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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 September 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 22,685,171
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
SEPTEMBER 30, DECEMBER 31,
2003 2002
---- ----
(unaudited)
ASSETS
CURRENT ASSETS:
Cash.............................................................................. $ 27,498 $ 24,333
Contracts-in-transit and vehicle receivables, net................................. 136,281 178,623
Accounts and notes receivable, net................................................ 66,976 58,194
Inventories, net.................................................................. 602,099 622,205
Deferred income taxes ............................................................ 11,858 10,793
Other assets...................................................................... 8,503 8,890
----------- ----------
Total current assets....................................................... 853,215 903,038
----------- ----------
PROPERTY AND EQUIPMENT, net......................................................... 124,887 116,270
GOODWILL............................................................................ 310,422 307,907
INTANGIBLE ASSETS................................................................... 67,885 60,879
INVESTMENTS RELATED TO INSURANCE POLICY SALES....................................... 19,413 15,813
DEFERRED COSTS RELATED TO INSURANCE POLICY AND VEHICLE SERVICE CONTRACT SALES....... 13,350 16,824
OTHER ASSETS........................................................................ 8,402 3,034
----------- ----------
Total assets............................................................... $ 1,397,574 $1,423,765
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Floorplan notes payable........................................................... $ 388,635 $ 652,538
Current maturities of long-term debt.............................................. 1,002 997
Accounts payable.................................................................. 99,911 90,809
Accrued expenses.................................................................. 83,310 64,939
----------- ----------
Total current liabilities.................................................. 572,858 809,283
----------- ----------
DEBT, net of current maturities..................................................... 13,077 9,073
SENIOR SUBORDINATED NOTES........................................................... 221,785 74,149
DEFERRED INCOME TAXES............................................................... 15,229 7,651
OTHER LIABILITIES................................................................... 28,078 31,005
----------- ----------
Total liabilities before deferred revenues................................. 851,027 931,161
----------- ----------
DEFERRED REVENUES FROM INSURANCE POLICY SALES....................................... 22,126 24,637
DEFERRED REVENUES FROM VEHICLE SERVICE CONTRACT SALES............................... 18,565 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........................................................ 255,322 254,145
Retained earnings ................................................................ 271,514 215,024
Accumulated other comprehensive loss ............................................. (1,742) (3,359)
Treasury stock, at cost, 790,744 and 942,419 shares............................... (19,473) (22,625)
----------- ----------
Total stockholders' equity................................................. 505,856 443,417
----------- ----------
Total liabilities and stockholders' equity................................. $ 1,397,574 $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 NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
REVENUES:
New vehicle retail sales.............................. $ 772,632 $ 739,193 $ 2,059,840 $ 1,907,248
Used vehicle retail sales............................. 230,978 255,228 687,132 703,869
Used vehicle wholesale sales.......................... 69,102 58,574 195,551 165,673
Parts and service sales............................... 121,792 108,295 349,184 295,497
Retail finance fees................................... 17,111 16,577 48,474 44,349
Vehicle service contract fees......................... 17,170 14,201 47,804 38,016
Other finance and insurance revenues, net............. 10,705 10,520 29,176 27,114
---------- ---------- ----------- -----------
Total revenues..................................... 1,239,490 1,202,588 3,417,161 3,181,766
COST OF SALES:
New vehicle retail sales.............................. 716,014 686,312 1,909,026 1,764,269
Used vehicle retail sales............................. 203,428 227,120 603,268 623,637
Used vehicle wholesale sales.......................... 71,373 60,797 201,832 170,618
Parts and service sales............................... 54,228 47,851 154,924 130,462
---------- ---------- ----------- -----------
Total cost of sales................................ 1,045,043 1,022,080 2,869,050 2,688,986
---------- ---------- ----------- -----------
GROSS PROFIT............................................ 194,447 180,508 548,111 492,780
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES............ 147,913 137,137 422,930 374,787
DEPRECIATION AND AMORTIZATION EXPENSE................... 3,623 3,299 10,564 8,920
---------- ---------- ----------- -----------
Income from operations ................................. 42,911 40,072 114,617 109,073
OTHER INCOME AND (EXPENSE):
Floorplan interest expense, excludes manufacturer
interest assistance................................. (4,811) (5,082) (16,493) (13,814)
Other interest expense, net........................... (3,915) (2,424) (8,618) (7,615)
Other expense, net.................................... (18) (80) (107) (190)
---------- ---------- ----------- -----------
INCOME BEFORE INCOME TAXES.............................. 34,167 32,486 89,399 87,454
PROVISION FOR INCOME TAXES.............................. 12,473 12,345 32,909 32,683
---------- ---------- ----------- -----------
NET INCOME.............................................. $ 21,694 $ 20,141 $ 56,490 $ 54,771
========== ========== =========== ===========
EARNINGS PER SHARE:
Basic................................................. $ 0.96 $ 0.88 $ 2.51 $ 2.38
Diluted............................................... $ 0.92 $ 0.84 $ 2.42 $ 2.26
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic................................................. 22,642,168 23,018,226 22,499,158 23,013,492
Diluted............................................... 23,611,631 24,026,015 23,299,130 24,222,717
