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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number: 1-13461
GROUP 1 AUTOMOTIVE, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 76-0506313
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
950 Echo Lane, Suite 100
Houston, Texas 77024
(Address of Principal Executive Offices) (Zip Code)
(713) 647-5700
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Title Outstanding
----- -----------
Common stock, par value $.01 22,600,673
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
JUNE 30, DECEMBER 31,
2003 2002
---- ----
(unaudited)
ASSETS
CURRENT ASSETS:
Cash ................................................. $ 21,201 $ 24,333
Contracts-in-transit and vehicle receivables, net .... 147,559 178,623
Accounts and notes receivable, net ................... 62,535 58,194
Inventories, net ..................................... 699,187 622,205
Deferred income taxes ................................ 10,467 10,793
Other assets ......................................... 9,680 8,890
----------- -----------
Total current assets .......................... 950,629 903,038
----------- -----------
PROPERTY AND EQUIPMENT, net ............................ 122,219 116,270
GOODWILL ............................................... 305,262 307,907
INTANGIBLE ASSETS ...................................... 61,348 60,879
INVESTMENTS RELATED TO INSURANCE POLICY SALES .......... 15,693 15,813
DEFERRED COSTS RELATED TO
INSURANCE POLICY AND VEHICLE SERVICE CONTRACT SALES .. 14,383 16,824
OTHER ASSETS ........................................... 4,492 3,034
----------- -----------
Total assets .................................. $ 1,474,026 $ 1,423,765
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Floorplan notes payable .............................. $ 662,141 $ 652,538
Current maturities of long-term debt ................. 826 997
Accounts payable ..................................... 86,805 90,809
Accrued expenses ..................................... 78,849 64,939
----------- -----------
Total current liabilities ..................... 828,621 809,283
----------- -----------
DEBT, net of current maturities ........................ 8,612 9,073
SENIOR SUBORDINATED NOTES .............................. 74,220 74,149
DEFERRED INCOME TAXES .................................. 12,291 7,651
OTHER LIABILITIES ...................................... 25,983 31,005
----------- -----------
Total liabilities before deferred revenues .... 949,727 931,161
----------- -----------
DEFERRED REVENUES FROM INSURANCE POLICY SALES .......... 22,630 24,637
DEFERRED REVENUES FROM VEHICLE SERVICE CONTRACT SALES .. 20,376 24,550
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 23,454,046 and 23,183,226 issued ........ 235 232
Additional paid-in capital ........................... 255,694 254,145
Retained earnings .................................... 249,820 215,024
Accumulated other comprehensive loss ................. (2,322) (3,359)
Treasury stock, at cost, 933,677 and 942,419 shares... (22,134) (22,625)
----------- -----------
Total stockholders' equity .................... 481,293 443,417
----------- -----------
Total liabilities and stockholders' equity .... $ 1,474,026 $ 1,423,765
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
2
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
REVENUES:
New vehicle sales ........................... $ 693,454 $ 615,532 $ 1,287,208 $ 1,168,055
Used vehicle sales .......................... 230,956 230,708 456,154 448,641
Used vehicle wholesale sales ................ 65,445 56,031 126,449 107,099
Parts and service sales ..................... 116,279 95,511 227,392 187,202
Retail finance fees ......................... 16,184 14,361 31,363 27,772
Vehicle service contract fees ............... 15,436 12,332 30,634 23,815
Other finance and insurance revenues, net ... 10,126 8,629 18,471 16,594
------------ ------------ ------------ ------------
Total revenues ........................... 1,147,880 1,033,104 2,177,671 1,979,178
COST OF SALES:
New vehicle sales ........................... 641,983 568,006 1,193,012 1,077,957
Used vehicle sales .......................... 202,782 205,046 399,840 396,517
Used vehicle wholesale sales ................ 67,660 57,458 130,459 109,821
Parts and service sales ..................... 51,239 41,831 100,696 82,611
------------ ------------ ------------ ------------
Total cost of sales .................. 963,664 872,341 1,824,007 1,666,906
------------ ------------ ------------ ------------
GROSS PROFIT .................................. 184,216 160,763 353,664 312,272
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ................................... 140,179 120,773 275,017 237,650
DEPRECIATION AND AMORTIZATION
EXPENSE ................................... 3,691 2,785 6,941 5,621
------------ ------------ ------------ ------------
Income from operations ........................ 40,346 37,205 71,706 69,001
OTHER INCOME AND (EXPENSE):
Floorplan interest expense, excludes
manufacturer interest assistance .......... (6,235) (4,342) (11,682) (8,732)
Other interest expense, net ................. (2,334) (2,452) (4,703) (5,191)
Other expense, net .......................... (63) (35) (89) (110)
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES .................... 31,714 30,376 55,232 54,968
PROVISION FOR INCOME TAXES .................... 11,734 11,239 20,436 20,338
------------ ------------ ------------ ------------
NET INCOME .................................... $ 19,980 $ 19,137 $ 34,796 $ 34,630
============ ============ ============ ============
EARNINGS PER SHARE:
Basic ....................................... $ 0.89 $ 0.83 $ 1.55 $ 1.50
Diluted ..................................... $ 0.86 $ 0.78 $ 1.50 $ 1.42
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic ....................................... 22,488,643 23,111,843 22,426,468 23,011,086
Diluted ..................................... 23,268,506 24,503,067 23,140,289 24,322,647
The accompanying notes are an integral part of these
consolidated financial statements.
3
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
SIX MONTHS ENDED
JUNE 30,
--------
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................................ $ 34,796 $ 34,630
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ................................... 6,941 5,621
Deferred income taxes ........................................... 4,975 4,033
Provision for doubtful accounts and uncollectible notes ......... 291 406
Loss on sale of assets .......................................... 158 102
Gain on sale of franchises ...................................... -- (414)
Changes in operating assets and liabilities, net of effects of
acquisitions and dispositions:
Contracts-in-transit and vehicle receivables ................. 32,405 2,922
Accounts receivable .......................................... (1,402) (5,013)
Inventories .................................................. (53,190) (52,858)
Prepaid expenses and other assets ............................ 1,010 (10,783)
Floorplan notes payable ...................................... (8,239) 26,812
Accounts payable, accrued expenses and deferred revenues ..... (2,489) 8,394
-------- --------
Total adjustments ......................................... (19,540) (20,778)
-------- --------
Net cash provided by operating activities ......... 15,256 13,852
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable ..................................... (2,011) (6,578)
Collections on notes receivable .................................. 704 678
Purchases of property and equipment .............................. (18,248) (19,488)
Proceeds from sales of property and equipment .................... 4,999 570
Proceeds from sales of franchises ................................ 7,414 7,430
Cash paid in acquisitions, net of cash received .................. (12,687) (21,502)
-------- --------
Net cash used by investing activities ............. (19,829) (38,890)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on revolving credit facility ...................... -- 32,764
Principal payments of long-term debt ............................. (602) (995)
Repurchase of senior subordinated notes .......................... -- (6,128)
Proceeds from issuance of common stock to benefit plans, including
tax benefit ..................................................... 4,541 7,870
Repurchase of common stock, amounts based on settlement date ..... (2,498) --
-------- --------
Net cash provided by financing activities ......... 1,441 33,511
-------- --------
NET INCREASE (DECREASE) IN CASH ..................................... (3,132) 8,473
CASH, beginning of period ........................................... 24,333 16,861
-------- --------
CASH, end of period ................................................. $ 21,201 $ 25,334
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for -
Interest ........................................................ $ 16,768 $ 14,873
Taxes ........................................................... $ 5,292 $ 12,891
The accompanying notes are an integral part of these
consolidated financial statements.
