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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
COMMISSION FILE NUMBER: 1-13461
GROUP 1 AUTOMOTIVE, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 76-0506313
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
950 ECHO LANE, SUITE 100, HOUSTON, TEXAS 77024
(Address of principal executive offices) (Zip code)
Registrant's telephone number including area code (713) 647-5700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of exchange on which Registered
------------------- ------------------------------------
COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [X] No [ ]
State the aggregate market value of voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was last sold, as of the last business day of the registrant's most
recently completed second fiscal quarter: $604.2 million.
As of March 1, 2004, there were 22.6 million shares of our common
stock, par value $.01 per share, outstanding.
Documents incorporated by reference: Proxy Statement of Group 1
Automotive, Inc. for the Annual Meeting of Stockholders to be held on May 19,
2004, which is incorporated into Part III of this Form 10-K.
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TABLE OF CONTENTS
PART I ..................................................................................................... 5
Item 1. Business............................................................................................. 5
Item 2. Properties........................................................................................... 22
Item 3. Legal Proceedings.................................................................................... 22
Item 4. Submission of Matters to a Vote of Security Holders.................................................. 22
PART II ..................................................................................................... 23
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................................ 23
Item 6. Selected Financial Data.............................................................................. 24
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 25
Item 7A. Quantitative and Qualitative Disclosures about Market Risk........................................... 39
Item 8. Financial Statements and Supplementary Data.......................................................... 40
Item 9. Changes in and Disagreements on Accounting and Financial Disclosure.................................. 40
Item 9A. Controls and Procedures.............................................................................. 40
PART III ..................................................................................................... 40
Item 10. Directors and Executive Officers of the Registrant................................................... 40
Item 11. Executive Compensation............................................................................... 40
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters....... 40
Item 13. Certain Relationships and Related Transactions....................................................... 40
Item 14. Principal Accountant Fees and Services............................................................... 40
PART IV ..................................................................................................... 40
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................................... 40
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CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
This annual report includes certain "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These statements include statements regarding
our plans, goals, beliefs or current expectations, including those plans, goals,
beliefs and expectations of our officers and directors with respect to, among
other things:
- the completion of future acquisitions
- operating cash flows and availability of capital
- future stock repurchases
- capital expenditures
- changes in sales volumes in the new and used vehicle and parts and
service markets
- business trends, including incentives, product cycles and interest
rates
- availability of financing for inventory and working capital
- inventory levels
- year-end used vehicle valuation reserves
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 Toyota / Lexus,
Ford, DaimlerChrysler, General Motors and Nissan / Infiniti 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
- our estimation of the realizable value of our inventories may be high
- insurance costs could increase significantly
- we may not achieve expected sales volumes from the new franchises
granted to us
- we may not obtain inventory of new and used vehicles and parts,
including imported inventory, at the cost, or in the volume, we expect
The information contained in this annual report, including the
information set forth under the heading "Business - Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," identifies factors that could affect our operating results and
performance. We urge you to carefully consider those factors.
All forward-looking statements attributable to us are qualified in
their entirety by this cautionary statement.
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PART I
ITEM 1. BUSINESS
GENERAL
Group 1 Automotive, Inc. ("Group 1," the "Company," "we" or "us") is a
leading operator in the $1 trillion automotive retailing industry. Through a
series of acquisitions, we operate 122 dealership franchises in California,
Colorado, Florida, Georgia, Louisiana, Massachusetts, New Jersey, New Mexico,
Oklahoma and Texas. Through our dealerships and Internet sites, we sell new and
used cars and light trucks; arrange related financing, vehicle service and
insurance contracts; provide maintenance and repair services; and sell
replacement parts.
OPERATING STRATEGY
We follow an operating strategy that focuses on decentralized
management of locally branded dealership operations, expansion of higher margin
businesses, superior customer service, effective asset management, development
of human capital and technology initiatives.
During the last five years we estimate that our parts and service
operations contributed approximately 41% of our pretax income; finance and
insurance operations contributed approximately 27% of our pretax income; new
vehicle operations contributed approximately 17% of our pretax income; and used
vehicle operations contributed approximately 15% of our pretax income. During
2003, we achieved an operating margin of 3.3%. Since our inception in 1997, our
annual operating margin has ranged between 2.8% and 3.4%.
DECENTRALIZED OPERATIONS BRANDED LOCALLY. We believe that by managing
our dealerships on a decentralized basis, we provide superior customer service
and a focused, market-specific responsiveness to sales, service, marketing and
inventory control. Local decision-making and an in-depth knowledge of customers'
needs and preferences are important in maximizing financial performance. By
coordinating certain operations on a local basis, we believe that we achieve
cost savings in such areas as advertising, vendor consolidation, data processing
and personnel utilization. The following table sets forth our geographic
diversity, based on new vehicle retail sales, and the number of dealerships and
franchises we own:
PERCENTAGE OF OUR
NEW VEHICLE
RETAIL UNITS
SOLD DURING THE TWELVE AS OF MARCH 1, 2004
MONTHS ENDED ------------------------------------------------
MARKET AREA DECEMBER 31, 2003 NUMBER OF DEALERSHIPS NUMBER OF FRANCHISES
- --------------------------------------------------------------------------------------------------------
Oklahoma.............. 14.3% 13 22
Houston............... 12.7 7 6
New England........... 12.7 10 13
California............ 11.9 7 7
Central Texas......... 7.6 7 9
Florida............... 7.6 4 4
West Texas............ 6.9 8 15
New Orleans........... 6.6 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
New Jersey............ - 3 3
------------------------------------------------------------------
TOTAL.............. 100.0% 82 122
==================================================================
EXPAND HIGHER MARGIN ACTIVITIES. We focus on expanding our higher
margin businesses such as used vehicle retail sales, sales of replacement parts,
maintenance and repair services and arranging financing, vehicle service and
insurance contracts. While each of our local operations conducts business in a
manner consistent with its specific market's characteristics,
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they also pursue an integrated companywide strategy designed to grow each of
these higher margin businesses to enhance profitability and stimulate internal
growth. With a competitive advantage in sourcing used vehicle inventory and
synergies from new vehicle operations, new vehicle franchises are especially
well positioned to compete in the used vehicle market. In addition, each of our
dealerships offers an integrated parts and service department, which provides an
important source of recurring higher margin revenues. We also have the
opportunity on each sale of a new or used vehicle to generate incremental
revenues from arranging finance and lease contracts, vehicle service contracts
and insurance policies.
COMMITMENT TO CUSTOMER SERVICE. We focus on providing high-quality
service to meet the needs of our customers. Our dealerships strive to cultivate
lasting relationships with their customers, and we believe these efforts
increase our opportunities for significant repeat and referral business. For
example, the dealerships regard their service and repair activities as an
integral part of their overall approach to customer service. This approach
provides us with an opportunity to foster ongoing relationships with customers
and deepen customer loyalty. In addition, our dealerships continually review
their processes in an effort to better meet the needs of their customers. We
believe that our ability to share best practices among our dealerships gives us
an advantage over smaller dealership groups. For example, our dealerships strive
to:
(1) employ more efficient selling approaches;
(2) utilize computer technology that decreases the time necessary to
purchase a vehicle;
(3) engage in extensive follow-up after a sale or service visit in order
to develop long-term relationships with customers; and
(4) extensively train their staffs to be able to meet the needs of the
customer.
ASSET MANAGEMENT. We monitor our inventory levels and sales. We target
a 60-day new vehicle inventory supply and a 30-day used vehicle inventory
supply. We monitor our investments in parts and receivables to maximize our
financial results. We allocate capital among competing investment opportunities
in the entire company based on expected returns on invested capital.
HUMAN CAPITAL. The success of our dealerships is highly dependent on
dealership personnel. We believe that our decentralized operating approach,
incentive compensation plans and training programs attract, develop and retain
top automotive retailing talent.
TECHNOLOGY INITIATIVES. We use the Internet to communicate more
effectively with our customers. Customers can arrange service appointments,
search our inventory and receive notice of special offers. Our local operation
based portal Web pages furnish customers a direct one-stop shopping experience
in their local market, providing multiple brands and an extensive inventory of
vehicles. Also, as franchised dealerships, we receive Internet leads from
manufacturers' e-commerce programs and, through a contractual relationship with
an e-commerce software company, we receive Internet leads from several major
portals. Lastly, at times, we use automotive Internet referral services to
provide incremental sales opportunities.
DEALERSHIP OPERATIONS
Each of our local operations has an established management structure
that promotes and rewards entrepreneurial spirit, and the achievement of team
goals. The general manager of each dealership is ultimately responsible for the
operation, personnel and financial performance of the dealership. The general
manager is complemented with a management team consisting of new vehicle sales,
used vehicle sales, parts and service and finance and insurance managers. Each
dealership is operated as a distinct profit center, in which dealership general
managers are given a high degree of autonomy. The general manager and the other
members of the dealership management team are generally long-time members of
their local communities and are typically best able to conduct day-to-day
operations based on their experience in, and familiarity with, the local market.
On a monthly basis, each of our local operations is compared to its monthly
operating forecast, and our other dealerships. Key financial information and
customer satisfaction data is also analyzed by corporate management and followed
up as necessary.
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NEW VEHICLE SALES. We currently represent 30 American, Asian and
European brands of economy, family, sports and luxury cars, light trucks and
sport utility vehicles. The following table sets forth the brands and number of
new vehicles we sold at retail during 2003, and the number of franchises, of
each of the manufacturers that we currently represent:
YEARS ENDED DECEMBER 31, 2003
-------------------------------------
ACTUAL NUMBER PERCENTAGE OF NUMBER OF
OF NEW TOTAL NEW FRANCHISES OWNED
BRAND VEHICLES SOLD VEHICLES SOLD AS OF MARCH 1, 2004
----- ------------- ------------- -------------------
Ford................. 22,676 22.7% 14
Toyota / Scion....... 20,894 20.9 9
Nissan............... 8,336 8.3 10
Honda................ 8,019 8.0 6
Dodge................ 7,102 7.1 9
Chevrolet............ 6,430 6.4 7
Lexus................ 5,259 5.3 2
Jeep................. 2,696 2.7 7
Mitsubishi........... 2,647 2.7 6
GMC.................. 2,227 2.2 4
Chrysler............. 2,181 2.2 7
Infiniti............. 1,897 1.9 1
Acura................ 1,762 1.8 2
Mazda................ 1,081 1.1 2
Lincoln.............. 1,006 1.0 6
Pontiac.............. 759 0.8 4
Mercury.............. 713 0.7 7
Subaru............... 705 0.7 1
Audi................. 703 0.7 1
Buick................ 564 0.6 4
BMW.................. 539 0.5 2
Cadillac............. 351 0.4 2
Volkswagen........... 341 0.3 2
Hyundai.............. 332 0.3 1
Mercedes-Benz........ 272 0.3 2
Porsche............... 158 0.2 1
Kia................... 131 0.1 1
Hummer................ 129 0.1 1
Isuzu................. 38 0.0 1
Other................. 23 0.0 -
--------- -------- ---------
TOTAL............ 99,971 100.0% 122
========= ======== =========
Our dealerships' new vehicle retail sales include traditional new
vehicle retail lease transactions and lease-type transactions, both of which are
arranged by the dealerships. New vehicle leases generally have short terms,
bringing the customer back to the market sooner than if the purchase was debt
financed. In addition, leases provide our dealerships with a steady source of
late-model, off-lease vehicles for their used vehicle inventory. Generally,
leased vehicles remain under factory warranty for the term of the lease,
allowing the dealerships to provide repair services to the lessee throughout the
lease term. We do not guarantee residual values on lease transactions.
We acquire substantially our entire new vehicle inventory from our
manufacturers and do not have a cost advantage in purchasing new vehicle
inventory from them. Manufacturers allocate a limited inventory among their
franchised dealers based primarily on sales volume and input from dealers. Our
dealerships finance their inventory purchases through the floorplan portion of
our revolving credit facility. At times, the manufacturers offer incentives to
the dealerships to achieve new vehicle sales goals set by them. These incentives
are recorded as a reduction of new vehicle cost of sales as the vehicles are
sold. We also receive interest assistance from several of our manufacturers.
This assistance has ranged from approximately 80% to 160% of our total floorplan
interest expense over the past three years. During 2003, we recognized $27.4
million of assistance, which we accounted for as a vehicle purchase price
7
discount and reflected as a reduction of cost of sales in the income statement
as vehicles were sold.
USED VEHICLE SALES. We sell used vehicles at each of our franchised
dealerships. Sales of used vehicles are a significant source of profit for the
dealerships. Used vehicles sold at retail typically generate higher gross
margins than new vehicles because of their limited comparability and the
subjective nature of their valuation, which is dependent on a vehicles age,
mileage and condition, among other things. Valuations will also vary based on
supply and demand factors, the level of new vehicle incentives, the availability
of retail finance and general economic conditions. We intend to grow our used
vehicle retail sales operations by maintaining a high-quality inventory,
providing competitive prices, offering vehicle service contracts for our used
vehicles and continuing to promote used vehicle sales.
At times, manufacturer incentives, including below-market retail
financing rates on new vehicles, can result in used vehicle buyers switching
from the used vehicle market to the new vehicle market. This results in a lower
sales volume of used vehicles and a higher sales volume of new vehicles. For
example, during 2002 and 2003, we experienced a decline in same store used
vehicle retail sales due to high levels of manufacturer incentives on new
vehicle sales. The incentives resulted in a reduction of the price difference to
the customer between a late model used vehicle and a new vehicle, thus driving
more customers to new vehicles.
Profits from sales of used vehicles depend primarily on the
dealerships' ability to obtain a high-quality supply of used vehicles and
effectively manage that inventory. Our new vehicle operations provide the used
vehicle operations with a large supply of high-quality trade-ins and off-lease
vehicles, which are the best sources of high-quality used vehicles. The
dealerships supplement their used vehicle inventory with used vehicles purchased
at auctions and from wholesalers.
Each of our dealerships generally maintains a 30-days supply of used
vehicles, and offers to other dealers and wholesalers used vehicles that they do
not retail to customers. Sales to other dealers or wholesalers are frequently
close to, or below, our cost and therefore negatively affect our gross margin on
used vehicle sales. Vehicles may be transferred among our dealerships, on a
local basis, to provide balanced inventories of used vehicles at each of our
dealerships.
Our dealerships have taken several steps towards building customer
confidence in their used vehicle inventory, including participation in
manufacturer certification programs, which are available only to new vehicle
franchises. This process makes these used vehicles eligible for new vehicle
benefits such as new vehicle finance rates and in some cases, extension of the
manufacturer warranty. In addition, the dealerships offer vehicle service
contracts covering the used vehicles that they sell.
We believe that our franchised dealerships' strengths in offering used
vehicles include:
(1) access to trade-ins on new vehicle purchases, which are typically
lower mileage and higher quality relative to trade-ins on used car
purchases;
(2) access to late-model, low mileage off-lease vehicles;
(3) access to manufacturers' auctions available only to their respective
franchised dealers;
(4) the availability of manufacturer certification programs for our used
vehicles; and
(5) access to a large number of finance sources to arrange financing for
our customers.
PARTS AND SERVICE SALES. We sell replacement parts and provide
maintenance and repair services at each of our franchised dealerships, primarily
for the vehicle brands sold at that dealership. We perform both warranty and
non-warranty service work. During 2003 warranty work accounted for approximately
17% of our parts, service and collision service revenues. Additionally, our
parts and service departments perform used vehicle reconditioning and new
vehicle preparation services. The profits from these services are realized when
the vehicles are sold to third parties. We also currently own 29 collision
service centers.
8
Historically, the automotive repair industry has been highly
fragmented. However, we believe that the increased use of advanced technology in
vehicles has made it difficult for independent repair shops to retain the
expertise to perform major or technical repairs. Additionally, manufacturers
permit warranty work to be performed only at franchised dealerships. Hence,
unlike independent service operations, our franchised dealerships are qualified
to perform work covered by our manufacturers' warranties. Given the increasing
technological complexity of motor vehicles and the trend toward extended
warranty periods for new vehicles, we believe that an increasing percentage of
repair work will be performed at our franchised dealerships, each of which have
the sophisticated equipment and skilled personnel necessary to perform complex
repairs and warranty repairs. We realize approximately the same gross margin on
warranty repairs as we do on customer-paid repairs.
We attribute our profitability in parts and service to a comprehensive
management system, including the use of variable rate pricing structures,
cultivation of strong customer relationships through an emphasis on preventive
maintenance and the efficient management of our parts inventory.
In charging for their technicians' labor, our dealerships use variable
rate structures designed to reflect the difficulty and sophistication of
different types of repairs. The percentage mark-ups on parts are similarly
priced based on market conditions for different parts. We believe that variable
rate pricing helps our dealerships achieve overall gross margins in parts and
service which are superior to those of certain competitors who rely on fixed
labor rates and percentage markups. Additionally, it allows the dealerships to
be competitive with independent repair shops that provide discounted pricing on
select services.
Our dealerships seek to retain each vehicle purchaser as a customer of
the dealership's parts and service departments. The dealerships have systems in
place that track their customers' maintenance records and notify owners of
vehicles purchased or serviced at the dealerships when their vehicles are due
for periodic services. The dealerships regard service and repair activities as
an integral part of their overall approach to customer service, providing an
opportunity to foster ongoing relationships with the dealership's customers and
deepen customer loyalty.
The dealerships' parts departments support their respective sales and
service departments. Each of the dealerships sells factory-approved parts for
the vehicle makes and models sold by that dealership. These parts are used
either in repairs made by the dealership, sold at retail to its customers or
sold at wholesale to independent repair shops and other franchised dealerships.
The dealerships employ a parts manager and independently control parts inventory
and sales. Our dealerships frequently share parts with each other.
FINANCE AND INSURANCE SALES. Finance and insurance ("F&I") revenues
consist primarily of fees for arranging financing, vehicle service and insurance
contracts. The dealerships arrange financing for their customers' vehicle
purchases, sell vehicle service contracts and arrange selected types of
insurance in connection with the financing of vehicle sales. We provide advanced
F&I training to our F&I personnel.
Typically, the dealerships forward proposed financing contracts to
manufacturers' captive finance companies, selected commercial banks or other
financing parties. The dealerships receive a financing fee from the lender for
arranging the financing and, for a limited time, may be assessed a chargeback
against a portion of the financing fee. We recognize the expected net fee as
revenue at the time we complete the sale and financing of the vehicle.
Additionally, we have negotiated incentive programs with several of the
financing institutions we use that provide for additional fees to be paid to us
when we achieve certain volumes of business with them. We do not own a finance
company and, generally, do not retain credit risk after a loan is made.
At the time of a new vehicle sale, the dealerships offer vehicle
service contracts to supplement the manufacturer warranty. Additionally, the
dealerships sell vehicle service contracts for used vehicles as the manufacturer
warranty period may have ended. Our dealerships sell service contracts of third
party vendors and our manufacturers, for which they receive a fee upon the sale
of the contract and are typically assessed a chargeback against a portion of the
fee if the contract is terminated prior to its scheduled maturity. In
administrator-obligor states, which are
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states where a third party, not our dealerships, has all responsibility for
claims made on the contract, we recognize the expected net fee as revenue at the
time we complete the sale of the contract, as the dealership has no future
liability. In dealer-obligor states, which are states where our dealership has
responsibility for claims made on the contract if the administrator is unable to
fulfill its obligation, the fees and related direct costs are deferred and
recognized over the life of the contracts. Due to a change in state law during
2002, we no longer sell dealer-obligor contracts as none of the states we
currently operate in are dealer-obligor states. We expect the deferred revenues
related to previously sold contracts, and the associated deferred costs, to be
recognized over the next four years.