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)
NINE MONTHS ENDED
-----------------
SEPTEMBER 30,
-------------
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................... $ 56,490 $ 54,771
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................... 10,564 8,920
Deferred income taxes....................................................... 7,167 5,087
Provision for doubtful accounts and uncollectible notes..................... (146) 687
Loss on sale of assets...................................................... 164 102
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............................. 43,683 (15,678)
Accounts receivable...................................................... (4,463) (764)
Inventories.............................................................. 59,539 (23,188)
Prepaid expenses and other assets........................................ (1,007) (7,190)
Floorplan notes payable.................................................. (112,214) 32,634
Accounts payable, accrued expenses and deferred revenues................. 12,697 4,155
---------- ---------
Total adjustments..................................................... 15,984 4,351
---------- ---------
Net cash provided by operating activities..................... 72,474 59,122
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable................................................. (3,570) (8,079)
Collections on notes receivable.............................................. 1,027 978
Purchases of property and equipment.......................................... (23,999) (30,472)
Proceeds from sales of property and equipment................................ 10,925 1,028
Proceeds from sales of franchises............................................ 7,414 7,430
Cash paid in acquisitions, net of cash received.............................. (22,889) (78,517)
---------- ---------
Net cash used by investing activities......................... (31,092) (107,632)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) borrowings on revolving credit facility....................... (185,242) 64,230
Principal payments of long-term debt......................................... (787) (1,600)
Repurchase of senior subordinated notes...................................... -- (6,800)
Proceeds from issuance of senior subordinated notes.......................... 143,480 --
Proceeds from issuance of common stock to benefit plans, including tax
benefit..................................................................... 9,088 9,043
Repurchase of common stock, amounts based on settlement date................. (4,756) (11,082)
---------- ---------
Net cash (used) provided by financing activities.............. (38,217) 53,791
---------- ---------
NET INCREASE IN CASH ........................................................... 3,165 5,281
CASH, beginning of period....................................................... 24,333 16,861
---------- ---------
CASH, end of period............................................................. $ 27,498 $ 22,142
========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for-
Interest..................................................................... $ 30,209 $ 20,668
Taxes........................................................................ $ 14,959 $ 21,931
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 of a normal and recurring nature 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 NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
(dollars in thousands, except per share amounts)
Net income as reported........................................... $ 21,694 $ 20,141 $ 56,490 $ 54,771
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............................................. (1,050) (1,535) (2,711) (3,829)
-------- --------- --------- ---------
Pro forma net income............................................. $ 20,644 $ 18,606 $ 53,779 $ 51,062
======== ========= ========= =========
Pro forma earnings per share:
Basic - as reported............................................. $ 0.96 $ 0.88 $ 2.51 $ 2.38
Basic - pro forma............................................... $ 0.91 $ 0.81 $ 2.39 $ 2.22
Diluted - as reported........................................... $ 0.92 $ 0.84 $ 2.42 $ 2.26
Diluted - pro forma............................................. $ 0.87 $ 0.77 $ 2.31 $ 2.11
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
expected 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.
6
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.
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 ending after
December 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 NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
Common stock issued, beginning of period......................... 23,454,046 23,125,031 23,183,226 23,029,853
Weighted average common stock issued-
Employee Stock Purchase Plan................................ 55,397 30,842 101,850 67,648
Stock options exercised..................................... 77,941 5,009 242,718 259,436
Less: Weighted average treasury shares held and weighted
average shares repurchased and cancelled ..................... (945,216) (142,656) (1,028,636) (343,445)
---------- ---------- ---------- ----------
Shares used in computing basic earnings per share................ 22,642,168 23,018,226 22,499,158 23,013,492
Dilutive effect of stock options, net of assumed repurchase of
treasury stock................................................ 969,463 1,007,789 799,972 1,209,225
---------- ---------- ---------- ----------
Shares used in computing diluted earnings per share.............. 23,611,631 24,026,015 23,299,130 24,222,717
========== ========== ========== ==========
7
4. BUSINESS COMBINATIONS AND DISPOSITIONS:
During the first nine months of 2003, the Company purchased seven
automobile dealership franchises in New Orleans and Oklahoma, opened a new
add-point Ford dealership in Pensacola, Florida and completed a market
consolidation project in conjunction with DaimlerChrysler's Alpha Initiative in
Dallas, Texas. The acquisitions were accounted for as purchases. The aggregate
consideration paid in completing the acquisitions included approximately $22.9
million in cash, net of cash received, the assumption of an estimated $38.5
million of inventory financing and the assumption of $4.8 million of notes
payable. The consolidated balance sheet includes preliminary allocations of the
purchase price for all of the acquisitions, and the allocations are subject to
final adjustment. These allocations resulted in recording approximately $7.0
million of franchise value intangible assets and $6.1 million of goodwill.