4
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Group 1 Automotive, Inc., a Delaware corporation, is a leading operator
in the automotive retailing industry. Group 1 Automotive, Inc. is a holding
company with no independent assets or operations other than its investments in
its subsidiaries, which are located in California, Colorado, Florida, Georgia,
Louisiana, Massachusetts, New Mexico, Oklahoma and Texas. These subsidiaries
sell new and used cars and light trucks through their dealerships and Internet
sites; arrange related financing, vehicle service and insurance contracts;
provide maintenance and repair services; and sell replacement parts. Group 1
Automotive, Inc. and its subsidiaries are herein collectively referred to as the
"Company" or "Group 1."
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
All acquisitions of dealerships completed during the periods presented
have been accounted for using the purchase method of accounting and their
results of operations are included from the effective dates of the closings of
the acquisitions. The allocations of purchase price to the assets acquired and
liabilities assumed are initially assigned and recorded based on preliminary
estimates of fair value. All significant intercompany balances and transactions
have been eliminated in consolidation.
Interim Financial Information
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments considered necessary for a fair presentation have
been included. Due to seasonality and other factors, the results of operations
for the interim periods are not necessarily indicative of the results that will
be realized for the entire fiscal year. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 2002.
Stock-Based Compensation Plans
In October 1995, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," which, if fully adopted, requires the Company to
record stock-based compensation at fair value. The Company has adopted the
disclosure requirements of SFAS No. 123 and has elected to record employee
compensation expense in accordance with APB No. 25, "Accounting for Stock Issued
to Employees." Accordingly, compensation expense is recorded for stock options
based on the excess of the fair market value of the common stock on the date the
options were granted over the aggregate exercise price of the options. As the
exercise price of options granted has been equal to or greater than the market
price of the Company's stock on the date of grant, no compensation expense has
been recorded. Additionally, no compensation expense is recorded for shares
issued pursuant to the employee stock purchase plan as it is a qualified plan.
5
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:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2003 2002 2003 2002
---- ---- ---- ----
(dollars in thousands, except per share amounts)
Net income as reported ..................................... $ 19,980 $ 19,137 $ 34,796 $ 34,630
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 ............................. (402) (1,252) (1,661) (2,294)
---------- ---------- ---------- ----------
Pro forma net income ....................................... $ 19,578 $ 17,885 $ 33,135 $ 32,456
========== ========== ========== ==========
Pro forma earnings per share:
Basic - as reported .................................... $ 0.89 $ 0.83 $ 1.55 $ 1.50
Basic - pro forma ...................................... $ 0.87 $ 0.77 $ 1.48 $ 1.41
Diluted - as reported .................................. $ 0.86 $ 0.78 $ 1.50 $ 1.42
Diluted - pro forma .................................... $ 0.84 $ 0.73 $ 1.43 $ 1.33
Accounting for Guarantees
In November 2002, FASB Interpretation ("FIN") No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" was issued. FIN No. 45 enhances the
disclosures to be made by a guarantor about its obligations under certain
guarantees that it has issued. It also requires, on a prospective basis,
beginning after January 1, 2003, that guarantors recognize, at the inception of
a guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee.
While the Company is not an obligor under the vehicle service contracts
it currently sells, it was an obligor under vehicle service contracts previously
sold in two states. These contracts were sold to our retail vehicle customers
with terms, typically, ranging from two to seven years. The purchase price paid
by the customer, net of the fee the Company receives, was remitted to an
administrator. The administrator set the pricing at a level adequate to fund
future claims and their profit. Additionally, the administrator purchases
insurance to further secure its ability to pay the claims under the contracts.
The Company can become liable if the administrator and the insurance company are
unable to fund future claims. Though the Company has never had to fund any
claims related to these contracts, and reviews the credit worthiness of the
administrator and the insurance company, it is unable to estimate the maximum
potential claim exposure, but believes there will not be any future obligation
to fund claims on the contracts. The Company's revenues related to these
contracts were deferred at the time of sale and recognized over the life of the
contracts. The amounts deferred are presented on the face of the balance sheets
as deferred revenues from vehicle service contract sales.
Income Taxes
The Company operates in nine different states, each of which has unique
tax rates and payment calculations. As the amount of income generated in each
state varies from period to period, the Company's effective tax rate will vary
based on the proportion of taxable income generated in each state.
6
Recent Accounting Pronouncements
In January 2003, FIN No. 46, "Consolidation of Variable Interest
Entities" was issued. FIN No. 46 clarifies the application of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," to variable
interest entities, which are certain entities in which equity investors do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated support from other parties. The interpretation is
intended to achieve more consistent application of consolidation policies to
variable interest entities and, thus to improve comparability between
enterprises engaged in similar activities even if some of those activities are
conducted through variable interest entities. The interpretation is effective
immediately for variable interest entities created after January 31, 2003, and
to variable interest entities in which a company obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after June
15, 2003, for variable interest entities in which a company holds a variable
interest that it acquired before February 1, 2003. The Company is currently
analyzing the impact this interpretation will have on its consolidated results
of operations and its financial position, with respect to entities acquired
before February 1, 2003.
Reclassifications
Certain reclassifications have been made in the 2002 financial
statements to conform to the current period presentation.
3. EARNINGS PER SHARE:
SFAS No. 128, "Earnings per Share" requires the presentation of basic
earnings per share and diluted earnings per share in financial statements of
public enterprises. Under the provisions of this statement, basic earnings per
share is computed based on weighted average shares outstanding and excludes
dilutive securities. Diluted earnings per share is computed including the
impacts of all potentially dilutive securities. The following table sets forth
the shares outstanding for the earnings per share calculations:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2003 2002 2003 2002
---- ---- ---- ----
Common stock issued, beginning of period ............... 23,373,326 23,120,924 23,183,226 23,029,853
Weighted average common stock issued -
Employee Stock Purchase Plan ...................... 57,088 37,964 73,615 51,208
Stock options exercised ........................... 53,418 61,238 176,781 204,857
Less: Weighted average treasury shares held and
weighted average shares repurchased and cancelled .. (995,189) (108,283) (1,007,154) (274,832)
---------- ---------- ---------- ----------
Shares used in computing basic earnings per share ...... 22,488,643 23,111,843 22,426,468 23,011,086
Dilutive effect of stock options, net of assumed
repurchase of treasury stock ....................... 779,863 1,391,224 713,821 1,311,561
---------- ---------- ---------- ----------
Shares used in computing diluted earnings per share .... 23,268,506 24,503,067 23,140,289 24,322,647
========== ========== ========== ==========
4. BUSINESS COMBINATIONS AND DISPOSITIONS:
During the first six months of 2003, the Company purchased three
franchises from Robert E. Howard II, a director of the Company, and sold one
franchise to a company owned by Mr. Howard. The Company acquired Ford, Lincoln
and Mercury franchises, with $131.2 million in annual revenues, and sold a
Mercedes-Benz franchise, with $47.4 million in annual revenues. In completing
the acquisitions, the aggregate consideration paid by the Company consisted of
$12.7 million of cash, net of cash received and the assumption of approximately
$22.9 million of inventory financing. The Company received $7.4 million in cash
from the sale of the Mercedes-Benz dealership franchise and related assets,
including goodwill of approximately $3.6 million. The proceeds received exceeded
the Company's basis in the dealership by approximately $1.3 million. This excess
sales price over cost was recorded as a reduction of the cost basis in the newly
acquired Ford, Lincoln and Mercury dealerships. Additionally, the outstanding
inventory
7
financing for the Mercedes-Benz dealership was assumed by a company owned by Mr.