The dealerships also offer selected types of insurance products to
customers who arrange the financing of their vehicle purchases through the
dealerships. The dealerships sell credit life insurance policies to these
customers, providing for repayment of the vehicle loan if the obligor dies while
the loan is outstanding. The dealerships also sell accident and disability
insurance policies, which provide payment of the monthly loan obligations during
a period in which the obligor is disabled. The dealerships sell this insurance
through third party vendors and we own a company that reinsures the policies. As
such, we defer all of the revenues and direct costs related to the sales of
these policies and recognize them over the life of the policies. Additionally,
the dealerships sell a gap insurance product that, if the customer's loan
balance is greater than the value of the vehicle, will pay the difference if the
vehicle is stolen or damaged beyond repair. The dealerships sell the gap
insurance products of third party vendors, for which they receive a fee upon the
sale of the contract and are typically assessed a chargeback against a portion
of the fee if the contract is terminated prior to its scheduled maturity.
ACQUISITION PROGRAM
We have a disciplined two-tier acquisition program that is designed to
enhance brand and geographic diversity, create economies of scale and deliver a
targeted return on invested capital. Under our acquisition program, we pursue:
(1) "platform" acquisitions of large, profitable and well-managed
multi-franchise dealership groups in large metropolitan and suburban
geographic markets that we do not currently serve, and
(2) "tuck-in" acquisitions, which are key, single-point dealerships that
are added to existing platforms. They allow us to increase brand
diversity, capitalize on economies of scale and offer a greater
breadth of products and services in each of the markets in which we
operate.
Over the past five years, we have purchased 79 dealership franchises
with annual revenues of approximately $2.5 billion, disposed of 22 dealership
franchises with annual revenues of approximately $277.2 million and been granted
12 new dealership franchises by the manufacturers. Our acquisition target for
2004 is to complete platform and tuck-in acquisitions of dealerships that have
approximately $1 billion in annual revenues.
ENTERING NEW GEOGRAPHIC MARKETS. We intend, over time, to expand into
geographic markets we do not currently serve by acquiring large, profitable and
well-established megadealers that are leaders in their regional markets. We
pursue megadealers that have superior operational and financial management
personnel, whom we seek to retain. We believe that by retaining existing
high-quality management we will be able to effectively operate acquired
megadealers with management personnel who understand the local market without
having to employ and train new and untested personnel.
EXPANDING WITHIN EXISTING MARKETS. We intend to make tuck-in
acquisitions of additional dealerships in the markets in which we operate,
including acquisitions that increase the brands, products and services offered
in these markets. We believe that these acquisitions will increase our operating
efficiencies and cost savings on a regional level in areas such as advertising,
vendor consolidation, data processing and personnel utilization.
RECENT ACQUISITIONS AND DISPOSITIONS. During 2003 we acquired, or were
granted by the manufacturers, a total of 10 franchises. Also, we completed a
market consolidation project in conjunction with DaimlerChrysler's Alpha
Initiative in Dallas, Texas. We completed tuck-in
10
acquisitions of eight franchises, consisting of Ford, Lincoln and Mercury in
Oklahoma City, Dodge, Lincoln, Mercury and Mitsubishi in New Orleans and
Chevrolet in Lubbock, Texas. These tuck-in acquisitions have annual revenues of
approximately $309.3 million. The aggregate consideration paid in completing all
of the 2003 acquisitions included approximately $35.4 million in cash and the
assumption of approximately $52.7 million of inventory financing.
Additionally, we were granted Lincoln and Mercury franchises in
Oklahoma City by the manufacturers during 2003, at no cost to us, and began
operations during 2003. During 2003 we opened a new add-point Ford dealership in
Pensacola, Florida that was previously granted to us.
Included in the acquisitions discussed above, are three franchises
purchased from Robert E. Howard II, one of our directors. Additionally, we sold
one franchise to a company owned by Mr. Howard. We acquired Ford, Lincoln and
Mercury franchises, with $131.2 million in annual revenues, and sold a
Mercedes-Benz franchise, with $47.4 million in annual revenues. All of the
franchises are located in Oklahoma City. In completing the acquisitions, the
aggregate consideration paid by us consisted of $12.7 million of cash, net of
cash received and the assumption of approximately $22.9 million of inventory
financing. We received $7.4 million in cash from the sale of the Mercedes-Benz
dealership franchise and related assets, which exceeded our basis in the
dealership by approximately $1.3 million. This excess sales price over cost 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 Mr. Howard.
During 2003, we disposed of three dealership franchises in
Massachusetts, Oklahoma and Texas, with annual revenues of approximately $76.5
million. We realized no gain or loss on the Massachusetts and Texas disposals.
The Oklahoma transaction was the sale of the Mercedes-Benz franchise to Mr.
Howard discussed in the preceding paragraph.
Since December 31, 2003, we have completed acquisitions of four
franchises. One of the acquisitions, with three franchises, is a new platform in
New Jersey. The other franchise was acquired in a tuck-in acquisition, and will
complement platform operations in Central Texas. The aggregate consideration
paid in completing these acquisitions was approximately $38.6 million in cash,
net of cash received, 54,372 shares of common stock and the assumption of $29.8
million of inventory financing.
COST AND REVENUE SYNERGIES
We believe that by consolidating the purchasing power of our
dealerships on a centralized basis we have benefited from certain significant
cost savings. For example, since we began operations, we have significantly
reduced the interest rate on our floorplan financing through our consolidated
credit facility. Furthermore, we have benefited from the consolidation of
administrative functions such as risk management, employee benefits and employee
training. We have also enhanced revenues by benchmarking our dealerships and by
establishing preferred providers for retail finance and vehicle service
contracts.
COMPETITION
The automotive retailing industry is highly competitive. In large
metropolitan areas consumers have a number of choices in deciding where to
purchase a new or used vehicle and where to have the vehicle serviced.
In the new vehicle market, our dealerships compete with other
franchised dealerships in their marketing areas. We also compete for vehicle
sales with auto brokers and leasing companies, and with Internet companies that
provide customer referrals to other dealerships or who broker vehicle sales
between customers and other dealerships. Our dealerships do not have any cost
advantage in purchasing new vehicles from the manufacturers, and typically rely
on advertising and merchandising, sales expertise, service reputation and
location of the dealership to sell new vehicles.
In the used vehicle market, our dealerships compete with other
franchised dealers, independent used vehicle dealers, automobile rental agencies
and private parties for supply and resale of used vehicles.
11
In the parts and service market, our dealerships compete against
franchised dealers to perform warranty repairs and against other automobile
dealers, franchised and independent service center chains and independent repair
shops for non-warranty repair and routine maintenance business. The dealerships
compete with other automobile dealers, service stores and auto parts retailers
in their parts operations. We believe that the principal competitive factors in
parts and service sales are the quality of customer service, the use of
factory-approved replacement parts, familiarity with a manufacturer's brands and
models, and price. A number of regional or national chains offer selected parts
and services at prices that may be lower than our dealerships' prices.
In arranging financing for our customers' vehicle purchases, we compete
with a broad range of financial institutions. In addition, financial
institutions are now offering F&I products through the Internet, which may
reduce our profits on these items. We believe that the principal competitive
factors in providing financing are convenience, interest rates and flexibility
in contract length.
Our success depends, in part, on national and regional
automobile-buying trends, local and regional economic factors and other regional
competitive pressures. Conditions and competitive pressures affecting the
markets in which we operate, such as price-cutting by dealers in these areas, or
in any new markets we enter, could adversely affect us, although the retail
automobile industry as a whole might not be affected. Some of our competitors
may have greater financial, marketing and personnel resources and lower overhead
and sales costs. We cannot guarantee that our strategy will be more effective
than the strategies of our competitors.
In the acquisition area, we compete with other national dealer groups
and individual investors for acquisitions. Some of our competitors may have
greater financial resources and competition may increase acquisition pricing. We
cannot guarantee that we will be able to complete acquisitions on terms
acceptable to us.
RELATIONSHIPS AND AGREEMENTS WITH OUR MANUFACTURERS
The following table sets forth the percentage of our new vehicle retail
unit sales attributable to the manufacturers we represented during 2003 that
accounted for 10% or more of our new vehicle retail unit sales:
PERCENTAGE OF OUR
NEW VEHICLE
RETAIL UNITS
SOLD DURING THE TWELVE
MONTHS ENDED
MANUFACTURER DECEMBER 31, 2003
------------ -----------------
Toyota / Lexus .............................. 26.2%
Ford......................................... 25.5%
DaimlerChrysler.............................. 12.3%
General Motors............................... 10.5%
Nissan / Infiniti........................... 10.2%
Each of our dealerships operates under a franchise agreement with one
of our manufacturers (or authorized distributors). Under our dealership
franchise agreements, the manufacturers exert considerable influence over the
operations of our dealerships. Each of the franchise agreements may be
terminated or not renewed by the manufacturer for a variety of reasons,
including any unapproved changes of ownership or management. While we believe we
will be able to renew all of our franchise agreements, we cannot guarantee all
of our franchise agreements will be renewed or that the terms of the renewals
will be as favorable to us as our current agreements. Our franchise agreements
do not give us the exclusive right to sell a manufacturer's product within a
given geographic area.
Our agreements with our manufacturers impose a number of restrictions
on our operations, including our ability to make acquisitions and obtain
financing, and on our
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management and ownership of our common stock. For a description of these
restrictions, please read "--Risk Factors."
GOVERNMENTAL REGULATIONS
A number of regulations affect our business of marketing, selling,
financing and servicing automobiles. We are also subject to laws and regulations
relating to business corporations generally.
Typically, we must obtain a license in order to establish, operate or
relocate a dealership or provide certain automotive repair services. These laws
also regulate the way we conduct our business, including our advertising and
sales practices.
We may be required to file applications and obtain clearances under
applicable federal antitrust laws before completing an acquisition. These
regulatory requirements may restrict or delay our acquisitions, and may increase
the cost of completing acquisitions.
Various federal and state laws established to protect dealerships from
the general unequal bargaining power between the parties also govern the
automobile franchise relationship. The following discussion of state court and
administrative holdings and various state laws is based on management's beliefs
and may not be an accurate description of the state court and administrative
holdings and various state laws. The state statutes generally provide that it is
a violation for a manufacturer to terminate or fail to renew a franchise without
good cause. These statutes also provide that the manufacturer is prohibited from
unreasonably withholding approval for a proposed change in ownership of the
dealership. Acceptable grounds for disapproval include material reasons relating
to the character, financial ability or business experience of the proposed
transferee. Accordingly, certain provisions of the franchise agreements,
particularly as they relate to a manufacturer's rights to terminate or fail to
renew the franchise, have repeatedly been held invalid by state courts and
administrative agencies.
Our financing activities with our customers are subject to federal
truth in lending, consumer leasing and equal credit opportunity regulations, as
well as state and local motor vehicle finance laws, installment finance laws,
insurance laws, usury laws and other installment sales laws. Some states
regulate finance fees that may be paid as a result of vehicle sales. Penalties
for violation of any of these laws or regulations may include revocation of
certain licenses, assessment of criminal and civil fines and penalties, and in
certain instances, create a private cause of action for individuals. We believe
that our dealerships comply substantially with all laws and regulations
affecting their business and do not have any material liabilities under such
laws and regulations.
ENVIRONMENTAL MATTERS
We are subject to a wide range of federal, state, and local
environmental laws and regulations, including those governing discharges into
the air and water, the storage of petroleum substances and chemicals, the
handling and disposal of wastes, and the remediation of contamination arising
from spills and releases. These environmental laws and regulations have become
very complex and stringent over the years, and the task of achieving and
maintaining full compliance with all applicable environmental laws and
regulations has become much more rigorous. Failure to comply with these laws and
regulations may result in the assessment of administrative, civil and criminal
penalties, imposition of injunctions that limit or prohibit certain activities,
or the performance of investigatory and remedial activities. We believe that we
are in substantial compliance with current applicable environmental laws and
regulations and that continued compliance with these existing laws and
regulations will not have a material adverse effect on our operations, earnings
or competitive position. Moreover, we generally obtain environmental studies on
dealerships to be acquired and, as necessary, implement environmental management
or remedial activities to reduce the risk of noncompliance with environmental
laws and regulations.
As with automobile dealerships generally, and parts, service and
collision service center operations in particular, our business involves the
generation, use, handling, storage, transport and disposal of hazardous or toxic
substances or wastes. Operations involving the management of hazardous and
nonhazardous wastes are subject to the requirements of the federal Resource
13
Conservation and Recovery Act ("RCRA") and comparable state statutes. Pursuant
to these laws, federal and state environmental agencies have established
approved methods for storage, treatment, and disposal of regulated wastes with
which we must comply.
Our business involves the use of aboveground and underground storage
tanks. Under applicable laws and regulations, we are responsible for the proper
use, maintenance and abandonment of regulated storage tanks which we own or
operate, and for remediation of subsurface soils and groundwater impacted by
releases from such existing or abandoned aboveground or underground storage
tanks. In addition to these regulated tanks, we own, operate or have otherwise
abandoned, other underground and aboveground devices or containers (e.g.,
automotive lifts and service pits) that may not be classified as regulated
tanks, but which are capable of releasing stored materials into the environment,
thereby potentially obligating us to remediate any soils or groundwater
resulting from such releases.
We are also subject to laws and regulations governing remediation of
contamination at facilities we operate or to which we send hazardous or toxic
substances or wastes for treatment, recycling or disposal. The Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), also known as
the "Superfund" law, and analogous state laws impose liability, without regard
to fault or the legality of the original conduct, on certain classes of persons
that are considered to have contributed to the release of a "hazardous
substance" into the environment. These persons include the owner or operator of
the disposal site or sites where the release occurred and companies that
disposed or arranged for the disposal of the hazardous substances released at
such sites. Under CERCLA, these "responsible parties" may be subject to joint
and several liability for the costs of cleaning up the hazardous substances that
have been released into the environment, for damages to natural resources and
for the costs of certain health studies, and it is not uncommon for neighboring
landowners and other third parties to file claims for personal injury and
property damage allegedly caused by the release of hazardous substances.
We currently own or lease, and in connection with our acquisition
program will in the future own or lease, properties that in some instances have
been used for auto retailing and servicing for many years. Although we have
utilized operating and disposal practices that were standard in the industry at
the time, it is possible that environmentally sensitive materials such as new
and used motor oil, transmission fluids, antifreeze, lubricants, solvents and
motor fuels may have been spilled or released on or under the properties owned
or leased by us or on or under other locations where such materials were taken
for disposal. Further, we believe that structures found on some of these
properties may contain suspect asbestos-containing materials, albeit in an
undisturbed condition. In addition, many of these properties have been operated
by third parties whose use, handling and disposal of such environmentally
sensitive materials were not under our control.
These properties and the waste materials spilled, released or otherwise
found thereon may be subject to RCRA, CERCLA and analogous state laws. Under
such laws, we could be required to remove or remediate previously spilled or
released waste materials (including such materials spilled or released by prior
owners or operators), or property contamination (including groundwater
contamination caused by prior owners or operators), or to perform monitoring or
remedial activities to prevent future contamination (including asbestos found to
be in a friable and disturbed condition).
In September 2001, we responded to a request for information from the
U.S. Environmental Protection Agency ("EPA") regarding materials sent by one of
our dealerships to the R&H Oil Company site in Bexar County, Texas, which site
currently has been proposed for inclusion on the EPA's National Priorities List
of Superfund sites. Our dealership apparently is one of some 300 or more parties
that may have contributed materials to the R&H site. We have received no
response from the EPA since our September 2001 correspondence. Our records
indicate that this dealership sent one 50-gallon barrel of used oil to the R&H
site. In other matters, five of our dealerships, as well as approximately 2,000
other parties, were notified in late December 2001, by the Georgia Department of
Natural Resources ("GDNR") of their identification as potentially responsible
parties ("PRPs") with respect to the M&J Solvents site in Atlanta, Georgia,
which is on the agency's Hazardous Site Inventory list. The GDNR has completed
its delineation of contamination at the M&J Solvents site and is currently
preparing a report summarizing the results of the field investigation. We
received no response from the GDNR in
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follow-up to the initial notifications made in December 2001. No further
response is required from us with respect to either of these matters at this
time.
In January 2003, we, along with some 100 other parties, received a
letter from a private party who is seeking all of our participation in a
voluntary mediation with the EPA and the U.S. Department of Justice regarding
the remedial liabilities of PRPs at the Double Eagle Refinery Superfund site in
Oklahoma City, Oklahoma. During 2003, we joined some 42 other parties in a group
that entered into negotiations with the EPA and DOJ regarding potential
liability for costs of remediating contamination and natural resource damages at
this Superfund site. Currently, negotiations between the parties are at an
advanced stage, with both sides having exchanged proposals for resolving this
matter. Based on the most recent set of proposals exchanged, we believe our pro
rata share of any settlement would be no higher than $61,000. However, because
no agreement has yet been reached between the parties, we cannot make any
assurances at this time as to our potential liability with respect to this
matter.
During the last week of December 2001, the Miller dealerships (together
with all other new car dealerships in the State of California) received a 60-Day
Notice of Intent to Sue ("Notice") from Citizens for Responsible Business, Inc.
("CFRB") under California's Proposition 65. The Notice alleged that the
dealerships exposed its employees and customers to a variety of harmful
chemicals without furnishing them with prior notice that those chemicals may
cause cancer, birth defects or other reproductive harm. Proposition 65 is
codified in California's Health & Safety Code, Sections 25249.5, et seq. On
January 28, 2002, California's Attorney General's Office sent a letter to CFRB's
attorneys, challenging their Notice on the basis that CFRB had no apparent
substantiation of its various contentions. CFRB thereafter complied with the
Attorney General's request for substantiation by providing 14 binders of studies
and test data, after which CFRB received a letter of September 25, 2002, from
the Attorney General's Office, confirming that CFRB could proceed with its
action. Thereafter, in December, 2002, CFRB sent a new round of 60-Day notices
under Proposition 65 to all California dealers, including the Miller
dealerships. Nonetheless, despite CFRB's issuance of notice in December 2002, we
were not served with a lawsuit by CFRB during 2003.
Further, the Federal Water Pollution Control Act, also known as the
Clean Water Act, and comparable state laws prohibit discharges of pollutants
into regulated waters without authorized National Pollution Discharge
Elimination System (NPDES) and similar state permits, require containment of
potential discharges of oil or hazardous substances, and require preparation of
spill prevention, control and countermeasure ("SPCC") plans. Currently, we are
evaluating and, as necessary, updating or otherwise implementing a number of our
SPCC plans to satisfy amended regulations that take effect in 2004. Some of our
operations involving the release of emissions, such as spray painting
activities, are also subject to regulation under the Clean Air Act and
comparable state and local requirements. We believe we are in substantial
compliance with these water and air related laws and regulations.
EMPLOYEES
As of December 31, 2003, we employed approximately 7,400 people, of
whom approximately 890 were employed in managerial positions, 2,290 were
employed in non-managerial vehicle sales department positions, 3,290 were
employed in non-managerial parts and service department positions and 930 were
employed in administrative support positions.
We believe that our relationships with our employees are favorable. 71
of our current employees are represented by a labor union in our New Jersey
operations. Because of our dependence on the manufacturers, we may be affected
by labor strikes, work slowdowns and walkouts at the manufacturers'
manufacturing facilities. Additionally, labor strikes, work slowdowns and
walkouts at businesses participating in the distribution of the manufacturers'
products may also affect us.
