Back to GetFilings.com
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, 2002
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 | |
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was approximately $433.0 million as of February 28, 2003 (based
on the last sale price of such stock as quoted on the New York Stock Exchange).
At such date there was no non-voting stock outstanding.
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, or the average bid and asked price of such common equity,
as of the last business day of the registrant's most recently completed second
fiscal quarter: $740.8 million
As of February 28, 2003, there were 22.4 million 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 21,
2003, which is incorporated into Part III of this Form 10-K.
2
TABLE OF CONTENTS
PART I........................................................................................................... 5
Item 1. Business.............................................................................................. 5
Item 2. Properties............................................................................................ 21
Item 3. Legal Proceedings..................................................................................... 21
Item 4. Submission of Matters to a Vote of Security Holders................................................... 21
PART II.......................................................................................................... 21
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................................. 21
Item 6. Selected Financial Data............................................................................... 22
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................. 23
Item 7A. Quantitative and Qualitative Disclosures about Market Risk............................................ 34
Item 8. Financial Statements and Supplementary Data........................................................... 35
Item 9. Changes in and Disagreements on Accounting and Financial Disclosure................................... 35
PART III......................................................................................................... 35
Item 10. Directors and Executive Officers of the Registrant.................................................... 35
Item 11. Executive Compensation................................................................................ 35
Item 12. Security Ownership of Certain Beneficial Owners and Management........................................ 35
Item 13. Certain Relationships and Related Transactions........................................................ 35
PART IV.......................................................................................................... 36
Item 14. Controls and Procedures............................................................................... 36
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................................... 36
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 of future acquisitions
- operating cash flows and availability of capital
- future stock repurchases
- capital expenditures
- changes in sales volumes in the new and used vehicle and parts and
service markets
- business trends, including incentives, product cycles and interest
rates
- availability of financing for inventory and working capital
- inventory levels
Any such forward-looking statements are not assurances of future
performance and involve risks and uncertainties. Actual results may differ
materially from anticipated results in the forward-looking statements for a
number of reasons, including:
- the future economic environment, including consumer confidence,
interest rates, the price of gasoline, the level of manufacturer
incentives and the availability of consumer credit may affect the
demand for new and used vehicles and parts and service sales
- the effect of any war or escalation of hostilities in Iraq or
elsewhere
- regulatory environment, adverse legislation, or unexpected
litigation
- our principal automobile manufacturers, especially Ford,
Toyota/Lexus, GM and DaimlerChrysler may not continue to produce or
make available to us vehicles that are in high demand by our
customers
- requirements imposed on us by our manufacturers may limit our
acquisitions and affect capital expenditures related to our
dealership facilities
- our dealership operations may not perform at expected levels or
achieve expected improvements
- we may not achieve expected future cost savings and our future costs
could be higher than we expected
- available capital resources and various debt agreements may limit
our ability to complete acquisitions, complete construction of new
or expanded facilities and repurchase shares
- our cost of financing could increase significantly
- new accounting standards could materially impact our reported
earnings per share
- we may not complete additional acquisitions or the pace of
acquisitions may change
- we may not be able to adjust our cost structure
- we may lose key personnel
- competition in our industry may impact our operations or our ability
to complete acquisitions
- insurance costs could increase significantly
- we may not achieve expected sales volumes from the new franchises
granted to us
- we may not obtain inventory of new and used vehicles and parts,
including imported inventory, at the cost, or in the volume, we
expect
The information contained in this annual report, including the
information set forth under the heading "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.
4
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, we operate 114 dealership franchises in California,
Colorado, Florida, Georgia, Louisiana, Massachusetts, New Mexico, Oklahoma and
Texas. Through our dealerships and Internet sites, we sell new and used cars and
light trucks; arrange related financing, vehicle service and insurance
contracts; provide maintenance and repair services; and sell replacement parts.
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.
We estimate that our parts and service operations contribute
approximately 40% of our pretax income; finance and insurance operations
contribute approximately 28% of our pretax income; and new and used vehicle
operations each contribute approximately 16% of our pretax income. During 2002,
we achieved an operating margin of 3.3%. Since our inception in 1997, our
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. The following table sets forth our
geographic diversity, based on new vehicle retail sales, and the number of
dealerships and franchises we own:
PERCENTAGE OF OUR
NEW VEHICLE
RETAIL UNITS
SOLD DURING THE TWELVE AS OF FEBRUARY 28, 2003
MONTHS ENDED ------------------------------------------------
MARKET AREA DECEMBER 31, 2002 NUMBER OF DEALERSHIPS NUMBER OF FRANCHISES
- ----------- ---------------------- --------------------- --------------------
Houston............... 14.6% 7 6
Oklahoma.............. 13.7 10 20
New England........... 11.4 10 14
Austin................ 9.4 6 9
Florida............... 9.0 4 4
West Texas............ 8.5 7 14
Atlanta............... 6.8 6 8
New Orleans........... 6.6 4 6
Dallas................ 6.5 6 8
California............ 5.0 7 7
Beaumont.............. 3.6 2 10
Albuquerque........... 3.5 3 7
Denver................ 1.4 1 1
----- --- ---
TOTAL.............. 100.0% 73 114
===== === ===
EXPAND HIGHER MARGIN ACTIVITIES. We focus on expanding our higher
margin businesses such as used vehicle retail sales, sales of replacement parts,
maintenance and repair services and arranging financing, vehicle service and
insurance contracts. While each of our local operations conducts business in a
manner consistent with its specific market's characteristics, they also pursue
an integrated company-wide strategy designed to grow each of these higher
5
margin businesses to enhance profitability and stimulate internal growth. With a
competitive advantage in sourcing used vehicle inventory and synergies from its
new vehicle operations, new vehicle franchises are especially well positioned to
compete 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.
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, and we believe these efforts
increase our opportunities for significant repeat and referral business. For
example, the dealerships regard their service and repair activities as an
integral part of their overall approach to customer service. This approach
provides us with an opportunity to foster ongoing relationships with customers
and deepen customer loyalty. 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 share best practices among 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.
ASSET MANAGEMENT. We closely monitor our inventory levels and sales.
We target a 60-day new vehicle inventory turn and a 30-day used vehicle
inventory turn. 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.
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 attract, develop and retain
top automotive retailing talent.
TECHNOLOGY INITIATIVES. We use the Internet to communicate more
effectively 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 and an extensive inventory of
vehicles. Also, as franchised dealerships, we receive Internet leads from
manufacturers' e-commerce programs and, through a contractual relationship with
an e-commerce software company, we receive Internet leads from several major
portals. Lastly, at times, we use automotive Internet referral services to
provide incremental sales opportunities.
DEALERSHIP OPERATIONS
Each of our local operations has an established 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 consisting of new vehicle sales,
used vehicle sales, parts and service and finance and insurance managers. Each
dealership is operated as a distinct profit center, in which dealership general
managers are given a high degree of autonomy. The general manager and the other
members of the dealership management team are generally long-time members of
their local communities and are typically best able to conduct day-to-day
operations based on their experience in, and familiarity with, the local market.
On a monthly basis, each of our local operations is compared to its monthly
operating forecast, and our other dealerships. Key financial information and
customer satisfaction data is also analyzed by corporate management and followed
up on as necessary.
6
NEW VEHICLE SALES. We currently represent 29 American, Asian and
European brands of economy, family, sports and luxury cars, light trucks and
sport utility vehicles. The following table sets forth the brands and number of
new vehicles we sold at retail, and the number of franchises, of the
manufacturers that we represent:
YEARS ENDED DECEMBER 31, 2002
------------------------------------
ACTUAL NUMBER PERCENTAGE OF NUMBER OF
OF NEW TOTAL NEW FRANCHISES OWNED
BRAND VEHICLES SOLD VEHICLES SOLD AS OF FEBRUARY 28, 2003
----- ------------- ------------- -----------------------
Ford................. 24,470 25.8% 14
Toyota............... 19,421 20.4 9
Chevrolet............ 7,117 7.5 5
Dodge................ 6,520 6.9 9
Nissan............... 6,283 6.6 10
Honda................ 5,515 5.8 5
Lexus................ 4,862 5.1 2
Mitsubishi........... 3,372 3.5 6
Chrysler............. 2,504 2.6 7
Jeep................. 2,472 2.6 7
GMC.................. 2,080 2.2 4
Acura................ 1,860 2.0 2
Pontiac.............. 1,017 1.1 4
Mazda................ 981 1.0 3
Audi................. 766 0.8 1
Mercedes-Benz........ 739 0.8 1
Subaru............... 737 0.8 1
Infiniti............. 645 0.7 1
Buick................ 529 0.5 4
Hyundai.............. 507 0.5 1
BMW.................. 418 0.4 2
Lincoln.............. 416 0.4 4
Mercury.............. 396 0.4 5
Cadillac............. 358 0.4 2
Volkswagen............ 344 0.4 1
Isuzu................. 258 0.3 1
Kia................... 152 0.2 1
Porsche............... 107 0.1 1
Hummer................ 70 0.1 1
Other................. 89 0.1 --
------ ----- ---
TOTAL............ 95,005 100.0% 114
====== ===== ===
Our dealerships' new vehicle retail sales include traditional new
vehicle retail lease transactions and lease-type transactions, both of which are
arranged by the dealerships. New vehicle leases generally have short terms,
bringing the customer back to the market 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 their used vehicle inventory. 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 do not guarantee residual values on lease transactions.
We acquire substantially all of our 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. Our
dealerships finance their inventory purchases through the floorplan portion of
our revolving credit facility. At times, the manufacturers offer incentives to
the dealerships to achieve 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. We also receive interest assistance from various of our manufacturers.
This assistance has ranged from approximately 80% to 160% of our total floorplan
interest expense over the past three years. During 2002, we recognized $26.7
million of assistance, which we accounted for as a vehicle purchase price
7
discount and reflected as a reduction of cost of sales in the income statement
as vehicles were sold.
USED VEHICLE SALES. We sell used vehicles at each of our franchised
dealerships. Sales of used vehicles are a significant source of profit for the
dealerships. Used vehicles sold at retail typically generate higher gross
margins than new vehicles because of their limited comparability and the
somewhat subjective nature of their valuation. We intend to continue growing 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 result in used vehicle buyers switching
from the used vehicle market to the new vehicle market resulting in a lower
sales volume of used vehicles and a higher sales volume of new vehicles. For
example, during 2002, we experienced a decline in same store used vehicle retail
sales 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 driving more customers to new vehicles.
Profits from sales of used vehicles depend primarily on the
dealerships' ability to obtain a high-quality supply of used vehicles and
effectively manage that inventory. Our new vehicle operations provide the 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. The
dealerships supplement their used vehicle inventory with used vehicles purchased
at auctions.
Each of our dealerships generally maintains a 30-day supply of used
vehicles, and offers to other dealers and wholesalers used vehicles that they do
not retail to customers. 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. Vehicles may be transferred 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 their used vehicle inventory, including participation in
manufacturer certification programs, which are available only to new vehicle
franchises. This process makes these used vehicles 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
higher quality used vehicles; and
(5) access to a large number of finance sources to arrange financing for
our customers.
PARTS AND SERVICE SALES. We sell replacement parts and provide
maintenance and repair services at each of our franchised dealerships, primarily
for the vehicle brands sold at that dealership. We perform both warranty and
non-warranty service work. Warranty work accounts for approximately 20% of our
parts, service and collision service revenues. Additionally, our parts and
service departments perform used vehicle reconditioning and new vehicle
preparation services. The profits from these services are realized when the
vehicles are sold to third parties. We also currently own 25 collision service
centers.
Historically, the automotive repair industry has been highly
fragmented. However, we believe that the increased use of advanced technology in
vehicles has made it difficult for independent repair shops to retain the
expertise to perform major or technical repairs. Additionally, manufacturers
permit warranty work to be performed only at franchised dealerships.
8
Hence, unlike independent service operations, our franchised dealerships are
qualified to perform work covered by our manufacturers' warranties. Given the
increasing technological complexity of motor vehicles and the trend toward
extended warranty periods for new vehicles, we believe that an increasing
percentage of repair work will be performed at our franchised dealerships, each
of which have the sophisticated equipment and skilled personnel necessary to
perform complex repairs and warranty repairs. We realize approximately the same
gross margin on warranty repairs as we do on customer-paid repairs.
We attribute our profitability in parts and service to a
comprehensive management system, including the use of variable rate pricing
structures, cultivation of strong customer relationships through an emphasis on
preventive maintenance and the efficient management of our parts inventory.
In charging for their technicians' labor, our dealerships use
variable rate structures designed to reflect the difficulty and sophistication
of different types of repairs. The percentage mark-ups on parts are similarly
priced based on market conditions for different parts. We believe that variable
rate pricing helps our dealerships achieve overall gross margins in parts and
service which are superior to those of certain competitors who rely on fixed
labor rates and percentage markups. Additionally, it allows the dealerships to
be competitive with independent repair shops that provide discounted pricing on
select services.
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
deepening customer loyalty.
The dealerships' parts departments support their respective sales
and service departments. Each of the dealerships sells factory-approved parts
for the vehicle makes and models sold by that dealership. These parts are used
either in repairs made by the dealership, sold at retail to its customers or
sold at wholesale to independent repair shops and other franchised dealerships.
The dealerships employ a parts manager and independently control parts inventory
and sales. Our dealerships frequently share parts with each other.
FINANCE AND INSURANCE SALES. Finance and insurance ("F&I") revenues
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 financing of vehicle sales. We provide advanced
F&I training to our finance and insurance personnel.
Typically, the dealerships forward proposed financing contracts to
manufacturers' captive finance companies, selected commercial banks or other
financing parties. The dealerships receive a financing fee from the lender for
arranging the financing and, for a limited time, may be assessed a chargeback
against a portion of the financing fee. 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 institutions we use that provide for additional fees to be paid to us
when we achieve certain volumes of business with them. We do not own a finance
company and, generally, do not retain credit risk after a loan is made.
At the time of a new vehicle sale, the dealerships offer vehicle
service contracts to supplement the manufacturer warranty. Additionally, the
dealerships sell primary vehicle service contracts for used vehicles. 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 a chargeback against a portion of the fee if the contract is terminated
prior to its scheduled maturity. In administrator-obligor states, which are
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
9
related direct costs are deferred and recognized over the life of the contracts.