Howard. As a result of the two transactions described above, the Company's
goodwill was reduced by $3.6 million and its intangible asset for franchise
value increased $0.5 million. Additionally, during the first six months of 2003,
the Company opened a new add-point Ford dealership in Pensacola, Florida.
5. SENIOR SUBORDINATED NOTES:
The Company's 10 7/8% Senior Subordinated Notes due 2009 (the "Notes")
pay interest semi-annually on March 1 and September 1, each year. The Company
may redeem all or part of the Notes at redemption prices of 105.438%, 103.625%,
101.813% and 100.000% of the principal amount plus accrued interest during the
twelve-month periods beginning March 1, of 2004, 2005, 2006 and 2007 and
thereafter, respectively. The Notes are jointly and severally and fully and
unconditionally guaranteed, on an unsecured senior subordinated basis, by all
subsidiaries of the Company (the "Subsidiary Guarantors"), other than certain
minor subsidiaries. All of the Subsidiary Guarantors are wholly-owned
subsidiaries of the Company.
6. FLOORPLAN NOTES PAYABLE AND LONG-TERM DEBT:
During June 2003, the Company completed an amendment to its existing
credit facility that extends the term until June 2006. The $775.0 million credit
facility consists of two tranches: 75% of the facility is for floorplan
financing ("the Floorplan Tranche") and 25% is for working capital and
acquisition financing ("the Acquisition Tranche"). The Acquisition Tranche bears
interest at a rate of LIBOR plus a margin varying between 175 and 325 basis
points, determined based on a ratio of debt to equity. The Floorplan Tranche
bears interest at rates of LIBOR plus 112.5 basis points for new vehicle
inventory and LIBOR plus 125 basis points for used vehicle inventory. Other than
the changes in the maturity date and the total amount available to be borrowed,
there were no significant changes in the terms of the agreement.
Simultaneous with the amendment of the above described credit facility,
the Company entered into a separate floorplan financing arrangement with Ford
Motor Credit Company to provide financing for its entire Ford, Lincoln and
Mercury new vehicle inventory. The arrangement provides for up to $300.0 million
of financing for the inventory at an interest rate of Prime plus 100 basis
points minus certain incentives. The Company expects the net cost of these
borrowings, after all incentives, to approximate the floorplan cost under the
$775.0 million credit facility.
7. COMPREHENSIVE INCOME:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2003 2002 2003 2002
---- ---- ---- ----
(dollars in thousands)
Net income .................................................. $ 19,980 $ 19,137 $ 34,796 $ 34,630
Other comprehensive income:
Change in fair value of interest rate swaps, net of tax .. 612 (2,063) 1,037 (1,141)
-------- -------- -------- --------
Comprehensive income ......................................... $ 20,592 $ 17,074 $ 35,833 $ 33,489
======== ======== ======== ========
8. RELATED PARTY TRANSACTIONS:
In addition to the transactions discussed in Note 4, effective February
18, 2003, the Company sold certain dealership buildings in Oklahoma City to Mr.
Howard for $4.5 million and leased them back on a 25-year lease. The sales price
represents the Company's cost basis in recently constructed buildings and no
gain or loss was recognized. The Company will pay Mr. Howard a market rental
rate of $44,376 per month, under standard lease terms, for land owned by Mr.
Howard and the buildings sold and leased back. The Company believes that the
terms of the lease are at fair market value.
8
9. COMMITMENTS AND CONTINGENCIES:
From time to time, the Company's dealerships are named in claims
involving the manufacturer of automobiles, contractual disputes and other
matters arising in the ordinary course of business.
The Texas Automobile Dealers Association ("TADA") and certain new
vehicle dealerships in Texas that are members of the TADA, including a number of
the Company's Texas dealership subsidiaries, have been named in two state court
class action lawsuits and one federal court class action lawsuit. The three
actions allege that since January 1994, Texas dealers have deceived customers
with respect to a vehicle inventory tax and violated federal antitrust and other
laws. In April 2002, the state court in which two of the actions are pending
certified classes of consumers on whose behalf the action would proceed. On
October 25, 2002, the Texas Court of Appeals affirmed the trial court's order of
class certification in the state action and the Company is appealing that ruling
to the Texas Supreme Court. In the other action, on March 26, 2003, the federal
court also certified a class of consumers, but denied a request to certify a
defendants' class consisting of all TADA members. On May 19, 2003, the Fifth
Circuit Court of Appeals granted a request for permission to appeal the class
certification ruling of the lower federal court. State and federal courts have
ordered the parties in the three cases to participate in mediation. In May 2003,
counsel for the parties agreed to withhold any objections to mediation and
agreed to mediate the cases. The Company intends to vigorously defend itself and
assert available defenses with respect to each of the foregoing matters and may
have certain insurance coverage and rights of indemnification. While the
Company does not believe this litigation will have a material adverse effect on
its financial condition or results of operations, no assurance can be given as
to its ultimate outcome and a settlement or an adverse resolution of this
matter could result in the payment of significant costs and damages.
In addition to the foregoing case, there are currently no legal
proceedings pending against or involving the Company that, in management's
opinion, based on current known facts and circumstances, are expected to have a
material adverse effect on the Company's financial position.
10. SUBSEQUENT EVENTS:
On July 31, 2003, the Company announced its intention to commence a
private placement offering of $150.0 million of a new issue of senior
subordinated notes. The Company intends to use the net proceeds of the offering
for general corporate purposes, including the retirement on or prior to the
initial redemption date of all of its outstanding 10 7/8% senior subordinated
notes due 2009 and potential acquisitions. The existing notes are redeemable
beginning March 1, 2004 at a redemption price of 105.438% of the principal
amount, plus accrued and unpaid interest. At June 30, 2003 the principal balance
of these notes was $75.4 million. Pending such uses, the Company intends to
temporarily reduce outstanding floorplan borrowings.
In July 2003, the Company completed a market consolidation project in
conjunction with DaimlerChrysler's Alpha Initiative in Dallas, Texas. The
transaction resulted in the consolidation of three dealerships consisting of
four franchises into one dealership with Dodge, Chrysler and Jeep franchises.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following should be read in conjunction with the response to Part
I, Item 1 of this Report and our other filings with the Securities and Exchange
Commission ("SEC").
OVERVIEW
We are a leading operator in the $1 trillion automotive retailing
industry. Through a series of acquisitions, we operate 112 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.
