance the purchase
of inventory, which in the automotive retail industry involves borrowing
significant sums of money in the form of floor plan financing. Floor plan
financing is vendor secured financing from a vehicle manufacturer. Our
dealerships borrow money to buy a particular vehicle from the manufacturer and
pay off the floor plan financing when they sell the particular vehicle, paying
interest during the interim period. In connection with acquisitions of
dealerships, we must either obtain new floor plan financing or obtain consents
to assume that financing. Our
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floor plan financing is secured by substantially all of the assets of our
automotive dealership subsidiaries and, in some cases, a guarantee from us. Our
remaining assets are pledged to secure our credit facilities. This may impede
our ability to borrow from other sources. Most of our floor plan lenders are
associated with manufacturers with whom we have franchise agreements.
Consequently, the deterioration of our relationship with a manufacturer could
adversely affect our relationship with the affiliated floor plan lender and vice
versa. Any inability to obtain floor plan financing on customary terms, or the
termination of our floor plan financing arrangements by our floor plan lenders,
could have a material adverse effect on our operations.
OUR FAILURE TO MEET A MANUFACTURER'S CONSUMER SATISFACTION REQUIREMENTS MAY
ADVERSELY AFFECT OUR ABILITY TO ACQUIRE NEW DEALERSHIPS, OUR ABILITY TO OBTAIN
INCENTIVE PAYMENTS FROM MANUFACTURERS AND OUR PROFITABILITY.
Many manufacturers attempt to measure customers' satisfaction with their
sales and warranty service experiences through systems which vary from
manufacturer to manufacturer, but which are generally known as customer
satisfaction indices, or CSI. These manufacturers may use a dealership's CSI
scores as a factor in evaluating applications for additional dealership
acquisitions. Certain of our dealerships have had difficulty from time to time
in meeting their manufacturers' CSI standards. We may be unable to comply with
these standards in the future. A manufacturer may refuse to consent to an
acquisition of one of its franchises if it determines that our dealerships do
not comply with the manufacturer's CSI standards. This could materially
adversely affect our acquisition strategy. In addition, because we receive
payments from the manufacturers based in part on CSI scores, future payments
could be materially reduced or eliminated if our CSI scores decline.
AUTOMOBILE MANUFACTURERS IMPOSE LIMITS ON OUR ABILITY TO ISSUE ADDITIONAL EQUITY
AND ON THE OWNERSHIP OF OUR COMMON STOCK BY THIRD PARTIES, WHICH MAY HAMPER OUR
ABILITY TO MEET OUR FINANCING NEEDS.
A number of manufacturers impose restrictions on the sale and transfer of
our common stock. The most prohibitive restrictions provide that, under
specified circumstances, we may be forced to sell or surrender franchises (1) if
a competitor automobile manufacturer acquires a 5% or greater ownership interest
in us or (2) if an individual or entity that has a criminal record in connection
with business dealings with any automobile manufacturer, distributor or dealer
or who has been convicted of a felony acquires a 5% or greater ownership
interest in us. Similarly, several manufacturers have the right to approve the
acquisition by a third party of 20% or more of our voting equity, and a number
of manufacturers continue to prohibit changes in ownership that may affect
control of our company.
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 renegotiate these restrictions, we may be forced to terminate or sell
one or more franchises, which could have a material adverse effect on us. This
may also inhibit our ability to acquire dealership groups. These restrictions
also 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 raise required capital or to issue
our stock as consideration for future acquisitions.
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AUTOMOTIVE RETAILING IS A MATURE INDUSTRY WITH LIMITED GROWTH POTENTIAL IN NEW
VEHICLE SALES.
The U.S. automotive retail industry is considered a mature industry in
which minimal growth in unit sales of new vehicles is expected. Accordingly,
growth in our revenues and earnings will depend significantly on our ability to
acquire and consolidate profitable dealerships and increase our higher-margin
businesses.
BUSINESS INTERRUPTIONS AT SOME OF OUR DEALERSHIPS COULD IMPACT OUR OPERATING
RESULTS.
We have historically experienced business interruptions at several of our
dealerships due to adverse weather conditions or other extraordinary events,
such as wild fires in California or hurricanes in Florida. To the extent we
experience future similar events, our operating results may be adversely
impacted.
IF WE LOSE KEY PERSONNEL OR ARE UNABLE TO ATTRACT ADDITIONAL QUALIFIED
PERSONNEL, OUR BUSINESS COULD BE ADVERSELY AFFECTED.
We believe that our success depends to a significant extent upon the
efforts and abilities of our executive management and key employees, including,
in particular, Roger S. Penske. Additionally, our business is dependent upon our
ability to continue to attract and retain qualified personnel, such as managers,
as well as retaining executive management in connection with acquisitions. We
generally have not entered into employment agreements with our key personnel.