Sales of contracts in dealer-obligor states accounted for approximately 5% of
the total number of contracts we sold during 2002. Due to a change in state law
during 2002, none of the states we currently operate in are dealer-obligor
states.
The dealerships also offer selected types of insurance 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,
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.
ACQUISITION PROGRAM
We have a disciplined two-tier acquisition program that is designed
to enhance brand and geographic diversity, create economies of scale and deliver
a targeted return on invested capital. Under our 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 economies of scale and offer a greater
breadth of products and services in each of the markets in which we
operate.
At December 31, 2002, our credit facility provided us with the
ability to borrow up to $194 million for acquisitions and working capital needs.
In addition, at December 31, 2002, we had approximately $20 million of working
capital in excess of the amount we believe we need to run our business. We also
have used, and may in the future use, subject to market conditions, our common
stock to fund a portion of our acquisitions.
Over the past five years, we have purchased 102 dealership
franchises with annual revenues of approximately $3.0 billion, disposed of 13
dealership franchises with annual revenues of approximately $154.8 million and
been granted 10 new dealership franchises by the manufacturers. Our acquisition
target for 2003 is to complete platform and tuck-in acquisitions of dealerships
that have approximately $800 million in annual revenues.
ENTERING NEW GEOGRAPHIC MARKETS. We intend, over time, 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
pursue megadealers that have superior operational and financial management
personnel, whom we seek to retain. We believe that by retaining existing
high-quality management we will be able to effectively operate acquired
megadealers with management personnel who understand the local market without
having to employ and train new and untested personnel.
EXPANDING WITHIN EXISTING MARKETS. We intend to make tuck-in
acquisitions of additional dealerships in the markets in which we operate,
including acquisitions that increase the brands, products and services offered
in these markets. We believe that these acquisitions will increase our operating
efficiencies and cost savings on a regional level in areas such as advertising,
vendor consolidation, data processing and personnel utilization.
RECENT ACQUISITIONS AND DISPOSITIONS. During 2002 we acquired, or
were granted by the manufacturers, a total of 21 franchises. Six of the
franchises were part of a platform acquisition in southern California that
consisted of Infiniti, Nissan, Mitsubishi, Toyota and two Honda franchises. This
platform, located in Van Nuys and Culver City, is our first operation in
California and has annual revenues of approximately $400 million. We completed
tuck-in acquisitions of nine franchises, consisting of Ford in New Orleans,
Nissan in Houston, Buick, Jeep and BMW in Oklahoma, Nissan and Toyota in Boston
and Lincoln and Mercury in Amarillo,
10
Texas. These tuck-in acquisitions have annual revenues of approximately $256
million. The aggregate consideration paid in completing all of the 2002
acquisitions included approximately $81.4 million in cash and the assumption of
approximately $59.0 million of inventory financing.
Additionally, we were granted six franchises by the manufacturers
during 2002, at no cost to us, three of which, Dodge in Rockwall, Texas, Hummer
in Oklahoma, and Mazda in Boston, began operations during 2002. The other three
franchises granted, Nissan in California, Nissan in Boston and Ford in Florida,
are expected to begin operations in 2003. The granted franchises are expected to
generate annual revenues of approximately $171 million.
Effective in January 2003, we purchased three franchises from
Robert E. Howard II, a director of the Company, and sold one franchise to a
company owned by Mr. Howard. 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 these franchises are located in
Oklahoma City. In completing the acquisitions, the aggregate consideration
paid by us consisted of $13.6 million of cash, net of cash received and the
assumption of approximately $21.1 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 will be 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.
During 2002, we disposed of five dealership franchises in Boston,
Florida and Texas, with annual revenues of approximately $51.2 million. We
realized a gain of approximately $0.4 million on these transactions.
COST AND REVENUE SYNERGIES
We believe that by consolidating the purchasing power 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 areas consumers have a number of choices in deciding where to
purchase a new or used vehicle and where to have the vehicle serviced.
In the $380 billion new vehicle market, our 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 $366 billion used vehicle market, our dealerships compete
with other franchised dealers, independent used vehicle dealers, automobile
rental agencies and private parties for supply and resale of used vehicles.
In the $219 billion 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
principal 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
11
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 contract
terms.
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. We cannot guarantee that our strategy will be more effective
than the strategies of our competitors.
In the acquisition area, 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.
GOVERNMENTAL REGULATIONS
A number of regulations affect our business of marketing, selling,
financing and servicing automobiles. We are also subject to 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. 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.
Various 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 court 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 state 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, consumer leasing and equal credit opportunity regulations, as
well as state and local motor vehicle finance laws, installment finance laws,
insurance laws, usury laws and other installment sales laws. Some states
regulate finance fees that may be paid as a result of vehicle sales. Penalties
for violation of any of these laws 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 laws and regulations
affecting their business and do not have any material liabilities under such
laws and regulations and that compliance with all such laws and regulations will
not, individually or in the aggregate, have a material adverse effect on our
operations, earnings or competitive position.
12
ENVIRONMENTAL MATTERS
We are subject to a wide range of federal, state, and local
environmental laws and regulations, including those governing discharges into
the air and water, the storage of petroleum substances 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
regulations may result in the assessment of administrative, civil and criminal
penalties, imposition of injunctions that limit or prohibit certain activities,
or the performance of investigatory and remedial activities. 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 requirements of the federal Resource
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
which 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
13
parties whose use, handling and disposal of such environmentally sensitive
materials were not under our control.
These properties and the waste materials spilled, released or
otherwise found thereon may be subject to RCRA, CERCLA 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 received no
response from the EPA in 2002 in follow-up to our September 2001 correspondence.
Our records indicate that this dealership sent one 50-gallon barrel of used oil
to the R&H site. In addition, 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. Currently, the
agency is pursuing delineation activities at the M&J Solvents site. We received
no response from the GDNR in 2002 in 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.
More recently, 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 PRPs at the Double Eagle Refinery
Superfund site in Oklahoma City, Oklahoma. Our involvement in this matter is
only in the beginning stages and we are currently evaluating our possible
identification as a PRP at the Double Eagle Refinery Superfund site, as well
as the potential liabilities associated with any such identification as a PRP.
During the last week of December 2001, the Miller dealerships
(together will 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 its 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 substantiation of its various contentions. CFRB thereafter
complied with the Attorney General's request for substantiation by providing 14
binders of studies 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. Although we believe that a civil lawsuit will
shortly be filed and served by CFRB, as a follow up to their Notice, we have not
yet been served with the lawsuit.
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 contingency plans. Some of our operations involving the release of
emissions, such as spray painting activities, are also subject to regulation
under the Clean Air Act and comparable state and local requirements. We believe
we are in substantial compliance with these water and air related laws and
regulations.
14
EMPLOYEES
As of December 31, 2002, we employed approximately 7,100 people, of
whom approximately 820 were employed in managerial positions, 2,160 were
employed in non-managerial vehicle sales department positions, 3,190 were
employed in non-managerial parts and service department positions and 930 were
employed in administrative support positions.
We believe that our relationships with our employees are favorable.
None of our employees are represented by a labor union, however, because of our
dependence on the manufacturers we may be affected by labor strikes, work
slowdowns and walkouts at the manufacturers' manufacturing facilities.
Additionally, labor strikes, work slowdowns and walkouts at businesses
participating in the distribution of the manufacturers' products may also affect
us.
RISK FACTORS
OUR RELATIONSHIP WITH OUR MANUFACTURERS IMPOSES A NUMBER OF
RESTRICTIONS ON OUR OPERATIONS.
The following table sets forth the percentage of our new vehicle
retail unit sales attributable to the manufacturers we represented during 2002
that represented 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, 2002
------------ ----------------------
Ford......................................... 26.6%
Toyota/Lexus................................. 25.5%
DaimlerChrysler.............................. 13.0%
General Motors............................... 11.8%
FRANCHISE AGREEMENTS. Each of our dealerships operates under a
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 for a variety of
reasons, including any unapproved changes of ownership or management. While we
believe that we will be able to renew all of our franchise agreements, we cannot
guarantee that all of our franchise agreements will be renewed or that the terms
of the renewals will be favorable to us. Our franchise agreements do not give us
the exclusive right to sell a manufacturer's product within a given geographic
area. Accordingly, a manufacturer may, subject to any protection of state law,
grant another dealer a franchise to start a new dealership near one of our
locations, or an existing dealer may move a dealership to a location, which
would compete directly with us.
ACQUISITIONS. 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 and customer satisfaction index scores of our
dealerships.
Our manufacturers attempt to measure customers' satisfaction with
automobile dealerships through systems generally known as the customer
satisfaction index or "CSI." 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. To date, we have not been
15
materially adversely affected by these standards and have not been denied
approval of any acquisition based on low CSI scores. However, we cannot assure
you that we will be able to comply with these standards in the future.
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
the manufacturers that accounted for 10% or more of our new vehicle retail unit
sales.
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 23 Ford, Lincoln and Mercury
dealership franchises and represent only approximately 0.7% of the national
retail sales of Ford, Lincoln and Mercury. 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 three Lexus dealerships nationally, including only
two Lexus dealerships in any one of the four Lexus geographic areas. While we
own a Lexus companion dealership located south of Houston, this dealership is
not considered by Lexus to be a new and separate Lexus dealership for purposes
of the restriction on the number of Lexus dealerships we may acquire. Currently,
we own nine Toyota and two Lexus dealership franchises and represent only
approximately 1.3% of the national retail sales of Toyota.
GENERAL MOTORS. General Motors ("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 20 GM dealership franchises and could acquire approximately
7,900 GM dealership franchises, dependent upon franchise line. Additionally, our
current agreement with GM does not include Saturn dealerships and our future
acquisition of a Saturn dealership will be subject to GM approval on a
case-by-case basis.
DAIMLERCHRYSLER. Currently, we have no agreement with Chrysler
restricting our ability to acquire Chrysler dealerships. 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
23 Chrysler and one Mercedes-Benz dealership franchises.
16
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 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 requirement with respect to our March 1999, senior subordinated
notes offering 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.
OUR OWNERSHIP AND MANAGEMENT. As a condition to granting their
consent to our previous acquisitions and our public offerings of common stock,
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 (for example, 20% in the
case of General Motors and Toyota, and 50% in the case of Ford);
- 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;
- the use of dealership facilities to sell or service new vehicles of
other manufacturers, in certain situations; and
- change in control of our Board of Directors or management.
If we are unable to comply with these restrictions, we generally
must (1) sell the assets of the dealerships to the manufacturer or to a third
party acceptable to the manufacturer, or (2) terminate the dealership agreements
with the manufacturer. Our manufacturers may impose additional restrictions on
us in the future.
OPERATIONS. We depend on our manufacturers for operational support:
- 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.
- We depend on our manufacturers for sales incentives 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. 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 manufacturer agreements also 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 may require us to move or sell some
dealerships. Moreover, our manufacturers generally require that the dealership
premises meet defined image standards. All of these requirements could impose
significant capital expenditures on us in the future.
17
Pursuant to the automobile dealership 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 require us to utilize available capital to maintain the working capital
levels of our dealerships at manufacturer-required levels.
OUR SUCCESS DEPENDS UPON THE OVERALL SUCCESS OF THE LINE OF VEHICLES
THAT EACH OF OUR DEALERSHIPS SELLS.
Demand for our manufacturers' vehicles as well as the financial
condition, management, marketing, production and distribution capabilities of
our manufacturers affect our business. Our Ford, Toyota/Lexus, GM and
DaimlerChrysler dealerships represented approximately 77% of our 2002 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, events such as labor disputes and other
production disruptions that may adversely affect a manufacturer may also
adversely affect 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.
GROWTH IN OUR REVENUES AND EARNINGS WILL BE IMPACTED BY 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 such
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, limit our ability to acquire additional
dealerships. In addition, increased competition for acquisition candidates 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
issuances of our common stock to the sellers of the acquired dealerships.
We currently intend to finance future acquisitions by issuing shares
of common stock as full or partial consideration for acquired dealerships. The
use of common stock as consideration for acquisitions will depend on two
factors: (i) the market value of our common stock at the time of the acquisition
and (ii) the willingness of potential acquisition candidates to accept common
stock as part of the consideration for the sale of their businesses. If
potential acquisition candidates are unwilling to accept our common stock, we
will be forced to rely solely on available cash or debt or equity financing,
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, delays or other
operational or financial problems. Acquisitions involve a number of special
risks, including the difficulties of managing operations located in geographic
areas where we have not previously operated, possible diversion of resources and
management's attention, inability to retain key personnel at the acquired entity
and risks associated with unanticipated events or liabilities, some or all of
which could have a material adverse effect on our business, financial condition
and results of operations. Although we conduct what we believe to be a prudent
level of investigation regarding the operating condition of the business we
purchase, in light of the circumstances of each transaction, an unavoidable
level of risk remains regarding the actual operating condition of these
businesses. Until we actually assume operating control of such business assets,
we may not be able to ascertain the actual value of the acquired entity.
18
THE LOSS OF KEY PERSONNEL COULD ADVERSELY AFFECT OUR OPERATIONS AND
GROWTH.
We depend to a large extent upon the abilities and continued efforts
of our executive officers, senior management and principals of our dealerships.
Furthermore, we will likely be dependent on the senior management of any
dealerships acquired in the future. We have long-term employment agreements with
our Chairman/President/CEO and some of the principals of our dealerships. Our
two Executive Vice Presidents are currently employed under employment agreements
that operate on a month-to-month basis. If any of those persons leave or if we
fail to attract and retain other qualified employees, our business could be
adversely affected. We currently have no key man insurance for any of our
officers or executive management.
CHANGES IN INTEREST RATES COULD ADVERSELY IMPACT OUR PROFITABILITY.
All of the borrowings under our credit facility bear interest based
on a floating rate. A significant increase in interest rates could cause a
substantial increase in our cost of borrowing. At times, we manage our exposure
to interest rate volatility through the use of interest rate swaps.
Additionally, a significant increase in interest rates could
adversely impact our ability to arrange financing for vehicle sales at rates
acceptable to our customers and the volume of fees we receive for arranging the
financing.