15
RISK FACTORS
IF WE FAIL TO OBTAIN A DESIRABLE MIX OF POPULAR NEW VEHICLES FROM
MANUFACTURERS OUR PROFITABILITY WILL BE NEGATIVELY AFFECTED.
We depend on the manufacturers to provide us with a desirable mix of
new vehicles. The most popular vehicles usually produce the highest profit
margins and are frequently difficult to obtain from the manufacturers. If we
cannot obtain sufficient quantities of the most popular models, our
profitability may be adversely affected. Sales of less desirable models may
reduce our profit margins.
IF WE FAIL TO OBTAIN RENEWALS OF ONE OR MORE OF OUR FRANCHISE
AGREEMENTS ON FAVORABLE TERMS OR SUBSTANTIAL FRANCHISES ARE TERMINATED, OUR
OPERATIONS MAY BE SIGNIFICANTLY IMPAIRED.
Each of our dealerships operates under a franchise agreement with one
of our manufacturers (or authorized distributors). Under our dealership
franchise agreements, the manufacturers exert considerable influence over the
operations of our dealerships. Each of the franchise agreements may be
terminated or not renewed by the manufacturer for a variety of reasons,
including any unapproved changes of ownership or management. While we believe we
will be able to renew all of our franchise agreements, we cannot guarantee all
of our franchise agreements will be renewed or that the terms of the renewals
will be as favorable to us as our current agreements. Our franchise agreements
do not give us the exclusive right to sell a manufacturer's product within a
given geographic area. As result, a manufacturer may grant another dealer a
franchise, which could directly compete against us and reduce the profitability
of our existing dealerships.
MANUFACTURERS' RESTRICTIONS ON ACQUISITIONS MAY LIMIT OUR FUTURE
GROWTH.
We must obtain the consent of the manufacturer prior to the
acquisition of any of its dealership franchises. Delays in obtaining, or failing
to obtain, manufacturer approvals for dealership acquisitions could adversely
affect our acquisition program. Obtaining the consent of a manufacturer for the
acquisition of a dealership could take a significant amount of time or might be
rejected entirely. In determining whether to approve an acquisition,
manufacturers may consider many factors, including the moral character and
business experience of the dealership principals and the financial condition,
ownership structure, customer satisfaction index scores and other performance
measures of our dealerships.
Our manufacturers attempt to measure customers' satisfaction with
automobile dealerships through systems generally known as the customer
satisfaction index or CSI. The manufacturers have modified the components of
their CSI scores from time to time in the past, and they may replace them with
different systems at any time. From time to time, we may not meet all of the
manufacturers' requirements to make acquisitions. To date, we have not been
materially adversely affected by these standards and have not been denied
approval of any acquisition based on low CSI scores or other measures. However,
we cannot assure you that all of our proposed future acquisitions will be
approved.
In addition, a manufacturer may limit the number of its dealerships
that we may own or the number that we may own in a particular geographic area.
If we reach a limitation imposed by a manufacturer for a particular geographic
market, we will be unable to make additional tuck-in acquisitions in that market
of that manufacturer's franchises, which could limit our ability to grow in that
geographic area. In addition, geographic limitations imposed by manufacturers
could restrict our ability to acquire platforms whose markets overlap with those
already served by us. The following is a summary of the restrictions imposed by
the manufacturers that accounted for 10% or more of our new vehicle retail unit
sales in 2003.
FORD. Ford currently limits the number of dealerships that we may own
to the greater of (1) 15 Ford and 15 Lincoln and Mercury dealerships and (2)
that number of Ford, Lincoln and Mercury dealerships accounting for 5% of the
preceding year's total Ford, Lincoln and Mercury retail sales of those brands in
the United States. Currently, we own a total of 27 Ford, Lincoln and Mercury
dealership franchises and represent only approximately 0.7% of the national
retail
16
sales of Ford, Lincoln and Mercury for 2003. In addition, Ford limits us to one
Ford dealership in a Ford-defined market area having two or less authorized Ford
dealerships and one-third of Ford dealerships in any Ford-defined market area
having more than three authorized Ford dealerships. In many of its dealership
franchise agreements Ford has the right of first refusal to acquire, subject to
applicable state law, a Ford franchised dealership when its ownership changes.
Currently, Ford is emphasizing increased sales performance from all of its
franchised dealers, including our Ford dealerships. To this end, Ford has
requested that we focus on the performance of owned dealerships as opposed to
acquiring additional Ford dealerships. We intend to comply with this request.
TOYOTA / LEXUS. Toyota restricts the number of dealerships that we may
own and the time frame over which we may acquire them. Under Toyota's standard
Multiple Ownership Agreement, we may acquire additional dealerships, over a
minimum of seven semi-annual periods, up to a maximum number of dealerships
equal to 5% of Toyota's aggregate national annual retail sales volume. In
addition, Toyota restricts the number of Toyota dealerships that we may acquire
in any Toyota-defined region and "Metro" market, as well as any contiguous
market. We may acquire only four primary Lexus dealerships or six outlets
nationally, including only two Lexus dealerships in any one of the four Lexus
geographic areas. Our Lexus companion dealership located south of Houston is not
considered by Lexus to be a primary Lexus dealership for purposes of the
restriction on the number of Lexus dealerships we may acquire. Currently, we own
nine Toyota and two primary Lexus dealership franchises. We represented
approximately 1.3% of the national retail sales of Toyota for 2003.
GENERAL MOTORS. General Motors, or GM currently evaluates our
acquisitions of GM dealerships on a case-by-case basis. GM, however, limits the
maximum number of GM dealerships that we may acquire at any time to 50% of the
GM dealerships, by franchise line, in a GM-defined geographic market area.
Currently, we own 22 GM dealership franchises and could acquire approximately
6,800 GM dealership franchises nationally, dependent upon franchise line and
restrictions within particular GM-defined geographic market areas. Additionally,
our current agreement with GM does not include Saturn dealerships and our future
acquisition of a Saturn dealership will be subject to GM approval on a
case-by-case basis.
DAIMLERCHRYSLER. Currently, we have no agreement with Chrysler
restricting our ability to acquire Chrysler dealerships. However, we are in
discussions with them regarding the creation of a framework agreement that has
similar terms and conditions to our other agreements. Chrysler has advised us
that in determining whether to approve an acquisition of a Chrysler dealership,
Chrysler considers the number of Chrysler dealerships the acquiring company
already owns. Chrysler currently carefully considers, on a case-by-case basis,
any acquisition that would cause the acquiring company to own more than 10
Chrysler dealerships nationally, six in the same Chrysler-defined zone and two
in the same market. Our agreement with Mercedes-Benz, in addition to limitations
on the number of dealership franchises in particular metropolitan markets and
regions, limits us to a maximum of the greater of four Mercedes-Benz dealership
franchises or the number of dealership franchises that would account for up to
3% of the preceding year's total Mercedes-Benz retail sales. Currently, we own
23 Chrysler and two Mercedes-Benz dealership franchises.
NISSAN / INFINITI. Nissan currently limits the number of dealerships
that we may own up to a maximum number of dealerships that would equal 5% of
Nissan's (or Infiniti's as applicable) aggregate national annual vehicle
registrations. In addition, Nissan restricts the number of dealerships that we
may own in any Nissan defined region to 20% of the aggregate regional
registrations for the applicable area. Currently we own 10 Nissan franchises and
one Infiniti franchise, and represent only approximately 1.2% and 1.6% of the
national vehicle registrations for Nissan and Infiniti, respectively.
MANUFACTURERS' RESTRICTIONS COULD NEGATIVELY IMPACT OUR ABILITY TO
OBTAIN CERTAIN TYPES OF FINANCINGS.
Provisions in our agreements with our manufacturers may restrict, in
the future, our ability to obtain certain types of financing. A number of our
manufacturers prohibit pledging the stock of their franchised dealerships. For
example, our agreement contains provisions prohibiting pledging the stock of our
GM franchised dealerships. Our agreement with Ford permits pledging our Ford
17
franchised dealerships' stock and assets, but only for Ford dealership-related
debt. Moreover, our Ford agreement permits our Ford franchised dealerships to
guarantee, and to use Ford franchised dealership assets to secure our debt, but
only for Ford dealership-related debt. Ford waived that requirement with respect
to our March 1999 and August 2003, senior subordinated notes offerings and the
subsidiary guarantees of those notes. Certain of our manufacturers require us to
meet certain financial ratios, which, if we fail to meet these ratios the
manufacturers may reject proposed acquisitions, and may give them the right to
purchase their franchises for fair value.
CERTAIN RESTRICTIONS RELATING TO OUR MANAGEMENT AND OWNERSHIP OF OUR
COMMON STOCK COULD DETER PROSPECTIVE ACQUIRERS FROM ACQUIRING CONTROL OF US AND
ADVERSELY AFFECT OUR ABILITY TO ENGAGE IN EQUITY OFFERINGS.
As a condition to granting their consent to our previous acquisitions
and our initial public offering, some of our manufacturers have imposed other
restrictions on us. These restrictions prohibit, among other things:
- any one person, who in the opinion of the manufacturer is unqualified
to own its franchised dealership or has interests incompatible with
the manufacturer, from acquiring more than a specified percentage of
our common stock (ranging from 20% to 50% depending on the particular
manufacturer's restrictions) and this trigger level can fall to as low
as 5% if another vehicle manufacturer is the entity acquiring the
ownership interest or voting rights;
- certain material changes in our business or extraordinary corporate
transactions such as a merger or sale of a material amount of our
assets;
- the removal of a dealership general manager without the consent of the
manufacturer; and
- change in control of our Board of Directors or change in management.
Our manufacturers may also impose additional restrictions on us in the
future. If we are unable to comply with these restrictions, we generally must
sell the assets of the dealerships to the manufacturer or to a third party
acceptable to the manufacturer, or terminate the dealership agreements with the
manufacturer, which may have a material adverse effect on us.
IF MANUFACTURERS DISCONTINUE SALES INCENTIVES AND OTHER PROMOTIONAL
PROGRAMS, OUR RESULTS OF OPERATIONS MAY BE MATERIALLY ADVERSELY AFFECTED.
We depend on our manufacturers for sales incentives and other programs
that are intended to promote dealership sales or support dealership
profitability. Manufacturers historically have made many changes to their
incentive programs during each year. A discontinuation or change in our
manufacturers' incentive programs could adversely affect our business. Moreover,
some manufacturers use a dealership's CSI scores as a factor for participating
in incentive programs. Failure to comply with the CSI standards could adversely
affect our participation in dealership incentive programs, which could have a
material adverse effect on us.
OUR RELATIONSHIP WITH OUR MANUFACTURERS IMPOSES A NUMBER OF
RESTRICTIONS ON OUR OPERATIONS, WHICH MAY REQUIRE US TO DIVERT FINANCIAL
RESOURCES FROM USES THAT MANAGEMENT BELIEVES MAY BE OF BETTER VALUE TO US.
Our manufacturer agreements specify that, in certain situations, we
cannot operate a dealership franchised by another manufacturer in the same
building as that manufacturer's franchised dealership. In addition, some
manufacturers, like GM, are in the process of realigning their franchised
dealerships along defined "channels," such as combining Pontiac, Buick and GMC
in one dealership location. As a result, GM, as well as other manufacturers, may
require us to move or sell some dealerships.
Our manufacturers generally require that the dealership premises meet
defined image standards and may direct us to implement costly capital
improvements to dealerships as a condition for renewing certain franchise
agreements. All of these requirements could impose significant capital
expenditures on us in the future.
18
Pursuant to the automobile dealership franchise agreements to which our
dealerships are subject, all dealerships are required to maintain a certain
minimum working capital, as determined by the manufacturers. This requirement
could require us to utilize available capital to maintain the working capital
levels of our dealerships at manufacturer-required levels.
OUR SUCCESS DEPENDS UPON THE CONTINUED VIABILITY AND OVERALL SUCCESS OF
THE MANUFACTURERS OF THE VEHICLES THAT EACH OF OUR DEALERSHIPS SELLS.
Demand for our manufacturers' vehicles as well as the financial
condition, management, marketing, production and distribution capabilities of
our manufacturers affect our business. Our Toyota / Lexus, Ford,
DaimlerChrysler, GM and Nissan / Infiniti dealerships represented approximately
84.7% of our 2003 total new vehicle retail sales. Although we have attempted to
lessen our dependence on any one manufacturer by buying dealerships representing
a number of different domestic and foreign manufacturers, events such as labor
disputes and other production disruptions that may adversely affect a
manufacturer may also adversely affect us. Similarly, the late delivery of
vehicles from manufacturers, which sometimes occurs during periods of new
product introductions, can lead to reduced sales during those periods. Moreover,
any event that causes adverse publicity involving any of our manufacturers may
have an adverse effect on us regardless of whether such event involves any of
our dealerships. Additionally, the inability of a manufacturer to continue
operations will not only impact our vehicle sales and profitability, but could
also result in the partial or complete impairment of intangible assets recorded,
thus resulting in a write off of those assets.
GROWTH IN OUR REVENUES AND EARNINGS WILL BE IMPACTED BY OUR ABILITY TO
ACQUIRE AND SUCCESSFULLY INTEGRATE AND OPERATE DEALERSHIPS.
We cannot guarantee that we will be able to identify and acquire
dealerships in the future. In addition, we cannot guarantee that such
acquisitions will be successful or will be on terms and conditions consistent
with past acquisitions. Restrictions by our manufacturers, as well as covenants
contained in our debt instruments, limit our ability to acquire additional
dealerships. In addition, increased competition for acquisition candidates may
develop, which could result in fewer acquisition opportunities available to us
and/or higher acquisition prices. Some of our competitors may have greater
financial resources than us.
We will continue to need substantial capital in order to acquire
additional automobile dealerships. In the past, we have financed these
acquisitions with a combination of cash flow from operations, proceeds from
borrowings under our credit facility, bond issuances and stock offerings and
issuances of our common stock to the sellers of the acquired dealerships.
We currently intend to finance future acquisitions by using cash and
issuing shares of common stock as partial consideration for acquired
dealerships. The use of common stock as consideration for acquisitions will
depend on two factors: (1) the market value of our common stock at the time of
the acquisition and (2) the willingness of potential acquisition candidates to
accept common stock as part of the consideration for the sale of their
businesses. If potential acquisition candidates are unwilling to accept our
common stock, we will rely solely on available cash or debt or equity financing,
which could adversely affect our acquisition program. Accordingly, our ability
to make acquisitions could be adversely affected if the price of our common
stock is depressed.
In addition, managing and integrating additional dealerships into our
existing mix of dealerships may result in substantial costs, delays or other
operational or financial problems. Acquisitions involve a number of special
risks, including the difficulties of managing operations located in geographic
areas where we have not previously operated, possible diversion of resources and
management's attention, inability to retain key personnel at the acquired entity
and risks associated with unanticipated events or liabilities, some or all of
which could have a material adverse effect on our business, financial condition
and results of operations. Although we conduct what we believe to be a prudent
level of investigation regarding the operating condition of the businesses we
purchase, in light of the circumstances of each transaction, an unavoidable
level of risk remains regarding the actual operating condition of these
businesses. Until we actually assume operating control of such business assets,
we may not be able to ascertain the actual value of the acquired entity.
19
THE LOSS OF KEY PERSONNEL COULD ADVERSELY AFFECT OUR OPERATIONS AND
GROWTH.
We depend to a large extent upon the abilities and continued efforts of
our executive officers, senior management and principals of our dealerships.
Furthermore, we will likely be dependent on the senior management of any
dealerships acquired in the future. Effective March 31, 2004, we employ two
senior executive officers, our Chairman, President and Chief Executive Officer
and our Executive Vice President. Our Executive Vice President, Chief Financial
Officer and Treasurer has resigned effective March 31, 2004. Our Senior Vice
President, Operations died tragically in an accident in November 2003. We are
currently conducting searches to replace those persons. If either of our current
senior executives leave or if we fail to attract and retain other qualified
employees, our business could be adversely affected.
CHANGES IN INTEREST RATES COULD ADVERSELY IMPACT OUR PROFITABILITY.
All of the borrowings under our credit facility bear interest based on
a floating rate. A significant increase in interest rates could cause a
substantial increase in our cost of borrowing. At times, we manage our exposure
to interest rate volatility through the use of interest rate swaps. Please see
"Quantitative and Qualitative Disclosures about Market Risk" for a discussion
regarding our interest rate sensitivity.
Additionally, a significant increase in interest rates could adversely
impact our ability to arrange financing for vehicle sales at rates acceptable to
our customers and the volume of fees we receive for arranging the financing.
CHANGES IN OUR INSURANCE PROGRAMS COULD ADVERSELY IMPACT OUR
PROFITABILITY.
Automobile dealerships require insurance covering a broad variety of
risks. We have insurance on our real property, comprehensive coverage for our
vehicle inventory, general liability insurance, employee dishonesty coverage,
employment practices liability insurance, pollution coverage and errors and
omissions insurance in connection with vehicle sales and financing activities.
Additionally, our current insurance includes umbrella policies with a $105.0
million aggregate limit, which covers losses in excess of our $1 million
self-insured retention on general liability claims.
Additionally, we retain some risk of loss under our self-insured
medical and property / casualty programs. Changes in the insurance market could
impact our level of retained risk and our results of operations.
WE ARE SUBJECT TO A NUMBER OF RISKS ASSOCIATED WITH IMPORTING
INVENTORY.
A portion of our new vehicle business involves the sale of vehicles,
vehicle parts or vehicles composed of parts that are manufactured outside the
United States. As a result, our operations are subject to customary risks
associated with imported merchandise, including fluctuations in the value of
currencies, import duties, exchange controls, trade restrictions, work stoppages
and general political and economic conditions in foreign countries.
The United States or the countries from which our products are imported
may, from time to time, impose new quotas, duties, tariffs or other
restrictions, or adjust presently prevailing quotas, duties or tariffs on
imported merchandise. Any of those impositions or adjustments could affect our
operations and our ability to purchase imported vehicles and parts. This, in
turn, could have an adverse effect on our business.
THE CYCLICALITY AND SEASONALITY OF VEHICLE SALES MAY ADVERSELY IMPACT
OUR PROFITABILITY.
Our operations, like the automotive retailing industry in general, can
be impacted by a number of factors relating to general economic conditions,
including consumer business cycles, consumer confidence, economic conditions,
availability of consumer credit and interest rates.
Our operations are subject to seasonal variations, with the second and
third quarters generally contributing more operating profit than the first and
fourth quarters. Three primary forces drive this seasonality: (1)
manufacturer-related factors, primarily the historical timing of major
manufacturer incentive programs and model changeovers, (2) weather-related
factors and (3) consumer buying patterns.
20
THE AUTOMOTIVE RETAILING INDUSTRY IS HIGHLY COMPETITIVE, WHICH MAY
REDUCE OUR PROFITABILITY AND GROWTH.
Our business and acquisition activity is subject to intense
competition. Please see "Business-Competition" for a discussion of competition
in our industry.
GOVERNMENTAL REGULATION AND ENVIRONMENTAL REGULATION COMPLIANCE COSTS
MAY ADVERSELY AFFECT OUR PROFITABILITY.
We are subject to a number of regulations that affect our business, the
compliance of which may impose substantial costs on us. Please see "Business -
Governmental Regulations" and "Environmental Matters" for a discussion of the
effect of such regulations on us.
CHANGES IN ACCOUNTING ESTIMATES COULD ADVERSELY IMPACT OUR
PROFITABILITY.