Included in the acquisitions discussed above, the Company purchased
three automobile dealership franchises from Robert E. Howard II, a director of
the Company, and sold one automobile dealership franchise to a company owned by
Mr. Howard. The Company acquired Ford, Lincoln and Mercury franchises, with
$131.2 million in annual revenues, and sold a Mercedes-Benz franchise, with
$47.4 million in annual revenues. In completing the acquisitions, the aggregate
consideration paid by the Company consisted of $12.7 million of cash, net of
cash received and the assumption of approximately $22.9 million of inventory
financing. The Company received $7.4 million in cash from the sale of the
Mercedes-Benz dealership franchise and related assets, including goodwill of
approximately $3.6 million. The Company believes the sale of the Mercedes-Benz
dealership was at fair market value. The proceeds received exceeded the
Company's basis in the dealership by approximately $1.3 million. This excess
sales price over cost was recorded as a reduction of the cost basis in the newly
acquired Ford, Lincoln and Mercury dealerships. Additionally, the outstanding
inventory financing for the Mercedes-Benz dealership was assumed by a company
owned by Mr. Howard. As a result of the two transactions described above, the
Company's goodwill was reduced by $3.5 million and its intangible asset for
franchise value increased $0.5 million.
5. SENIOR SUBORDINATED NOTES:
During August 2003, the Company issued 8 1/4% Senior Subordinated Notes
due 2013 (the "8 1/4% Notes") with a face amount of $150.0 million. The 8 1/4%
Notes pay interest semi-annually on February 15 and August 15, each year
beginning February 15, 2004. The 8 1/4% Notes have the following redemption
provisions:
- The Company, before August 15, 2006, may redeem up to
$52.5 million of the 8 1/4% Notes with the proceeds of
certain public offerings of common stock at a redemption
price of 108.250% of the principal amount plus accrued
interest.
- The Company may redeem all or a portion of the 8 1/4%
Notes prior to August 15, 2008, at a redemption price
equal to the principal amount plus a make-whole premium
to be determined, plus accrued interest.
- The Company may redeem all or a portion of the 8 1/4%
Notes at redemption prices of 104.125%, 102.750%,
101.375% and 100.000% of the principal amount plus
accrued interest during the twelve-month periods
beginning August 15, 2008, 2009, 2010 and 2011 and
thereafter, respectively.
The 8 1/4% Notes are jointly and severally and fully and
unconditionally guaranteed, on an unsecured senior subordinated basis, by all
subsidiaries of the Company, other than certain minor subsidiaries (the
"Subsidiary Guarantors"). All of the Subsidiary Guarantors are wholly-owned
subsidiaries of the Company. Additionally, the 8 1/4% Notes are subject to
various covenants, including financial ratios, and other requirements that must
be maintained by the Company.
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
intends to redeem all or part of the Notes at a redemption price of 105.438% of
the principal amount plus accrued interest on the initial redemption
8
date of March 1, 2004. The Notes are jointly and severally and fully and
unconditionally guaranteed, on an unsecured senior subordinated basis, by all of
the Subsidiary Guarantors. Additionally, the Notes are subject to various
covenants, including financial ratios, and other requirements that must be
maintained by the Company.
6. FLOORPLAN NOTES PAYABLE AND LONG-TERM DEBT:
During June 2003, the Company completed an amendment to its existing
$900.0 million credit facility and completed a new arrangement with Ford Motor
Credit Company. The two facilities provide the Company with $1.075 billion of
borrowing capacity.
The amendment to the existing credit facility extended the term until
June 2006 and provides $775.0 million of financing, consisting 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 provisions 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 and matures in June 2006. 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 NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
(dollars in thousands)
Net income....................................................... $ 21,694 $ 20,141 $ 56,490 $ 54,771
Other comprehensive income (loss):
Change in fair value of interest rate swaps, net of tax...... 580 (1,630) 1,617 (2,770)
---------- ---------- ---------- ----------
Comprehensive income ............................................ $ 22,274 $ 18,511 $ 58,107 $ 52,001
========== ========== ========== ==========
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.
9
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 defendants have requested that
the Texas Supreme Court review that decision on appeal. On August 25, 2003, the
Texas Supreme Court requested briefing in the state cases. 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.
Mediation has begun and has resulted in a settlement proposal from the plaintiff
class representatives to the defendant dealers, including the Company's Texas
dealership subsidiaries. The Company has not yet accepted or declined this
proposal. While the Company does not believe this litigation will have a
material adverse effect on its financial condition or results of operations, no
assurance can be given as to its ultimate outcome. A settlement or an adverse
resolution of this matter could result in the payment of significant costs and
damages.
In addition to the foregoing cases, there are currently no legal
proceedings pending against or involving the Company that, in management's
opinion, based on current known facts and circumstances, are expected to have a
material adverse effect on the Company's financial position.