The following table sets forth our brand diversity, based on new
vehicle retail unit sales, and the number of franchises we own:
SIX MONTH ENDED JUNE 30, 2003
-----------------------------
ACTUAL NUMBER PERCENTAGE OF NUMBER OF
OF NEW TOTAL NEW FRANCHISES OWNED
BRAND VEHICLES SOLD VEHICLES SOLD AS OF JULY 31, 2003
----- ------------- ------------- -------------------
Ford................. 11,147 23.4% 14
Toyota............... 9,727 20.4 9
Honda................ 4,104 8.6 5
Nissan............... 3,935 8.3 10
Dodge................ 3,216 6.8 8
Chevrolet............ 3,015 6.3 5
Lexus................ 2,343 4.9 2
Mitsubishi........... 1,419 3.0 6
Jeep................. 1,156 2.4 7
Chrysler............. 1,038 2.2 7
GMC.................. 1,036 2.2 4
Infiniti............. 899 1.9 1
Acura................ 841 1.8 2
Mazda................ 535 1.1 2
Pontiac.............. 401 0.9 4
Lincoln.............. 378 0.8 4
Subaru............... 358 0.8 1
Audi................. 341 0.7 1
Mercury.............. 285 0.6 5
BMW.................. 274 0.6 2
Buick................ 269 0.6 4
Hyundai.............. 187 0.4 1
Volkswagen........... 174 0.4 1
Cadillac............. 158 0.3 2
Mercedes-Benz......... 155 0.3 1
Hummer................ 70 0.1 1
Kia................... 69 0.1 1
Porsche............... 63 0.1 1
Other................. 47 0.0 1
------ ----- ---
TOTAL............ 47,640 100.0% 112
====== ===== ===
10
The following table sets forth our geographic diversity, based on new
vehicle retail unit sales, and the number of dealerships and franchises we own:
PERCENTAGE OF OUR
NEW VEHICLE
RETAIL UNITS AS OF JULY 31, 2003
SOLD DURING THE SIX ----------------------------
MONTHS ENDED NUMBER OF NUMBER OF
MARKET AREA JUNE 30, 2003 DEALERSHIPS FRANCHISES
- ---------------------- ------------------- ----------- ----------
Oklahoma.............. 14.1% 10 20
Houston............... 13.1 7 6
New England........... 12.4 10 13
California............ 11.6 7 7
Austin................ 7.8 6 9
Florida............... 7.8 4 4
West Texas............ 7.3 7 14
New Orleans........... 6.4 4 6
Dallas................ 6.0 4 7
Atlanta............... 5.6 6 8
Beaumont.............. 3.3 2 10
Albuquerque........... 3.3 3 7
Denver................ 1.3 1 1
----- -- ---
TOTAL.............. 100.0% 71 112
===== == ===
We have diverse sources of revenues, including: new car sales, new
truck sales, used car sales, used truck sales, manufacturer remarketed vehicle
sales, parts sales, service sales, collision repair service sales, financing
fees, vehicle service contract fees, insurance fees and after-market product
sales. Sales revenues from new and used vehicle sales and parts and service
sales include sales to retail customers, other dealerships and wholesalers.
Finance and insurance revenues include fees from arranging financing, vehicle
service and insurance contracts, net of a provision for anticipated chargebacks.
Our total gross margin varies as our merchandise mix (the mix between
new vehicle sales, used vehicle sales (retail and wholesale), parts and service
sales, collision repair service sales and finance and insurance revenues)
changes. Our gross margin on the sale of products and services varies
significantly, with new vehicle sales generally resulting in the lowest gross
margin and finance and insurance revenues generally resulting in the highest
gross margin. When our new vehicle sales increase or decrease at a rate greater
than our other revenue sources, our gross margin responds inversely. Factors
such as seasonality, weather, cyclicality and manufacturers' advertising and
incentives may impact our merchandise mix, and therefore influence our gross
margin.
Selling, general and administrative expenses consist primarily of
incentive-based compensation for sales, administrative, finance and general
management personnel, rent, marketing, insurance and utilities. We believe that
approximately 65% of our selling, general and administrative expenses are
variable, allowing us to adjust our cost structure based on business trends. It
takes several months to adjust our cost structure when business volume changes
significantly. Interest expense consists of interest charges on interest-bearing
debt, including floorplan inventory financing, net of interest income earned. We
receive interest assistance from several of our manufacturers. This assistance,
which is reflected as a reduction of cost of sales, has ranged between 80% and
160% of our floorplan interest expense over the past three years, mitigating the
impact of interest rate changes on our financial results.
11
SELECTED OPERATIONAL AND FINANCIAL DATA FOR THE THREE MONTH PERIODS ENDED JUNE
30, 2003 AND JUNE 30, 2002
NEW VEHICLE DATA
(dollars in thousands, INCREASE/ PERCENT
except per unit amounts) 2003 2002 (DECREASE) CHANGE
---- ---- ---------- -------
Retail unit sales .......................... 25,463 23,486 1,977 8.4%
Retail sales revenues ...................... $693,454 $615,532 $ 77,922 12.7%
Gross profit (1) ........................... $ 51,471 $ 47,526 $ 3,945 8.3%
Average gross profit per retail unit sold .. $ 2,021 $ 2,024 $ (3) (0.1)%
Gross margin (1) ........................... 7.4% 7.7% (0.3)%
- ------------------
(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, INCREASE/ PERCENT
except per unit amounts) 2003 2002 (DECREASE) CHANGE
---- ---- ---------- -------
Retail unit sales .................... 16,167 16,221 (54) (0.3)%
Wholesale unit sales ................. 10,714 9,659 1,055 10.9%
Retail sales revenues ................ $ 230,956 $ 230,708 $ 248 0.1%
Wholesale sales revenues ............. 65,445 56,031 9,414 16.8%
--------- --------- ---------
Total revenues .................... $ 296,401 $ 286,739 $ 9,662 3.4%
Total gross profit ................... $ 25,959 $ 24,235 $ 1,724 7.1%
Total gross margin (1) ............... 8.8% 8.5% 0.3%
Average gross profit per retail
unit sold (2) ..................... $ 1,606 $ 1,494 $ 112 7.5%
Retail gross margin (1) .............. 11.2% 10.5% 0.7%
Wholesale gross loss ................. $ (2,215) $ (1,427) $ (788) (55.2)%
Average wholesale sales gross loss per
wholesale unit sold ............... $ (207) $ (148) $ (59) (39.9)%
Wholesale gross margin ............... (3.4)% (2.5)% (0.9)%
- ------------------
(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 is 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 is included in this number, as these transactions
facilitate retail vehicle sales and are not expected to generate profit.
PARTS AND SERVICE DATA
INCREASE/ PERCENT
(dollars in thousands) 2003 2002 (DECREASE) CHANGE
---- ---- ---------- -------
Sales revenues.............................. $ 116,279 $ 95,511 $ 20,768 21.7%
Gross profit................................ $ 65,040 $ 53,680 $ 11,360 21.2%
Gross margin................................ 55.9% 56.2% (0.3)%
12
FINANCE AND INSURANCE DATA
(dollars in thousands, INCREASE/ PERCENT
except per unit amounts) 2003 2002 (DECREASE) CHANGE
---- ---- ---------- -------
Retail new and used unit sales ........ 41,630 39,707 1,923 4.8%
Retail finance fees ................... $16,184 $14,361 $ 1,823 12.7%
Vehicle contract fees ................. 15,436 12,332 3,104 25.2%
Other finance and insurance revenues .. 10,126 8,629 1,497 17.3%
------- ------- -------
Total finance and insurance revenues $41,746 $35,322 $ 6,424 18.2%
Finance and insurance, net per
retail unit sold .................... $ 1,003 $ 890 $ 113 12.7%
SAME STORE REVENUES COMPARISON (1)
INCREASE/ PERCENT
(dollars in thousands) 2003 2002 (DECREASE) CHANGE
---- ---- ---------- -------
New vehicle retail sales ........ $ 573,056 $ 601,805 $ (28,749) (4.8)%
Used vehicle retail sales ....... 196,915 224,094 (27,179) (12.1)%
Used vehicle wholesale sales .... 56,918 54,636 2,282 4.2%
Parts and service sales ......... 97,807 92,653 5,154 5.6%
Retail finance fees ............. 13,279 14,053 (774) (5.5)%
Vehicle service contract fees ... 10,914 11,601 (687) (5.9)%
Other finance and insurance
revenues, net ................ 6,383 7,567 (1,184) (15.6)%
---------- ---------- ----------
Total same store revenues .... $ 955,272 $1,006,409 $ (51,137) (5.1)%
- ------------------
(1) Includes only those dealerships owned during all of the months of both
periods in the comparison.