We are required to make estimates and assumptions in the preparation of
financial statements in conformity with accounting principles generally accepted
in the United States. Please see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Discussion of Critical
Accounting Policies" for a discussion of what we believe are our critical
accounting policies.
OUR STOCKHOLDER RIGHTS PLAN AND CERTAIN PROVISIONS OF OUR CERTIFICATE
OF INCORPORATION AND BYLAWS CONTAIN CERTAIN PROVISIONS THAT MAKE A TAKEOVER OF
GROUP 1 DIFFICULT.
Our stockholder rights plan and certain provisions of our certificate
of incorporation and bylaws could make it more difficult for a third party to
acquire control of Group 1, even if such change of control would be beneficial
to stockholders. These include provisions:
- providing for a board of directors with staggered, three-year terms,
permitting the removal of a director from office only for cause;
- allowing only the board of directors to set the number of directors;
- requiring super-majority or class voting to affect certain amendments
to our certificate of incorporation and bylaws;
- limiting the persons who may call special stockholders' meetings;
- limiting stockholder action by written consent;
- establishing advance notice requirements for nominations for election
to the board of directors or for proposing matters that can be acted
upon at stockholders' meetings; and
- allowing our board of directors to issue shares of preferred stock
without stockholder approval.
Certain of our dealer agreements prohibit the acquisition of more than
a specified percentage of common stock without the consent of the relevant
manufacturer. These terms of our dealer agreements could also make it more
difficult for a third party to acquire control of Group 1.
INTERNET WEB SITE AND AVAILABILITY OF PUBLIC FILINGS
Our Internet address is www.group1auto.com. We make the following
information available free of charge on our Internet Web site:
- Annual Report on Form 10-K
- Quarterly Reports on Form 10-Q
- Current Reports on Form 8-K
- Amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934
- Corporate Governance Guidelines
21
- Charters for our Audit, Compensation and Nominating/Governance
Committees
- Code of Conduct for Directors, Officers and Employees
- Code of Ethics for our Chief Executive Officer, Chief Financial
Officer, Controller and all of our financial and accounting officers.
We make our SEC filings available on our Web site as soon as reasonably
practicable after we electronically file such material with, or furnish such
material to, the SEC. We make our SEC filings available via a link to our
filings on the SEC Web site. The above information is available in print to
anyone who requests it.
ITEM 2. PROPERTIES
We use a number of facilities to conduct our dealership operations.
Each of our dealerships may include facilities for (1) new and used vehicle
sales, (2) vehicle service operations, (3) retail and wholesale parts
operations, (4) collision service operations, (5) storage and (6) general office
use. We try to structure our operations so as to avoid the ownership of real
property. In connection with our acquisitions, we generally seek to lease rather
than acquire the facilities on which the acquired dealerships are located. We
generally enter into lease agreements with respect to such facilities that have
30-year total terms with 15-year initial terms and three five-year option
periods, at our option. As a result, we lease the majority of our facilities
under long-term operating leases.
ITEM 3. LEGAL PROCEEDINGS
From time to time, our dealerships are named in claims involving the
manufacture of automobiles, contractual disputes and other matters arising in
the ordinary course of business.
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. Such briefing was
completed on February 6, 2004. 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. Briefing on the merits of
defendants' appeal was completed on February 13, 2004. The parties participated
in mediation in 2003. That mediation resulted in a settlement proposal from the
plaintiff class representatives to the defendant dealers, including our Texas
dealership subsidiaries. The proposal was contingent on achieving a certain
minimum level of participation among the defendant dealers based on the number
of transactions in which each dealer engaged. Because the participation
threshold was not satisfied, the proposal failed. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock is listed on the New York Stock Exchange ("NYSE")
under the symbol "GPI." There were 109 holders of record of our common stock as
of March 1, 2004.
The following table presents the quarterly high and low sales prices
for our common stock for 2002 and 2003, as reported on the New York Stock
Exchange Composite Tape under the symbol "GPI."
HIGH LOW
---- ---
2002:
First Quarter............................. $43.69 $25.31
Second Quarter............................ 50.80 34.85
Third Quarter............................. 38.11 22.20
Fourth Quarter............................ 24.75 18.00
2003:
First Quarter............................. 27.35 19.91
Second Quarter............................ 33.94 20.80
Third Quarter............................. 40.19 32.17
Fourth Quarter............................ 39.04 31.60
We have never declared or paid dividends on our common stock.
Generally, we have retained earnings to finance the development and expansion of
our business. Any decision to pay dividends will be made by our Board of
Directors after considering our results of operations, financial condition,
capital requirements, outlook for our business, general business conditions and
other factors.
Certain provisions of our credit facilities and our senior subordinated
notes require us to maintain certain financial ratios and limit the amount of
disbursements outside the ordinary course of business, including limitations on
the payment of cash dividends and stock repurchases, which are limited to
percentage of cumulative net income.
We have entered into an agreement to purchase certain assets and assume
certain liabilities of various automobile dealerships for cash and shares of our
Common Stock. The following is the transaction in which stock has been issued:
Date Securities
Date of Agreement Issued Acquisition Shares
- ----------------- ------ ----------- ------
November 11, 2003 February 9, 2004 David Michael Motor Group 54,372
We relied on Section 4(2) under the Securities Act of 1933, as amended
(the "Securities Act"), as an exemption from the registration requirements of
the Securities Act relating to the issuance of the common stock in the
acquisition. We believe we are justified in relying on such exemption since only
one person received common stock in the transaction and such person is an
"accredited investor" as defined by Regulation D.
EQUITY COMPENSATION PLANS
Information regarding our equity compensation plans as of December 31,
2003, is disclosed in Item 12. "Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters."
23
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical financial data as of December 31,
2003, 2002, 2001, 2000 and 1999, and for the five years in the period ended
December 31, 2003, have been derived from our audited financial statements. This
selected financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and related notes included elsewhere in
this Form 10-K.
We have accounted for all of our dealership acquisitions using the
purchase method of accounting and, as a result, we do not include in our
financial statements the results of operations of these dealerships prior to the
date they were acquired by us. As a result of the effects of our acquisitions
and other potential factors in the future, the historical financial information
described in the selected financial data is not necessarily indicative of the
results of operations and financial position of Group 1 in the future or the
results of operations and financial position that would have resulted had such
acquisitions occurred at the beginning of the periods presented in the selected
financial data.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
2003 2002 2001 2000 1999
---------------------------------------------------------------------
(dollars in thousands, except per share amounts)
INCOME STATEMENT DATA:
Revenues............................. $ 4,518,560 $ 4,214,364 $ 3,996,374 $ 3,586,146 $ 2,508,324
Cost of sales........................ 3,795,149 3,562,069 3,389,122 3,058,709 2,131,967
----------- ----------- ----------- ----------- -----------
Gross profit...................... 723,411 652,295 607,252 527,437 376,357
Selling, general and
administrative expenses........... 561,698 502,732 458,546 393,679 279,791
Depreciation and amortization........ 14,381 11,940 17,358 16,038 10,616
----------- ----------- ----------- ----------- -----------
Income from operations............ 147,332 137,623 131,348 117,720 85,950
Other income (expense):
Floorplan interest expense........ (20,615) (19,371) (27,935) (37,536) (20,395)
Other interest expense, net....... (14,276) (9,925) (13,863) (15,500) (10,052)
Other income (expense), net....... 631 (1,045) (128) 1,142 186
----------- ----------- ----------- ----------- -----------
Income before income taxes........ 113,072 107,282 89,422 65,826 55,689
Provision for income taxes........... 36,946 40,217 33,980 25,014 22,174
----------- ----------- ----------- ----------- -----------
Net income........................ $ 76,126 $ 67,065 $ 55,442 $ 40,812 $ 33,515
=========== =========== =========== =========== ===========
Earnings per share:
Basic............................. $ 3.38 $ 2.93 $ 2.75 $ 1.91 $ 1.62
Diluted........................... $ 3.26 $ 2.80 $ 2.59 $ 1.88 $ 1.55
Weighted average shares outstanding:
Basic............................. 22,523,825 22,874,918 20,137,661 21,377,902 20,683,308
Diluted........................... 23,346,221 23,968,072 21,415,154 21,709,833 21,558,920
AS OF DECEMBER 31,
---------------------------------------------------------------------
2003 2002 2001 2000 1999
---------------------------------------------------------------------
(in thousands)
BALANCE SHEET DATA:
Working capital....................... $ 276,530 $ 94,910 $ 154,361 $ 54,769 $ 80,128
Inventories, net...................... 671,279 622,205 454,961 527,101 386,255
Total assets.......................... 1,488,165 1,422,393 1,052,823 1,097,721 840,848
Total long-term debt, including
current portion.................... 231,088 82,847 95,584 140,067 112,188
Stockholders' equity.................. 518,109 443,417 392,243 247,416 232,029
Long-term debt to capitalization...... 31% 16% 20% 36% 33%
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are a leading operator in the $1 trillion automotive retailing
industry. Through a series of acquisitions, we operate 122 dealership franchises
in California, Colorado, Florida, Georgia, Louisiana, Massachusetts, New Jersey,
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 29 collision service centers.
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, finance and general management
personnel, salaries for administrative personnel and expenses for rent,
marketing, insurance and utilities. We believe that a majority 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, which is generally based on
variable rates. 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 floorplan interest expense over the
past three years, mitigating the impact of interest rate changes on our
financial results.
We have grown our business through acquisitions. Over the past five
years, we have purchased 79 dealership franchises with annual revenues of
approximately $2.5 billion, disposed of 22 dealership franchises with annual
revenues of approximately $277.2 million and been granted 12 new dealership
franchises by the manufacturers. Our acquisition target for 2004 is to complete
platform and tuck-in acquisitions of dealerships that have approximately $1
billion in annual revenues.
CURRENT BUSINESS TRENDS
During the last three years, new vehicle sales have ranged between 16.7
million and 17.2 million units in the United States. Industry analyst estimates
for 2004 are predicting new vehicle unit sales of approximately 17 million
units. The used vehicle market has been negatively impacted by aggressive
manufacturer incentives on new vehicles during 2003 and 2002. We expect the used
vehicle market to be stable in 2004 as we anticipate the new vehicle market
improving and increases in manufacturer incentives abating. Due to the increase
in vehicles in operation, and the increasing complexity of the vehicles, we
expect to see growth in the parts and service market for franchised automobile
dealers. We expect the interest rate environment in 2004 to be flat at the
beginning of the year with minor increases in the last six months of the year.
For a discussion of other uncertainties that may impact our business,
please review the "Business-Risk Factors" section of this Form 10-K.
25
RESULTS OF OPERATIONS
SELECTED OPERATIONAL AND FINANCIAL DATA FOR THE YEARS ENDED DECEMBER 31, 2003
AND DECEMBER 31, 2002
NEW VEHICLE DATA
(dollars in thousands,
except per unit amounts)
INCREASE/ PERCENT
2003 2002 (DECREASE) CHANGE
---- ---- ---------- ------
Retail unit sales........................... 99,971 95,005 4,966 5.2 %
Retail sales revenues....................... $2,739,315 $2,526,847 $ 212,468 8.4 %
Gross profit (1)............................ $ 199,996 $ 189,624 $ 10,372 5.5 %
Average gross profit per retail unit sold... $ 2,001 $ 1,996 $ 5 0.3 %
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
(dollars in thousands,
except per unit amounts)
INCREASE/ PERCENT
2003 2002 (DECREASE) CHANGE
---- ---- ----------- -----------
Retail unit sales........................... 62,721 65,698 (2,977) (4.5)%
Wholesale unit sales........................ 43,616 39,754 3,862 9.7 %
Retail sales revenues....................... $ 884,819 $ 921,359 $ (36,540) (4.0)%
Wholesale sales revenues.................... 265,187 222,529 42,658 19.2 %
---------- ---------- ---------
Total revenues............................ $1,150,006 $1,143,888 $ 6,118 0.5 %
Total gross profit.......................... $ 100,412 $ 96,079 $ 4,333 4.5 %
Total gross margin (1)...................... 8.7 % 8.4 % 0.3 % -
Average gross profit per retail unit
sold (2)................................. $ 1,601 $ 1,462 $ 139 9.5 %
Retail gross margin (1)..................... 11.3 % 10.4 % 0.9 % -
Net wholesale loss.......................... $ (6,141) $ (7,895) $ 1,754 (22.2)%
Average wholesale loss per
wholesale unit sold...................... $ (141) $ (199) $ 58 (29.1)%
Wholesale gross margin...................... (2.3)% (3.5)% 1.2 % -
(1) Total gross margin equals total gross profit divided by total
revenues. Retail gross margin equals total gross profit, which
includes net wholesale loss, divided by retail sales revenues. The
profit or loss on wholesale sales are included in this number, as
these transactions facilitate retail vehicle sales and are not
expected to generate profit.
(2) Average gross profit per retail unit sold equals total gross profit,
which includes net wholesale loss, divided by retail unit sales. The
profit or loss on wholesale sales are included in this number, as
these transactions facilitate retail vehicle sales and are not
expected to generate profit.
PARTS AND SERVICE DATA
(dollars in thousands)
INCREASE/ PERCENT
2003 2002 (DECREASE) CHANGE
---- ---- ---------- ------
Sales revenues.............................. $465,989 $402,169 $ 63,820 15.9 %
Gross profit................................ $259,753 $225,132 $ 34,621 15.4 %
Gross margin................................ 55.7 % 56.0 % (0.3) % -
26
FINANCE AND INSURANCE DATA
(dollars in thousands,
except per unit amounts)
PERCENT
2003 2002 INCREASE CHANGE
---- ---- -------- ------
Retail new and used unit sales.............. 162,692 160,703 1,989 1.2 %
Retail finance fees......................... $ 63,210 $ 58,869 $ 4,341 7.4 %
Vehicle service contract fees............... 61,315 52,346 8,969 17.1 %
Other finance and insurance revenues........ 38,725 30,245 8,480 28.0 %
-------- -------- --------
Total finance and insurance revenues...... $163,250 $141,460 $ 21,790 15.4 %
Finance and insurance revenues, per
retail unit sold.......................... $ 1,003 $ 880 $ 123 14.0 %
SAME STORE REVENUES COMPARISON (1)
(dollars in thousands)
INCREASE/ PERCENT
2003 2002 (DECREASE) CHANGE
---- ---- ---------- ------
New vehicle retail sales.................... $2,192,028 $2,283,499 $(91,471) (4.0)%
Used vehicle retail sales................... 741,650 838,668 (97,018) (11.6)%
Used vehicle wholesale sales................ 220,047 198,656 21,391 10.8 %
Parts and service sales..................... 380,669 357,893 22,776 6.4 %
Retail finance fees......................... 50,311 52,603 (2,292) (4.4)%
Vehicle service contract fees............... 42,692 45,111 (2,419) (5.4)%
Other finance and insurance
revenues, net............................ 24,377 27,978 (3,601) (12.9)%
------ ------ -------
Total same store revenues.............. $3,651,774 $3,804,408 $(152,634) (4.0)%
(1) Includes only those dealerships owned during all of the months of both
periods in the comparison.
YEAR ENDED DECEMBER 31, 2003 COMPARED WITH YEAR ENDED DECEMBER 31, 2002
OVERVIEW. Net income increased $9.0 million, or 13.4%, to $76.1 million
for the year ended December 31, 2003, from $67.1 million for the year ended
December 31, 2002. Diluted earnings per share increased $0.46, or 16.4%, to
$3.26 from $2.80. The increase in net income and diluted earnings per share was
primarily the result of the accretive impact of acquisitions, organic growth in
parts and service, improved used vehicle inventory valuations, which resulted in
lower expected losses being reserved, and a reduction in our tax liability as we
successfully resolved certain tax contingencies. Offsetting these positives were
negative new and used vehicle same store revenues, higher interest expense from
our new 8 1/4% senior subordinated note issuance and very unfavorable results
from our Atlanta operations.
REVENUES. Revenues increased $304.2 million, or 7.2%, to $4,518.6
million for the year ended December 31, 2003, from $4,214.4 million for the year
ended December 31, 2002. The growth in total revenues came from acquisitions,
which were partially offset by a same store revenues decline of $152.6 million.
New vehicle revenues increased $212.5 million, as acquired operations
offset a same store decline of $91.5 million. The same store revenues decreased
reflecting a less robust vehicle market in 2003, particularly with respect to
our Ford and Mitsubishi dealerships, as these manufacturers lost market share
nationally during 2003. Additionally, revenues were down at a Toyota dealership
in Houston due to increased competitive pressures in that market.
Our used vehicle retail revenues declined $36.5 million as revenues
from acquired operations were offset by a $97.0 million decline in our same
store sales. The same store sales decline was due primarily to high levels of
manufacturer incentives on new vehicle sales, which reduced the price difference
to the customer between a late model used vehicle and a new vehicle, thus
switching more customers to new vehicles. Wholesale sales increased $42.7
million. The decline in retail sales required us to wholesale more vehicles to
keep inventory turns on target and inventory levels in line with expected retail
sales volumes.
The increase in parts and service revenues of $63.8 million included a
same store revenues increase of $22.8 million. The same store revenues increase
was driven by increased
27
customer-pay parts and service sales and wholesale parts sales, which were
driven by expanded wholesale parts operations in Oklahoma City.
Retail finance fee revenues increased $4.3 million, with a $2.3 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, partially offset by the impact of a favorable interest rate
environment.
Vehicle service contract fee revenues increased $9.0 million, of which
$4.6 million was from the recognition of revenues related to contracts requiring
revenue deferral over the life of the contracts. During 2003 we did not sell any
contracts requiring revenue and cost deferral. We expect the deferred revenues
balance at December 31, 2003, and the associated deferred costs, to be
recognized over the next four years. The increases were partially offset by same
store sales decreases of $2.4 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 $8.5 million, of which
$4.7 million was from the recognition of revenues related to contracts requiring
revenue deferral over the life of the contracts. The deferred revenues consist
primarily of amounts related to sales of credit life and accident and health
insurance contracts, which are reinsured by a company we own. The remainder is
related to certain products sold in two platforms in prior years. The platforms
did not sell a significant number of contracts requiring revenue and cost
deferral during 2003, thus, we expect the majority of the remaining deferred
revenues, and associated deferred costs, to be recognized over the next four
years. The increases were partially offset by same store sales declines of $3.6
million. The same store decrease is driven primarily by a decline in retail unit
sales.
GROSS PROFIT. Gross profit increased $71.1 million, or 10.9%, to $723.4
million for the year ended December 31, 2003, from $652.3 million for the year
ended December 31, 2002. The increase was attributable to an increase in the
gross margin from 15.5% for the year ended December 31, 2002, to 16.0% for the
year ended December 31, 2003, and increased revenues.
The gross margin increased, as lower margin new and used vehicle
revenues decreased as a percentage of total revenues, and finance and insurance
revenues, per retail unit sold, increased.
Although our new vehicle gross profit per retail unit remained
consistent with the prior year, the gross margin on new vehicle retail sales
declined to 7.3% from 7.5% due to an increase in the average selling price of
vehicles sold.
Our used vehicle gross profit per retail unit sold increased to $1,601
for the year ended December 31, 2003, from $1,462 for the year ended December
31, 2002. Our used vehicle retail gross margin increased to 11.3 % for the year
ended December 31, 2003, from 10.4% for the year ended December 31, 2002. The
increase per retail unit sold and the increase in the retail gross margin were
due primarily to increased gross margins in the Florida market and improved used
vehicle valuations at year end, which resulted in reduced valuation reserves.