10
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 116 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 27 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:
NINE MONTHS ENDED SEPTEMBER 30, 2003
------------------------------------
ACTUAL NUMBER PERCENTAGE OF NUMBER OF
OF NEW TOTAL NEW FRANCHISES OWNED
BRAND VEHICLES SOLD VEHICLES SOLD AS OF OCTOBER 31, 2003
----- ------------- ------------- ----------------------
Ford........... 17,708 23.3% 14
Toyota......... 15,720 20.7 9
Honda.......... 6,386 8.4 5
Nissan......... 6,298 8.3 10
Dodge.......... 5,161 6.8 9
Chevrolet...... 4,847 6.4 5
Lexus.......... 3,751 4.9 2
Mitsubishi..... 2,140 2.8 7
Jeep........... 1,978 2.6 7
GMC............ 1,711 2.2 4
Chrysler....... 1,633 2.1 7
Infiniti....... 1,464 1.9 1
Acura.......... 1,294 1.7 2
Mazda.......... 856 1.1 2
Lincoln........ 706 0.9 5
Pontiac........ 603 0.8 4
Subaru......... 539 0.7 1
Audi........... 520 0.7 1
Mercury........ 516 0.7 6
Buick.......... 431 0.6 4
BMW............ 391 0.5 2
Volkswagen..... 282 0.4 1
Hyundai........ 270 0.4 1
Cadillac....... 259 0.3 2
Mercedes-Benz.. 216 0.3 1
Porsche........ 124 0.2 1
Kia............ 114 0.1 1
Hummer......... 95 0.1 1
Scion.......... 56 0.1 N/A
Other.......... 48 0.0 1
------ ----- ---
TOTAL..... 76,117 100.0% 116
====== ===== ===
11
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 OCTOBER 31, 2003
SOLD DURING THE NINE ----------------------
MONTHS ENDED NUMBER OF NUMBER OF
MARKET AREA SEPTEMBER 30, 2003 DEALERSHIPS FRANCHISES
----------- -------------------- ----------- ----------
Oklahoma....... 14.3% 10 20
New England.... 12.7 10 13
Houston........ 12.5 7 6
California..... 12.1 7 7
Florida........ 7.8 4 4
Austin......... 7.6 6 9
West Texas..... 6.9 7 14
New Orleans.... 6.4 7 10
Atlanta........ 6.0 6 8
Dallas......... 6.0 4 7
Beaumont....... 3.3 2 10
Albuquerque.... 3.2 3 7
Denver......... 1.2 1 1
----- -- ---
TOTAL....... 100.0% 74 116
===== == ===
We have diverse sources of automotive retailing revenues, including:
new car sales, new truck sales, used car sales, used truck sales, manufacturer
remarketed vehicle sales, parts sales, service sales, collision repair service
sales, financing fees, vehicle service contract fees, insurance fees and
after-market product sales. Sales revenues from new and used vehicle sales and
parts and service sales include sales to retail customers, other dealerships and
wholesalers. Finance and insurance revenues include fees from arranging
financing, vehicle service and insurance contracts, net of a provision for
anticipated chargebacks.
Our total gross margin varies as our merchandise mix (the mix between
new vehicle sales, used vehicle sales (retail and wholesale), parts and service
sales, collision repair service sales and finance and insurance revenues)
changes. Our gross margin on the sale of products and services varies
significantly, with new vehicle sales generally resulting in the lowest gross
margin and finance and insurance revenues generally resulting in the highest
gross margin. When our new vehicle sales increase or decrease at a rate greater
than our other revenue sources, our gross margin responds inversely. Factors
such as seasonality, weather, cyclicality and manufacturers' advertising and
incentives may impact our merchandise mix, and therefore influence our gross
margin.
Selling, general and administrative expenses consist primarily of
incentive-based compensation for sales, 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.
12
SELECTED OPERATIONAL AND FINANCIAL DATA FOR THE THREE MONTH PERIODS ENDED
SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002
NEW VEHICLE DATA
(dollars in thousands, PERCENT
except per unit amounts) 2003 2002 INCREASE CHANGE
---- ---- -------- ------
Retail unit sales........................... 28,477 27,994 483 1.7%
Retail sales revenues....................... $ 772,632 $ 739,193 $ 33,439 4.5%
Gross profit (1)............................ $ 56,618 $ 52,881 $ 3,737 7.1%
Average gross profit per retail unit sold... $ 1,988 $ 1,889 $ 99 5.2%
Gross margin (1)............................ 7.3% 7.2% 0.1%
- ----------
(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........................... 16,521 18,194 (1,673) (9.2)%
Wholesale unit sales........................ 11,985 10,926 1,059 9.7%
Retail sales revenues....................... $ 230,978 $ 255,228 $ (24,250) (9.5)%
Wholesale sales revenues.................... 69,102 58,574 10,528 18.0%
----------- ---------- ----------
Total revenues........................... $ 300,080 $ 313,802 $ (13,722) (4.4)%
Total gross profit.......................... $ 25,279 $ 25,885 $ (606) (2.3)%
Total gross margin (1)...................... 8.4% 8.2% 0.2%
Average gross profit per retail unit
sold (2)................................. $ 1,530 $ 1,423 $ 107 7.5%
Retail gross margin (1)..................... 10.9% 10.1% 0.8%
Wholesale gross loss ....................... $ (2,271) $ (2,223) $ (48) (2.2)%
Average wholesale sales gross loss per
wholesale unit sold...................... $ (189) $ (203) $ 14 6.9%
Wholesale gross margin ..................... (3.3)% (3.8)% 0.5%
- -----------
(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.............................. $ 121,792 $ 108,295 $ 13,497 12.5%
Gross profit................................ $ 67,564 $ 60,444 $ 7,120 11.8%
Gross margin................................ 55.5% 55.8% (0.3)%
13
FINANCE AND INSURANCE DATA
(dollars in thousands, INCREASE/ PERCENT
except per unit amounts) 2003 2002 (DECREASE) CHANGE