CHANGES IN OUR INSURANCE PROGRAMS COULD ADVERSELY IMPACT OUR
PROFITABILITY.
Automobile dealerships require insurance covering a broad variety of
risks. We have insurance on our real property, comprehensive coverage for our
vehicle inventory, general liability insurance, employee dishonesty coverage,
employment practices liability insurance, pollution coverage and errors and
omissions insurance in connection with vehicle sales and financing activities.
Additionally, our insurance includes umbrella policies with a $105 million
aggregate limit, which covers losses in excess of our $500 thousand self-insured
retention on general liability claims.
Additionally, 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.
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, trade restrictions, 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, could have an adverse effect on our business.
THE CYCLICALITY AND SEASONALITY OF VEHICLE SALES MAY ADVERSELY
IMPACT OUR PROFITABILITY.
Our operations, like the automotive retailing 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. Although the above factors,
among others, may impact our business, we believe the impact on our operations
of future negative trends in such factors will be somewhat mitigated by our (i)
parts, service and collision repair service operations, (ii) variable cost
structure, (iii) geographic diversity and (iv) product diversity.
19
Our operations are subject to seasonal variations, with the second
and third quarters generally contributing more operating profit than the first
and fourth quarters. Three primary forces drive this seasonality: (i)
manufacturer-related factors, primarily the historical timing of major
manufacturer incentive programs and model changeovers, (ii) weather-related
factors and (iii) consumer buying patterns.
THE AUTOMOTIVE RETAILING INDUSTRY IS HIGHLY COMPETITIVE, WHICH MAY
REDUCE OUR PROFITABILITY AND GROWTH.
Our business and acquisition activity is subject to intense
competition. Please see "Business-Competition" for a discussion of competition
in our industry.
GOVERNMENTAL REGULATION AND ENVIRONMENTAL REGULATION COMPLIANCE
COSTS MAY ADVERSELY AFFECT OUR PROFITABILITY.
We are subject to a number of regulations that affect our business,
the compliance of which may impose substantial costs on us. Please see
"Business-Governmental Regulations" and "Environmental Matters" for a discussion
of the effect of such regulations on us.
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 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 dealer agreements prohibit the acquisition of more
than a specified percentage of common stock without the consent of the relevant
manufacturer. These terms of our dealer agreements could also make it more
difficult for a third party to acquire control of Group 1.
INTERNET WEBSITE AND AVAILABILITY OF PUBLIC FILINGS
Our Internet address is www.group1auto.com. We make available free
of charge through our Internet website, our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 as soon as reasonably practicable after we
electronically file such material with, or furnish such material to, the SEC.
Commencing February 3, 2003, we made our SEC filings available via a direct
link to our filings on the SEC website. During 2002, and through February 3,
2003, we made our filings available via the FreeEdgar website, which required
the user to request a list of our filings.
20
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 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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 117 holders of record of our common stock as
of February 28, 2003.
The following table presents the quarterly high and low sales prices
for our common stock since January 1, 2001, as reported on the New York Stock
Exchange Composite Tape under the symbol "GPI."
HIGH LOW
---- ---
2001:
First Quarter............................................ $13.00 $8.13
Second Quarter........................................... 29.98 12.00
Third Quarter............................................ 34.95 20.00
Fourth Quarter........................................... 34.99 25.00
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
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,
capital requirements, general business conditions and other factors.
Certain provisions of the credit facility and the senior
subordinated notes require us to maintain certain financial ratios and limit the
amount of disbursements outside the ordinary course of business, including
limitations on the payment of cash dividends and stock repurchases, which are
limited to 33% of net income.
21
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical financial data as of December 31,
2002, 2001, 2000, 1999 and 1998, and for the five years in the period ended
December 31, 2002, have been derived from our audited financial statements. 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 were acquired by us. 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,
---------------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
(dollars in thousands, except per share amounts)
INCOME STATEMENT DATA:
Revenues............................. $4,214,364 $3,996,374 $3,586,146 $2,508,324 $1,630,057
Cost of sales........................ 3,562,069 3,389,122 3,058,709 2,131,967 1,393,547
---------- ---------- ---------- ---------- ----------
Gross profit...................... 652,295 607,252 527,437 376,357 236,510
Selling, general and
administrative expenses........... 502,732 458,546 393,679 279,791 178,038
Depreciation and amortization........ 11,940 17,358 16,038 10,616 6,426
---------- ---------- ---------- ---------- ----------
Income from operations............ 137,623 131,348 117,720 85,950 52,046
Other income (expense):
Floorplan interest expense........ (19,371) (27,935) (37,536) (20,395) (12,837)
Other interest expense, net....... (9,925) (13,863) (15,500) (10,052) (4,027)
Other income (expense), net....... (1,045) (128) 1,142 186 39
---------- ---------- ---------- ---------- ----------
Income before income taxes........ 107,282 89,422 65,826 55,689 35,221
Provision for income taxes........... 40,217 33,980 25,014 22,174 14,502
---------- ---------- ---------- ---------- ----------
Net income........................ $ 67,065 $ 55,442 $ 40,812 $ 33,515 $ 20,719
========== ========== ========== ========== ==========
Earnings per share:
Basic............................. $ 2.93 $ 2.75 $ 1.91 $ 1.62 $ 1.20
Diluted........................... $ 2.80 $ 2.59 $ 1.88 $ 1.55 $ 1.16
Weighted average shares outstanding:
Basic............................. 22,874,918 20,137,661 21,377,902 20,683,308 17,281,165
Diluted........................... 23,968,072 21,415,154 21,709,833 21,558,920 17,904,878
AS OF DECEMBER 31,
---------------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
(in thousands)
BALANCE SHEET DATA:
Working capital....................... $93,755 $154,713 $54,769 $80,128 $48,251
Inventories, net...................... 622,205 454,961 527,101 386,255 219,176
Total assets.......................... 1,423,765 1,054,425 1,099,553 842,910 477,710
Total long-term debt, including
current portion................... 84,219 97,186 141,899 114,250 45,787
Stockholders' equity.................. 443,417 392,243 247,416 232,029 136,184
Long-term debt to capitalization...... 16% 20% 36% 33% 25%
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are a leading operator in the $1 trillion automotive retailing
industry. Through a series of acquisitions, we operate 114 dealership franchises
in California, Colorado, Florida, Georgia, Louisiana, Massachusetts, New Mexico,
Oklahoma and Texas. Through our dealerships and Internet sites, we sell new and
used cars and light trucks; arrange related financing, vehicle service and
insurance contracts; provide maintenance and repair services; and sell
replacement parts. We also operate 25 collision service centers.
We have diverse sources of revenues, including: new car sales, new
truck sales, used car sales, used truck sales, manufacturer remarketed vehicle
sales, parts sales, service sales, collision repair services, financing fees,
vehicle service contract fees, insurance fees and after-market product sales.
Sales revenues from new and used vehicle sales and parts and service sales
include sales to retail customers, other dealerships and wholesalers. Finance
and insurance revenues include fees from arranging financing, vehicle service
and insurance contracts, net of a provision for anticipated chargebacks.
Our total gross margin varies as our merchandise mix (the mix
between new vehicle sales, used vehicle sales (retail and wholesale), parts and
service sales, collision repair service sales and finance and insurance
revenues) changes. Our gross margin on the sale of products and services varies
significantly, with new vehicle sales generally resulting in the lowest gross
margin and finance and insurance revenues generally resulting in the highest
gross margin. When our new vehicle sales increase or decrease at a rate greater
than our other revenue sources, our gross margin responds inversely. Factors
such as seasonality, weather, cyclicality and manufacturers' advertising and
incentives may impact our merchandise mix, and therefore influence our gross
margin.
Selling, general and administrative expenses consist primarily of
incentive-based compensation for sales, administrative, finance and general
management personnel, rent, marketing, insurance and utilities. We believe that
approximately 65% of our selling, general and administrative expenses are
variable, allowing us to adjust our cost structure based on business trends. It
takes about three months to adjust our cost structure when business volume
changes significantly. Interest expense consists of interest charges on
interest-bearing debt, including floorplan inventory financing, net of interest
income earned. We receive interest assistance from various of our manufacturers.
This assistance, which is reflected as a reduction of cost of sales, has ranged
between 80% and 160% of floorplan interest expense over the past three years,
mitigating the impact of interest rate changes on our financial results.
23
RESULTS OF OPERATIONS
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
sold (2) ........................ $ 1,462 $ 1,425 $ 37 2.6%
Retail gross margin (1) ............ 10.4% 10.2% 0.2% --
Wholesale gross loss ............... $ (7,895) $ (6,707) $ (1,188) 17.7%
Average wholesale gross 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 wholesale gross loss, divided by retail sales revenues. The
profit or loss on wholesale sales are included in this number, as
these transactions facilitate retail vehicle sales and are not
expected to generate profit.
(2) Average gross profit per retail unit sold equals total gross profit,
which includes wholesale gross loss, divided by retail unit sales.
The profit or loss on wholesale sales are included in this number,
as these transactions facilitate retail vehicle sales and are not
expected to generate profit.
PARTS AND SERVICE DATA
(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% --
24
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
25
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 are being
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 accounts 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.
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, we had reborrowed the amounts used to pay
down the floorplan portion of our credit facility. We have 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
26
increase is due primarily to $1.2 million of losses recorded on the repurchases
and retirements of a portion of our senior subordinated notes.
SELECTED OPERATIONAL AND FINANCIAL DATA FOR THE YEARS ENDED DECEMBER 31, 2001
AND DECEMBER 31, 2000
NEW VEHICLE DATA
(dollars in thousands,
except per unit amounts)
INCREASE/ PERCENT
2001 2000 (DECREASE) CHANGE
---------- ---------- ---------- ------
Retail unit sales........................... 90,615 86,729 3,886 4.5%
Retail sales revenues....................... $2,373,299 $2,172,786 $200,513 9.2%
Gross profit (1)............................ $187,360 $176,522 $10,838 6.1%
Average gross profit per retail unit sold... $2,068 $2,035 $33 1.6%
Gross margin (1)............................ 7.9% 8.1% (0.2)% --
- ----------
(1) Interest assistance is recorded as a reduction of cost of sales, as
the vehicles are sold to third parties. Interest assistance varies
with changes in interest rates and will impact gross margin.
USED VEHICLE DATA
(dollars in thousands,
except per unit amounts)
INCREASE/ PERCENT
2001 2000 (DECREASE) CHANGE
----------- ----------- --------- ----
Retail unit sales .................. 67,927 59,144 8,783 14.9 %
Wholesale unit sales ............... 37,771 37,413 358 1.0 %
Retail sales revenues .............. $ 949,086 $ 808,698 $ 140,388 17.4 %
Wholesale sales revenues ........... 190,565 199,720 (9,155) (4.6)%
----------- ----------- ---------
Total revenues ................... $ 1,139,651 $ 1,008,418 $ 131,233 13.0 %
Total gross profit ................. $ 96,798 $ 84,599 $ 12,199 14.4 %
Total gross margin (1) ............. 8.5% 8.4 % 0.1 % --
Average gross profit per retail unit
sold (2) ........................ $ 1,425 $ 1,430 $ (5) (0.3)%
Retail gross margin (1) ............ 10.2 % 10.5 % (0.3)% --
Wholesale gross loss ............... $ (6,707) $ (5,361) $ (1,346) 25.1 %
Average wholesale gross loss per
wholesale unit sold ............. $ (178) $ (143) $ (35) 24.5 %
Wholesale gross margin ............. (3.5)% (2.7)% (0.8)% --
- ----------
(1) Total gross margin equals total gross profit divided by total
revenues. Retail gross margin equals total gross profit, which
includes wholesale gross loss, divided by retail sales revenues. The
profit or loss on wholesale sales are included in this number, as
these transactions facilitate retail vehicle sales and are not
expected to generate profit.
(2) Average gross profit per retail unit sold equals total gross profit,
which includes wholesale gross loss, divided by retail unit sales.
The profit or loss on wholesale sales are included in this number,
as these transactions facilitate retail vehicle sales and are not
expected to generate profit.
PARTS AND SERVICE DATA
(dollars in thousands)
PERCENT
2001 2000 INCREASE CHANGE
-------- -------- -------- ------
Sales revenues.............................. $360,201 $306,089 $54,112 17.7%
Gross profit................................ $199,871 $167,463 $32,408 19.4%
Gross margin................................ 55.5% 54.7% 0.8% --
27
FINANCE AND INSURANCE DATA
(dollars in thousands,
except per unit amounts)
PERCENT
2001 2000 INCREASE CHANGE
---------- ---------- --------- -------
Retail new and used unit sales ....... 158,542 145,873 12,669 8.7 %
Retail finance fees .................. $ 56,272 $ 45,043 $ 11,229 24.9 %
Vehicle service contract fees ........ 44,080 37,484 6,596 17.6 %
Other finance and insurance revenues . 22,871 16,326 6,545 40.1 %
---------- ---------- ---------
Total finance and insurance revenues $ 123,223 $ 98,853 $ 24,370 24.7 %
Finance and insurance revenues, per
retail unit sold ................... $ 777 $ 678 $ 99 14.6 %
SAME STORE REVENUES COMPARISON (1)
(dollars in thousands)
INCREASE/ PERCENT
2001 2000 (DECREASE) CHANGE
---------- ---------- --------- -------
New vehicle retail sales ............. $2,222,930 $2,093,289 $ 129,641 6.2 %
Used vehicle retail sales ............ 871,978 770,996 100,982 13.1 %
Used vehicle wholesale sales ......... 169,701 189,251 (19,550) (10.3)%
Parts and service sales .............. 324,598 290,590 34,008 11.7 %
Retail finance fees .................. 54,112 42,591 11,521 27.1 %
Vehicle service contract fees ........ 41,196 35,829 5,367 15.0 %
Other finance and insurance
revenues, net ..................... 20,883 14,715 6,168 41.9 %
---------- ---------- ---------
Total same store revenues . $3,705,398 $3,437,261 $ 268,137 7.8 %
- ----------
(1) Includes only those dealerships owned during all of the months of
both periods in the comparison.