Our used vehicle inventory is required to be carried at the lower of
cost or estimated market value at the end of each reporting period. Valuation
reserves are provided against the inventory balance based on a detailed review
of our inventory, actual subsequent sales of the inventory, our historical loss
experience and our consideration of current market trends. As a result, a $1.1
million reserve for estimated used vehicle losses was established at December
31, 2003, as compared to a $6.6 million reserve at December 31, 2002. The net
decline of $5.5 million in the used vehicle valuation reserve, based on $1.2
billion of used vehicle sales, was due to the application of losses incurred
retailing and wholesaling used vehicles during 2003 against the reserve. Based
on a detailed review of our used vehicle inventory at December 31, 2003,
subsequent sales of this inventory and economic trends indicating an improved
used vehicle market, we determined that $1.1 million was the appropriate used
vehicle valuation reserve in
28
the current environment, and it was not necessary to charge used vehicle cost of
sales to establish the used vehicle valuation reserve at the same level as at
December 31, 2002.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $59.0 million, or 11.7%, to $561.7 million for
the year ended December 31, 2003, from $502.7 million for the year ended
December 31, 2002. The increase was primarily attributable to the additional
operations acquired. Selling, general and administrative expenses increased as a
percentage of gross profit to 77.6% from 77.1% due primarily to below expected
operating performance in our Atlanta and Dallas operations and adjustments to
variable expenses lagging the decline in sales volume.
INTEREST EXPENSE. Floorplan and other interest expense, net, increased
$5.6 million, or 19.1%, to $34.9 million for the year ended December 31, 2003,
from $29.3 million for the year ended December 31, 2002. The increase was due to
an increase in the average balance of debt outstanding partially offset by a
decline in interest rates.
During 2003, our average debt outstanding increased due to increased
floorplan borrowings and the issuance, in August 2003, of $150.0 million of 8
1/4% senior subordinated notes. Floorplan borrowings increased due to:
- acquisitions completed during 2002 and 2003, and
- an increase in our average new vehicle inventory supply to
75 days during 2003 from 63 days during 2002.
Partially offsetting the factors increasing the average floorplan
borrowings outstanding was the use of the proceeds from our 8 1/4% senior
subordinated notes offering to temporarily pay down our floorplan notes payable.
Interest expense on our floorplan notes payable and acquisition
borrowings under the bank credit facility is based on LIBOR plus a spread.
During 2003, there was an approximately 56 basis point reduction in the average
LIBOR rate as compared to the prior year.
OTHER INCOME (EXPENSE), NET. Other income increased $1.6 million to
$0.6 million for the year ended December 31, 2003, from $(1.0) million for the
year ended December 31, 2002. The increase is due primarily to a net gain of
$0.6 million on the disposal of dealership assets in 2003, as compared to $1.2
million of losses recorded on the repurchases and retirements of a portion of
our senior subordinated notes during 2002.
PROVISION FOR INCOME TAXES. The provision for income taxes decreased
$3.3 million to $36.9 million for the year ended December 31, 2003, from $40.2
million for the year ended December 31, 2002. The decrease is due to a $5.4
million reduction in our estimated tax liabilities as a result of the favorable
resolution of tax contingencies during 2003 as various state and federal tax
audits were concluded, providing certainty and resolution on various formation,
financing, acquisition and structural matters. In addition, various other tax
exposures of acquired companies have been favorably resolved. The impact of the
change in our reserve was to reduce our effective tax rate for 2003 to 32.7% as
compared to 37.5% for 2002. We expect our effective tax rate in future years to
be between 36.5% and 38.5%.
29
SELECTED OPERATIONAL AND FINANCIAL DATA FOR THE YEARS ENDED DECEMBER 31, 2002
AND DECEMBER 31, 2001
NEW VEHICLE DATA
(dollars in thousands,
except per unit amounts)
INCREASE/ PERCENT
2002 2001 (DECREASE) CHANGE
---- ---- ----------- ------
Retail unit sales........................... 95,005 90,615 4,390 4.8 %
Retail sales revenues....................... $2,526,847 $2,373,299 $153,548 6.5 %
Gross profit (1)............................ $ 189,624 $ 187,360 $ 2,264 1.2 %
Average gross profit per retail unit sold... $ 1,996 $ 2,068 $ (72) (3.5)%
Gross margin (1)............................ 7.5 % 7.9 % (0.4)% -
- ------------
(1) Interest assistance is recorded as a reduction of cost of sales, as
the vehicles are sold to third parties. Interest assistance varies
with changes in interest rates and will impact gross margin.
USED VEHICLE DATA
(dollars in thousands,
except per unit amounts)
INCREASE/ PERCENT
2002 2001 (DECREASE) CHANGE
---- ---- ---------- ------
Retail unit sales........................... 65,698 67,927 (2,229) (3.3)%
Wholesale unit sales........................ 39,754 37,771 1,983 5.3 %
Retail sales revenues....................... $ 921,359 $ 949,086 $ (27,727) (2.9)%
Wholesale sales revenues.................... 222,529 190,565 31,964 16.8 %
------- ------- ------
Total revenues............................ $1,143,888 $1,139,651 $ 4,237 0.4 %
Total gross profit.......................... $ 96,079 $ 96,798 $ (719) (0.7)%
Total gross margin (1)...................... 8.4 % 8.5 % (0.1)% -
Average gross profit per retail unit $ 1,462 $ 1,425 $ 37 2.6 %
sold (2).................................
Retail gross margin (1)..................... 10.4 % 10.2 % 0.2 % -
Net wholesale loss.......................... $ (7,895) $ (6,707) $ (1,188) 17.7 %
Average wholesale loss per
wholesale unit sold...................... $ (199) $ (178) $ (21) 11.8 %
Wholesale gross margin...................... (3.5)% (3.5)% (0.0)% -
(1) Total gross margin equals total gross profit divided by total
revenues. Retail gross margin equals total gross profit, which
includes net wholesale loss, divided by retail sales revenues. The
profit or loss on wholesale sales are included in this number, as
these transactions facilitate retail vehicle sales and are not
expected to generate profit.
(2) Average gross profit per retail unit sold equals total gross profit,
which includes net wholesale loss, divided by retail unit sales. The
profit or loss on wholesale sales are included in this number, as
these transactions facilitate retail vehicle sales and are not
expected to generate profit.
PARTS AND SERVICE DATA
(dollars in thousands)
PERCENT
2002 2001 INCREASE CHANGE
---- ---- -------- ------
Sales revenues.............................. $402,169 $360,201 $41,968 11.7 %
Gross profit................................ $225,132 $199,871 $25,261 12.6 %
Gross margin................................ 56.0 % 55.5 % 0.5 % -
30
FINANCE AND INSURANCE DATA
(dollars in thousands,
except per unit amounts)
PERCENT
2002 2001 INCREASE CHANGE
---- ---- -------- ------
Retail new and used unit sales ........................ 160,703 158,542 2,161 1.4 %
Retail finance fees ................................... $ 58,869 $ 56,272 $ 2,597 4.6 %
Vehicle service contract fees ......................... 52,346 44,080 8,266 18.8 %
Other finance and insurance revenues .................. 30,245 22,871 7,374 32.2 %
-------- -------- --------
Total finance and insurance revenues ................ $141,460 $123,223 $ 18,237 14.8 %
Finance and insurance revenues, per
retail unit sold .................................... $ 880 $ 777 $ 103 13.3 %
SAME STORE REVENUES COMPARISON (1)
(dollars in thousands)
INCREASE/ PERCENT
2002 2001 (DECREASE) CHANGE
---------- ---------- ---------- ------
New vehicle retail sales .................... $2,279,737 $2,323,086 $ (43,349) (1.9)%
Used vehicle retail sales ................... 834,268 922,375 (88,107) (9.6)%
Used vehicle wholesale sales ................ 198,999 180,917 18,082 10.0 %
Parts and service sales ..................... 348,654 349,163 (509) (0.1)%
Retail finance fees ......................... 52,472 56,261 (3,789) (6.7)%
Vehicle service contract fees ............... 44,606 43,233 1,373 3.2 %
Other finance and insurance
revenues, net ............................ 27,693 22,138 5,555 25.1 %
---------- ---------- ----------
Total same store revenues .............. $3,786,429 $3,897,173 $ (110,744) (2.8)%
- ----------------
(1) Includes only those dealerships owned during all of the months
of both periods in the comparison.
YEAR ENDED DECEMBER 31, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001
REVENUES. Revenues increased $218.0 million, or 5.5%, to $4,214.4
million for the year ended December 31, 2002, from $3,996.4 million for the year
ended December 31, 2001. The growth in total revenues came from acquisitions,
which were partially offset by a same store revenues decline of $110.7 million.
New vehicle revenues increased $153.5 million, as acquired operations
offset a same store decline of $43.3 million. The same store revenues decreased
slightly, which reflected a less robust vehicle market in 2002, as compared to
the near-record new vehicle sales in 2001, for all automobile retailers in the
United States.
Our used vehicle retail revenues declined $27.7 million as revenues
from acquired operations were offset by an $88.1 million decline in our same
store sales. The same store sales decline was due to high levels of manufacturer
incentives on new vehicle sales, which reduced the price difference to the
customer between a late model used vehicle and a new vehicle, thus switching
more customers to new vehicles. Wholesale sales increased $32.0 million. The
decline in retail sales required us to wholesale more vehicles to keep inventory
turns on target and inventory levels in line with expected retail sales volumes.
The increase in parts and service revenues of $42.0 million was from
acquired operations as our same store sales declined $0.5 million. The primary
driver of the same store sales decline was the Ford / Firestone tire recall,
which caused a one-time increase in warranty and associated repairs at our Ford
dealerships during 2001. Also contributing to the decrease was increased
business during the summer months of 2001, due to the damage caused by tropical
storm Allison, in Houston. These declines offset the same store increases we had
in other areas of our operations.
Retail finance fee revenues increased $2.6 million, with a $3.8 million
same store decrease partially offsetting the revenues contributed by
acquisitions. The same store decline was caused primarily by zero percent
financing offered by many of the manufacturers for our
31
customers, which began late in 2001 and continued throughout 2002, which reduced
the amount of fees we earned for arranging the financing.
Vehicle service contract fee revenues increased $8.3 million, with same
store sales increasing $1.4 million. Included in the revenues from acquired
dealerships is $1.3 million of deferred revenues recognized on dealer-obligor
contracts written prior to our acquisitions of the dealerships. At the date of
acquisition, we moved the dealerships to administrator-obligor contracts.
Other finance and insurance revenues increased $7.4 million, with same
store sales contributing $5.6 million. The same store increases were driven by
the introduction and sale of new products, in addition to our training programs.
GROSS PROFIT. Gross profit increased $45.0 million, or 7.4%, to $652.3
million for the year ended December 31, 2002, from $607.3 million for the year
ended December 31, 2001. The increase was attributable to an increase in the
gross margin from 15.2% for the year ended December 31, 2001, to 15.5% for the
year ended December 31, 2002, and increased revenues.
The gross margin increased, as lower margin new and used vehicle
revenues decreased as a percentage of total revenues, and increased finance and
insurance revenues, per retail unit sold, offset the decline in the new and used
vehicle gross margins.
The gross margin on new retail vehicle sales declined to 7.5% from
7.9%, partially due to a reduction in floorplan assistance received from our
manufacturers as a result of the decline in interest rates during the year,
which reduced our gross profit by $3.8 million and our gross margin by 15 basis
points. Floorplan assistance is a purchase discount and is recorded as a
reduction of new vehicle cost of sales. Performance below expectations and prior
year levels in our Dallas operations accounted for approximately 10 basis points
of the decline in our new vehicle margin. Also, generally, the gross profit per
retail unit does not vary with changes in the selling prices of the vehicles. As
such, the 1.6% increase in our average selling price per new vehicle sold
negatively impacted our new vehicle gross margin by 10 basis points.
The gross margin on retail used vehicle sales increased to 10.4% from
10.2% as our dealerships worked to increase the gross profit per unit sold to
offset the impact of the reduction of retail used vehicle sales. Our wholesale
losses increased, as we wholesaled more vehicles, in light of the decline in the
retail sales volume.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $44.2 million, or 9.6%, to $502.7 million for
the year ended December 31, 2002, from $458.5 million for the year ended
December 31, 2001. The increase was primarily attributable to the additional
operations acquired and increased compensation and benefits. Compensation and
benefits are largely incentive-based and constitute approximately 60% of total
expenses, and increased due to increased gross profit. Selling, general and
administrative expenses increased as a percentage of gross profit to 77.1% from
75.5% due primarily to below expected operating performance in our Atlanta and
Dallas operations. Excluding the gross profit and selling, general and
administrative expenses of our Atlanta and Dallas operations, our selling,
general and administrative expenses as a percentage of gross profit would have
been 75.1% in 2002.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense decreased $5.5 million, or 31.6%, to $11.9 million for the year ended
December 31, 2002, from $17.4 million for the year ended December 31, 2001. The
decline was due to the implementation of SFAS No. 142, which resulted in the
elimination of goodwill amortization expense.
INTEREST EXPENSE. Floorplan and other interest expense, net, decreased
$12.5 million, or 29.9%, to $29.3 million for the year ended December 31, 2002,
from $41.8 million for the year ended December 31, 2001. The decrease was due to
a decline in interest rates and a lower average balance of debt outstanding.
During the year ended December 31, 2002, there was an approximately 230 basis
point reduction in our floorplan financing rate as compared to the prior year.
During October 2001, we completed a $98.5 million stock offering and used the
proceeds initially to pay down borrowings under our credit facility. By the end
of the third quarter of 2002,
32
we had reborrowed the amounts used to pay down the floorplan portion of our
credit facility. We had no borrowings under the acquisition portion of our
credit facility during 2002.
OTHER INCOME (EXPENSE), NET. Other expense increased $917,000 to
$(1,045,000) for the year ended December 31, 2002, from $(128,000) for the year
ended December 31, 2001. The increase was due primarily to $1.2 million of
losses recorded on the repurchases and retirements of a portion of our senior
subordinated notes.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity are cash from operations, our credit
facilities (which include floorplan facilities and an acquisition facility) and
equity and debt offerings.
The following table sets forth selected historical information from our
statements of cash flows:
YEAR ENDED DECEMBER 31,
-----------------------
2003 2002 2001
---- ---- ----
(in thousands)
Net cash provided by operating activities .................. $ 80,345 $ 74,839 $ 76,687
Net cash used in investing activities ...................... (52,603) (122,295) (27,229)
Net cash provided by (used in) financing activities ........ (26,634) 54,928 (55,844)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ....... $ 1,108 $ 7,472 $ (6,386)
========= ========= =========
CASH FLOWS
Total cash at December 31, 2003, was $25.4 million.
OPERATING ACTIVITIES. Net income plus depreciation and amortization is
generally a good indicator of our operating cash flow as revenues are converted
into cash in a very short timeframe, typically less than two weeks, and there
are very few deferred expenses. Additionally, while our inventory balances can
change dramatically from period to period, there is typically little impact on
cash flow from operations as changes in contracts-in-transit, vehicle
receivables and floorplan notes payable generally combine to offset the impact
of the inventory change. For the three-year period ended December 31, 2003, we
generated $231.9 million in net cash from operating activities, primarily driven
by net income plus depreciation and amortization.
INVESTING ACTIVITIES. During 2003, the $52.6 million of cash used for
investing activities was primarily attributable to the use of $35.4 million of
cash in acquisitions, net of cash balances obtained in the acquisitions, and
$34.6 million for purchases of property and equipment. Approximately $22.9
million of the property and equipment purchases were for the purchase of land
and construction of new or expanded facilities. Offsetting these uses was $11.6
million received from the sales of property and equipment and $7.4 million
received from the sale of one dealership franchise during 2003.
During 2002, the $122.3 million of cash used for investing activities
was primarily attributable to the use of $81.4 million of cash in acquisitions,
net of cash balances obtained in the acquisitions, and $43.5 million for
purchases of property and equipment. Approximately $32.4 million of the property
and equipment purchases were the purchase of land and construction of new or
expanded facilities. Offsetting these uses was $7.4 million received from the
sales of three dealership franchises during 2002.
During 2001, $27.2 million of cash was used for investing activities
primarily attributable to purchases of property and equipment and cash paid in
acquisitions, net of cash balances obtained in the acquisitions, partially
offset by proceeds from sales of franchises. During 2001, we used approximately
$20.9 million in purchasing property and equipment, of which, approximately
$12.5 million was for the purchase of land and construction of new or expanded
facilities.
FINANCING ACTIVITIES. We used approximately $26.6 million in financing
activities during 2003, primarily for payments on our credit facility, using the
proceeds from our issuance of 8 1/4% senior subordinated notes in August 2003
and cash flows from operations. Additionally, we spent $14.4 million for
repurchases of common stock.
33
During 2002, we obtained approximately $54.9 million from financing
activities, primarily borrowings under our credit facility. We reborrowed
amounts available under our credit facility that were paid down with the
proceeds from our stock offering in October 2001. Additionally, we spent $11.6
million repurchasing a portion of our senior subordinated notes and $23.8
million for repurchases of common stock.
During 2001, we used approximately $55.8 million in financing
activities. The uses were primarily attributable to payments made on our
revolving credit facility and repurchases of common stock, largely offset by the
proceeds of our common stock offering. In October 2001, we completed an offering
of 3.3 million shares of our common stock, with net proceeds from the offering,
after expenses, of approximately $98.5 million. The proceeds from the offering,
as well as cash flows from operations, were used to reduce the outstanding
balance under our credit facility by $121.0 million
WORKING CAPITAL. At December 31, 2003, we had working capital of $276.5
million, which is approximately $160 million higher than we believe we need to
operate our existing business. On March 1, 2004, we used approximately $79.5
million of this excess working capital to fund the redemption of our 10 7/8%
senior subordinated notes. We expect to use the remaining excess working capital
to fund acquisitions and anticipated capital expenditures. Historically, we have
funded our operations with internally generated cash flow and borrowings. While
we cannot guarantee it, based on current facts and circumstances, we believe we
have adequate cash flow coupled with borrowing capacity under our credit
facility to fund our current operations and capital expenditures and
acquisitions budgeted for 2004. If our capital expenditure or acquisition plans
for 2004 as outlined below change, we may need to access the private or public
capital markets to obtain additional funding.
Changes in our working capital are driven primarily by changes in
floorplan notes payable outstanding. Borrowings on our new vehicle floorplan
notes payable, subject to agreed upon pay off terms, are equal to 100% of the
factory invoice of the vehicles. Borrowings on our used vehicle floorplan notes
payable, subject to agreed upon pay off terms, are limited to 55% of the
aggregate book value of our used vehicle inventory. At times, as at December 31,
2003, we have made payments on our floorplan notes payable using excess cash
flow from operations and the proceeds of debt and equity offerings. As needed,
we reborrow the amounts later, up to the limits on the floorplan notes payable
discussed above, for working capital, acquisitions, capital expenditures or
general corporate purposes.
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 2003 we repurchased approximately
463,000 shares for approximately $14.4 million. As of December 31, 2003, $10.6
million remained under the board of directors' authorization.
CAPITAL EXPENDITURES
Our capital expenditures include expenditures to extend the useful life
of current facilities and expenditures to start or expand operations.
Historically, our annual capital expenditures exclusive of new or expanded
operations have approximately equaled our annual depreciation charge.