---- ---- ---------- ------
Retail new and used unit sales.............. 44,998 46,188 (1,190) (2.6)%
Retail finance fees......................... $ 17,111 $ 16,577 $ 534 3.2 %
Vehicle service contract fees............... 17,170 14,201 2,969 20.9 %
Other finance and insurance revenues........ 10,705 10,520 185 1.8 %
----------- ---------- ----------
Total finance and insurance revenues..... $ 44,986 $ 41,298 $ 3,688 8.9 %
Finance and insurance, net per retail
unit sold.................................. $ 1,000 $ 894 $ 106 11.9 %
SAME STORE REVENUES COMPARISON (1)
INCREASE/ PERCENT
(dollars in thousands) 2003 2002 (DECREASE) CHANGE
---- ---- -------- ------
New vehicle retail sales.................... $ 638,690 $ 668,024 $ (29,334) (4.4)%
Used vehicle retail sales................... 201,440 235,578 (34,138) (14.5)%
Used vehicle wholesale sales................ 59,019 53,306 5,713 10.7 %
Parts and service sales..................... 106,166 97,929 8,237 8.4 %
Retail finance fees......................... 14,271 14,644 (373) (2.5)%
Vehicle service contract fees............... 12,683 13,125 (442) (3.4)%
Other finance and insurance revenues, net... 6,996 8,390 (1,394) (16.6)%
----------- ---------- ----------
Total same store revenues................ $ 1,039,265 $1,090,996 $ (51,731) (4.7)%
- ----------
(1) Includes only those dealerships owned during all of the months of both
periods in the comparison.
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 2002
REVENUES. Revenues increased $36.9 million, or 3.1%, to $1,239.5
million for the three months ended September 30, 2003, from $1,202.6 million for
the three months ended September 30, 2002. The growth in total revenues came
from acquisitions, which were partially offset by a same store revenues decline
of $51.7 million.
New vehicle revenues increased $33.4 million, as acquired operations
offset a same store revenues decline of $29.3 million. The same store revenues
decreased, reflecting a less robust vehicle market for the three months ended
September 30, 2003, particularly with respect to our Ford and Mitsubishi
dealerships and our Toyota dealerships in Houston.
Our used vehicle retail revenues decreased $24.3 million as revenues
from acquired operations were offset by a $34.1 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
$10.5 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 $13.5 million included a
same store revenues increase of $8.2 million. The same store revenues increase
was driven by increased customer-pay parts and service sales and wholesale parts
sales.
14
Retail finance fee revenues increased $0.5 million, with a $0.4 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.
Vehicle service contract fee revenues increased $3.0 million, with same
store sales decreasing $0.4 million. During the three months ended September 30,
2003, revenues recognized related to contracts requiring 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 $0.2 million, with same
store sales declining $1.4 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 $13.9 million, or 7.7%, to $194.4
million for the three months ended September 30, 2003, from $180.5 million for
the three months ended September 30, 2002. The increase was attributable to an
increase in gross margin to 15.7% for the three months ended September 30, 2003,
from 15.0% for the three months ended September, 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 gross margins on new and used vehicle sales, plus increased finance
and insurance revenues, per retail unit sold, offset the slight decline in the
parts and service gross margin.
Our new vehicle gross profit per retail unit sold increased to $1,988
for the three months ended September 30, 2003, from $1,889 for the three months
ended September 30, 2002. This increase is partially attributable to a $0.4
million adjustment to our valuation reserves on new vehicle inventory. The
adjustment was made after a thorough analysis of our new vehicle inventory, and
as we were able to reduce the days supply of inventory to 62 days at September
30, 2003, from 83 days at June 30, 2003. In reducing the inventory to our
targeted levels we incurred $1.5 million in losses, which were previously
reserved. The gross margin on new retail vehicle sales increased to 7.3% from
7.2%, primarily due to the valuation reserve adjustment, partially offset by an
increase in the average selling price of vehicles sold.
Our used vehicle gross profit per retail unit sold increased to $1,530
for the three months ended September 30, 2003, from $1,423 for the three months
ended September 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 Austin and Florida markets. Our wholesale losses increased
slightly 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 $10.8 million, or 7.9%, to $147.9 million for
the three months ended September 30, 2003, from $137.1 million for the three
months ended September 30, 2002. The increase was primarily attributable to the
additional operations acquired. Selling, general and administrative expenses
increased slightly as a percentage of gross profit to 76.1% from 76.0% due
primarily to below expected operating performance in our Atlanta operations.
Excluding the gross profit and selling, general and administrative expenses of
our Atlanta operations, our selling, general and administrative expenses as a
percentage of gross profit would have been consistent when comparing the three
months ended September 30, 2003, to the three months ended September 30, 2002.