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000
REVENUES. Revenues increased $410.3 million, or 11.4%, to $3,996.4
million for the year ended December 31, 2001, from $3,586.1 million for the year
ended December 31, 2000. The growth in total revenues came primarily from same
store revenues increases of $268.1 million, with acquisitions, net of
dispositions, accounting for the remaining increase.
New vehicle revenues increased $200.5 million, primarily from same
store revenues, which increased $129.6 million. As compared to a 1.4% decline in
total new vehicle unit sales for automobile retailers in the United States, our
same store revenues increase of 6.2% was driven by strong customer acceptance of
our products, particularly Toyota, Lexus and Honda and aggressive manufacturer
incentives. The remaining increase of $70.9 million came from the acquisitions
of additional dealership operations during 2000 and 2001, net of decreases due
to the sale of a few small dealerships.
The growth in used vehicle retail revenues of $140.4 million was
primarily attributable to growth in our same store sales of $101.0 million. The
same store sales growth was due to an emphasis on used vehicle sales in the New
Mexico, Atlanta, Oklahoma, Boston, Houston, West Texas and Austin markets. The
additional dealership operations acquired contributed the remaining $39.4
million of the increase. Wholesale sales declined $9.2 million due to the
emphasis on increasing retail sales in the above markets.
The increase in parts and service revenues of $54.1 million was due
to strong same store sales growth of $34.0 million. The same store sales growth
came primarily from our Boston, Houston, Oklahoma and south Florida operations.
The primary driver of the same store sales growth was the Ford/Firestone tire
recall, which caused an increase in warranty and associated repairs at our Ford
dealerships. Also contributing to the increase was a higher volume of business
due to the damage caused by tropical storm Allison in Houston, during the summer
months of 2001. The additional dealership operations acquired, net of sold
dealerships, contributed the remaining $20.1 million of the increase.
28
Retail finance fee revenues increased $11.2 million, with $11.5
million of the increase coming from same store sales and $1.6 million being
contributed by acquisitions. Offsetting the increase was a decline in revenues
from one-time incentives on retail finance programs.
Vehicle service contract fee revenues increased $6.6 million, with
same store sales of $5.4 million and acquired operations contributing $1.6
million. Offsetting the increases were deferrals of revenues related to sales of
dealer-obligor contracts.
Other finance and insurance revenues increased $6.5 million, with
same store sales contributing $6.2 million and acquired operations contributing
$0.8 million. Offsetting these increases was a decline caused by reduced
one-time incentives due to a decline in the volume of credit life and accident
and disability contracts sold.
The same store revenues increase in retail finance fees, vehicle
service contract fees and other finance and insurance revenues is primarily
attributable to increased sales training, company-wide benchmarking, a favorable
interest rate market and an increase in the number of retail new and used units
sold.
GROSS PROFIT. Gross profit increased $79.9 million, or 15.1%, to
$607.3 million for the year ended December 31, 2001, from $527.4 million for the
year ended December 31, 2000. The increase was attributable to an increase in
the gross margin from 14.7% for the year ended December 31, 2000, to 15.2% for
the year ended December 31, 2001, and increased revenues.
The gross margin increased as lower margin new vehicle revenues
decreased as a percentage of total revenues, and increased gross margins on
total used vehicle sales and parts and service sales offset the majority of the
decline in the new vehicle gross margin.
The gross margin on new retail vehicle sales declined to 7.9% from
8.1% due primarily to the decline in interest rates during the year, which
resulted in a reduction in the amount of floorplan assistance paid by various of
our manufacturers. Floorplan assistance is a purchase discount and is recorded
as a reduction of new vehicle cost of sales.
The gross margin on retail used vehicle sales decreased to 10.2%
from 10.5% due primarily to pressure on used vehicle values caused by aggressive
incentives placed on new vehicles by the manufacturers. The pressure on used
vehicle pricing also increased our losses on used vehicle wholesale sales as the
market value of used vehicles declined more rapidly than in the prior year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $64.8 million, or 16.5%, to $458.5 million for
the year ended December 31, 2001, from $393.7 million for the year ended
December 31, 2000. The increase was primarily attributable to increased
compensation and benefits, which are largely incentive-based and constitute
approximately 60% of total expenses, and increased selling expenses.
Compensation and benefits, and selling expenses increased due to increased
revenues and gross profit. Selling, general and administrative expenses
increased as a percentage of gross profit to 75.5% from 74.6% due primarily to
the additional dealership operations acquired not achieving the same expense
leverage as the existing dealerships.
INTEREST EXPENSE. Floorplan and other interest expense, net,
decreased $11.2 million, or 21.1%, to $41.8 million for the year ended December
31, 2001, from $53.0 million for the year ended December 31, 2000. The decrease
was due primarily to a decline in interest rates. During the year ended December
31, 2001, there was an approximately 240 basis point reduction in our floorplan
financing rate as compared to the prior year.
OTHER INCOME (EXPENSE), NET. Other income (expense), net, decreased
$1,270,000 to $(128,000) for the year ended December 31, 2001, from $1,142,000
for the year ended December 31, 2000. The decrease is due primarily to a $1.0
million gain from the sale of a Chrysler franchise in Austin, Texas, during
2000.
29
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity are cash from operations, our
credit facility (which includes the floorplan facility and the acquisition
facility) and equity and debt offerings.
The following table sets forth selected historical information from
our statements of cash flows:
YEAR ENDED DECEMBER 31,
---------------------------------------
2002 2001 2000
--------- -------- --------
(in thousands)
Net cash provided by operating
activities ................. $ 73,539 $ 74,268 $ 74,591
Net cash used in investing
activities ................. (122,295) (27,229) (77,681)
Net cash provided by (used in)
financing activities ....... 56,228 (53,425) (770)
--------- -------- --------
Net increase in cash and cash
Equivalents ................ $ 7,472 $ (6,386) $ (3,860)
========= ======== ========
CASH FLOWS
Total cash at December 31, 2002, was $24.3 million.
OPERATING ACTIVITIES. For the three-year period ended December 31,
2002, we generated $222.4 million in net cash from operating activities,
primarily driven by net income plus depreciation and amortization.
INVESTING ACTIVITIES. During 2002, the $122.3 million of cash used
for investing activities was primarily attributable to the use of $81.4 million
of cash in acquisitions, net of cash balances obtained in the acquisitions, and
purchases of property and equipment. We used approximately $43.5 million for
purchases of property and equipment, with approximately $32.4 million being for
the purchase of land and construction of new facilities. Offsetting these uses
was $7.4 million received from the sales of three dealership franchises during
2002.
During 2001, $27.2 million of cash was used for investing activities
primarily attributable to purchases of property and equipment and cash paid in
acquisitions, net of cash balances obtained in the acquisitions, partially
offset by proceeds from sales of franchises. During 2001, we used approximately
$20.9 million in purchasing property and equipment, of which, approximately
$12.5 million was for the purchase of land and construction of new facilities.
During 2000, $77.7 million of cash was used for investing
activities, primarily attributable to cash paid in completing acquisitions, net
of cash balances obtained in the acquisitions, and purchases of property and
equipment, partially offset by proceeds from the sales of franchises. During
2000, we used approximately $17.3 million in purchasing property and equipment,
of which, approximately $8.8 million was for the purchase of land and
construction of new facilities.
FINANCING ACTIVITIES. We obtained approximately $56.2 million from
financing activities during 2002, primarily 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 $53.4 million in financing
activities. The uses were primarily attributable to paydowns 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 $118.6 million. We may reborrow the amounts
repaid under our credit facility for general corporate purposes, including
acquisitions.
30
During 2000 we used approximately $770,000 in financing activities.
Cash was provided primarily through borrowings on our revolving credit facility.
We used $6.3 million for principal payments of long-term debt. Additionally, we
used $20.9 million for repurchases of common stock.
WORKING CAPITAL. At December 31, 2002, we had working capital of
$93.8 million, which is approximately $20 million higher than we believe we need
to operate our existing business. We expect to use this 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 2003. If our capital expenditure or acquisition plans
for 2003 as outlined below change, we may need to access the private or public
capital markets to obtain additional funding.
STOCK REPURCHASE
In November 2002, the board of directors authorized us to repurchase
up to $42.7 million of our stock, subject to management's judgment and the
restrictions of our various debt agreements. Our agreements, subject to other
covenants, allow us to use up to approximately 33% of our cumulative net income
to repurchase stock and pay dividends. During 2002 we repurchased approximately
983 thousand shares for approximately $23.8 million. As of December 31, 2002, we
had the capacity to repurchase an additional $18.9 million of stock under the
November 2002 board of directors' authorization. We allocate our financial
resources based on a risk-adjusted analysis of expected returns. As such, we may
repurchase shares of our common stock if market conditions allow us to receive
an acceptable return on investment.
CAPITAL EXPENDITURES
Our capital expenditures include expenditures to extend the useful
life of current facilities and expenditures to start or expand operations.
Historically, our annual capital expenditures exclusive of new or expanded
operations have approximately equaled our annual depreciation charge.
Expenditures relating to the construction or expansion of dealership facilities,
generally, are driven by new franchises being granted to us by a manufacturer or
significant growth in sales at an existing facility. During 2003, we plan to
invest approximately $25.9 million to expand thirteen existing facilities and
prepare three new facilities for operations. Additionally, many of our
dealership facilities are leased to us. With respect to leased facilities during
2003, we expect there will be three new dealership facilities built for new
dealership franchises granted to us, one new dealership facility to which we
will relocate an existing dealership and three existing dealership facilities
will be expanded. The result of these projects for new and expanded operations
is an estimated incremental annual rent expense of $3.7 million, per year.
ACQUISITION FINANCING
Our acquisition target for 2003 is to complete platform and tuck-in
acquisitions that have approximately $800 million in annual revenues. We expect
the cash needed to complete our acquisitions will come from excess working
capital, operating cash flows of our dealerships and borrowings under our credit
facility. Depending on the market value of our common stock, we may issue common
stock to fund a portion of the purchase price of acquisitions.
CREDIT FACILITY
Our credit facility provides a floorplan facility of $702 million,
with an interest rate of LIBOR plus 112.5 basis points, for financing vehicle
inventories. Additionally, the credit facility provides an acquisition facility
of $198 million for financing acquisitions, general corporate purposes and
capital expenditures and bears interest at LIBOR plus a margin varying between
175 to 325 basis points, determined based on a ratio of debt to equity. The
amount available to be borrowed under the acquisition portion of the credit
facility is dependent upon a calculation based on our cash flow. Based on our
December 31, 2002, financial statements, $194.1 million was available, after
deducting $3.9 million for outstanding letters of credit. 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
31
that must be maintained. The lending group is comprised of 15 major financial
institutions, including five manufacturer captive finance companies. The
manufacturer captive finance companies are Ford Motor Credit Company, Toyota
Motor Credit Corporation, BMW Financial Services N.A. Inc., Chrysler Financial
Company, L.L.C. and Mercedes-Benz Credit Corporation. As of February 28, 2003,
$189.1 million was available to be drawn under the acquisition facility for
borrowings and letters of credit. The credit facility allows up to 33% of net
income to be used for cash dividends and stock repurchases.
Our credit facility matures on December 31, 2003. The credit
facility funds our inventory and, at times, acquisitions and other general
corporate needs. We are currently in discussions for a new long-term credit
facility with our current lender group. There is no guarantee that we will be
able to close a new long-term credit facility with the same terms and conditions
as our current credit facility. At February 28, 2003, $637.5 million was
outstanding under the credit facility for inventory financing and $8.9 million
was outstanding under the acquisition portion of the credit facility for
borrowings and letters of credit.
During July 2001, we entered into a two-year interest rate swap with
a notional amount of $100 million. Additionally, during October 2001, we entered
into a three-year interest rate swap with a notional amount of $100 million. The
effect of these swaps is to convert the interest rate on a portion of our
floorplan borrowings from the 30-day LIBOR-based rate to an average fixed rate
of interest of 4.07%.
LEASES
We lease various real estate, facilities and equipment under
long-term operating lease agreements. Generally, the leases have 30-year total
terms with initial terms of 15 years and three five-year option periods, at our
option. Additionally, we generally have an option to purchase the real estate
and facilities at the end of the lease term, and a right of first refusal,
giving us the opportunity to purchase the real estate and facilities if the
owner reaches an agreement to sell them to a third party.
OBLIGATIONS AND COMMITMENTS
The following is a summary of our future contractual cash
obligations:
CONTRACTUAL CASH
OBLIGATIONS 2003 2004 2005 2006 2007 THEREAFTER TOTAL
- ---------------------------- -------- ------- ------- ------- ------- ---------- ----------
(in thousands)
Debt (1) ................... $ 997 $ 881 $ 829 $ 555 $ 499 $ 81,689 $ 85,450
Floorplan notes payable(1) 652,538 -- -- -- -- -- 652,538
Leases ..................... 45,621 44,653 42,967 42,186 41,129 234,518 451,074
Other long-term obligations 25 25 114 25 25 -- 214
-------- ------- ------- ------- ------- -------- ----------
Total .................... $699,181 $45,559 $43,910 $42,766 $41,653 $316,207 $1,189,276
======== ======= ======= ======= ======= ======== ==========
- ----------
(1) Excludes interest payments.
Our credit facility is currently set to mature on December 31, 2003.
The credit facility provides commitments for inventory financing, floorplan
notes payable, up to $702 million, of which we had borrowed $652.5 million at
December 31, 2002. Payments, generally, are required to be made on the floorplan
notes payable as the vehicles are sold. The credit facility also provides
commitments for a revolving credit line for general corporate purposes,
including acquisitions, up to $198 million, of which $3.9 million was
outstanding under letters of credit at December 31, 2002. Other than the
interest rate swap agreements discussed above, there are no other significant
contractual commitments to or from us.
CURRENT BUSINESS TRENDS
During 2002, approximately 16.8 million new vehicles were sold in
the United States. Industry analyst estimates for 2003 are predicting new
vehicle unit sales of approximately 16 million units. As the used vehicle market
has been negatively impacted by aggressive manufacturer incentives on new
vehicles, we expect the used vehicle market to be down 2% to 6% in 2003. Due to
the increase in units in operation from the recent record new vehicle sales, and
the increasing complexity of the vehicles being sold today, we expect to see
growth in the
32
parts and service market for franchised automobile dealers. We expect the
interest rate environment in 2003 to be similar to what we experienced in 2002.