Expenditures relating to the construction or expansion of dealership facilities,
generally, are driven by new franchises being granted to us by a manufacturer,
significant growth in sales at an existing facility or manufacturer imaging
programs. During 2004, we plan to invest approximately $31.1 million to expand
11 existing facilities, prepare four new facilities for operations and purchase
equipment for new and expanded facilities. We have agreed to sell three of the
new facilities completed during 2004. Expected total proceeds from the sales of
these construction projects is estimated at approximately $12.3 million,
resulting in net capital expenditures for new and expanded operations of $18.8
million. Upon sale we will begin leasing the facilities from the buyer,
resulting in an estimated incremental annual rent expense of $2.5 million, per
year.
34
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 and borrowings under our credit
facility. Depending on the market value of our common stock, we may issue common
stock to fund a portion of the purchase price of acquisitions. We purchase
businesses based on expected return on investment. Generally, the purchase price
is approximately 15% to 20% of the annual revenue. Thus our targeted acquisition
budget of $1 billion is expected to cost us between $150 and $200 million, which
is expected to be funded with a blend of cash and the issuance of common stock.
Since December 31, 2003, we have completed acquisitions of four
franchises. One of the acquisitions, with three franchises, is a new platform in
New Jersey. The other franchise was acquired in a tuck-in acquisition and will
complement platform operations in Central Texas. The aggregate consideration
paid in completing these acquisitions was approximately $38.6 million in cash,
net of cash received, 54,372 shares of common stock and the assumption of $29.8
million of inventory financing.
CREDIT FACILITIES
During June 2003, we completed an amendment to our existing $900.0
million credit facility and entered into a new credit facility with Ford Motor
Credit Company. The two facilities provide us with $1.075 billion of borrowing
capacity.
$775 MILLION CREDIT FACILITY. 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. The amount available to be borrowed under the Acquisition Tranche is
dependent upon a calculation based on our cash flow. 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. The credit facility also
contains various covenants including financial ratios, such as fixed-charge
coverage, interest coverage and a minimum net worth requirement, among others,
as well as other requirements that must be maintained. As of December 31, 2003,
we were in compliance with these covenants. The lending group is comprised of 14
major financial institutions, including two manufacturer captive finance
companies. As of February 29, 2004, $188.8 million was available, after
deducting $5.0 million for outstanding letters of credit, to be drawn under the
Acquisition Tranche for working capital, acquisition or floorplan financing and
letters of credit. The credit facility allows up to 33% of net income to be used
for cash dividends and stock repurchases.
FORD MOTOR CREDIT FACILITY. Simultaneous with the amendment of the
above described credit facility, we entered into a separate floorplan financing
arrangement with Ford Motor Credit Company ("FMCC Facility") to provide
financing for our 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. We expect the net cost of these borrowings, after all
incentives, to approximate our floorplan cost under the $775.0 million credit
facility.
35
The following table summarizes our outstanding borrowings and total
commitments under our credit facilities:
OUTSTANDING UNUSED TOTAL
AT DECEMBER 31, 2003 COMMITMENTS COMMITMENT
-------------------- ----------- ----------
(in millions)
Floorplan Tranche $ 291.7 $ 289.5 $ 581.2
Acquisition Tranche (1) 5.0 188.8 193.8
-------- -------- ----------
Total Bank Facility 296.7 478.3 775.0
FMCC Facility 192.9 107.1 300.0
-------- -------- ----------
Total Credit Facilities $ 489.6 $ 585.4 $ 1,075.0
======== ======== ==========
- ----------------
(1) The outstanding balance at December 31, 2003 includes $5.0
million of letters of credit.
For a more detailed discussion of our credit facilities, please read
Notes 6 and 7 to our consolidated financial statements.
INTEREST RATE SWAPS. On July 25, 2003, one of our interest rate swaps,
with a notional amount of $100.0 million, reached its termination date.
Therefore, at this time, we have only 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 $143.3 million and were used to temporarily pay down floorplan borrowings
under the Floorplan Tranche of our credit facility, currently bearing interest
at 2.25%. As of March 1, 2004, we have reborrowed approximately $38.6 million in
completing acquisitions and $79.5 million in the redemption of all of our
outstanding 10 7/8% senior subordinated notes. The 8 1/4% senior subordinated
notes are fully and unconditionally guaranteed by our dealership subsidiaries
and contain various provisions that permit us to redeem the notes at our option
and a requirement that we repurchase all of the notes upon a change of control.
Additionally, the notes contain various covenants, including financial ratios,
such as cash flow coverage, as well as other requirements that must be
maintained, such as limitations on the payment of dividends and repurchase of
stock, among others. For a more detailed discussion of our notes please read
Note 8 to our consolidated financial statements.
OFF-BALANCE SHEET ARRANGEMENTS AND OBLIGATIONS AND COMMITMENTS
The following is a summary of our off-balance sheet arrangements and
future contractual cash obligations as of December 31, 2003:
2004 2005 2006 2007 2008 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---------- -----
(in millions)
Off-Balance Sheet Arrangements
Leases ............................... $ 49,203 $ 47,846 $ 47,494 $ 47,203 $ 41,501 $ 224,389 $ 457,636
Contractual Commitments
Capital expenditures ................. 17,098 2,581 -- -- -- -- 19,679
On-Balance Sheet Obligations
Debt (1) ............................. 910 935 732 707 775 234,934 238,993
Floorplan notes payable (1) .......... 493,568 -- -- -- -- -- 493,568
Other long-term obligations .......... 25 114 25 25 -- -- 189
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total Obligations and Commitments ...... $ 560,804 $ 51,476 $ 48,251 $ 47,935 $ 42,276 $ 459,323 $1,210,065
========== ========== ========== ========== ========== ========== ==========
- -------------
(1) Excludes interest payments.
We lease various real estate, facilities and equipment under long-term
operating lease agreements. Generally, the leases have 30-year total terms with
initial terms of 15 years and three five-year option periods, at our option.
Additionally, we generally have an option to purchase the real estate and
facilities at the end of the lease term, and a right of first refusal,
36
giving us the opportunity to purchase the real estate and facilities if the
owner reaches an agreement to sell them to a third party.
Our credit facilities are currently set to mature in June 2006. The
credit facilities provide commitments for inventory financing up to $881.2
million, of which we had borrowed $484.6 million at December 31, 2003. Payments,
generally, are required to be made on the floorplan notes payable as the
vehicles are sold. The Acquisition Tranche of our credit facility also provides
commitments for a revolving credit line for general corporate purposes,
including acquisitions, up to $193.8 million, of which $5.0 million was
outstanding under letters of credit at December 31, 2003.
On March 1, 2004, we completed the redemption of all of our 10 7/8%
senior subordinated notes. The amount necessary to complete the redemption was
obtained through borrowings under the Floorplan Tranche of our credit facility.
The face value of $75.4 million is included in the Debt line in the Thereafter
column in the preceding table.
DISCUSSION OF CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires us to make estimates
and assumptions in determining the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The significant estimates made by us in the accompanying
consolidated financial statements relate to reserves for inventory valuations
and future chargebacks on finance and vehicle service contract fees, and
valuation of intangible assets. Actual results could differ from those
estimates.
Critical accounting policies are those that are both most important to
the portrayal of a company's financial position and results of operations, and
require management's most difficult, subjective or complex judgments. Below is a
discussion of what we believe are our critical accounting policies. See Note 2
to our consolidated financial statements for additional discussion regarding our
accounting policies.
INVENTORIES
New, used and demonstrator vehicles are stated at the lower of cost or
market. Vehicle inventory cost consists of the amount paid to acquire the
inventory, plus reconditioning cost, cost of equipment added and transportation
cost. Additionally, we receive interest assistance from some of our
manufacturers. The assistance is accounted for as a vehicle purchase price
discount and is reflected as a reduction to the inventory cost on the balance
sheet and as a reduction to cost of sales in the income statement as the
vehicles are sold. Parts and accessories are stated at the lower of cost
(determined on a first-in, first-out basis) or market. As the market value of
our inventories typically declines with the passage of time, valuation reserves
are provided against the inventory balances based on the historical loss
experience and market trends. Additionally, used vehicles present added
complexity to the inventory valuation process. There is no standardized source
for determining exact values, as each vehicle and each market we operate in, is
unique. As such, these factors are also considered in determining the
appropriate level of valuation reserves.
RETAIL FINANCE AND VEHICLE SERVICE CONTRACT REVENUES RECOGNITION
We arrange financing for customers through various institutions and
receive financing fees based on the difference between the loan rates charged to
customers over predetermined financing rates set by the financing institution.
In addition, we receive fees from the sale of vehicle service contracts to
customers.
We may be charged back ("chargebacks") for unearned financing fees or
vehicle service contract fees in the event of early termination of the contracts
by customers. The revenues from financing fees and vehicle service contract fees
in administrator-obligor states are recorded at the time of the sale of the
vehicles and a reserve for future chargebacks is established based on historical
operating results and the termination provisions of the applicable contracts. In
dealer-obligor states, revenues from vehicle service contract fees and related
direct costs are deferred
37
and recognized over the life of the contracts. Due to changes in state law
during 2002, none of the states we currently operate in are dealer-obligor
states.
INTANGIBLE ASSETS
In June 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was
issued. SFAS No. 142 changes the treatment of goodwill by no longer amortizing
goodwill; however, other identifiable intangible assets are to be separately
recognized and amortized, as applicable. The statement requires, at least
annually, an assessment for impairment of goodwill and other indefinite life
intangible assets by applying a fair-value based test. We complete the required
assessment at the end of each calendar year, and at such other times as required
by events or circumstances at a reporting unit indicating a potential reduction
of fair value below book value. In performing the assessment, we estimate the
fair value of our intangibles using a calculation based on the historical and
expected cash flows of the dealerships, market trends and conditions, review of
completed transactions and current market valuations. A portion of our
intangible assets relates to franchise value, which is considered to have an
indefinite life, with goodwill accounting for the remainder. We adopted this
statement effective January 1, 2002. Adoption did not result in an impairment of
any intangible assets, based on the new fair-value based test; however, changes
in facts and circumstances surrounding this estimate could result in an
impairment of intangible assets in the future.
LEGAL PROCEEDINGS
From time to time our dealerships are named in claims involving the
manufacture of automobiles, contractual disputes and other matters arising in
the ordinary course of business. Currently, no legal proceedings are pending
against or involve us that, in our opinion, could be expected to have a material
adverse effect on our business, financial condition or results of operations.
However, the results of these proceedings cannot be predicted with certainty,
and changes in facts and circumstances could impact our estimate for reserves
for legal proceedings.
SELF-INSURANCE RESERVES
We are self-insured for a portion of the claims related to our employee
medical benefits and property / casualty insurance programs, requiring us to
make estimates regarding expected claims to be incurred. These estimates, for
the portion of claims not covered by stop-loss insurance, are based on certain
actuarial assumptions, and our historical claims experience. Changes in the
frequency or severity of claims could impact our reserve for claims.
38
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The table below provides information about our market-sensitive
financial instruments and constitutes a "forward-looking statement." Our major
market-risk exposure is changing interest rates. Our policy is to manage
interest rate exposure through the use of a combination of fixed and floating
rate debt. Additionally, interest rate swaps may be used to adjust our exposure
to interest rate movements. These swaps are entered into with financial
institutions with investment grade credit ratings, thereby minimizing the risk
of credit loss. All interest rate swaps are non-trading and qualify for hedge
accounting.
LIABILITY
EXPECTED MATURITY DATE FAIR VALUE AT
--------------------------------------------------------------------------------- DECEMBER 31,
(dollars in millions) 2004 2005 2006 2007 2008 Thereafter Total 2003
---- ---- ---- ---- ---- ---------- ----- ----
VARIABLE RATE DEBT
Current ................... $ 493.6 $ - $ - $ - $ - $ - $ 493.6 $493.6
Average interest rates
(1)(2) ................. 2.55% - - - - -
Non-current ............... $ - $ - $ - $ - $ - $ - $ - $ -
Average interest rates .. - - - -
-------- -------- -------- -------- -------- -------- --------
Total variable rate debt .. $ 493.6 $ - $ - $ - $ - $ - $ 493.6
Interest rate swaps ....... $ 100.0 $ - $ - $ - $ - $ - $ 100.0 $ 2.1
Average pay rate (fixed)
(2) ....................... 4.88% - - - - -
Average receive rate
(variable)
(1)(2)(3) ........... 2.25% - - - - -
-------- -------- -------- -------- -------- -------- --------
Net variable rate debt .... $ 393.6 $ - $ - $ - $ - $ - $ 393.6
======== ======== ======== ======== ======== ======== ======
- ---------------------
(1) Based on 30-day LIBOR and Prime as of December 31, 2003.
(2) The average rate shown includes the spread charged on our
floorplan notes payable.
(3) The swap's variable rate is based on 30-day LIBOR.
At December 31, 2003, our variable rate floorplan notes payable have
decreased since the prior year due to decreased leverage on the inventory
partially offset by increases in inventory levels. A 100 basis point increase in
interest rates would have increased floorplan interest expense $5.5 million for
the year ended December 31, 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 million and converting 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 the swaps and, thus, would have reduced our
floorplan interest expense by $1.6 million for the year ended December 31, 2003.
The swap currently outstanding expires at the end of October 2004. As such,
depending on interest rate levels during the last two months of 2004, and
whether we enter into other interest rate swaps, our floorplan interest expense
could be impacted.
The net result on floorplan interest expense of a 100 basis point
increase in interest rates would have been an increase of $3.9 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 $27.4 million during 2003 and $26.7 million during 2002. We treat
this interest assistance as a vehicle purchase price discount, and reflect it as
a reduction of new vehicle cost of sales as new vehicles are sold. Approximately
half of the assistance we receive varies with changes in interest rates and thus
mitigates the impact of interest rate changes.
39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Financial Statements beginning on page F-1 for the information
required by this Item.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer performed an
evaluation of our disclosure controls and procedures, which have been designed
to permit us to effectively identify and timely disclose important information.
They concluded that the controls and procedures were effective as of December
31, 2003 to ensure that material information was accumulated and communicated to
our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.
During the three months ended December 31, 2003, we have made no change in our
internal controls over financial reporting that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting.
PART III
Please see the definitive Proxy Statement of Group 1 Automotive, Inc.
for the Annual Meeting of Stockholders to be held on May 19, 2004, which will be
filed with the Securities and Exchange Commission and is incorporated herein by
reference for the information concerning:
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
The financial statements listed in the accompanying Index to
Financial Statements are filed as part of this Annual Report
on Form 10-K.
(b) Reports on Form 8-K
On March 5, 2004, the Company filed a Current Report on Form
8-K reporting under Item 9.
On February 26, 2004, the Company filed a Current Report on
Form 8-K reporting under Items 7 and 12.
40
On February 18, 2004, the Company filed a Current Report on
Form 8-K reporting under Item 9.
On February 5, 2004, the Company filed a Current Report on
Form 8-K reporting under Item 9.
On January 29, 2004, the Company filed a Current Report on
Form 8-K reporting under Item 9.
On January 27, 2004, the Company filed a Current Report on
Form 8-K reporting under Items 5 and 7.
On January 27, 2004, the Company filed a Current Report on
Form 8-K reporting under Items 5 and 7.
On December 4, 2003, the Company filed a Current Report on
Form 8-K reporting under Items 5 and 7.
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.
(c) Other Information
None.
41
(d) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 -- Restated Certificate of Incorporation of the Company
(Incorporated by reference to Exhibit 3.1 of the Company's
Registration Statement on Form S-1 Registration No.
333-29893).
3.2 -- Certificate of Designation of Series A Junior Participating
Preferred Stock (Incorporated by reference to Exhibit 3.2
of the Company's Registration Statement on Form S-1
Registration No. 333-29893).
3.3 -- Bylaws of the Company (Incorporated by reference to Exhibit
3.3 of the Company's Registration Statement on Form S-1
Registration No. 333-29893).
4.1 -- Specimen Common Stock Certificate (Incorporated by
reference to Exhibit 4.1 of the Company's Registration
Statement on Form S-1 Registration No. 333-29893).
4.2 -- 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).
4.3 -- 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).
4.4 -- Form of Subordinated Debt Securities (included in
Exhibit 4.3).
10.1* -- Employment Agreement between the Company and B.B.
Hollingsworth, Jr. effective March 1, 2002 (Incorporated by
reference to Exhibit 10.1 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2001).
10.2* -- Employment Agreement between the Company and John T. Turner
dated November 3, 1997 (Incorporated by reference to
Exhibit 10.5 of the Company's Annual Report on Form 10-K
for the year ended December 31, 1997).
10.3* -- Employment Agreement between the Company and Scott L.
Thompson dated November 3, 1997 (Incorporated by reference
to Exhibit 10.6 of the Company's Annual Report on Form 10-K
for the year ended December 31, 1997).
10.4* -- 1996 Stock Incentive Plan (Incorporated by reference to
Exhibit 10.7 of the Company's Registration Statement on
Form S-1 Registration No. 333-29893).
10.5* -- First Amendment to 1996 Stock Incentive Plan (Incorporated
by reference to Exhibit 10.8 of the Company's Registration
Statement on Form S-1 Registration No. 333-29893).
10.6 -- Lease Agreement between Howard Pontiac GMC and Robert E.
Howard II (Incorporated by reference to Exhibit 10.9 of the
Company's Registration Statement on Form S-1 Registration
No. 333-29893).
10.7 -- Lease Agreement between Bob Howard Motors and Robert E.
Howard II (Incorporated by reference to Exhibit 10.9 of the
Company's Registration Statement on Form S-1 Registration
No. 333-29893).
10.8 -- Lease Agreement between Bob Howard Chevrolet and Robert E.
Howard II (Incorporated by reference to Exhibit 10.9 of the
Company's Registration Statement on Form S-1 Registration
No. 333-29893).
10.9 -- Lease Agreement between Bob Howard Automotive-H and North
Broadway Real Estate (Incorporated by reference to Exhibit
10.9 of the Company's Registration Statement on Form S-1
Registration No. 333-29893).
10.10 -- Rights Agreement between Group 1 Automotive, Inc. and
ChaseMellon Shareholder Services, L.L.C., as rights agent
dated October 3, 1997 (Incorporated by reference to Exhibit
10.10 of the Company's Registration Statement on Form S-1
Registration No. 333-29893).
10.11* -- 1998 Employee Stock Purchase Plan (Incorporated by
reference to Exhibit 10.11 of the Company's Registration
Statement on Form S-1 Registration No. 333-29893).
10.12 -- Form of Agreement between Toyota Motor Sales, U.S.A., and
Group 1 Automotive, Inc. (Incorporated by reference to
Exhibit 10.12 of the Company's Registration Statement on
Form S-1 Registration No. 333-29893).
42
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.13 -- Form of Supplemental Agreement to General Motors
Corporation Dealer Sales and Service Agreement
(Incorporated by reference to Exhibit 10.13 of the
Company's Registration Statement on Form S-1 Registration
No. 333-29893).
10.14 -- Supplemental Terms and Conditions between Ford Motor
Company and Group 1 Automotive, Inc. dated September 4,
1997 (Incorporated by reference to Exhibit 10.16 of the
Company's Registration Statement on Form S-1 Registration
No. 333-29893).
10.15 -- Toyota Dealer Agreement between Gulf States Toyota, Inc.
and Southwest Toyota, Inc. dated April 5, 1993
(Incorporated by reference to Exhibit 10.17 of the
Company's Registration Statement on Form S-1 Registration
No. 333-29893).