THREE MONTHS ENDED JUNE 30, 2003 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2002
REVENUES. Revenues increased $114.8 million, or 11.1%, to $1,147.9
million for the three months ended June 30, 2003, from $1,033.1 million for the
three months ended June 30, 2002. The growth in total revenues came from
acquisitions, which were partially offset by a same store revenues decline of
$51.1 million.
New vehicle revenues increased $77.9 million, as acquired operations
offset a same store revenues decline of $28.7 million. The same store revenues
decreased, reflecting a less robust vehicle market for the three months ended
June 30, 2003, particularly with respect to our Ford dealerships.
Our used vehicle retail revenues increased $0.2 million as revenues
from acquired operations were offset by a $27.2 million decline in our same
store sales. The same store sales decline was due to continued high levels of
manufacturer incentives on new vehicle sales, which reduced the price difference
to the customer between a late-model used vehicle and a new vehicle, thus
switching more customers to new vehicles. Used vehicle wholesale sales increased
$9.4 million as the decline in used vehicle retail sales required us to
wholesale more used vehicles to keep inventory turns on target and inventory
levels in line with expected retail sales volumes.
The increase in parts and service revenues of $20.8 million included a
same store revenues increase of $5.2 million. The same store revenues increase
was driven by increased customer-pay parts and service sales and wholesale parts
sales, partially offset by reduced warranty sales.
Retail finance fee revenues increased $1.8 million, with a $0.8 million
same store decrease partially offsetting the revenues contributed by
acquisitions. The same store decline was caused primarily by a decline in retail
unit sales and was partially offset by the impact of a favorable interest rate
environment.
Vehicle service contract fee revenues increased $3.1 million, with same
store sales decreasing $0.7 million. During the three months ended June 30,
2003, revenues recognized related to contracts requiring
13
revenue deferral over the life of the contracts increased $1.6 million. The same
store decline is due to the decline in retail unit sales, partially offset by
increased revenues per unit sold. The increased revenues per unit sold was
driven by increased sales training and our customers' increased ability and
willingness to finance vehicle service contract purchases due to the low
interest rates available.
Other finance and insurance revenues increased $1.5 million, with same
store sales declining $1.2 million. The same store decreases were caused
primarily by the decline in retail unit sales and a decline in the sales of
insurance contracts, as we emphasized the sales of products with a higher value
to the customer.
GROSS PROFIT. Gross profit increased $23.4 million, or 14.6%, to $184.2
million for the three months ended June 30, 2003, from $160.8 million for the
three months ended June 30, 2002. The increase was attributable to an increase
in gross margin to 16.0% for the three months ended June 30, 2003, from 15.6%
for the three months ended June 30, 2002, and increased revenues derived from
acquisitions.
The gross margin increased as higher margin parts and service, and
finance and insurance revenues increased as a percentage of total revenues, and
increased finance and insurance revenues, per retail unit sold, offset the
decline in the new vehicle gross margin.
Although our new vehicle gross profit per retail unit sold remained
consistent with the prior year, the gross margin on new retail vehicle sales
declined to 7.4% from 7.7%, primarily due to an increase in the average selling
price of vehicles sold.
Our used vehicle gross profit per retail unit sold increased to $1,606
for the three months ended June 30, 2003, from $1,494 for the three months ended
June 30, 2002. The increase per retail unit sold and the increase in our used
vehicle retail gross margin improved primarily due to increased gross margins in
the Florida and Oklahoma markets. Our wholesale losses increased as we
wholesaled more vehicles in light of the decline in the used vehicle retail
sales volume.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $19.4 million, or 16.1%, to $140.2 million for
the three months ended June 30, 2003, from $120.8 million for the three months
ended June 30, 2002. The increase was primarily attributable to the additional
operations acquired. Selling, general and administrative expenses increased as a
percentage of gross profit to 76.1% from 75.1% due primarily to below expected
operating performance in our Atlanta and Dallas operations, partially offset by
a $1.0 million benefit from positive claims experience in our property and
casualty insurance program. 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 approximately 50 basis points higher when comparing the three months ended
June 30, 2003, to the three months ended June 30, 2002.
INTEREST EXPENSE. Floorplan and other interest expense, net, increased
$1.8 million, or 26.5%, to $8.6 million for the three months ended June 30,
2003, from $6.8 million for the three months ended June 30, 2002. The increase
was due to an increase in the average balance of debt outstanding, partially
offset by lower interest rates. During October 2001, we completed a $98.5
million stock offering and initially used the proceeds to pay down borrowings
under our credit facility, which resulted in a lower average balance of debt
outstanding during the three months ended June 30, 2002. By the end of 2002, we
had reborrowed the amounts used to pay down the floorplan portion of our credit
facility. Additionally, we have increased floorplan borrowings outstanding due
to acquisitions completed during the past twelve months and higher overall
inventory levels. At June 30, 2003, we had an 83 days supply of new vehicle
inventory, which is higher than our targeted 60 days supply. During the three
months ended June 30, 2003, there was an approximately 50 basis point reduction
in our average floorplan financing rate as compared to the three months ended
June 30, 2002.
14
SELECTED OPERATIONAL AND FINANCIAL DATA FOR THE SIX MONTH PERIODS ENDED JUNE 30,
2003 AND JUNE 30, 2002
NEW VEHICLE DATA
(dollars in thousands, INCREASE/ PERCENT
except per unit amounts) 2003 2002 (DECREASE) CHANGE
---- ---- ---------- -------
Retail unit sales .......................... 47,640 44,255 3,385 7.6%
Retail sales revenues ...................... $1,287,208 $1,168,055 $ 119,153 10.2%
Gross profit (1) ........................... $ 94,196 $ 90,098 $ 4,098 4.5%
Average gross profit per retail unit sold .. $ 1,977 $ 2,036 $ (59) (2.9)%
Gross margin (1) ........................... 7.3% 7.7% (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, INCREASE/ PERCENT
except per unit amounts) 2003 2002 (DECREASE) CHANGE
---- ---- ---------- -------
Retail unit sales ............. 32,479 32,380 99 0.3%
Wholesale unit sales .......... 20,811 18,908 1,903 10.1%
Retail sales revenues ......... $ 456,154 $ 448,641 $ 7,513 1.7%
Wholesale sales revenues ...... 126,449 107,099 19,350 18.1%
--------- --------- ---------
Total revenues ............. $ 582,603 $ 555,740 $ 26,863 4.8%
Total gross profit ............ $ 52,304 $ 49,402 $ 2,902 5.9%
Total gross margin (1) ........ 9.0% 8.9% 0.1%
Average gross profit per retail
unit sold (2) ............... $ 1,610 $ 1,526 $ 84 5.5%
Retail gross margin (1) ....... 11.5% 11.0% 0.5%
Wholesale gross loss .......... $ (4,010) $ (2,722) $ (1,288) (47.3)%
Average wholesale gross loss
per wholesale unit sold ..... $ (193) $ (144) $ (49) (34.0)%
Wholesale gross margin ........ (3.2)% (2.5)% (0.7)%
- ------------------
(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 is 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 is included in this number, as these
transactions facilitate retail vehicle sales and are not expected to
generate profit.