For a discussion of other uncertainties that may impact our
business, please review the "Business-Risk Factors" section of this Form 10-K.
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 agings of the
inventories 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 and recognized over the life of the
contracts.
INTANGIBLE ASSETS
The following are recently issued statements by the Financial
Accounting Standards Board that we believe could have a significant impact on
our reported financial condition or statement of operations.
In June 2001, Statement of Financial Accounting Standards ("SFAS")
No. 141, "Business Combinations" was issued. SFAS No. 141 eliminates the use of
the pooling-of-interests method of accounting for business combinations and
establishes the purchase method as the only
33
acceptable method. We adopted this statement effective July 1, 2001. Acquired
intangible assets, if any, are separately recognized if, among other things, the
benefit is obtained through contractual or other legal rights, such as franchise
agreements. Goodwill is recorded only to the extent the purchase price for an
entity exceeds the fair value of the net tangible assets and identifiable
intangible assets acquired.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The table below provides 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.
FAIR VALUE
DECEMBER 31,
EXPECTED MATURITY DATE 2002
----------------------------------------------------------------------------------- ------------
(dollars in millions) 2003 2004 2005 2006 2007 Thereafter Total
--------- --------- --------- --------- --------- ---------- ---------
VARIABLE RATE DEBT
Current ........................ $ 652.5 $ -- $ -- $ -- $ -- $ -- $ 652.5 $ 652.5
Average interest rates (1) (2) 2.51% -- -- -- -- --
Non-current .................... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Average interest rates ....... -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total variable rate debt ....... $ 652.5 $ -- $ -- $ -- $ -- $ -- $ 652.5
Interest rate swaps ............ $ 100.0 $ 100.0 $ -- $ -- $ -- $ -- $ 200.0 $ 5.4
Average pay rate (fixed) (2) . 5.53% 4.88% -- -- -- --
Average receive rate
(variable) (1) (2) (3) .... 2.51% 2.51% -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net variable rate debt ......... $ 552.5 $ (100.0) $ -- $ -- $ -- $ -- $ 452.5
========= ========= ========= ========= ========= ========= =========
- ----------
(1) The 30-day LIBOR used is as of December 31, 2002.
(2) The rate shown includes the 112.5 basis point spread charged on the
floorplan notes payable.
(3) Both swaps variable rates are based on 30-day LIBOR.
At December 31, 2002, our variable rate floorplan notes payable have
increased over the prior year due to increases in inventory levels and greater
leverage on the inventory. A 100 basis point increase in interest rates would
have increased floorplan interest expense $4.4 million for the year ended
December 31, 2002, before the impact of our interest rate swaps. We have had no
other significant balances outstanding under variable rate borrowing agreements.
34
At times, we have used interest rate swaps to reduce our exposure to
interest rate fluctuations. Currently, we have two interest rate swaps
outstanding, each with notional amounts of $100 million and converting 30-day
LIBOR to a fixed rate. As these swaps are hedging our floorplan interest rate
exposure, the impact on interest expense is included in floorplan interest
expense in our statements of operations. A 100 basis point increase in interest
rates would reduce the cost of the swaps and, thus, reduce our floorplan
interest expense by $2.0 million for the year ended December 31, 2002. One of
the swaps, with a notional amount of $100 million, expires at the end of July
2003. As such, depending on interest rate levels during the last five months of
2003, our floorplan interest expense could be impacted.
The net result on floorplan interest expense of a 100 basis point
increase in interest rates is an increase of $2.4 million, after combining the
increase in expense on our borrowings and the decrease in expense from our
swaps.
Additionally, we receive floorplan interest assistance from the
majority of our manufacturers. This assistance, which has ranged from
approximately 80% to 160% of our floorplan interest expense over the past three
years, totaled $26.7 million during 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 changes in interest rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the 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
Information concerning a change in accountants is included in the
Company's Current Report on Form 8-K/A dated May 15, 2002.
PART III
Please see the definitive Proxy Statement of Group 1 Automotive,
Inc. for the Annual Meeting of Stockholders to be held on May 21, 2003, 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
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
35
PART IV
ITEM 14. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Within 90 days before the filing of this Report, the Company's
principal executive officer and principal financial officer evaluated the
effectiveness of the Company's disclosure controls and procedures. Based on the
evaluation, the Company's principal executive officer and principal financial
officer believe that:
- the Company's disclosure controls and procedures are designed to
ensure that information required to be disclosed by the Company in
the reports it files or submits under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms; and
- the Company's disclosure controls and procedures were effective to
ensure such information was accumulated and communicated to the
Company's management, including the Company's principal executive
officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure.
CHANGES IN INTERNAL CONTROLS
There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect the Company's
internal controls subsequent to their evaluation, nor have there been any
corrective actions with regard to significant deficiencies or material
weaknesses.
ITEM 15. EXHIBITS, 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) Reports on Form 8-K
On November 12, 2002, the Company filed a Current Report on Form 8-K
reporting under Item 9.
On November 15, 2002, the Company filed a Current Report on Form 8-K
reporting under Item 9 and including exhibits under Item 7 thereof.
On November 15, 2002, the Company filed a Current Report on Form 8-K
reporting under Item 5.
On December 13, 2002, the Company filed a Current Report on Form 8-K
reporting under Item 9 and including exhibits under Item 7 thereof.
On January 29, 2003, the Company filed a Current Report on Form 8-K
reporting under Item 9.
On February 19, 2003, the Company filed a Current Report on Form 8-K
reporting under Item 9.
(c) Other Information
The certifications by our chief executive officer and chief financial
officer required by Section 1350 of Title 18 of the United States Code, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 have
been filed as exhibits 99.1 and 99.2, respectively, to this Annual Report
on Form 10-K.
36
(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 -- Form of Subordinated Indenture (Incorporated by reference
to Exhibit 4.5 of the Company's Registration Statement on Form
S-3 Registration No. 333-69693).
4.3 -- Form of Subordinated Debt Securities (included in Exhibit
4.2).
4.4 -- First Supplemental Indenture dated as of March 5, 1999
among Group 1 Automotive, Inc., the Subsidiary Guarantors
named therein and IBJ Whitehall Bank & Trust Company
(Incorporated by reference to Exhibit 4.1 of the Company's
Current Report of Form 8-K dated March 5, 1999).
4.5 -- Form of 10 7/8% Senior Subordinated Note due March 1, 2009
(included in Exhibit 4.4).
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 Robert E.
Howard II dated November 3, 1997 (Incorporated by reference to
Exhibit 10.2 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 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 -- 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).
10.5 -- 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).
10.6 -- 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).
10.7 -- 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).
10.8 -- 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).
10.9 -- 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).
10.10 -- Lease Agreement between Howard Pontiac-GMC, Inc. and North
Broadway Real Estate Limited Liability Company.
10.11 -- 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).
10.12 -- 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).
37
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.13 -- 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).
10.14 -- 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).
10.15 -- 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).
10.16 -- 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).
10.17 -- 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).
10.18 -- 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).
10.19 -- Fourth Amended and Restated Revolving Credit Agreement,
dated as of October 15, 1999, and effective as of November 1,
1999 (Incorporated by reference to Exhibit 10.1 of the
Company's Current Report on Form 8-K dated October 29, 1999).
10.20 -- Amendment to Fourth Amended and Restated Revolving Credit
Agreement, dated as of March 7, 2000 (Incorporated by
reference to Exhibit 10.23 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2000).
10.21 -- Second Amendment to Fourth Amended and Restated Revolving
Credit Agreement, dated as of May 22, 2000 (Incorporated by
reference to Exhibit 10.24 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2000).
10.22 -- Third Amendment to Fourth Amended and Restated Revolving
Credit Agreement, dated as of December 1, 2000 (Incorporated
by reference to Exhibit 10.25 of the Company's Annual Report
on Form 10-K for the year ended December 31, 2000).
10.23 -- Fourth Amendment to Fourth Amended and Restated Revolving
Credit Agreement, dated as of November 9, 2001 (Incorporated
by reference to Exhibit 10.23 of the Company's Annual Report
on Form 10-K for the year ended December 31, 2001).
10.24 -- 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).
10.25 -- 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).
10.26 -- Employment Agreement between the Company and John S. Bishop
dated October 7, 1998 (Incorporated by reference to Exhibit
10.37 of the Company's Annual Report on Form 10-K for the year
ended December 31, 1998).
10.27 -- 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).
10.28 -- 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).
10.29 -- 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).
10.30 -- 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).
10.31 -- 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).
38
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.32 -- 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).
10.33 -- 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).
10.34 -- Interest Rate Swap Confirmation, dated as of July 23, 2001
(Incorporated by reference to Exhibit 10.34 of the Company's
Annual Report on Form 10-K for the year ended December 31,
2001).
10.35 -- 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).
10.36 -- 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.
10.37 -- Lease Agreement between Bob Howard Automotive-East, Inc.
and REHCO EAST, L.L.C.
10.38 -- Lease Agreement between Howard-H, Inc. and REHCO, L.L.C.
10.39 -- Employment Agreement between the Company and Kevin H.
Whalen dated November 3, 2002.
10.40 -- Amendment to Lease Agreement between Howard-H, Inc. and
REHCO, L.L.C.
10.41 -- Lease Agreement between Howard Ford, Inc. and REHCO EAST,
L.L.C.
10.42 -- Stock Purchase Agreement by and among Group 1 Holdings-F,
L.L.C. and Howard Ford, Inc. and Robert E. Howard II dated as
of December 3, 2002.
10.43 -- Stock Purchase Agreement by and among BHE, Inc. and Bob
Howard German Imports, Inc. and Group 1 Holdings-DC, L.L.C.
dated effective January 1, 2003.
10.44 -- Split Dollar Life Insurance Payment Deferral Letter dated
February 25, 2003.
11.1 -- Statement re: computation of earnings per share is included
under Note 2 to the financial statements.
21.1 -- Group 1 Automotive, Inc. Subsidiary List.
23.1 -- Consent of Ernst & Young LLP.
99.1 -- Certification of Chief Executive Officer of Group 1
Automotive, Inc. Pursuant to 18 U.S.C. section 1350.
99.2 -- Certification of Chief Financial Officer of Group 1
Automotive, Inc. Pursuant to 18 U.S.C. section 1350.
39
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 the 26th day of March, 2003.
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 26th day of March, 2003.
SIGNATURE TITLE
--------- -----
/s/ B.B. Hollingsworth, Jr. Chairman, President and Chief
- ------------------------------------- Executive Officer and Director
B.B. Hollingsworth, Jr. (Principal Executive Officer)
/s/ Scott L. Thompson Executive Vice President,
- ------------------------------------- Chief Financial Officer and Treasurer
Scott L. Thompson (Chief Financial and Accounting
Officer)
/s/ John L. Adams Director
- -------------------------------------
John L. Adams
/s/ Bennett E. Bidwell Director
- -------------------------------------
Bennett E. Bidwell
/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/ Max P. Watson, Jr. Director
- -------------------------------------
Max P. Watson, Jr.
/s/ Kevin H. Whalen Director
- -------------------------------------
Kevin H. Whalen
40
CERTIFICATION
I, B.B. Hollingsworth, Jr., Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Group 1 Automotive,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing
the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 26, 2003
/s/ B.B. Hollingsworth, Jr.
---------------------------
B.B. Hollingsworth, Jr.
Chief Executive Officer
41
CERTIFICATION
I, Scott L. Thompson, Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Group 1 Automotive,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing
the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 26, 2003
/s/ Scott L. Thompson
-----------------------
Scott L. Thompson
Chief Financial Officer
42
INDEX TO FINANCIAL STATEMENTS
Group 1 Automotive, Inc. and Subsidiaries -- Consolidated Financial Statements
Report of Independent Auditors........................................ F-2
Report of Independent Public Accountants.............................. F-3
Consolidated Balance Sheets........................................... F-4
Consolidated Statements of Operations................................. F-5
Consolidated Statements of Stockholders' Equity....................... F-6
Consolidated Statements of Cash Flows................................. F-7
Notes to Consolidated Financial Statements............................ F-8
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Group 1 Automotive, Inc and
Subsidiaries:
We have audited the consolidated balance sheet of Group 1 Automotive, Inc. and
Subsidiaries as of December 31, 2002, and the related statements of operations,
stockholders' equity, and cash flows for the year then ended. 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 audit. The financial statements of Group 1 Automotive, Inc and Subsidiaries
as of December 31, 2001 and 2000, and for the years 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 audit 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 audit provides a reasonable basis for our
opinion.
In our opinion, the 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, 2002 and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States.
As discussed in Note 5 to the consolidated financial statements, 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 2000, and for the years 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 and 2000
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 and 2000 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 and 2000 in Note 5 are appropriate. However,
we were not engaged to audit, review, or apply any procedures to the 2001 and
2000 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 and 2000
financial statements taken as a whole.
/s/ Ernst & Young LLP
Houston, Texas
February 19, 2003
F-2
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, in conformity with accounting principles generally accepted in the United
States.
/s/ Arthur Andersen LLP
Houston, Texas
February 14, 2002
Note: This is a copy of the audit report previously issued by Arthur Andersen
LLP in connection with Group 1 Automotive, Inc.'s filing on Form 10-K for the
year ended December 31, 2001. This audit report has not been reissued by Arthur
Andersen LLP in connection with this filing on Form 10-K.