INTEREST EXPENSE. Floorplan and other interest expense, net, increased
$1.2 million, or 16.0%, to $8.7 million for the three months ended September 30,
2003, from $7.5 million for the three months ended September 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 September 30, 2002. By the end
of
15
2002, we had reborrowed the amounts used to pay down the floorplan portion of
our credit facility. During August 2003, we completed an offering of $150.0
million of senior subordinated notes bearing interest at 8 1/4%. The proceeds
from the offering have initially been used to pay down borrowings under our
credit facility, which had an average interest rate of 2.25% during the three
months ended September 30, 2003. Additionally, we have increased floorplan
borrowings outstanding due to acquisitions completed during the past twelve
months. During the three months ended September 30, 2003, there was an
approximately 70 basis point reduction in our average floorplan financing rate
as compared to the three months ended September 30, 2002.
SELECTED OPERATIONAL AND FINANCIAL DATA FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002
NEW VEHICLE DATA
INCREASE/ PERCENT
(dollars in thousands, 2003 2002 (DECREASE) CHANGE
except per unit amounts) ---------- ---------- --------- -------
Retail unit sales ......................... 76,117 72,249 3,868 5.4%
Retail sales revenues ..................... $2,059,840 $1,907,248 $ 152,592 8.0%
Gross profit (1) .......................... $ 150,814 $ 142,979 $ 7,835 5.5%
Average gross profit per retail unit sold.. $ 1,981 $ 1,979 $ 2 0.1%
Gross margin (1) .......................... 7.3% 7.5% (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
INCREASE/ PERCENT
(dollars in thousands, 2003 2002 (DECREASE) CHANGE
except per unit amounts) --------- --------- --------- -------
Retail unit sales ............. 49,000 50,574 (1,574) (3.1)%
Wholesale unit sales .......... 32,796 29,834 2,962 9.9 %
Retail sales revenues ......... $ 687,132 $ 703,869 $ (16,737) (2.4)%
Wholesale sales revenues ...... 195,551 165,673 29,878 18.0 %
--------- --------- ---------
Total revenues ............. $ 882,683 $ 869,542 $ 13,141 1.5 %
Total gross profit ............ $ 77,583 $ 75,287 $ 2,296 3.0 %
Total gross margin (1) ........ 8.8 % 8.7% 0.1%
Average gross profit per retail
unit sold (2) ............... $ 1,583 $ 1,489 $ 94 6.3 %
Retail gross margin (1) ....... 11.3% 10.7% 0.6%
Wholesale gross loss .......... $ (6,281) $ (4,945) $ (1,336) (27.0)%
Average wholesale gross loss
per wholesale unit sold ..... $ (192) $ (166) $ (26) (15.7)%
Wholesale gross margin ........ (3.2)% (3.0)% (0.2)%
- ----------
(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.
16
PARTS AND SERVICE DATA
INCREASE/ PERCENT
(dollars in thousands) 2003 2002 (DECREASE) CHANGE
--------- --------- --------- -------
Sales revenues........................... $ 349,184 $ 295,497 $ 53,687 18.2%
Gross profit............................. $ 194,260 $ 165,035 $ 29,225 17.7%
Gross margin............................. 55.6% 55.8% (0.2)%
FINANCE AND INSURANCE, NET
(dollars in thousands, PERCENT
except per unit amounts) 2003 2002 INCREASE CHANGE
--------- --------- --------- -------
Retail new and used unit sales........... 125,117 122,823 2,294 1.9%
Retail finance fees...................... $ 48,474 $ 44,349 $ 4,125 9.3%
Vehicle service contract fees............ 47,804 38,016 9,788 25.7%
Other finance and insurance revenues..... 29,176 27,114 2,062 7.6%
---------- --------- ---------
Total finance and insurance revenues.. $ 125,454 $ 109,479 $ 15,975 14.6%
Finance and insurance, net per
retail unit sold....................... $ 1,003 $ 891 $ 112 12.6%
SAME STORE REVENUES COMPARISON (1)
INCREASE/ PERCENT
(dollars in thousands) 2003 2002 (DECREASE) CHANGE
----------- ----------- ---------- -------
New vehicle retail sales................. $ 1,647,182 $ 1,765,804 $ (118,622) (6.7)%
Used vehicle retail sales................ 577,874 652,516 (74,642) (11.4)%
Used vehicle wholesale sales............. 162,236 152,828 9,408 6.2 %
Parts and service sales.................. 286,004 270,064 15,940 5.9 %
Retail finance fees...................... 38,807 40,956 (2,149) (5.2)%
Vehicle service contract fees............ 33,559 34,923 (1,364) (3.9)%
Other finance and insurance revenues, net 18,879 22,113 (3,234) (14.6)%
----------- ----------- ----------
Total same store revenues............. $ 2,764,541 $ 2,939,204 $ (174,663) (5.9)%
- ----------
(1) Includes only those dealerships owned during all of the months of both
periods in the comparison.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 2002
REVENUES. Revenues increased $235.4 million, or 7.4%, to $3,417.2
million for the nine months ended September 30, 2003, from $3,181.8 million for
the nine months ended September 30, 2002. The growth in total revenues came from
acquisitions, which were partially offset by a same store revenues decline of
$174.7 million.
New vehicle revenues increased $152.6 million, as acquired operations
offset a same store revenues decline of $118.6 million. The same store revenues
decreased, reflecting a less robust vehicle market for the nine months ended
September 30, 2003, particularly with respect to our Ford and Mitsubishi
dealerships and our Toyota dealerships in Houston.