PARTS AND SERVICE DATA
INCREASE/ PERCENT
(dollars in thousands) 2003 2002 (DECREASE) CHANGE
---- ---- ---------- ------
Sales revenues.............................. $ 227,392 $ 187,202 $ 40,190 21.5%
Gross profit................................ $ 126,696 $ 104,591 $ 22,105 21.1%
Gross margin................................ 55.7% 55.9% (0.2)%
15
FINANCE AND INSURANCE, NET
(dollars in thousands, PERCENT
except per unit amounts) 2003 2002 INCREASE CHANGE
---- ---- -------- ------
Retail new and used unit sales.............. 80,119 76,635 3,484 4.5%
Retail finance fees......................... $31,363 $27,772 $ 3,591 12.9%
Vehicle service contract fees............... 30,634 23,815 6,819 28.6%
Other finance and insurance revenues........ 18,471 16,594 1,877 11.3%
------- ------- ---------
Total finance and insurance revenues..... $80,468 $68,181 $ 12,287 18.0%
Finance and insurance, net per
retail unit sold.......................... $ 1,004 $ 890 $ 114 12.8%
SAME STORE REVENUES COMPARISON (1)
INCREASE/ PERCENT
(dollars in thousands) 2003 2002 (DECREASE) CHANGE
---- ---- -------- ------
New vehicle retail sales.................... $1,051,296 $1,136,481 $ (85,185) (7.5)%
Used vehicle retail sales................... 389,503 435,480 (45,977) (10.6)%
Used vehicle wholesale sales................ 106,601 102,612 3,989 3.9%
Parts and service sales..................... 188,516 180,500 8,016 4.4%
Retail finance fees......................... 25,424 27,192 (1,768) (6.5)%
Vehicle service contract fees............... 21,641 22,523 (882) (3.9)%
Other finance and insurance
revenues, net............................ 12,285 14,067 (1,782) (12.7)%
---------- ---------- ---------
Total same store revenues............ $1,795,266 $1,918,855 $(123,589) (6.4)%
- ------------------
(1) Includes only those dealerships owned during all of the months of both
periods in the comparison.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2002
REVENUES. Revenues increased $198.5 million, or 10.0%, to $2,177.7
million for the six months ended June 30, 2003, from $1,979.2 million for the
six months ended June 30, 2002. The growth in total revenues came from
acquisitions, which were partially offset by a same store revenues decline of
$123.6 million.
New vehicle revenues increased $119.2 million, as acquired operations
offset a same store revenues decline of $85.2 million. The same store revenues
decreased, reflecting a less robust vehicle market for the six months ended June
30, 2003, particularly with respect to our Ford and Toyota dealerships.
Our used vehicle retail revenues increased $7.5 million as revenues
from acquired operations were partially offset by a $46.0 million decline in our
same store sales. The same store sales decline was due to high levels of
manufacturer incentives on new vehicle sales, which reduced the price difference
to the customer between a late-model used vehicle and a new vehicle, thus
switching more customers to new vehicles. Used vehicle wholesale sales increased
$19.4 million as the decline in used vehicle retail sales required us to
wholesale more used vehicles to keep inventory turns on target and inventory
levels in line with expected retail sales volumes.
The increase in parts and service revenues of $40.2 million included a
same store revenues increase of $8.0 million. The same store revenues increase
was driven by increased customer-pay parts and service sales and wholesale parts
sales, partially offset by reduced warranty sales.
Retail finance fee revenues increased $3.6 million, with a $1.8 million
same store decrease partially offsetting the revenues contributed by
acquisitions. The same store decline was caused primarily by the decline in
retail unit sales which was partially offset by the impact of a favorable
interest rate environment.
Vehicle service contract fee revenues increased $6.8 million, with same
store sales decreasing $0.9 million. During the six months ended June 30, 2003,
revenues recognized related to contracts requiring
16
revenue deferral over the life of the contracts increased approximately $3.0
million. The same store decline is due to the decline in retail unit sales,
partially offset by increased revenues per unit sold. The increased revenues per
unit sold was driven by the receipt of increased annual incentives on vehicle
service contract sales, increased sales training and our customers' increased
ability and willingness to finance vehicle service contract purchases due to the
low interest rates available.
Other finance and insurance revenues increased $1.9 million, with same
store sales decreasing $1.8 million. The same store decline was caused primarily
by the decline in retail unit sales.
GROSS PROFIT. Gross profit increased $41.4 million, or 13.3%, to $353.7
million for the six months ended June 30, 2003, from $312.3 million for the six
months ended June 30, 2002. The increase was attributable to an increase in
gross margin to 16.2% for the six months ended June 30, 2003, from 15.8% for the
six months ended June 30, 2002, and increased revenues derived from
acquisitions.
The gross margin increased as higher margin parts and service, and
finance and insurance revenues increased as a percentage of total revenues, and
increased finance and insurance revenues, per retail unit sold, offset the
decline in the new gross margin.
Our new vehicle gross profit per retail unit sold declined to $1,977
for the six months ended June 30, 2003, from $2,036 for the six months ended
June 30, 2002, primarily due to a decline in the floorplan assistance per retail
unit sold recognized and declines in gross profit per retail unit sold in our
Houston operations. The gross margin on new retail vehicle sales declined to
7.3% from 7.7%, primarily due to an increase in the average selling price of
vehicles sold and declines in the new vehicle gross profit per retail unit sold.
Our used vehicle gross profit per retail unit sold increased to $1,610
for the six months ended June 30, 2003, from $1,526 for the six months ended
June 30, 2002. The increase per retail unit sold and the increase in our used
vehicle retail gross margin improved primarily due to increased gross margins in
the Florida and Oklahoma markets. Our wholesale losses increased as we
wholesaled more vehicles in light of the decline in the used vehicle retail
sales volume.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $37.3 million, or 15.7%, to $275.0 million for
the six months ended June 30, 2003, from $237.7 million for the six months ended
June 30, 2002. The increase was primarily attributable to the additional
operations acquired. Selling, general and administrative expenses increased as a
percentage of gross profit to 77.8% from 76.1% due primarily to below expected
operating performance in our Atlanta and Dallas operations, and adjustments to
variable selling expenses lagging the decline in sales volume. Partially
offsetting the increases in selling, general and administrative expenses was a
$1.0 million benefit from positive claims experience in our property and
casualty insurance program.
INTEREST EXPENSE. Floorplan and other interest expense, net, increased
$2.5 million, or 18.0%, to $16.4 million for the six months ended June 30, 2003,
from $13.9 million for the six months ended June 30, 2002. The increase was due
to an increase in the average balance of debt outstanding, partially offset by
lower interest rates. During October 2001, we completed a $98.5 million stock
offering and initially used the proceeds to pay down borrowings under our credit
facility, which resulted in a lower average balance of debt outstanding during
the six months ended June 30, 2002. By the end of 2002, we had reborrowed the
amounts used to pay down the floorplan portion of our credit facility.
Additionally, we have increased floorplan borrowings outstanding due to
acquisitions completed during the past twelve months and higher overall
inventory levels. During the six months ended June 30, 2003, there was an
approximately 50 basis point reduction in our average floorplan financing rate
as compared to the six months ended June 30, 2002.
17
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity are cash on hand, cash from
operations, our credit facility, which includes the floorplan tranche and the
acquisition tranche, and equity and debt offerings.
CASH FLOWS
Total cash at June 30, 2003, was $21.2 million.
OPERATING ACTIVITIES. During the first six months of 2003, we generated
$15.3 million of cash flow from operations, primarily driven by net income plus
depreciation and amortization, partially offset by excess cash balances used to
fund inventory purchases. Amounts received from reduction of contracts in
transit and vehicle receivables outstanding were used to pay down the floorplan
balance.
INVESTING ACTIVITIES. During the first six months of 2003, we used
approximately $19.8 million in investing activities. We paid $18.2 million for
purchases of property and equipment, of which $12.8 million was used for the
purchase of land and construction of facilities for new or expanded operations.
We received $5.0 million in proceeds from the sales of property and equipment.