F-3
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------
2002 2001
----------- -----------
(in thousands)
ASSETS
CURRENT ASSETS:
Cash .............................................. $ 24,333 $ 16,861
Contracts in transit and vehicle receivables, net . 178,623 130,351
Accounts and notes receivable, net ................ 58,194 43,684
Inventories, net .................................. 622,205 454,961
Deferred income taxes ............................. 10,793 10,721
Other assets ...................................... 8,890 5,354
----------- -----------
Total current assets ............................ 903,038 661,932
----------- -----------
PROPERTY AND EQUIPMENT, net .......................... 116,270 83,011
GOODWILL ............................................. 307,907 277,913
INTANGIBLE ASSETS .................................... 60,879 4,614
INVESTMENTS, AT MARKET VALUE, RELATED TO
INSURANCE POLICY SALES ............................ 15,813 14,313
DEFERRED COSTS RELATED TO INSURANCE
POLICY AND VEHICLE SERVICE CONTRACT SALES ......... 16,824 6,874
OTHER ASSETS ......................................... 3,034 5,768
----------- -----------
Total assets .................................... $ 1,423,765 $ 1,054,425
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Floorplan notes payable ........................... $ 652,538 $ 364,954
Current maturities of long-term debt .............. 997 1,687
Accounts payable .................................. 90,809 73,089
Accrued expenses .................................. 64,939 67,489
----------- -----------
Total current liabilities ....................... 809,283 507,219
----------- -----------
DEBT, net of current maturities ...................... 9,073 10,497
Senior Subordinated Notes ............................ 74,149 85,002
DEFERRED INCOME TAXES ................................ 7,651 9,982
OTHER LIABILITIES .................................... 31,005 20,776
----------- -----------
Total liabilities before deferred revenues ...... 931,161 633,476
----------- -----------
DEFERRED REVENUES FROM INSURANCE POLICY
SALES ............................................. 24,637 24,706
DEFERRED REVENUES FROM VEHICLE SERVICE
CONTRACT SALES .................................... 24,550 4,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, 1,000,000 shares authorized, none
issued or outstanding ........................... -- --
Common stock, $.01 par value, 50,000,000 shares
authorized, 23,183,226 and 23,029,853 issued ... 232 230
Additional paid-in capital ........................ 254,145 251,145
Retained earnings ................................. 215,024 147,959
Accumulated other comprehensive loss .............. (3,359) (807)
Treasury stock, at cost, 942,419 and 343,345 shares (22,625) (6,284)
----------- -----------
Total stockholders' equity ...................... 443,417 392,243
----------- -----------
Total liabilities and stockholders' equity ...... $ 1,423,765 $ 1,054,425
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
--------------------------------------------
2002 2001 2000
------------ ------------ ------------
(dollars in thousands, except per share amounts)
REVENUES:
New vehicle retail sales ..................... $ 2,526,847 $ 2,373,299 $ 2,172,786
Used vehicle retail sales .................... 921,359 949,086 808,698
Used vehicle wholesale sales ................. 222,529 190,565 199,720
Parts and service sales ...................... 402,169 360,201 306,089
Retail finance fees .......................... 58,869 56,272 45,043
Vehicle service contract fees ................ 52,346 44,080 37,484
Other finance and insurance revenues, net .... 30,245 22,871 16,326
------------ ------------ ------------
Total revenues ............................ 4,214,364 3,996,374 3,586,146
COST OF SALES:
New vehicle retail sales ..................... 2,337,223 2,185,939 1,996,264
Used vehicle retail sales .................... 817,385 845,581 718,738
Used vehicle wholesale sales ................. 230,424 197,272 205,081
Parts and service sales ...................... 177,037 160,330 138,626
------------ ------------ ------------
Total cost of sales ....................... 3,562,069 3,389,122 3,058,709
------------ ------------ ------------
GROSS PROFIT ................................... 652,295 607,252 527,437
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ..................... 502,732 458,546 393,679
DEPRECIATION AND AMORTIZATION EXPENSE .......... 11,940 17,358 16,038
------------ ------------ ------------
Income from operations ......................... 137,623 131,348 117,720
OTHER INCOME AND (EXPENSES):
Floorplan interest expense, excludes
manufacturer interest assistance .......... (19,371) (27,935) (37,536)
Other interest expense, net .................. (9,925) (13,863) (15,500)
Other income (expense), net .................. (1,045) (128) 1,142
------------ ------------ ------------
INCOME BEFORE INCOME TAXES ..................... 107,282 89,422 65,826
PROVISION FOR INCOME TAXES ..................... 40,217 33,980 25,014
------------ ------------ ------------
NET INCOME ..................................... $ 67,065 $ 55,442 $ 40,812
============ ============ ============
EARNINGS PER SHARE:
Basic ........................................ $2.93 $2.75 $1.91
Diluted ...................................... $2.80 $2.59 $1.88
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic ........................................ 22,874,918 20,137,661 21,377,902
Diluted ...................................... 23,968,072 21,415,154 21,709,833
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL
---------------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
------------ ------------ ------------ ------------
(dollars in thousands)
BALANCE, December 31, 1999 ...... 21,801,367 $ 218 $ 181,398 $ 51,705
Net income .................... -- -- -- 40,812
Issuance of common stock in
acquisitions ............... 633,888 6 6,223 --
Proceeds from sales of common
stock under employee benefit
plans ...................... 413,004 4 3,680 --
Issuance of treasury stock to
employee benefit plans ..... (341,004) (3) (4,510) --
Purchase of treasury stock .... -- -- -- --
Cancellation of treasury stock
purchased .................. (1,247,028) (12) (16,108) --
------------ ------------ ------------ ------------
BALANCE, December 31, 2000 ...... 21,260,227 213 170,683 92,517
Comprehensive income:
Net income .................... -- -- -- 55,442
Other accumulated
comprehensive income:
Interest rate swap
adjustment ............ -- -- -- --
Tax benefit on interest
rate swap adjustment .. -- -- -- --
Total comprehensive income ....
Common stock offering, net .... 3,300,000 33 98,489 --
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 ....
Proceeds from sales of common
stock under employee benefit
plans ...................... 547,306 6 8,030 --
Issuance of treasury stock to
employee benefit plans ..... (393,933) (4) (7,427) --
Non-cash stock compensation ... -- -- 193 --
Purchase of treasury stock .... -- -- -- --
Tax benefit from options
exercised ................. -- -- 2,204 --
------------ ------------ ------------ ------------
BALANCE, December 31, 2002 ...... 23,183,226 $ 232 $ 254,145 $ 215,024
============ ============ ============ ============
ACCUMULATED
OTHER
COMPREHENSIVE TREASURY
LOSS STOCK TOTAL
------------- ------------ ------------
(dollars in thousands)
BALANCE, December 31, 1999 ...... $ -- $ (1,292) $ 232,029
Net income .................... -- -- 40,812
Issuance of common stock in
acquisitions ............... -- -- 6,229
Proceeds from sales of common
stock under employee benefit
plans ...................... -- -- 3,684
Issuance of treasury stock to
employee benefit plans ..... -- 4,513 --
Purchase of treasury stock .... -- (35,338) (35,338)
Cancellation of treasury stock
purchased .................. -- 16,120 --
------------ ------------ ------------
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 sales of common
stock under employee benefit
plans ...................... -- -- 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
------------
Total comprehensive income .... $ 64,513
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
============ ============ ============
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,
-----------------------------------
2002 2001 2000
--------- --------- ---------
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................................... $ 67,065 $ 55,442 $ 40,812
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation and amortization ................................ 11,940 17,358 16,038
Deferred income taxes ........................................ 6,883 (1,225) 6,370
Provision for doubtful accounts and uncollectible notes ...... 1,078 1,732 1,176
(Gain) loss on sale of assets ................................ 483 120 (87)
Gain on sales of franchises .................................. (414) -- (1,048)
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 ............... (37,750) (12,720) (21,001)
Accounts receivable ........................................ (3,055) (4,996) (1,930)
Inventories ................................................ (107,487) 68,472 (78,480)
Prepaid expenses and other assets .......................... (8,610) (6,689) (2,167)
Floorplan notes payable .................................... 142,427 (81,126) 113,424
Accounts payable, accrued expenses and deferred revenues ... (194) 37,900 1,484
--------- --------- ---------
Total adjustments .......................................... 6,474 18,826 33,779
--------- --------- ---------
Net cash provided by operating activities ................ 73,539 74,268 74,591
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable ................................. (8,083) (2,678) (2,933)
Collections on notes receivable .............................. 1,303 1,150 1,413
Purchases of property and equipment .......................... (43,498) (20,857) (17,252)
Proceeds from sale of property and equipment ................. 1,975 818 1,371
Proceeds from sales of franchises ............................ 7,430 5,373 9,700
Cash paid in acquisitions, net of cash received .............. (81,422) (11,035) (69,980)
--------- --------- ---------
Net cash used in investing activities .................... (122,295) (27,229) (77,681)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) on revolving credit facility ....... 83,322 (118,572) 25,250
Principal payments of long-term debt ......................... (1,950) (1,791) (6,321)
Borrowings of long-term debt ................................. 17 1,426 1,098
Proceeds from common stock offering, net ..................... -- 98,522 --
Repurchase of senior subordinated notes ...................... (11,629) (9,601) (3,587)
Proceeds from issuance of common stock to benefit plans ...... 10,240 5,001 3,684
Repurchase of common stock, amounts based on settlement
Date ......................................................... (23,772) (28,410) (20,894)
--------- --------- ---------
Net cash provided by (used in) financing activities ...... 56,228 (53,425) (770)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH ................................... 7,472 (6,386)
(3,860)
CASH, beginning of period ......................................... 16,861 23,247 27,107
--------- --------- ---------
CASH, end of period ............................................... $ 24,333 $ 16,861 $ 23,247
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for -
Interest ..................................................... $ 31,075 $ 44,647 $ 53,226
Income taxes ................................................. $ 36,632 $ 28,975 $ 19,150
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 Mexico, Oklahoma and Texas.
These subsidiaries sell new and used cars and light trucks through their
dealerships and Internet sites; arrange related financing, vehicle service and
insurance contracts; provide maintenance and repair services; and sell
replacement parts. Group 1 Automotive, Inc. and its subsidiaries are herein
collectively referred to as the "Company" or "Group 1."
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
All acquisitions of dealerships completed during the periods
presented have been accounted for using the purchase method of accounting and
their results of operations are included from the effective dates of the
closings of the acquisitions. The allocations of purchase price to the assets
acquired and liabilities assumed are assigned and recorded based on preliminary
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.
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 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, net of a reserve for estimated future
chargebacks based on historical operating results and the termination provisions
of the applicable contracts. In dealer-obligor states, revenues from vehicle
service contract fees and related direct costs are deferred and recognized over
the life of the contracts.
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 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 sales are regulated by state insurance
commissions and consist of permitted investments, in general, government-backed
securities and obligations of government agencies. These investments are carried
at market value.
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.
F-8
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 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, 2002 and 2001, inventory cost had been
reduced by $5.2 and $4.2 million, respectively, for interest assistance received
from manufacturers. New vehicle cost of sales has been reduced by $26.7, $29.1
and $31.1 million for interest assistance received related to vehicles sold for
the years ended December 31, 2002, 2001 and 2000, respectively.
Parts and accessories are stated at the lower of cost (determined on
a first-in, first-out basis) or market.
Valuation reserves are provided against the inventory balances based
on the agings of the inventories 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 represent the excess of the purchase
price of businesses acquired over the fair value of the net tangible 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, SFAS No. 142, "Goodwill and Other
Intangible Assets" was issued. SFAS No. 142 changes the treatment of goodwill by
no longer permitting the amortization of goodwill or indefinite-lived intangible
assets, but requires, at least annually, an assessment for impairment of
goodwill and other indefinite-lived intangible assets by applying a fair-value
based test. The Company completes 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. The Company adopted this statement effective January 1, 2002, and
adoption did not result in an impairment of any intangible assets or goodwill,
based on the fair-value based test. Additionally, as of December 31, 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 estimate could result in an impairment of
intangible assets in the future. Prior to the adoption of SFAS No. 142, all
purchase price in excess of the net tangible assets was recorded as goodwill and
no intangible assets were recognized.
Impairment of Long-Lived Assets
SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived 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, it is 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
F-9
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
recognized in accordance with SFAS No. 144 is permanent and may not be restored.
Through December 31, 2002, 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/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 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. Specifically, the carrying value of the
Company's senior subordinated notes, which are currently on the books with a
cost basis of $74.1 million, net of discount of $1.2 million, have a fair value
of $78.6 million at December 31, 2002.
During 2001, the Company entered into two interest rate swap
transactions. The Company entered into the swaps to mitigate its exposure to
fluctuations in interest rates and has designated the swaps as cash flow hedges,
in accordance with SFAS No. 133. The details of the transactions are as follows:
FAIR VALUE
NOTIONAL RATE RATE AT DECEMBER 31, 2002
EXPIRATION DATE AMOUNT PAID RECEIVED ASSET (LIABILITY)
- -------------------- ------------ ----- ------------ --------------------
July 2003 $100 million 4.40% 30-day LIBOR $(1,765,092)
October 2004 $100 million 3.75% 30-day LIBOR $(3,652,496)
The net fair value of the swaps is included in other liabilities,
with a corresponding charge to other comprehensive income, net of tax. If the
interest rates at December 31, 2002, remain unchanged, the cash flow settlements
to be paid by the Company for the next twelve months would total approximately
$4.1 million. The Company intends to hold the swaps to maturity. There is no
ineffectiveness in the transactions 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 its 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, 2002, 2001, and
2000, totaled $49.6, $38.3 and $38.1 million, respectively.
F-10
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 accompanying consolidated financial statements relate to
reserves for inventory valuations, future chargebacks on finance and vehicle
service contract fees, and self-insured medical, income taxes and
property/casualty plans and valuation of intangible assets. 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 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 11 for
a summary of our related party lease commitments. See Note 16 for information
regarding certain transactions that occurred after December 31, 2002. There are
no other significant related party transactions.
Earnings Per Share
SFAS No. 128, "Earnings per Share" requires the presentation of
basic earnings per share and diluted earnings per share in financial statements
of public enterprises. Under the provisions of this statement, basic earnings
per share is computed based on weighted average shares outstanding and excludes
dilutive securities. Diluted earnings per share is computed including the 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, 2002, 2001 and 2000:
YEAR ENDED DECEMBER 31,
-----------------------------------------
2002 2001 2000
----------- ----------- -----------
Common stock issued, beginning of period ........................ 23,029,853 21,260,227 21,801,367
Weighted average common stock issued in offerings ............ -- 605,753 --
Weighted average common stock issued in acquisitions ......... -- -- 633,888
Weighted average common stock issued to employee stock
purchase plan ............................................. 76,914 180,034 208,202
Weighted average common stock issued in stock option exercises 247,494 62,773 14,191
Less: Weighted average treasury shares purchased and weighted
average shares purchased and cancelled .................... (479,343) (1,971,126) (1,279,746)
----------- ----------- -----------
Shares used in computing basic earnings per share ............... 22,874,918 20,137,661 21,377,902
Dilutive effect of stock options, net of assumed repurchase
of treasury stock ......................................... 1,093,154 1,277,493 331,931
----------- ----------- -----------
Shares used in computing diluted earnings per share ............. 23,968,072 21,415,154 21,709,833
=========== =========== ===========
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, 0.7
and 2.2 million for the years ended December 31, 2002, 2001 and 2000,
respectively.