Our used vehicle retail revenues decreased $16.7 million as revenues
from acquired operations were offset by a $74.6 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 $29.9
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.
17
The increase in parts and service revenues of $53.7 million included a
same store revenues increase of $15.9 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 $4.1 million, with a $2.1 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 $9.8 million, with same
store sales decreasing $1.4 million. During the nine months ended September 30,
2003, revenues recognized related to contracts requiring revenue deferral over
the life of the contracts increased approximately $4.6 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 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 $2.0 million, with same
store sales decreasing $3.2 million. The same store decline was caused primarily
by the decline in retail unit sales.
GROSS PROFIT. Gross profit increased $55.3 million, or 11.2%, to $548.1
million for the nine months ended September 30, 2003, from $492.8 million for
the nine months ended September 30, 2002. The increase was attributable to an
increase in gross margin to 16.0% for the nine months ended September 30, 2003,
from 15.5% for the nine months ended September 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.
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 7.3% from 7.5%, primarily due to an increase in the average selling
price of vehicles sold.
Our used vehicle gross profit per retail unit sold increased to $1,583
for the nine months ended September 30, 2003, from $1,489 for the nine months
ended September 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 $48.1 million, or 12.8%, to $422.9 million for
the nine months ended September 30, 2003, from $374.8 million for the nine
months ended September 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 77.2% 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.
INTEREST EXPENSE. Floorplan and other interest expense, net, increased
$3.7 million, or 17.3%, to $25.1 million for the nine months ended September 30,
2003, from $21.4 million for the nine months ended September 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 nine months ended September 30, 2002. By the end
of 2002, we had reborrowed the amounts used to pay down the floorplan portion of
our credit facility. During August 2003, we completed an offering of $150.0
million of senior subordinated notes bearing interest at 8 1/4%. The proceeds
from the offering have initially been used to pay down borrowings under our
credit facility, which had an average interest rate of 2.25% during the three
months ended September 30, 2003. Additionally, we have increased floorplan
borrowings outstanding due to acquisitions completed during the past twelve
months and higher overall inventory levels. During the nine months ended
September 30,
18
2003, there was an approximately 60 basis point reduction in our average
floorplan financing rate as compared to the nine months ended September 30,
2002.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity are cash on hand; cash from
operations; our credit facilities, which provide floorplan, working capital and
acquisition financing; and future equity and debt offerings.
CASH FLOWS
Total cash at September 30, 2003, was $27.5 million.
OPERATING ACTIVITIES. During the first nine months of 2003, we
generated $72.5 million of cash flow from operations, primarily driven by net
income plus depreciation and amortization.
INVESTING ACTIVITIES. During the first nine months of 2003, we used
approximately $31.1 million in investing activities. We paid $24.0 million for
purchases of property and equipment, of which $16.0 million was used for the
purchase of land and construction of facilities for new or expanded operations.
We received $10.9 million in proceeds from the sales of property and equipment.
We have used $22.9 million in the acquisitions of seven franchises and received
$7.4 million from the sale of one franchise, for which no gain was recognized.
FINANCING ACTIVITIES. During the first nine months of 2003, we used
approximately $38.2 million in financing activities, primarily to pay down the
floorplan portion of our revolving credit facility utilizing cash flows from
operations, until the amounts are needed to finance other corporate activities.
The proceeds from our offering of 8 1/4% senior subordinated notes were also
utilized to pay down borrowings under our revolving credit facility. We intend
to use a portion of the proceeds from our 8 1/4% senior subordinated notes
offering to retire all of our 10 7/8% senior subordinated notes due 2009, on
March 1, 2004, the initial redemption date.
WORKING CAPITAL. At September 30, 2003, we had working capital of
$280.4 million, which is approximately $190 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.
CREDIT FACILITIES
During June 2003, we completed an amendment to our existing $900.0
million credit facility and completed a new arrangement with Ford Motor Credit
Company. The two facilities provide us with $1.075 billion of borrowing
capacity.
The amendment to our existing credit facility extended the term until
June 2006 and provides $775.0 million of financing, consisting 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 October 30, 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 September 30,
2003, there was $212.0 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 provisions 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, Lincoln and Mercury new
vehicle inventory. The arrangement provides for up to $300.0 million of
financing
19
for the inventory at an interest rate of Prime plus 100 basis points minus
certain incentives and matures in June 2006. We expect the net cost of these
borrowings, after all incentives, to approximate our floorplan cost under the
$775.0 million credit facility. At September 30, 2003, there was $176.6 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.
SENIOR SUBORDINATED NOTES OFFERING
During August 2003, we completed a private offering of $150.0 million
of 8 1/4% senior subordinated notes due 2013. Net proceeds from the offering
were $143.5 million and were used to temporarily pay down floorplan borrowings
under our credit facilities, currently bearing interest at 2.25%. We intend to
use the proceeds for general corporate purposes, including the retirement of
$74.3 million of our outstanding 10 7/8% senior subordinated notes on March 1,
2004, the initial redemption date at a price of approximately $79.5 million,
before accrued interest. During October 2003, we filed an exchange offer to
exchange the outstanding 8 1/4% senior subordinated notes for new notes with
substantially identical terms that have been registered under the Securities Act
of 1933 and are freely tradeable.