The loss of the services of one or more members of our senior management team,
including, in particular, Roger S. Penske, 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 key employees or the failure to
attract qualified managers could have a material adverse effect on our business
and may materially impact the ability of our dealerships to conduct their
operations in accordance with our standards.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE DUE TO SEASONALITY IN THE
AUTOMOTIVE RETAIL BUSINESS AND OTHER FACTORS.
The automobile industry typically experiences seasonal variations in
vehicle revenues. Demand for automobiles is generally lower during the winter
months than in other seasons, particularly in regions of the United States that
may have harsh winters. A higher amount of vehicle sales generally occurs in the
second and third quarters of each year, due in part to consumer buying trends
and the introduction of new vehicle models. Therefore, if conditions exist in
the second or third quarters that depress or affect automotive sales, such as
high fuel costs, depressed economic conditions or similar adverse conditions,
our revenues for the year may be disproportionately adversely affected. Our
dealerships located in the northeastern states are typically affected by
seasonality more than our dealerships in other regions.
In addition, the U.K. retail automotive industry typically experiences
peak sales activity during March and September of each year. This seasonality
results from the perception in the U.K. that the resale value of a vehicle may
be determined by the date that the vehicle is registered. Because new vehicle
registration periods begin on March 1 and September 1 each year, vehicles with
comparable mileage that were registered in March may have an equivalent used
vehicle value to vehicles registered in August of the same year.
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OUR BUSINESS MAY BE ADVERSELY AFFECTED BY IMPORT PRODUCT RESTRICTIONS AND
FOREIGN TRADE RISKS THAT MAY IMPAIR OUR ABILITY TO SELL FOREIGN VEHICLES
PROFITABLY.
A significant portion of our new vehicle business involves the sale of
vehicles, vehicle parts or vehicles composed of parts that are manufactured
outside the region in which they are sold. As a result, our operations are
subject to customary risks associated with imported merchandise, including
fluctuations in the relative 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 locations in which we operate 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 materially affect our operations and our ability to purchase
imported vehicles and parts at reasonable prices, which could have a material
adverse effect on our business.
OUR AUTOMOTIVE DEALERSHIPS ARE SUBJECT TO SUBSTANTIAL REGULATION WHICH MAY
ADVERSELY AFFECT OUR PROFITABILITY.
A number of regulations affect our business of marketing, selling,
financing and servicing automobiles. Under the laws of states in locations which
we currently operate or into which we may expand, we typically must obtain a
license in order to establish, operate or relocate a dealership or operate an
automotive repair service, including dealer, sales, finance and
insurance-related licenses. These laws also regulate our conduct of business,
including our advertising, operating, financing, employment and sales practices.
Our financing activities with customers are subject to truth-in-lending,
consumer leasing, equal credit opportunity and similar regulations as well as
motor vehicle finance laws, installment finance laws, insurance laws, usury laws
and other installment sales laws. Some jurisdictions regulate finance fees that
may be paid as a result of vehicle sales. In the past several years, private
plaintiffs and state attorney generals in the U.S. have increased their scrutiny
of advertising, sales, and finance and insurance activities in the sale and
leasing of motor vehicles. These activities have led many lenders to limit the
amounts that may be charged to customers as fee income for these activities. If
these or similar activities were to restrict our ability to generate revenue
from arranging financing for our customers, we could be adversely affected.
We could also be susceptible to claims or related actions if we fail to
operate our business in accordance with these laws. Claims arising out of actual
or alleged violations of law may be asserted against us or any of our dealers by
individuals, either individually or through class actions, or by governmental
entities in civil or criminal investigations and proceedings. Such actions may
expose us to substantial monetary damages and legal defense costs, injunctive
relief and criminal and civil fines and penalties, including suspension or
revocation of our licenses and franchises to conduct dealership operations.
We will generally 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.
IF STATE DEALER LAWS IN THE UNITED STATES ARE REPEALED OR WEAKENED, OUR
AUTOMOTIVE DEALERSHIPS WILL BE MORE SUSCEPTIBLE TO TERMINATION, NON-RENEWAL OR
RENEGOTIATION OF THEIR FRANCHISE AGREEMENTS.
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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 non-renewal. Some state dealer laws allow dealers to file
protests or petitions or to attempt to comply with the manufacturer's criteria
within the notice period to avoid the termination or non-renewal. 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.
OUR AUTOMOTIVE DEALERSHIPS ARE SUBJECT TO ENVIRONMENTAL REGULATIONS THAT MAY
RESULT IN CLAIMS AND LIABILITIES WHICH COULD BE MATERIAL.