10.16 -- Lexus Dealer Agreement between Toyota Motor Sales, U.S.A.,
Inc. and SMC Luxury Cars, Inc. dated August 21, 1995
(Incorporated by reference to Exhibit 10.18 of the
Company's Registration Statement on Form S-1 Registration
No. 333-29893).
10.17 -- Form of General Motors Corporation U.S.A. Sales and Service
Agreement (Incorporated by reference to Exhibit 10.25 of
the Company's Registration Statement on Form S-1
Registration No. 333-29893).
10.18 -- Fifth Amended and Restated Revolving Credit Agreement,
dated as of June 2, 2003 (Incorporated by reference to
Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2003).
10.19 -- Form of Ford Motor Credit Company Automotive Wholesale
Plan Application for Wholesale Financing and Security
Agreement (Incorporated by reference to Exhibit 10.2 of the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2003).
10.20 -- First Amendment to Fifth Restated Revolving Credit
Agreement, dated as of July 25, 2003 (Incorporated by
reference to Exhibit 10.37 of the Company's Registration
Statement on Form S-4 Registration No. 333-109080).
10.21 -- Stock Pledge Agreement dated December 19, 1997
(Incorporated by reference to Exhibit 10.54 of the
Company's Annual Report on Form 10-K for the year ended
December 31, 1997).
10.22* -- First Amendment to Group 1 Automotive, Inc. 1998 Employee
Stock Purchase Plan (Incorporated by reference to Exhibit
10.35 of the Company's Annual Report on Form 10-K for the
year ended December 31, 1998).
10.23 -- Form of Ford Motor Company Sales and Service Agreement
(Incorporated by reference to Exhibit 10.38 of the
Company's Annual Report on Form 10-K for the year ended
December 31, 1998).
10.24 -- Form of Chrysler Corporation Sales and Service Agreement
(Incorporated by reference to Exhibit 10.39 of the
Company's Annual Report on Form 10-K for the year ended
December 31, 1998).
10.25 -- Form of Nissan Division Dealer Sales and Service Agreement.
10.26 -- Form of Infiniti Division Dealer Sales and Service Agreement.
10.27* -- Second Amendment to the 1996 Stock Incentive Plan
(Incorporated by reference to Exhibit 10.1 of the Company's
Quarterly Report on Form 10-Q for the quarter ended March
31, 1999).
10.28* -- Group 1 Automotive, Inc. Deferred Compensation Plan, as
Amended and Restated (Incorporated by reference
to Exhibit 4.1 of the Company's Registration Statement on
Form S-8 Registration No. 333-83260).
10.29* -- Second Amendment to Group 1 Automotive, Inc. 1998 Employee
Stock Purchase Plan (Incorporated by reference to Exhibit
4.1 of the Company's Registration Statement on Form S-8
Registration No. 333-75754).
10.30* -- Third Amendment to Group 1 Automotive, Inc. 1996 Stock
Incentive Plan (Incorporated by reference to Exhibit 4.1 of
the Company's Registration Statement on Form S-8
Registration No. 333-75784).
10.31 -- ISDA Master Agreement (Incorporated by reference to Exhibit
10.33 of the Company's Annual Report on Form 10-K for the
year ended December 31, 2001).
10.32 -- Interest Rate Swap Confirmation, dated as of October 19,
2001 (Incorporated by reference to Exhibit 10.35 of the
Company's Annual Report on Form 10-K for the year ended
December 31, 2001).
43
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.33* -- Split Dollar Life Insurance Agreement between Group 1
Automotive, Inc., and Leslie Hollingsworth and Leigh
Hollingsworth Copeland, as Trustees of the Hollingsworth
2000 Children's Trust, dated as of January 23, 2002
(Incorporated by reference to Exhibit 10.36 of the
Company's Annual Report on Form 10-K for the year ended
December 31, 2002).
10.34 -- Lease Agreement between Bob Howard Automotive-East, Inc.
and REHCO East, L.L.C (Incorporated by reference to Exhibit
10.37 of the Company's Annual Report on Form 10-K for the
year ended December 31, 2002).
10.35 -- Lease Agreement between Howard-H, Inc. and REHCO, L.L.C
(Incorporated by reference to Exhibit 10.38 of the
Company's Annual Report on Form 10-K for the year ended
December 31, 2002).
10.36 -- Lease Agreement between Howard Pontiac-GMC, Inc. and North
Broadway Real Estate Limited Liability Company
(Incorporated by reference to Exhibit 10.39 of the
Company's Annual Report on Form 10-K for the year ended
December 31, 2002).
10.37* -- Employment Agreement between the Company and Kevin H.
Whalen dated November 3, 2002 (Incorporated by reference to
Exhibit 10.40 of the Company's Annual Report on Form 10-K
for the year ended December 31, 2002).
10.38 -- Lease Agreement between Howard-Ford, Inc. and REHCO EAST,
LLC dated as of February 28, 2003.
10.39 -- Amendment and Assignment of Lease between Howard Ford,
Inc., Howard-FLM, Inc. and REHCO EAST, LLC dated as of
November 1, 2003.
10.40* -- First Amendment to Employment Agreement between the Company
and B.B. Hollingsworth, Jr. effective March 1, 2002.
10.41* -- Split Dollar Life Insurance Payment Deferral Letter dated
January 28, 2004.
11.1 -- Statement re: computation of earnings per share is included
under Note 2 to the financial statements.
14.1 -- Code of Ethics for Specified Officers of Group 1
Automotive, Inc. dated as of May 14, 2003.
21.1 -- Group 1 Automotive, Inc. Subsidiary List.
23.1 -- Consent of Ernst & Young LLP.
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.
- --------------
* Management contract or compensatory plan
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in the city of Houston,
Texas, on 11th day of March, 2004.
Group 1 Automotive, Inc.
By: /s/ B.B. Hollingsworth, Jr.
----------------------------------
B.B. Hollingsworth, Jr.
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on the 11th day of March, 2004.
SIGNATURE TITLE
--------- -----
/s/ B.B. Hollingsworth, Jr. Chairman, President and Chief
- ------------------------------------------------- Executive Officer and Director (Principal
B.B. Hollingsworth, Jr. Executive Officer)
/s/ Scott L. Thompson Executive Vice President,
- ------------------------------------------------- Chief Financial Officer and Treasurer (Chief
Scott L. Thompson Financial and Accounting Officer)
/s/ John L. Adams Director
- -------------------------------------------------
John L. Adams
/s/ Robert E. Howard II Director
- -------------------------------------------------
Robert E. Howard II
/s/ Louis E. Lataif Director
- -------------------------------------------------
Louis E. Lataif
/s/ Stephen D. Quinn Director
- -------------------------------------------------
Stephen D. Quinn
/s/ J. Terry Strange Director
- -------------------------------------------------
J. Terry Strange
/s/ Max P. Watson, Jr. Director
- -------------------------------------------------
Max P. Watson, Jr.
45
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Group 1 Automotive, Inc. and Subsidiaries -- Consolidated Financial Statements
Report of Independent Auditors................................................. F-2
Report of Independent Public Accountants....................................... F-3
Consolidated Balance Sheets.................................................... F-4
Consolidated Statements of Operations.......................................... F-5
Consolidated Statements of Stockholders' Equity................................ F-6
Consolidated Statements of Cash Flows.......................................... F-7
Notes to Consolidated Financial Statements..................................... F-8
F-1
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Group 1 Automotive, Inc. and
Subsidiaries:
We have audited the consolidated balance sheets of Group 1 Automotive, Inc. and
Subsidiaries as of December 31, 2003 and 2002, and the related statements of
operations, stockholders' equity, and cash flows for each of the two years in
the period ended December 31, 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The financial
statements of Group 1 Automotive, Inc. and Subsidiaries as of December 31, 2001,
and for the year then ended were audited by other auditors who have ceased
operations and whose report dated February 14, 2002, expressed an unqualified
opinion on those statements before the reclassification adjustments described in
Note 14 and the transitional disclosures described in Note 5.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the 2003 and 2002 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Group 1
Automotive, Inc. and Subsidiaries at December 31, 2003 and 2002 and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States.
As discussed in Note 5 to the consolidated financial statements, effective
January 1, 2002, the Company changed its method of accounting for goodwill.
As discussed above, the financial statements of Group 1 Automotive, Inc. and
Subsidiaries as of December 31, 2001, and for the year then ended were audited
by other auditors who have ceased operations. As described in Note 14, these
financial statements have been revised. We audited the reclassification
adjustments described in Note 14 that were applied to revise the 2001 financial
statements. In our opinion, such reclassification adjustments are appropriate
and have been properly applied. Additionally, as described in Note 5, these
financial statements were further revised to include the transitional
disclosures required by Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets, which was adopted by the Company on
January 1, 2002. Our audit procedures with respect to the disclosures in Note 5
for 2001 included (a) agreeing the previously reported net income to the
previously issued financial statements and the adjustments to reported net
income representing amortization expense, net of tax, recognized in those
periods related to goodwill and intangible assets that are no longer being
amortized to the Company's underlying records obtained from management, and (b)
testing the mathematical accuracy of the reconciliation of adjusted net income
to reported net income, and the related earnings-per-share amounts. In our
opinion, the disclosures for 2001 in Note 5 are appropriate. However, we were
not engaged to audit, review, or apply any procedures to the 2001 financial
statements of the Company other than with respect to such reclassification
adjustments and transitional disclosures and, accordingly, we do not express an
opinion or any other form of assurance on the 2001 financial statements taken as
a whole.
/s/ Ernst & Young LLP
Houston, Texas
February 26, 2004
F-2
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Group 1 Automotive, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Group 1
Automotive, Inc. (a Delaware corporation) and Subsidiaries (the "Company") as of
December 31, 2001 and 2000 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 2001 and 2000, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Houston, Texas
February 14, 2002
NOTE: This is a copy of the audit report previously issued by Arthur Andersen
LLP in connection with Group 1 Automotive, Inc.'s filing on Form 10-K for the
year ended December 31, 2001. This audit report has not been reissued by Arthur
Andersen LLP in connection with this filing on Form 10-K.
F-3
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------
2003 2002
----------- -----------
(in thousands)
ASSETS
CURRENT ASSETS:
Cash ......................................................... $ 25,441 $ 24,333
Contracts-in-transit and vehicle receivables, net ............ 143,260 178,623
Accounts and notes receivable, net ........................... 63,604 58,194
Inventories, net ............................................. 671,279 622,205
Deferred income taxes ........................................ 11,163 10,793
Prepaid expenses and other assets ............................ 16,176 8,890
----------- -----------
Total current assets ....................................... 930,923 903,038
----------- -----------
PROPERTY AND EQUIPMENT, net ..................................... 131,647 116,270
GOODWILL ........................................................ 314,211 307,907
INTANGIBLE ASSETS ............................................... 76,656 60,879
INVESTMENTS, AT MARKET VALUE, RELATED TO
INSURANCE POLICY SALES ....................................... 16,025 15,813
DEFERRED COSTS RELATED TO INSURANCE
POLICY AND VEHICLE SERVICE CONTRACT SALES .................... 12,238 16,824
OTHER ASSETS .................................................... 6,465 1,662
----------- -----------
Total assets ............................................... $ 1,488,165 $ 1,422,393
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Floorplan notes payable ...................................... $ 493,568 $ 652,538
Current maturities of long-term debt ......................... 910 997
Accounts payable ............................................. 87,675 90,809
Accrued expenses ............................................. 72,240 63,784
----------- -----------
Total current liabilities .................................. 654,393 808,128
----------- -----------
DEBT, net of current maturities ................................. 12,703 9,073
SENIOR SUBORDINATED NOTES ....................................... 217,475 72,777
DEFERRED INCOME TAXES ........................................... 19,506 7,651
OTHER LIABILITIES ............................................... 25,224 29,927
----------- -----------
Total liabilities before deferred revenues ................. 929,301 927,556
----------- -----------
DEFERRED REVENUES FROM INSURANCE POLICY SALES ................... 24,984 24,637
DEFERRED REVENUES FROM VEHICLE SERVICE CONTRACT SALES ........... 12,952 24,550
DEFERRED REVENUES FROM VEHICLE MAINTENANCE AGREEMENT SALES ...... 2,819 2,233
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 ................................... 255,356 254,145
Retained earnings ............................................ 291,150 215,024
Accumulated other comprehensive loss ......................... (1,285) (3,359)
Treasury stock, at cost, 1,002,506 and 942,419 shares ........ (27,347) (22,625)
----------- -----------
Total stockholders' equity ................................. 518,109 443,417
----------- -----------
Total liabilities and stockholders' equity ................. $ 1,488,165 $ 1,422,393
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
----------------------------------------------
2003 2002 2001
------------ ------------ ------------
(dollars in thousands, except per share amounts)
REVENUES:
New vehicle retail sales ............................ $ 2,739,315 $ 2,526,847 $ 2,373,299
Used vehicle retail sales ........................... 884,819 921,359 949,086
Used vehicle wholesale sales ........................ 265,187 222,529 190,565
Parts and service sales ............................. 465,989 402,169 360,201
Retail finance fees ................................. 63,210 58,869 56,272
Vehicle service contract fees ....................... 61,315 52,346 44,080
Other finance and insurance revenues, net ........... 38,725 30,245 22,871
------------ ------------ ------------
Total revenues ................................... 4,518,560 4,214,364 3,996,374
COST OF SALES:
New vehicle retail sales ............................ 2,539,319 2,337,223 2,185,939
Used vehicle retail sales ........................... 778,266 817,385 845,581
Used vehicle wholesale sales ........................ 271,328 230,424 197,272
Parts and service sales ............................. 206,236 177,037 160,330
------------ ------------ ------------
Total cost of sales .............................. 3,795,149 3,562,069 3,389,122
------------ ------------ ------------
GROSS PROFIT .......................................... 723,411 652,295 607,252
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ............................ 561,698 502,732 458,546
DEPRECIATION AND
AMORTIZATION EXPENSE ............................... 14,381 11,940 17,358
------------ ------------ ------------
Income from operations ................................ 147,332 137,623 131,348
OTHER INCOME AND (EXPENSES):
Floorplan interest expense, excludes
manufacturer interest assistance ................. (20,615) (19,371) (27,935)
Other interest expense, net ......................... (14,276) (9,925) (13,863)
Other income (expense), net ......................... 631 (1,045) (128)
------------ ------------ ------------
INCOME BEFORE INCOME TAXES ............................ 113,072 107,282 89,422
PROVISION FOR INCOME TAXES ............................ 36,946 40,217 33,980
------------ ------------ ------------
NET INCOME ............................................ $ 76,126 $ 67,065 $ 55,442
============ ============ ============
EARNINGS PER SHARE:
Basic ............................................... $ 3.38 $ 2.93 $ 2.75
Diluted ............................................. $ 3.26 $ 2.80 $ 2.59
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic ............................................... 22,523,825 22,874,918 20,137,661
Diluted ............................................. 23,346,221 23,968,072 21,415,154
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL
--------------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
----------- ----------- ----------- ---------
(dollars in thousands)
BALANCE, December 31, 2000 ................. 21,260,227 $ 213 $ 170,683 $ 92,517
Comprehensive income:
Net income ............................... - - - 55,442
Other accumulated comprehensive income:
Interest rate swap
adjustment ....................... - - - -
Tax benefit on interest
rate swap adjustment ............. - - - -
Total comprehensive income ...............
Common stock offering, net ............... 3,300,000 33 98,489 -
Proceeds from sales of common
stock under employee benefit
plans ................................. 439,325 4 4,997 -
Issuance of treasury stock to
employee benefit plans ................ (390,254) (4) (4,669) -
Purchase of treasury stock ............... - - - -
Cancellation of treasury stock
purchased ............................. (1,579,445) (16) (18,990) -
Tax benefit from options
exercised ............................ - - 635 -
----------- ----------- ----------- ---------
BALANCE, December 31, 2001 ................. 23,029,853 230 251,145 147,959
Comprehensive income:
Net income ............................ - - - 67,065
Other accumulated
comprehensive income:
Interest rate swap
adjustment ....................... - - - -
Tax benefit on interest
rate swap adjustment ............. - - - -
Total comprehensive income ...............
Proceeds from sales of common
stock under employee benefit
plans ................................. 547,306 6 8,030 -
Issuance of treasury stock to
employee benefit plans ................ (393,933) (4) (7,427) -
Non-cash stock compensation .............. - - 193 -
Purchase of treasury stock ............... - - - -
Tax benefit from options
exercised ............................ - - 2,204 -
----------- ----------- ----------- ---------
BALANCE, December 31, 2002 ................. 23,183,226 232 254,145 215,024
Comprehensive income:
Net income ............................ - - - 76,126
Other accumulated
comprehensive income:
Interest rate swap
adjustment ....................... - - - -
Tax expense on interest
rate swap adjustment ............. - - - -
Total comprehensive income ...............
Proceeds from sales of common
stock under employee benefit
plans ................................. 673,572 7 8,984 -
Issuance of treasury stock to
employee benefit plans ................ (402,752) (4) (9,678) -
Purchase of treasury stock ............... - - - -
Tax benefit from options
exercised ............................ - - 1,905 -
----------- ----------- ----------- ---------
BALANCE, December 31, 2003 ................. 23,454,046 $ 235 $ 255,356 $ 291,150
=========== =========== =========== =========
ACCUMULATED
OTHER
COMPREHENSIVE TREASURY
LOSS STOCK TOTAL
----------- ----------- -----------
(dollars in thousands)
BALANCE, December 31, 2000 ................. $ - $ (15,997) $ 247,416
Comprehensive income:
Net income ............................... - - 55,442
Other accumulated comprehensive income:
Interest rate swap
adjustment ....................... (1,303) - (1,303)
Tax benefit on interest
rate swap adjustment ............. 496 - 496
------
Total comprehensive income ............... 54,635
Common stock offering, net ............... - - 98,522
Proceeds from sales of common
stock under employee benefit
plans ................................. - - 5,001
Issuance of treasury stock to
employee benefit plans ................ - 4,673 -
Purchase of treasury stock ............... - (13,966) (13,966)
Cancellation of treasury stock
purchased ............................. - 19,006 -
Tax benefit from options
exercised ............................ - - 635
----------- ----------- -----------
BALANCE, December 31, 2001 ................. (807) (6,284) 392,243
Comprehensive income:
Net income ............................ - - 67,065
Other accumulated
comprehensive income:
Interest rate swap
adjustment ....................... (4,115) - (4,115)
Tax benefit on interest
rate swap adjustment ............. 1,563 - 1,563
------
64,513
Total comprehensive income ...............