F-11
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recent Accounting Pronouncements
In June 2002, SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" was issued. SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of commitment to an exit or disposal plan. This
statement is effective for exit or disposal activities initiated after December
31, 2002. The Company does not believe that the adoption of SFAS No. 146 will
have a material impact on its results of operations or financial position.
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.
The Company is an obligor under vehicle service contracts sold in
certain states, which represent approximately 5% of the total contracts sold.
The contracts are sold to our retail vehicle customers and, typically, have
terms between two and seven years. The purchase price paid by the customer, net
of the fee the Company receives, is remitted to an administrator. The
administrator sets the pricing at a level adequate to fund future claims and
their profit. Additionally, the administrator purchases insurance to further
secure its ability to pay the claims under the contracts. The Company can become
liable if the administrator and the insurance company are unable to fund future
claims. Though the Company has never had to fund any claims related to these
contracts, and reviews the credit worthiness of the administrator and the
insurance company, it is unable to estimate the maximum potential claim
exposure, but believes there will not be any future obligation to fund claims on
the contracts. The Company's revenues related to these contracts are deferred at
the time of sale and recognized over the life of the contracts. The amounts
deferred are presented on the face of the balance sheets as deferred revenues
from vehicle service contract sales.
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, provide maintenance and repair services, sell replacement parts and
arrange financing, vehicle service and insurance contracts. For the reasons
discussed below, all of our 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.
The Company's operating companies deliver the same products and
services 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:
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.
Six of the franchises acquired 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 our statements since that
time. The acquisition expanded the Company's geographic and brand diversity, and
represents 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
F-12
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 times an agreed upon
multiple. The total purchase price paid in excess of the net amounts assigned to
the assets acquired, including franchise value intangibles, and liabilities
assumed was recognized as goodwill. At the date of acquisition, the combined
condensed balance sheet of the Miller Automotive Group, which includes the
initial allocation of the purchase price, was as follows (dollars in millions):
Contracts in transit and vehicle receivables .. $ 10.5
Accounts receivable ........................... 6.5
Inventories ................................... 45.8
Other current assets .......................... 5.3
------
Total current assets ....................... 68.1
------
Goodwill and intangible assets ................ 60.9
Other long term assets ........................ 8.2
------
Total assets ............................... $137.2
======
Floorplan notes payable ....................... $ 40.5
Accounts payable and accrued liabilities ...... 26.0
------
Total current liabilities .................. 66.5
------
Long term liabilities ......................... 1.0
------
Total liabilities .......................... 67.5
Deferred revenues from vehicle service contract
sales ...................................... 13.9
Stockholders' equity .......................... 55.8
------
Total liabilities and equity ............... $137.2
======
The consolidated balance sheet includes preliminary allocations of
the purchase price for all of the acquisitions, and is subject to final
adjustment due to changes in estimates, based on the resolution of
pre-acquisition events. These allocations resulted in recording approximately
$56.3 million of franchise value intangible assets and $37.0 million of
goodwill, of which $17.2 million is deductible for tax purposes.
Additionally, 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.
During 2001, the Company acquired four automobile dealership
franchises. These acquisitions were accounted for as purchases. The aggregate
consideration paid in completing these acquisitions included approximately $11.0
million in cash, net of cash received, the assumption of an estimated $7.7
million of inventory financing and the assumption of approximately $0.3 million
of notes payable. The purchase price allocations resulted in recording
approximately $8.5 million of goodwill, a portion of which was amortized during
2001. Additionally, during 2001, the Company sold eight dealership franchises
for $5.4 million in cash. No gain or loss was recognized on these sales as they
were completed at net book value.
During 2000, the Company acquired 16 automobile dealership
franchises. These acquisitions were accounted for as purchases. The aggregate
consideration paid in completing these acquisitions, including real estate
acquired and satisfying certain contingent acquisition payment arrangements from
previous transactions, included approximately $65.1 million in cash, net of cash
received, $6.8 million of acquisition payments payable, the issuance of
approximately 630,000 shares of restricted/unregistered common stock, the
assumption of an estimated $59.8 million of inventory financing and the
assumption of approximately $11.1 million of notes payable. The purchase price
allocations resulted in recording approximately $64.3 million of goodwill, a
portion of which was amortized during 2001 and 2000.
F-13
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2001, and December 31, 2002, assuming that they occurred on January
1, 2001, and (2) certain pro forma adjustments discussed below:
2002 2001
--------- ---------
(in millions, except per share amounts)
(unaudited)
Revenues ....................... $ 4,497.7 $ 4,504.3
Gross profit ................... 700.3 693.0
Income from operations ......... 149.6 145.8
Net income ..................... 72.7 59.7
Basic earnings per share ....... 3.16 2.96
Diluted earnings per share ..... 3.00 2.79
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.
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts and notes receivable consist of the following:
DECEMBER 31,
--------------------
2002 2001
-------- --------
(in thousands)
Amounts due from manufacturers ....... $ 32,156 $ 24,015
Parts and service receivables ........ 11,244 10,010
Finance and insurance receivables .... 7,531 7,615
Other ................................ 10,012 4,955
-------- --------
Total accounts and notes receivable 60,943 46,595
Less - Allowance for doubtful accounts (2,749) (2,911)
-------- --------
Accounts and notes receivable, net $ 58,194 $ 43,684
======== ========
Inventories, net of valuation reserves, consist of the following:
DECEMBER 31,
-------------------
2002 2001
-------- --------
(in thousands)
New vehicles ............... $500,842 $349,962
Used vehicles .............. 80,115 69,351
Rental vehicles ............ 11,254 9,559
Parts, accessories and other 29,994 26,089
-------- --------
Total inventories ....... $622,205 $454,961
======== ========
F-14
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 2002 2001
-------- --------- ---------
(in thousands)
Land .............................................. -- $ 20,168 $ 19,576
Buildings ......................................... 30 to 40 22,958 19,430
Leasehold improvements ............................ 7 to 15 28,413 14,337
Machinery and equipment ........................... 7 to 20 30,044 22,691
Furniture and fixtures ............................ 3 to 10 35,808 28,075
Company vehicles .................................. 3 to 5 5,285 4,237
--------- ---------
Total ........................................... 142,676 108,346
Less - Accumulated depreciation and amortization .. (35,255) (25,335)
Construction in progress .......................... 8,849 --
--------- ---------
Property and equipment, net ..................... $ 116,270 $ 83,011
========= =========
Depreciation expense totaled approximately $10.1, $8.2, and $7.6
million for the years ended December 31, 2002, 2001 and 2000, respectively.
5. INTANGIBLE ASSETS AND GOODWILL:
The following is a rollforward of the Company's intangible asset and
goodwill accounts:
FRANCHISE VALUE
INTANGIBLE GOODWILL
--------- ---------
Balance, December 31, 1999 ............ $ -- $ 235,312
Additions through acquisitions ..... -- 64,260
Amortization expense ............... -- (6,915)
Reductions from sales of dealerships -- (6,765)
--------- ---------
Balance, December 31, 2000 ............ $ -- $ 285,892
Additions through acquisitions ..... 4,614 3,861
Amortization expense ............... -- (7,488)
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
========= =========
The reduction in goodwill related to the realization of certain tax
benefits related 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 2000
------- -------
(dollars in thousands,
except per share amounts)
Net income ..................................... $55,442 $40,812
Goodwill amortization expense, net of tax ...... 5,611 5,015
------- -------
Pro forma net income ........................... $61,053 $45,827
======= =======
Pro forma earnings per share:
Basic ....................................... $ 3.03 $ 2.14
Diluted ..................................... $ 2.85 $ 2.11
F-15
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. FLOORPLAN NOTES PAYABLE:
Floorplan notes payable reflect amounts payable for the purchase of
specific vehicle inventory and consist of the following:
DECEMBER 31,
--------------------------
2002 2001
-------- --------
(in thousands)
New vehicles ......................... $585,204 $310,236
Used vehicles ........................ 56,164 45,598
Rental vehicles ...................... 11,170 9,120
-------- --------
Total floorplan notes payable $652,538 $364,954
======== ========
The Company obtains its floorplan financing through its Revolving
Credit Agreement with a lending group (the "Credit Facility"). The lending group
is comprised of 15 major financial institutions, including five manufacturer
captive finance companies. The manufacturer captive finance companies are Ford
Motor Credit Company, Toyota Motor Credit Corporation, BMW Financial Services
N.A., Inc., Chrysler Financial Company, L.L.C. and Mercedes-Benz Credit
Corporation. The maturity date of the Credit Facility is December 31, 2003. The
notes payable bear interest at the London Interbank Offered Rate ("LIBOR") plus
112.5 basis points. As of December 31, 2002 and 2001, the interest rate on
floorplan notes payable outstanding was 2.53% and 3.27%, respectively. See the
discussion of the Company's interest rate swaps under Note 2. 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 floorplan arrangement permits the Company to borrow up to $702
million, dependent upon new and used vehicle inventory levels. As of December
31, 2002, total available borrowings under the floorplan agreements were
approximately $49.5 million.
Payments on the floorplan notes payable are due as the vehicles are
sold. The floorplan notes payable are collateralized by substantially all of the
vehicle inventories of the Company.
7. LONG-TERM DEBT:
DECEMBER 31,
---------------------------
2002 2001
-------- --------
(in thousands)
Credit Facility (described below) .................... $ -- $ --
Real estate note payable, maturing June 2018, bearing
interest at 9.01%, with a monthly payment of $54,023 5,402 5,559
Notes payable, maturing June 2013, bearing interest at
8.89%, with a monthly payment of $36,783 ........... 3,010 3,172
Note payable, maturing March 2006, bearing interest
at 7.50% with a monthly payment of $29,000 ......... 1,001 1,263
Other notes payable, maturing in varying amounts
through April 2006 with a weighted average interest
rate of 7.10% ...................................... 657 2,190
-------- --------
Total long-term debt ................................. 10,070 12,184
Less - Current portion ............................. (997) (1,687)
-------- --------
Long-term portion .................................... $ 9,073 $ 10,497
======== ========
In addition to floorplan notes payable, the Credit Facility provides
an acquisition line of credit of up to $198 million for the financing of
acquisitions, general corporate purposes or capital expenditures. 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, 2002 financial statements,
$194.1 million was available under the acquisition line, after deducting $3.9
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
F-16
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2002, 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 3.13% based on LIBOR at December 31, 2002, 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 $3.0,
$5.2 and $5.7 million for the years ended December 31, 2002, 2001 and 2000,
respectively, which included approximately $1,295,000, $897,000, and $352,000 of
capitalized interest on construction projects in 2002, 2001 and 2000,
respectively.
The aggregate maturities of long-term debt as of December 31, 2002,
were as follows (in thousands):
2003 ................... $997
2004 ................... 881
2005.................... 829
2006 ................... 555
2007 ................... 499
Thereafter.............. 6,309
-------
Total long-term debt.. $10,070
=======
8. SENIOR SUBORDINATED NOTES:
The Company completed the offering of $100 million of its 10 7/8%
Senior Subordinated Notes due 2009 (the "Notes") on March 5, 1999. The Notes pay
interest semi-annually on March 1 and September 1, each year. The Company may
redeem all or part of the Notes at redemption prices of 105.438%, 103.625%,
101.813% and 100.000% of the principal amount plus accrued interest during the
twelve-month periods beginning March 1, of 2004, 2005, 2006, and 2007 and
thereafter, respectively. The Notes are jointly and severally and fully and
unconditionally guaranteed, on an unsecured senior subordinated basis, by all
subsidiaries of the Company (the "Subsidiary Guarantors"), other than certain
minor subsidiaries. All of the Subsidiary Guarantors are wholly-owned
subsidiaries of the Company.
During 2000, 2001 and 2002, the Company repurchased a portion of its
Notes. The Company recorded a $1.2 million loss during 2002 related to the
repurchases, which is included in Other Income (Expense), net in the statement
of operations. The purchases during 2000 and 2001 were completed at or near the
Company's carrying value of the Notes.
Total interest expense on the Notes for the years ended December 31,
2002, 2001, and 2000 was approximately $8.8 million, $10.1 million and $10.7
million, respectively.
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
million shares, of which 215,943 are available for future issuance as of
December 31, 2002. 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- to six-year periods.
F-17
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, 1999 ............ 2,742,504 $ 14.45
Grants (exercise prices between $9.38 and $12.29
per share) ................................... 1,137,050 11.00
Exercised ....................................... (74,800) 3.24
Forfeited ....................................... (262,625) 17.39
---------- ----------
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
========== ==========
At December 31, 2002, 2001 and 2000, 1,771,538, 1,309,079 and
799,111 options, respectively, were exercisable at weighted average exercise
prices of $13.49, $13.02 and $11.88, respectively. The weighted average fair
value per share of options granted during the years ended December 31, 2002,
2001 and 2000 is $21.73, $18.67 and $7.34, 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, 2002, 2001 and 2000:
2002 2001 2000
---------- ---------- -----------
Weighted average risk-free interest rate..... 4.6% 5.1% 6.3%
Weighted average expected life of options.... 8 years 10 years 10 years
Weighted average expected volatility......... 52.5% 57.7% 46.4%
Weighted average expected dividends.......... -- -- --
The following table summarizes information regarding stock options
outstanding as of December 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------- --------------------------------
NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 12/31/02 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/02 EXERCISE PRICE
--------------- ----------- ---------------- -------------- ----------- --------------
$2.90 213,480 4.1 years $2.90 213,480 $2.90
$9.00 to $13.99 1,251,022 6.7 11.16 728,052 11.30
$14.00 to $19.99 1,074,837 6.6 17.08 713,637 16.89
$20.00 to $24.99 476,710 8.0 24.58 82,370 24.48
$25.00 to $44.99 502,300 9.1 37.18 33,999 28.97
--------- --------- ------ --------- ------
TOTAL 3,518,349 7.0 years $18.00 1,771,538 $13.49
========= ========= ====== ========= ======
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 1.5 million shares of common stock and
provides that no options to purchase shares may
F-18
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
be granted under the Purchase Plan after June 30, 2007. As of December 31, 2002,
there were 319,335 shares remaining in reserve for future issuance under the
Purchase Plan. The Purchase 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 2002, 2001 and 2000, the Company issued 153,954, 257,235 and
338,204 shares, respectively, of common stock to employees participating in the
Purchase Plan.