We are subject to a wide range of environmental laws and regulations,
including 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
use, storage, handling and contracting for recycling or disposal of hazardous
materials or wastes and other environmentally sensitive materials. Our business
also involves the operation of storage tanks containing such materials. Storage
tanks are subject to periodic testing, containment, upgrading and removal under
relevant law. Furthermore, investigation or remediation may be necessary in the
event of leaks or other discharges from current or former underground or
aboveground storage tanks. In the U.S., 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 be material. In connection
with dispositions of businesses, or dispositions previously made by companies we
acquire, we may retain exposure for environmental costs and liabilities, some of
which may be material. Compliance with current or amended, or new or more
stringent, laws or regulations, stricter interpretations of existing laws or the
future discovery of environmental conditions could require additional
expenditures by us, and those expenditures could be material.
OUR PRINCIPAL STOCKHOLDERS HAVE SUBSTANTIAL INFLUENCE OVER US AND MAY MAKE
DECISIONS WITH WHICH YOU DISAGREE. SOME OF OUR DIRECTORS AND OFFICERS MAY HAVE
CONFLICTS OF INTEREST WITH RESPECT TO CERTAIN RELATED PARTY TRANSACTIONS AND
OTHER BUSINESS INTERESTS.
Penske Corporation through various affiliates beneficially owns 40% of our
outstanding common stock. In addition, Penske Corporation and its affiliates
have entered into a stockholders agreement with our second largest stockholder,
Mitsui & Co., Ltd. and
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one of its affiliates, pursuant to which they have agreed to vote together as to
the election of our directors. Collectively, these two groups beneficially own
56% of our outstanding stock. As a result, these persons have the ability to
control the composition of our board of directors and therefore they may be able
to control the direction of our affairs and business.
This concentration of ownership, as well as various provisions contained
in our agreements with manufacturers, our certificate of incorporation and
bylaws and the Delaware General Corporation Law, could have the effect of
discouraging, delaying or preventing a change in control of us or unsolicited
acquisition proposals. These provisions include the stock ownership limits
imposed by various manufacturers and our ability to issue "blank check"
preferred stock and the "interested stockholder" provisions of Section 203 of
Delaware law.
Some of our executive officers also hold executive positions at other
companies affiliated with our largest stockholder. Roger S. Penske, our Chairman
and Chief Executive Officer, is also Chairman and Chief Executive Officer of
Penske Corporation, a diversified transportation services company. Robert H.
Kurnick, Jr., our Executive Vice President and General Counsel, is also
President of Penske Corporation, and Paul H. Walters, our Executive Vice
President -- Human Resources, is also Executive Vice President -- Administration
of Penske Corporation. Much of the compensation of these officers is paid by
Penske Corporation and not by us, and while these officers have historically
devoted a substantial amount of their time to our matters, these officers are
not required to spend any specific amount of time on our matters. In addition,
two of our directors, James A. Hislop and Richard J. Peters, are also directors
of Penske Corporation. Mr. Hislop is a managing member of Penske Capital
Partners and Messrs. Hislop and Peters are managing directors of Transportation
Resource Partners. In addition, Penske Corporation owns Penske Automotive Group,
a privately held automotive dealership company with operations in southern
California. Due to their relationships with these related entities, Messrs.
Penske, Kurnick, Walters, Hislop and Peters may have a conflict of interest in
making any decision related to transactions between their related entities and
us, or with respect to allocations of corporate opportunities.
OUR INTERNATIONAL OPERATIONS SUBJECT US TO FOREIGN CURRENCY TRANSLATION RISK AND
EXPOSURE TO CHANGES IN EXCHANGE RATES.
Between 25% and 35% of our revenues are generated in international
markets, predominately the United Kingdom. As a result, we are exposed to the
risks involved in foreign operations, including:
- changes in international tax laws and treaties, including increases
of withholding and other taxes on remittances and other payments by
subsidiaries;
- currency and exchange risks;
- tariffs, trade barriers, and restrictions on the transfer of funds
between nations;
- changes in international governmental regulations;
- the impact of local economic and political conditions;
- the impact of European Commission regulation and the relationship
between the U.K. and continental Europe; and
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- increased competition and the impact on vehicle pricing resulting
from the expiration of the Block Exemption in the U.K.
If our international operations fail to perform as expected, we will be
adversely impacted. In addition, our international results of operations and
financial position are reported in local currency and are then translated into
U.S. dollars at the applicable foreign currency exchange rate for inclusion in
our consolidated financial statements. As exchange rates fluctuate, particularly
between the U.S. and U.K., the translation effect of such fluctuations may have
a material effect on our results of operations or financial position as reported
in U.S. dollars.
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