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 2004 is to complete platform and tuck-in
acquisitions that have approximately $1 billion 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.
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 a percentage of our cumulative net income to
repurchase stock and pay dividends. During the first nine months of 2003 we
repurchased approximately 181,000 shares for approximately $4.8 million. As of
September 30, 2003, $20.2 million remained under the board of directors'
authorization. However, due to the completion of our 8 1/4% senior subordinated
notes offering in August 2003, which is currently our most limiting agreement
with respect to stock repurchases, our debt agreements limited our capacity to
repurchase stock to $10.2 million as of September 30, 2003.
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
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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.
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.
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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 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.
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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
decreased due to decreases in inventory levels and the use of proceeds from our
August 2003 8 1/4% senior subordinated notes offering to pay down borrowings
under our credit facility. A 100 basis point increase in interest rates would
have increased floorplan interest expense approximately $4.5 million for the
nine-month period ended September 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 one interest rate swap
outstanding, with a notional amount of $100.0 million that converts 30-day LIBOR
to a fixed rate. Another swap, with a notional amount of $100.0 million, expired
at the end of July 2003. As the swaps hedged our floorplan interest rate
exposure, the impact on interest expense is included in floorplan interest
expense in our statements of operations. A 100 basis point increase in interest
rates would have reduced the cost of our swaps and, thus, would have reduced our
floorplan interest expense by $1.3 million for the nine-month period ended
September 30, 2003.
The net result on floorplan interest expense of a 100 basis point
increase in interest rates would have been an increase of $3.2 million for the
nine months ended September 30, 2003, 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 $20.5 million during the first nine months of 2003 and $20.4
million during the first nine 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
As of the end of the period covered by 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 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.
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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 the defendants have requested that
the Texas Supreme Court review that decision on appeal. On August 25, 2003, the
Texas Supreme Court requested briefing in the state cases. 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.
Mediation has begun and has resulted in a settlement proposal from the plaintiff
class representatives to the defendant dealers, including our Texas dealership
subsidiaries. We have not yet accepted or declined this proposal. While we do
not believe this litigation will have a material adverse effect on our financial
condition or results of operations, no assurance can be given as to its ultimate
outcome. A settlement or an adverse resolution of this matter could result in
the payment of significant costs and damages.
In addition to the foregoing cases, there are currently no legal
proceedings pending against or involving us that, in our opinion, based on
current known facts and circumstances, are expected to have a material adverse
effect on our financial position.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
4.1 Subordinated Indenture dated as of August 13, 2003 among Group 1
Automotive, Inc., the Subsidiary Guarantors named therein and
Wells Fargo Bank, N.A., as Trustee (Incorporated by reference to
Exhibit 4.6 of the Company's Registration Statement on Form S-4
Registration No. 333-109080).
4.2 First Supplemental Indenture dated as of August 13, 2003 among
Group 1 Automotive, Inc., the Subsidiary Guarantors named therein
and Wells Fargo Bank, N.A., as Trustee (Incorporated by reference
to Exhibit 4.7 of the Company's Registration Statement on Form S-4
Registration No. 333-109080).
4.3 Form of Subordinated Debt Securities (Included in Exhibit 4.2).
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 October 30, 2003, the Company filed a Current Report on Form 8-K
reporting under items 7 and 12.
On October 14, 2003, the Company filed a Current Report on Form 8-K
reporting under items 5 and 7.
On October 8, 2003, the Company filed a Current Report on Form 8-K
reporting under Item 9.
On September 19, 2003, the Company filed a Current Report on Form 8-K
reporting under Item 9.
On September 2, 2003, the Company filed a Current Report on Form 8-K
reporting under Item 12.
On August 27, 2003, the Company filed a Current Report on Form 8-K
reporting under Item 9.
On August 11, 2003, the Company filed a Current Report on Form 8-K
reporting under Items 5 and 7.
On August 4, 2003, the Company filed a Current Report on Form 8-K
reporting under Item 12.
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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.
October 31, 2003 By: /s/ Scott L. Thompson
- ---------------- --------------------------------------------
Date Scott L. Thompson, Executive Vice President,
Chief Financial Officer and Treasurer
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EXHIBIT INDEX
A. EXHIBITS:
4.1 Subordinated Indenture dated as of August 13, 2003 among Group 1
Automotive, Inc., the Subsidiary Guarantors named therein and
Wells Fargo Bank, N.A., as Trustee (Incorporated by reference to
Exhibit 4.6 of the Company's Registration Statement on Form S-4
Registration No. 333-109080).
4.2 First Supplemental Indenture dated as of August 13, 2003 among
Group 1 Automotive, Inc., the Subsidiary Guarantors named therein
and Wells Fargo Bank, N.A., as Trustee (Incorporated by reference
to Exhibit 4.7 of the Company's Registration Statement on Form S-4
Registration No. 333-109080).
4.3 Form of Subordinated Debt Securities (Included in Exhibit 4.2).
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.
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