We have used $12.7 million in the acquisitions of three franchises and received
$7.4 million from the sale of one franchise, for which no gain was recognized.
FINANCING ACTIVITIES. During the first six months of 2003, we obtained
approximately $1.4 million from financing activities, primarily from issuances
of stock to our benefit plans, net of repurchases of our common stock.
WORKING CAPITAL. At June 30, 2003, we had working capital of $122.0
million, which is approximately $30 million higher than we believe we need to
operate our business. While we cannot guarantee it, based on current facts and
circumstances, we believe we have adequate cash flows, coupled with borrowing
capacity under our credit facility, to fund our current operations, capital
expenditures and acquisitions budgeted for 2003. If our capital expenditure or
acquisition plans, as outlined below, change, we may need to access the private
or public capital markets to obtain additional funding.
RECENT DEVELOPMENTS
On July 31, 2003, we announced our intention to commence a private
placement offering of $150.0 million of a new issue of senior subordinated
notes. We intend to use the net proceeds of the offering for general corporate
purposes, including the retirement on or prior to the initial redemption date of
all of our outstanding 10 7/8% senior subordinated notes due 2009 and potential
acquisitions. The existing notes are redeemable beginning March 1, 2004 at a
redemption price of 105.438% of the principal amount, plus accrued and unpaid
interest. At June 30, 2003 the principal balance of these notes was $75.4
million. Pending such uses, we intend to temporarily reduce outstanding
floorplan borrowings.
CREDIT FACILITIES
During June 2003, we completed an amendment to our existing credit
facility that extends the term until June 2006. The $775.0 million credit
facility consists of two tranches: 75% of the facility is for floorplan
financing ("the Floorplan Tranche") and 25% is for working capital and
acquisition financing ("the Acquisition Tranche"). The Acquisition Tranche,
which bears interest at a rate of LIBOR plus a margin varying between 175 and
325 basis points, determined based on a ratio of debt to equity, totals $193.8
million and, as of July 31, 2003, $189.7 million was available, after deducting
$4.1 million for outstanding letters of credit, to be drawn for working capital,
acquisition or floorplan financing. At June 30, 2003, there was $425.6 million
outstanding under the Floorplan Tranche, which bears interest at rates of LIBOR
plus 112.5 basis points for new vehicle inventory and LIBOR plus 125 basis
points for used vehicle inventory. Other than the changes in the maturity date
and the total amount available to be borrowed, there were no significant changes
in the terms of the agreement.
Simultaneous with the amendment of the above described credit facility,
we entered into a separate floorplan financing arrangement with Ford Motor
Credit Company to provide financing for our entire Ford,
18
Lincoln and Mercury new vehicle inventory. The arrangement provides for up to
$300.0 million of financing for the inventory at an interest rate of Prime plus
100 basis points minus certain incentives. We expect the net cost of these
borrowings, after all incentives, to approximate our floorplan cost under the
$775.0 million credit facility. At June 30, 2003, there was $236.5 million
outstanding under this floorplan financing arrangement. This floorplan financing
arrangement matures in June 2006.
On July 25, 2003, one of our interest rate swaps, with a notional
amount of $100.0 million, reached its termination date. As such, at this time,
we have one interest rate swap outstanding, with a notional amount of $100.0
million that converts the interest rate on a portion of our floorplan borrowings
from the 30-day LIBOR-based rate to a fixed rate of 3.75% plus the applicable
spread.
CAPITAL EXPENDITURES
Our capital expenditures include expenditures to extend the useful life
of current facilities and expenditures to start or expand operations.
Historically, our annual capital expenditures, exclusive of new or expanded
operations, have approximately equaled our annual depreciation charge.
Expenditures relating to the construction or expansion of dealership facilities,
generally, are driven by new franchises being awarded to us by a manufacturer,
significant growth in sales at an existing facility or manufacturer imaging
programs.
ACQUISITIONS AND ACQUISITION FINANCING
Our acquisition target for 2003 is to complete platform and tuck-in
acquisitions that have approximately $800 million in annual revenues. We expect
the cash needed to complete our acquisitions will come from excess working
capital, operating cash flows of our dealerships, borrowings under our credit
facility and debt or equity offerings. Depending on the market value of our
common stock, we may issue common stock to fund a portion of the purchase price
of acquisitions.
In July 2003, we completed a market consolidation project in
conjunction with DaimlerChrysler's Alpha Initiative in Dallas, Texas. The
transaction resulted in the consolidation of three dealerships consisting of
four franchises into one dealership with Dodge, Chrysler and Jeep franchises.
STOCK REPURCHASE
In February 2003, the board of directors authorized us to repurchase up
to $25.0 million of our stock, subject to management's judgment and the
restrictions of our various debt agreements. Our agreements, subject to other
covenants, allow us to use approximately 33% of our cumulative net income to
repurchase stock and pay dividends. During the first six months of 2003 we
repurchased approximately 117,000 shares for approximately $2.5 million. As of
June 30, 2003, we had the capacity to repurchase an additional $22.5 million of
stock under the board of directors' authorization.
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 included in our Annual Report on Form
10-K for the year ended December 31, 2002.
19
INVENTORIES
New, used and demonstrator vehicles are stated at the lower of cost or
market. Vehicle inventory cost consists of the amount paid to acquire the
inventory, plus reconditioning cost, cost of equipment added and transportation
cost. Additionally, we receive interest assistance from most of our
manufacturers. The assistance is accounted for as a purchase discount and is
reflected as a reduction to the inventory cost on the balance sheet and as a
reduction to cost of sales in the income statement as the vehicles are sold.
Parts and accessories are stated at the lower of cost (determined on a first-in,
first-out basis) or market. As the market value of our inventories typically
declines with the passage of time, valuation reserves are provided against the
inventory balances based on the agings of the inventories and market trends. In
particular, used vehicles present added complexity to the inventory valuation
process. There is no standardized source for determining exact values, as each
vehicle and each market in which we operate, is unique. As such, these factors
are also considered in determining the appropriate level of valuation reserves.
RETAIL FINANCE AND VEHICLE SERVICE CONTRACT REVENUES RECOGNITION
We arrange financing for customers through various institutions and
receive financing fees based on the difference between the loan rates charged to
customers over predetermined financing rates set by the financing institution.
In addition, we receive fees from the sale of vehicle service contracts to
customers.
We may be charged back ("chargebacks") for unearned financing fees or
vehicle service contract fees in the event of early termination of the contracts
by customers. The revenues from financing fees and vehicle service contract fees
in administrator-obligor states are recorded at the time of the sale of the
vehicles and a reserve for future chargebacks is established based on historical
operating results and the termination provisions of the applicable contracts. In
dealer-obligor states, revenues from vehicle service contract fees and related
direct costs are deferred and recognized over the life of the contracts.
Currently, none of the states in which we operate are dealer-obligor states.
INTANGIBLE ASSETS
In June 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was
issued. The statement requires, at least annually, an assessment for impairment
of goodwill and other indefinite life intangible assets (franchise value) by
applying a fair-value based test. We complete the required assessment at the end
of each calendar year, and at such other times as required by events and
circumstances at a reporting unit indicating a potential reduction of fair value
below book value. In performing the assessment, we estimate fair value using a
calculation based on historical and expected cash flows of the dealerships,
market trends and conditions, review of completed transactions and current
market valuations. Our fair value estimate requires numerous subjective
assumptions and estimates to determine fair value. Depending on future levels of
cash flows and other facts and circumstances, and changes in our estimates and
assumptions, we could be required to recognize impairment charges in the future.