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.
The Company has adopted the disclosure requirements of SFAS No. 123 and has
elected to record employee compensation expense in accordance with APB No. 25,
"Accounting for Stock Issued to Employees." Accordingly, compensation expense is
recorded for stock options based on the excess of the fair market value of the
common stock on the date the options were granted over the aggregate exercise
price of the options. As the exercise price of options granted under the Plan
has been equal to or greater than the market price of the Company's stock on the
date of grant, no compensation expense related to the Plan has been recorded.
Additionally, no compensation expense is recorded for shares issued pursuant to
the Purchase Plan as it is a qualified plan.
Had compensation expense for the stock incentive and employee stock
purchase plans been determined based on the provisions of SFAS No. 123, the
impact on the Company's net income would have been as follows:
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------
2002 2001 2000
---------- ---------- ----------
(in thousands, except per share amounts)
Net income, as reported ........................ $ 67,065 $ 55,442 $ 40,812
Add: Stock-based employee compensation expense
included in reported net income, net of
related tax effects .......................... 120 -- --
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects ...................................... (5,333) (3,728) (3,316)
---------- ---------- ----------
Pro forma net income ........................... $ 61,852 $ 51,714 $ 37,496
========== ========== ==========
Earnings per share:
Basic - as reported .......................... $ 2.93 $ 2.75 $ 1.91
Basic - pro forma ............................ $ 2.70 $ 2.57 $ 1.75
Diluted - as reported ........................ $ 2.80 $ 2.59 $ 1.88
Diluted - pro forma .......................... $ 2.58 $ 2.41 $ 1.73
10. EMPLOYEE SAVINGS PLANS:
The Company has a deferred compensation plan to provide selected
employees 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 earned. The participants
can choose from various defined investment options to determine their earnings
crediting 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, 2002 and 2001, were $7.5 and $3.3 million, respectively.
The Company offers a 401k plan to all of its employees and provides
a matching contribution to those employees that participate. The matching
contributions paid by the
F-19
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company totaled $2.7, $2.2 and $1.8 million for the years ended December 31,
2002, 2001 and 2000, respectively.
11. OPERATING LEASES:
The Company leases various facilities and equipment under long-term
operating lease agreements. These leases expire on various dates through
December 2031 and, in general, have renewal or cancellation options, at the
Company's option, at various times during the lease term.
Future minimum lease payments for operating leases as of December
31, 2002, are as follows (in thousands):
RELATED THIRD
YEAR ENDED DECEMBER 31, PARTIES PARTIES TOTAL
- ----------------------- -------- -------- --------
2003........................... $9,896 $35,725 $45,621
2004........................... 9,884 34,769 44,653
2005........................... 9,756 33,211 42,967
2006........................... 9,756 32,430 42,186
2007........................... 9,636 31,493 41,129
Thereafter..................... 56,577 177,941 234,518
-------- -------- --------
Total.......................... $105,505 $345,569 $451,074
======== ======== ========
Total rent expense under all operating leases, including operating
leases with related parties, was approximately $36.8, $30.7 and $28.3 million
for the years ended December 31, 2002, 2001 and 2000, respectively. Rental
expense on related party leases, which is included in the above amounts, totaled
approximately $8.4, $7.9 and $10.9 million for the years ended December 31,
2002, 2001 and 2000, respectively.
12. INCOME TAXES:
Federal and state income taxes are as follows:
DECEMBER 31,
-------------------------------------
2002 2001 2000
-------- -------- --------
(in thousands)
Federal -
Current ................ $ 31,026 $ 32,514 $ 17,731
Deferred ............... 6,336 (1,129) 5,163
State -
Current ................ 2,308 2,691 913
Deferred ............... 547 (96) 1,207
-------- -------- --------
Provision for income taxes $ 40,217 $ 33,980 $ 25,014
======== ======== ========
Actual income tax expense differs from income tax expense computed
by applying the U.S. federal statutory corporate tax rate of 35% in 2002, 2001
and 2000 to income before income taxes as follows:
DECEMBER 31,
------------------------------------
2002 2001 2000
-------- -------- --------
(in thousands)
Provision at the statutory rate .. $ 37,549 $ 31,298 $ 23,039
Increase (decrease) resulting
from -
State income tax, net of benefit
for federal deduction ....... 1,856 1,669 1,326
Non-deductible portion of
goodwill amortization ....... -- 776 691
Other .......................... 812 237 (42)
-------- -------- --------
Provision for income taxes ....... $ 40,217 $ 33,980 $ 25,014
======== ======== ========
F-20
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,
-----------------------
2002 2001
-------- --------
(in thousands)
Inventory (LIFO conversion) $ (432) $ (1,236)
Loss reserves and accruals 27,150 20,336
Goodwill amortization ..... (13,855) (10,013)
Depreciation expense ...... (5,785) (4,019)
Reinsurance operations .... (2,490) (2,850)
Interest rate swaps ....... 2,059 496
Other ..................... (3,505) (1,975)
-------- --------
Net deferred tax asset . $ 3,142 $ 739
======== ========
The net deferred tax assets (liabilities) are comprised of the
following:
DECEMBER 31,
-----------------------
2002 2001
-------- --------
(in thousands)
Deferred tax assets -
Current ............... $ 14,297 $ 13,118
Long-term ............. 24,264 15,652
Deferred tax liabilities -
Current ............... (3,504) (2,397)
Long-term ............. (31,915) (25,634)
-------- --------
Net deferred tax asset .. $ 3,142 $ 739
======== ========
The Company believes it is more likely than not, that the deferred
tax assets will be realized, based primarily on the assumption of future taxable
income.
13. COMMITMENTS AND CONTINGENCIES:
Legal Proceedings
The Company is a defendant in several lawsuits arising from normal
business activities. Management has reviewed all pending litigation with legal
counsel and believes that the ultimate liability, if any, resulting from such
actions will not have a material adverse effect on the Company's financial
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 includes umbrella
policies with a $105 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. Additionally, the Company
retains some risk of loss under its self-insured medical and property/casualty
plans. See further discussion under Note 2. The Company has a $3.8 million
letter of credit outstanding, supporting its obligations with respect to its
property/casualty insurance program.
F-21
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. RECLASSIFICATIONS
Certain reclassifications have been made in the 2001 and 2000
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:
YEAR ENDED DECEMBER 31,
-----------------------
2001 2000
-------- --------
(dollars in thousands)
Increase new vehicle retail sales revenues $ 8,291 $ 6,832
Increase used vehicle retail sales revenues 6,585 4,659
Decrease other dealership revenues, net ... (14,876) (11,491)
-------- --------
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 the 2001 and 2000 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 and 2000 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 and 2000 statements of operations.
- Contracts in transit have been reclassified from the cash line item
to present these amounts as a separate line item in the 2001 balance
sheet. Additionally, as a result of this reclassification, contracts
in transit is now presented as a separate line item under changes in
operating assets and liabilities in the operating activities section
of the 2001 and 2000 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. In 2000, the impact of this
change was to reduce net cash provided by operating activities by
$21.0 million, increase cash paid in acquisitions and cash used in
investing activities by $4.9 million and decrease the net increase
(decrease) in cash by $25.9 million in the 2000 statement of cash
flows.
F-22
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
QUARTER
---------------------------------------------------------- FULL
YEAR ENDED DECEMBER 31, FIRST SECOND THIRD FOURTH YEAR
- ----------------------- ---------- ---------- ---------- ---------- ----------
(in thousands, except per share data)
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 ..... 0.64 0.78 0.84 0.53 2.80
2001
Total revenues ................. $ 928,864 $1,006,571 $1,021,030 $1,039,909 $3,996,374
Gross profit ................... 141,928 153,821 158,472 153,031 607,252
Net income ..................... 9,321 14,070 15,894 16,157 55,442
Basic earnings per share ....... 0.47 0.72 0.81 0.74 2.75
Diluted earnings per share ..... 0.47 0.68 0.75 0.68 2.59
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 $900 thousand.
16. SUBSEQUENT EVENTS:
Effective in January 2003, the Company purchased three franchises
from Robert E. Howard II, a director of the Company, and sold one franchise to
a company owned by Mr. Howard. The Company acquired Ford, Lincoln and Mercury
franchises, with $131.2 million in annual revenues, and sold a Mercedes-Benz
franchise, with $47.4 million in annual revenues. In completing the
acquisitions, the aggregate consideration paid by the Company consisted of
$13.6 million of cash, net of cash received and the assumption of
approximately $21.1 million of inventory financing. The Company received
$7.4 million in cash from the sale of the Mercedes-Benz dealership franchise
and related assets, which exceeded the Company's basis in the dealership by
approximately $1.3 million. This excess sales price over cost will be
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 above, the Company's investment in the newly acquired dealerships
is expected to approximate the fair value of the net tangible assets and thus,
no significant intangible assets are expected to be recorded.
F-23
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 -- Form of Subordinated Indenture (Incorporated by reference
to Exhibit 4.5 of the Company's Registration Statement on Form
S-3 Registration No. 333-69693).
4.3 -- Form of Subordinated Debt Securities (included in Exhibit
4.2).
4.4 -- First Supplemental Indenture dated as of March 5, 1999
among Group 1 Automotive, Inc., the Subsidiary Guarantors
named therein and IBJ Whitehall Bank & Trust Company
(Incorporated by reference to Exhibit 4.1 of the Company's
Current Report of Form 8-K dated March 5, 1999).
4.5 -- Form of 10 7/8% Senior Subordinated Note due March 1, 2009
(included in Exhibit 4.4).
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 Robert E.
Howard II dated November 3, 1997 (Incorporated by reference to
Exhibit 10.2 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 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 -- 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).
10.5 -- 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).
10.6 -- 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).
10.7 -- 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).
10.8 -- 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).
10.9 -- 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).
10.10 -- Lease Agreement between Howard Pontiac-GMC, Inc. and North
Broadway Real Estate Limited Liability Company.
10.11 -- 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).
10.12 -- 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).
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.13 -- 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).
10.14 -- 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).
10.15 -- 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).
10.16 -- 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).
10.17 -- 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).
10.18 -- 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).
10.19 -- Fourth Amended and Restated Revolving Credit Agreement,
dated as of October 15, 1999, and effective as of November 1,
1999 (Incorporated by reference to Exhibit 10.1 of the
Company's Current Report on Form 8-K dated October 29, 1999).
10.20 -- Amendment to Fourth Amended and Restated Revolving Credit
Agreement, dated as of March 7, 2000 (Incorporated by
reference to Exhibit 10.23 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2000).
10.21 -- Second Amendment to Fourth Amended and Restated Revolving
Credit Agreement, dated as of May 22, 2000 (Incorporated by
reference to Exhibit 10.24 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2000).
10.22 -- Third Amendment to Fourth Amended and Restated Revolving
Credit Agreement, dated as of December 1, 2000 (Incorporated
by reference to Exhibit 10.25 of the Company's Annual Report
on Form 10-K for the year ended December 31, 2000).
10.23 -- Fourth Amendment to Fourth Amended and Restated Revolving
Credit Agreement, dated as of November 9, 2001 (Incorporated
by reference to Exhibit 10.23 of the Company's Annual Report
on Form 10-K for the year ended December 31, 2001).
10.24 -- 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).
10.25 -- 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).
10.26 -- Employment Agreement between the Company and John S. Bishop
dated October 7, 1998 (Incorporated by reference to Exhibit
10.37 of the Company's Annual Report on Form 10-K for the year
ended December 31, 1998).
10.27 -- 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).
10.28 -- 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).
10.29 -- 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).
10.30 -- 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).
10.31 -- 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).
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.32 -- 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).
10.33 -- 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).
10.34 -- Interest Rate Swap Confirmation, dated as of July 23, 2001
(Incorporated by reference to Exhibit 10.34 of the Company's
Annual Report on Form 10-K for the year ended December 31,
2001).
10.35 -- 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).
10.36 -- 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.
10.37 -- Lease Agreement between Bob Howard Automotive-East, Inc.
and REHCO EAST, L.L.C.
10.38 -- Lease Agreement between Howard-H, Inc. and REHCO, L.L.C.
10.39 -- Employment Agreement between the Company and Kevin H.
Whalen dated November 3, 2002.
10.40 -- Amendment to Lease Agreement between Howard-H, Inc. and
REHCO, L.L.C.
10.41 -- Lease Agreement between Howard Ford, Inc. and REHCO EAST,
L.L.C.
10.42 -- Stock Purchase Agreement by and among Group 1 Holdings-F,
L.L.C. and Howard Ford, Inc. and Robert E. Howard II dated as
of December 3, 2002.
10.43 -- Stock Purchase Agreement by and among BHE, Inc. and Bob
Howard German Imports, Inc. and Group 1 Holdings-DC, L.L.C.
dated effective January 1, 2003.
10.44 -- Split Dollar Life Insurance Payment Deferral Letter dated
February 25, 2003.
11.1 -- Statement re: computation of earnings per share is included
under Note 2 to the financial statements.
21.1 -- Group 1 Automotive, Inc. Subsidiary List.
23.1 -- Consent of Ernst & Young LLP.
99.1 -- Certification of Chief Executive Officer of Group 1
Automotive, Inc. Pursuant to 18 U.S.C. section 1350.
99.2 -- Certification of Chief Financial Officer of Group 1
Automotive, Inc. Pursuant to 18 U.S.C. section 1350.