20
CAUTIONARY STATEMENT ABOUT FORWARD LOOKING STATEMENTS
This quarterly report includes certain "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. These statements include statements
regarding our plans, goals, beliefs or current expectations, including those
plans, goals, beliefs and expectations of our officers and directors with
respect to, among other things:
- 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
- the completion of announced notes offering
- the early retirement of outstanding senior subordinated notes
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 adverse international developments such as war,
terrorism, political conflicts or other hostilities
- regulatory environment, adverse legislation, or unexpected
litigation
- our principal automobile manufacturers, especially Ford, Toyota, GM
and DaimlerChrysler, may not continue to produce or make available
to us vehicles that are in high demand by our customers
- 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
This information and additional factors that could affect our operating
results and performance are described in our filings with the SEC. We urge you
to carefully consider those factors.
All forward-looking statements attributable to us are qualified in
their entirety by this cautionary statement.
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following information about our market sensitive financial
instruments updates the information provided as of December 31, 2002, in our
Annual Report on Form 10-K and constitutes a "forward-looking statement." Our
major market risk exposure is changing interest rates. Our policy is to manage
interest rate exposure through the use of a combination of fixed and floating
rate debt. Additionally, interest rate swaps may be used to adjust our exposure
to interest rate movements. These swaps are entered into with financial
institutions with investment grade credit ratings, thereby minimizing the risk
of credit loss. All interest rate swaps are non-trading and qualify for hedge
accounting.
Since December 31, 2002, our variable rate floorplan notes payable have
increased due to increases in inventory levels. A 100 basis point increase in
interest rates would have increased floorplan interest expense approximately
$3.2 million for the six month period ended June 30, 2003, before the impact of
our interest rate swaps. We have had no other significant balances outstanding
under variable rate borrowing agreements.
At times, we have used interest rate swaps to reduce our exposure to
interest rate fluctuations. Currently, we have two interest rate swaps
outstanding, each with notional amounts of $100.0 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 $1.0 million for the six month period ended June 30, 2003.
One of the swaps, with a notional amount of $100.0 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 $2.2 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 $12.8 million during the first six months of 2003 and $12.6
million during the first six months of 2002. We treat this interest assistance
as a purchase discount, and reflect it as a reduction of new vehicle cost of
sales as new vehicles are sold. Approximately half of the assistance we receive
varies with changes in interest rates.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Within 90 days before the filing of this Report, the Company's
principal executive officer and principal financial officer evaluated the
effectiveness of the Company's disclosure controls and procedures. Based on the
evaluation, the Company's principal executive officer and principal financial
officer believe that:
- 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.
22
CHANGES IN INTERNAL CONTROLS
There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect the Company's
internal controls subsequent to their evaluation, nor have there been any
corrective actions with regard to significant deficiencies or material
weaknesses.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, our dealerships are named in claims involving the
manufacture of automobiles, contractual disputes and other matters arising in
the ordinary course of business.
The Texas Automobile Dealers Association ("TADA") and certain new
vehicle dealerships in Texas that are members of the TADA, including a number of
our Texas dealership subsidiaries, have been named in two state court class
action lawsuits and one federal court class action lawsuit. The three actions
allege that since January 1994, Texas dealers have deceived customers with
respect to a vehicle inventory tax and violated federal antitrust and other
laws. In April 2002, the state court in which two of the actions are pending
certified classes of consumers on whose behalf the action would proceed. On
October 25, 2002, the Texas Court of Appeals affirmed the trial court's order of
class certification in the state action and we are appealing that ruling to the
Texas Supreme Court. In the other action, on March 26, 2003, the federal court
also certified a class of consumers, but denied a request to certify a
defendants' class consisting of all TADA members. On May 19, 2003, the Fifth
Circuit Court of Appeals granted a request for permission to appeal the class
certification ruling of the lower federal court. State and federal courts have
ordered the parties in the three cases to participate in mediation. In May 2003,
counsel for the parties agreed to withhold any objections to mediation and
agreed to mediate the cases. We intend to vigorously defend ourselves and assert
available defenses with respect to each of the foregoing matters and may have
certain insurance coverage and rights of indemnification. While we do not
believe this litigation will have a material adverse effect on our financial
condition or results of operations, no assurance can be given as to its ultimate
outcome and a settlement or an adverse resolution of this matter could result in
the payment of significant costs and damages.
In addition to the foregoing case, there are currently no legal
proceedings pending against or involving us that, in our opinion, based on
current known facts and circumstances, are expected to have a material adverse
effect on our financial position.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the May 21, 2003, Annual Meeting of Stockholders, our stockholders
voted on three matters.
1) Election of two directors:
The stockholders elected two nominees as directors for a
three-year term based on the following voting results:
VOTES CAST:
------------------------------------
AGAINST OR
NOMINEES ELECTED FOR WITHHELD
- ----------------------- ------------------ ----------------
B.B. Hollingsworth, Jr. 18,763,918 779,264
Robert E. Howard II 18,911,410 631,772
Our other continuing directors are:
John L. Adams
Louis E. Lataif
Stephen D. Quinn
Max P. Watson, Jr.
Kevin H. Whalen
2) Approval of amendment to 1998 Employee Stock Purchase Plan:
The stockholders approved the amendment to the 1998 Employee
Stock Purchase Plan. The results of the voting were as
follows:
For 20,608,506
Against 1,809
Abstain 26,277
3) Appointment of Independent Public Auditors:
The stockholders ratified the appointment of Ernst & Young LLP
as independent auditors for the year ended December 31, 2003.
The results of the voting were as follows:
For 19,431,551
Against 103,572
Abstain 8,059
ITEM 5. OTHER INFORMATION
The certifications by our chief executive officer and chief financial
officer required by Section 1350 of Title 18 of the United States Code, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, have been
filed as exhibits 32.1 and 32.2, respectively, to this Quarterly Report on Form
10-Q.
24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
10.1 Fifth Amended and Restated Revolving Credit Agreement dated June
2, 2003.
10.2 Form of Ford Motor Credit Company Automotive Wholesale Plan
Application for Wholesale Financing and Security Agreement.
11.1 Statement re: computation of earnings per share is included under
Note 3 to the financial statements.
31.1 Certification of Chief Executive Officer under Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer under Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer under Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer under Section 906 of the
Sarbanes-Oxley Act of 2002.
B. REPORTS ON FORM 8-K:
On July 31, 2003, the Company filed a Current Report on Form 8-K
reporting under Item 12.
On July 31, 2003, the Company filed a Current Report on Form 8-K
reporting under Item 5.
On July 10, 2003, the Company filed a Current Report on Form 8-K
reporting under Item 9.
On June 3, 2003, the Company filed a Current Report on Form 8-K
reporting under Item 9.
On June 2, 2003, the Company filed a Current Report on Form 8-K
reporting under Item 9.
On May 21, 2003, the Company filed a Current Report on Form 8-K
reporting under Item 9.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Group 1 Automotive, Inc.
July 31, 2003 By:/s/ Scott L. Thompson
- ------------- --------------------------------------------
Date Scott L. Thompson, Executive Vice President,
Chief Financial Officer and Treasurer
26
INDEX TO EXHIBITS
Exhibit No. Description
10.1 Fifth Amended and Restated Revolving Credit Agreement
dated June 2, 2003.
10.2 Form of Ford Motor Credit Company Automotive
Wholesale Plan Application for Wholesale Financing
and Security Agreement.
11.1 Statement re: computation of earnings per share is
included under Note 3 to the financial statements.
31.1 Certification of Chief Executive Officer under
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer under
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer under
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer under
Section 906 of the Sarbanes-Oxley Act of 2002.