Proceeds from sales of common
stock under employee benefit
plans ................................. - - 8,036
Issuance of treasury stock to
employee benefit plans ................ - 7,431 -
Non-cash stock compensation .............. - - 193
Purchase of treasury stock ............... - (23,772) (23,772)
Tax benefit from options
exercised ............................ - - 2,204
----------- ----------- -----------
BALANCE, December 31, 2002 ................. (3,359) (22,625) 443,417
Comprehensive income:
Net income ............................ - - 76,126
Other accumulated
comprehensive income:
Interest rate swap
adjustment ....................... 3,362 - 3,362
Tax expense on interest
rate swap adjustment ............. (1,288) - (1,288)
------
Total comprehensive income ............... 78,200
Proceeds from sales of common
stock under employee benefit
plans ................................. - - 8,991
Issuance of treasury stock to
employee benefit plans ................ - 9,682 -
Purchase of treasury stock ............... - (14,404) (14,404)
Tax benefit from options
exercised ............................ - - 1,905
----------- ----------- -----------
BALANCE, December 31, 2003 ................. $ (1,285) $ (27,347) $ 518,109
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------------------
2003 2002 2001
--------- --------- ---------
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ....................................................... $ 76,126 $ 67,065 $ 55,442
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation and amortization ................................... 14,381 11,940 17,358
Deferred income taxes ........................................... 11,951 6,883 (1,225)
Provision for doubtful accounts and uncollectible notes ......... (631) 1,078 1,732
(Gain) loss on sale of assets ................................... (622) 483 120
Gain on sales of franchises ..................................... -- (414) --
Losses on repurchases of senior subordinated notes .............. -- 1,173 --
Changes in operating assets and liabilities, net of effects of
acquisitions and dispositions-
Contracts-in-transit and vehicle receivables .................. 36,704 (37,750) (12,720)
Accounts receivable ........................................... (2,799) (3,055) (4,996)
Inventories ................................................... 4,709 (107,487) 68,472
Prepaid expenses and other assets ............................. (8,486) (8,610) (6,689)
Floorplan notes payable ....................................... (41,438) 143,727 (78,707)
Accounts payable, accrued expenses and deferred revenues ...... (9,550) (194) 37,900
--------- --------- ---------
Total adjustments ............................................. 4,219 7,774 21,245
--------- --------- ---------
Net cash provided by operating activities ................... 80,345 74,839 76,687
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable ..................................... (2,958) (8,083) (2,678)
Collections on notes receivable .................................. 1,388 1,303 1,150
Purchases of property and equipment .............................. (34,627) (43,498) (20,857)
Proceeds from sale of property and equipment ..................... 11,598 1,975 818
Proceeds from sales of franchises ................................ 7,414 7,430 5,373
Cash paid in acquisitions, net of cash received .................. (35,418) (81,422) (11,035)
--------- --------- ---------
Net cash used in investing activities ....................... (52,603) (122,295) (27,229)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) on revolving credit facility ........... (165,170) 82,022 (120,991)
Principal payments of long-term debt ............................. (1,253) (1,950) (1,791)
Borrowings of long-term debt ..................................... -- 17 1,426
Proceeds from common stock offering, net ......................... -- -- 98,522
Proceeds from issuance of senior subordinated notes .............. 143,297 -- --
Repurchase of senior subordinated notes .......................... -- (11,629) (9,601)
Proceeds from issuance of common stock to benefit plans .......... 10,896 10,240 5,001
Repurchase of common stock, amounts based on settlement
date ............................................................ (14,404) (23,772) (28,410)
--------- --------- ---------
Net cash provided by (used in) financing activities ......... (26,634) 54,928 (55,844)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH ...................................... 1,108 7,472 (6,386)
CASH, beginning of period ............................................ 24,333 16,861 23,247
--------- --------- ---------
CASH, end of period .................................................. $ 25,441 $ 24,333 $ 16,861
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for -
Interest ........................................................ $ 38,863 $ 31,075 $ 44,647
Income taxes .................................................... $ 31,971 $ 36,632 $ 28,975
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Group 1 Automotive, Inc., a Delaware corporation, is a leading operator
in the automotive retailing industry. Group 1 Automotive, Inc. is a holding
company with no independent assets or operations other than its investments in
its subsidiaries, which are located in California, Colorado, Florida, Georgia,
Louisiana, Massachusetts, New Jersey, New Mexico, Oklahoma and Texas. These
subsidiaries sell new and used cars and light trucks through their dealerships
and Internet sites; arrange related financing, vehicle service and insurance
contracts; provide maintenance and repair services; and sell replacement parts.
Group 1 Automotive, Inc. and its subsidiaries are herein collectively referred
to as the "Company" or "Group 1."
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
All acquisitions of dealerships completed during the periods presented
have been accounted for using the purchase method of accounting and their
results of operations are included from the effective dates of the closings of
the acquisitions. The allocations of purchase price to the assets acquired and
liabilities assumed are assigned and recorded based on estimates of fair value.
All significant intercompany balances and transactions have been eliminated in
consolidation.
Revenue Recognition
Revenues from vehicle sales, parts sales and vehicle service are
recognized upon completion of the sale and delivery to the customer. Conditions
to completing a sale include having an agreement with the customer, including
pricing, and the sales price must be reasonably expected to be collected.
In accordance with Emerging Issues Task Force ("EITF") No. 00-21,
"Revenue Arrangements with Multiple Deliverables," the Company defers revenues
received for products and services to be delivered at a later date. This relates
primarily to the sale of various maintenance services, to be provided in the
future, at the time of the sale of a vehicle. The amount of revenues deferred is
based on the then current retail price of the service to be provided. The
revenues are recognized over the period during which the services are to be
delivered.
In accordance with EITF No. 99-19, "Reporting Revenue Gross as a
Principal versus Net as an Agent," the Company records the profit it receives
for arranging vehicle fleet transactions net in other finance and insurance
revenues, net. Since all sales of new vehicles must occur through franchised new
vehicle dealerships, the dealerships effectively act as agents for the
automobile manufacturers in completing sales of vehicles to fleet customers. As
these customers typically order the vehicles, the Company has no significant
general inventory risk. Additionally, fleet customers generally receive special
purchase incentives from the automobile manufacturers and the Company receives
only a nominal fee for facilitating the transactions.
Retail Finance, Vehicle Service and Insurance Contract Revenue
Recognition
The Company arranges financing for customers through various
institutions and receives financing fees based on the difference between the
loan rates charged to customers and predetermined financing rates set by the
financing institution. In addition, the Company receives fees from the sale of
vehicle service contracts to customers.
The Company may be charged back ("chargebacks") a portion of the
financing fees or vehicle service contract fees in the event of early
termination of the contracts by customers. The revenues from financing fees and
vehicle service contract fees in administrator-obligor states are recorded at
the time of the sale of the vehicles, net of a reserve for estimated future
chargebacks based on historical operating results and the termination provisions
of the applicable contracts. In dealer-obligor states, revenues from vehicle
service contract fees and related direct costs are deferred and recognized over
the life of the contracts.
The Company consolidates the operations of its reinsurance companies.
The Company reinsures the credit life and accident and health insurance policies
sold by its dealerships. All of
F-8
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the revenues and related direct costs from the sales of these policies are
deferred and recognized over the life of the policies, in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 60, "Accounting and
Reporting by Insurance Enterprises." Investments related to insurance policy
sales are regulated by state insurance commissions and consist of permitted
investments, in general, government-backed securities and obligations of
government agencies. These investments are carried at market value.
Contracts-in-Transit and Vehicle Receivables
Contracts-in-transit and vehicle receivables consist primarily of
amounts due from financing institutions on retail finance contracts from vehicle
sales. Also included are amounts receivable from vehicle wholesale sales.
Inventories
New, used and demonstrator vehicles are stated at the lower of cost or
market. Vehicle inventory cost consists of the amount paid to acquire the
inventory, plus reconditioning cost, cost of equipment added and transportation
cost. Additionally, the Company receives interest assistance from some of the
automobile manufacturers. The assistance is accounted for as a vehicle purchase
price discount and is reflected as a reduction to the inventory cost on the
balance sheet and as a reduction to cost of sales in the income statement as the
vehicles are sold. At December 31, 2003 and 2002, inventory cost had been
reduced by $5.6 and $5.2 million, respectively, for interest assistance received
from manufacturers. New vehicle cost of sales has been reduced by $27.4, $26.7
and $29.1 million for interest assistance received related to vehicles sold for
the years ended December 31, 2003, 2002 and 2001, respectively.
Parts and accessories are stated at the lower of cost (determined on a
first-in, first-out basis) or market.
Valuation reserves are provided against the inventory balances based on
the historical loss experience and management's considerations of current market
trends.
Property and Equipment
Property and equipment are recorded at cost and depreciation is
provided using the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are capitalized and amortized over the lesser of
the life of the lease or the estimated useful life of the asset.
Expenditures for major additions or improvements, which extend the
useful lives of assets, are capitalized. Minor replacements, maintenance and
repairs, which do not improve or extend the lives of the assets, are charged to
operations as incurred. Disposals are removed at cost less accumulated
depreciation, and any resulting gain or loss is reflected in current operations.
Intangible Assets and Goodwill
Intangible assets and goodwill represent the excess of the purchase
price of businesses acquired over the fair value of the net tangible assets
acquired at the date of acquisition. The Company has determined that, generally,
its only identifiable intangible asset is franchise value, which is an
indefinite-lived intangible. In June 2001, SFAS No. 142, "Goodwill and Other
Intangible Assets" was issued. SFAS No. 142 changes the treatment of goodwill by
no longer permitting the amortization of goodwill or indefinite-lived intangible
assets, but requires, at least annually, an assessment for impairment of
goodwill and other indefinite-lived intangible assets by applying a fair-value
based test. The Company completes the required assessment at the end of each
calendar year, and at such other times as required by events or circumstances at
a reporting unit indicating a potential reduction of fair value below book
value. The Company adopted this statement effective January 1, 2002, and
adoption did not result in an impairment of any intangible assets or goodwill,
based on the fair-value based test. Additionally, as of December 31, 2003 and
2002, no impairment of any intangible assets or goodwill resulted from the
required assessment, based on the fair-value based test. However, changes in
facts and circumstances surrounding this estimate could result in an impairment
of intangible assets in the
F-9
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
future. Prior to the adoption of SFAS No. 142, all purchase prices in excess of
the net tangible assets was recorded as goodwill and no intangible assets were
recognized.
Impairment of Long-Lived Assets
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" requires that long-lived assets be reviewed for impairment whenever
there is evidence that the carrying amount of such assets may not be
recoverable. This consists of comparing the carrying amount of the asset with
its expected future undiscounted cash flows without interest costs. If the asset
carrying amount is less than such cash flow estimate, it is written down to its
fair value. Estimates of expected future cash flows represent management's best
estimate based on currently available information and reasonable and supportable
assumptions. Any impairment recognized in accordance with SFAS No. 144 is
permanent and may not be restored. Through December 31, 2003, the Company has
not recorded any significant impairment writedowns of its long-lived assets.
Income Taxes
The Company follows the liability method of accounting for income taxes
in accordance with SFAS No. 109, "Accounting for Income Taxes." Under this
method, deferred income taxes are recorded based upon differences between the
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the underlying
assets are realized or liabilities are settled. A valuation allowance reduces
deferred tax assets when it is more likely than not that some or all of the
deferred tax assets will not be realized. See Note 12 regarding income taxes.
Self-Insured Medical and Property / Casualty Plans
The Company is self-insured for a portion of the claims related to its
employee medical benefits and property / casualty insurance programs. Claims,
not subject to stop-loss insurance, are accrued based upon the Company's
estimates of the aggregate liability for claims incurred using certain actuarial
assumptions and the Company's historical claims experience.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of floorplan
notes payable and long-term debt. Excluding the Company's senior subordinated
notes, the carrying amount of these financial instruments approximates fair
value due either to length of maturity or existence of variable interest rates
that approximate current market rates. The following table sets forth the
carrying values and fair values, based on market quotes, of the Company's
outstanding senior subordinated notes issuances as of December 31, 2003:
FACE CARRYING FAIR VALUE AT YIELD TO
NOTE DESCRIPTION VALUE DISCOUNT VALUE DECEMBER 31, 2003 MATURITY
- ---------------- ----- -------- ----- ----------------- --------
(in millions)
10 7/8% due 2009 $ 75.4 $2.2 $ 73.2 $ 80.3 4.1%
8 1/4% due 2013 $150.0 $5.7 $144.3 $160.5 7.2%
F-10
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 2001, the Company entered into an interest rate swap
transaction. The Company entered into the swap to mitigate its exposure to
fluctuations in interest rates and has designated the swap as a cash flow hedge,
in accordance with SFAS No. 133. The details of the transaction are as follows:
FAIR VALUE
NOTIONAL RATE RATE AT DECEMBER 31, 2003
EXPIRATION DATE AMOUNT PAID RECEIVED LIABILITY
- --------------- ------ ---- -------- ---------
October 2004 $100 million 3.75% 30-day LIBOR $2.1 million
The net fair value of the swap is included in other liabilities, with a
corresponding charge to other comprehensive income, net of tax. The fair value
is based on the settlement value obtained from the counter-party in the
transaction. If the interest rates at December 31, 2003 remain unchanged, the
cash flow settlements to be paid by the Company for the next ten months would
total approximately $2.2 million. The Company intends to hold the swap to
maturity. There is no ineffectiveness in the transaction as the rate being
swapped is identical to the underlying rate on the floorplan notes payable.
Factory Incentives
In addition to the interest assistance discussed above, the Company
receives various incentive payments from certain of its automobile
manufacturers. These incentive payments are typically received on parts
purchases from the automobile manufacturers and on new vehicle retail sales.
These incentives are reflected as reductions of cost of sales in the statement
of operations.
Advertising
The Company expenses production and other costs of advertising as
incurred. Advertising expense for the years ended December 31, 2003, 2002, and
2001, totaled $60.5, $49.6 and $38.3 million, respectively. Additionally, the
Company receives advertising assistance from some of the automobile
manufacturers. The assistance is accounted for as an advertising expense
reimbursement and is reflected as a reduction of advertising expense in the
income statement as the vehicles are sold, and in other accruals on the balance
sheet for amounts related to vehicles still in inventory on that date.
Advertising expense has been reduced by $13.9, $13.2 and $11.5 million for
advertising assistance received related to vehicles sold for the years ended
December 31, 2003, 2002, and 2001, respectively. At December 31, 2003 and 2002,
accrued expenses included $2.9 and $1.4 million, respectively, related to
deferrals of advertising assistance received from the manufacturers.
Business Concentrations
The Company owns and operates franchised automotive dealerships in the
United States. Automotive dealerships operate pursuant to franchise agreements
with vehicle manufacturers. Franchise agreements generally provide the
manufacturers or distributors with considerable influence over the operations of
the dealership and generally provide for termination of the franchise agreement
for a variety of causes. The success of any franchised automotive dealership is
dependent, to a large extent, on the financial condition, management, marketing,
production and distribution capabilities of the vehicle manufacturers or
distributors of which the Company holds franchises. The Company purchases
substantially all of its new vehicles from various manufacturers or distributors
at the prevailing prices to all franchised dealers. The Company's sales volume
could be adversely impacted by the manufacturers' or distributors' inability to
supply the dealerships with an adequate supply of vehicles.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions in determining the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. The significant estimates made by management in the
F-11
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
accompanying consolidated financial statements relate to reserves for inventory
valuations, future chargebacks on finance and vehicle service contract fees, and
self-insured medical, income taxes and property / casualty plans and valuation
of intangible assets. Actual results could differ from those estimates.
Statements of Cash Flows
For purposes of the statements of cash flows, the net change in
floorplan financing of inventory, which is a customary financing technique in
the industry, is reflected as an operating activity in the statements of cash
flows.
Related Party Transactions
From time to time, the Company has entered into transactions with
related parties. Related parties include officers, directors, five percent or
greater stockholders and other management personnel of the Company.
At times, the Company has purchased its stock from related parties.
These transactions were completed at then current market prices. See Note 11 for
a summary of our related party lease commitments. See Note 3 for information
regarding certain transactions that occurred during the year ended December 31,
2003. There are no other significant related party transactions.
Earnings Per Share
SFAS No. 128, "Earnings per Share" requires the presentation of basic
earnings per share and diluted earnings per share in financial statements of
public enterprises. Under the provisions of this statement, basic earnings per
share is computed based on weighted average shares outstanding and excludes
dilutive securities. Diluted earnings per share are computed including the
impact of all potentially dilutive securities. The following table sets forth
the shares outstanding for the earnings per share calculations for the years
ended December 31, 2003, 2002 and 2001:
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2003 2002 2001
----------- ----------- -----------
Common stock issued, beginning of period .................................. 22,499,158 23,029,853 21,260,227
Weighted average common stock issued in offerings ...................... - - 605,753
Weighted average common stock issued to employee stock
purchase plan ....................................................... 124,336 76,914 180,034
Weighted average common stock issued in stock option exercises ......... 298,168 247,494 62,773
Less: Weighted average treasury shares purchased and weighted
average shares purchased and cancelled .............................. (397,837) (479,343) (1,971,126)
----------- ----------- -----------
Shares used in computing basic earnings per share ......................... 22,523,825 22,874,918 20,137,661
Dilutive effect of stock options, net of assumed repurchase
of treasury stock ................................................... 822,396 1,093,154 1,277,493
----------- ----------- -----------
Shares used in computing diluted earnings per share ....................... 23,346,221 23,968,072 21,415,154
=========== =========== ===========
Any options with an exercise price in excess of the average market
price of the Company's common stock, during the periods presented, are not
considered when calculating the dilutive effect of stock options for diluted
earnings per share calculations. The weighted average number of options not
included in the calculation of the dilutive effect of stock options was 0.4, 0.4
and 0.7 million for the years ended December 31, 2003, 2002 and 2001,
respectively.
Stock Compensation
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-Based Compensation," which, if fully adopted,
requires the Company to record stock-based compensation at fair value. The
Company has adopted the disclosure requirements of SFAS No. 123 and has elected
to record employee compensation expense in accordance with APB No. 25,
"Accounting for Stock Issued to Employees." Accordingly,
F-12
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
compensation expense is recorded for stock options based on the excess of the
fair market value of the common stock on the date the options were granted over
the aggregate exercise price of the options. As the exercise price of options
granted under the stock incentive plan has been equal to or greater than the
market price of the Company's stock on the date of grant, no compensation
expense related to the stock incentive plan 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.
Had compensation expense for the stock incentive and employee stock
purchase plans been determined based on the provisions of SFAS No. 123, the
impact on the Company's net income would have been as follows:
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------
2003 2002 2001
---------- ---------- ----------
(in thousands, except per share amounts)
Net income, as reported ........................ $ 76,126 $ 67,065 $ 55,442
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 ...................................... (3,576) (5,333) (3,728)
---------- ---------- ----------
Pro forma net income ........................... $ 72,550 $ 61,852 $ 51,714
========== ========== ==========
Earnings per share:
Basic - as reported .......................... $ 3.38 $ 2.93 $ 2.75
Basic - pro forma ............................ $ 3.22 $ 2.70 $ 2.57
Diluted - as reported ........................ $ 3.26 $ 2.80 $ 2.59
Diluted - pro forma .......................... $ 3.11 $ 2.58 $ 2.41
Recent Accounting Pronouncements
In January 2003, FASB Interpretation ("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. In December 2003, the FASB issued a revision to FIN No. 46, ("FIN No.
46R"), to clarify some of the provisions of FIN No. 46 and to exempt certain
entities from its requirements. Under the new guidance, special effective date
provisions apply to enterprises that have fully or partially applied FIN No. 46
prior to issuance of this revised interpretation. Otherwise, application of FIN
No. 46R is required in financial statements of public entities that have
interests in structures that are commonly referred to as special-purpose
entities for periods ending after December 15, 2003. Application by public
entities, other than small business issuers, for all other types of variable
interest entities is required in financial statements for periods ending after
March 15, 2004. 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 created or acquired before February
1, 2003.
F-13
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Business Segment Information
The Company, through its operating companies, operates in the
automotive retailing industry. All of the operating companies sell new and used
vehicles, provide maintenance and repair services, sell replacement parts and
arrange financing, vehicle service and insurance contracts. For the reasons
discussed below, all of our operating companies represent one reportable segment
under SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." Accordingly, the accompanying consolidated financial statements
reflect the operating results of the Company's reportable segment.
The Company's operating companies deliver the same products and
services to a common customer group. The Company's customers, generally, are
individuals. All of the operating companies, generally, follow the same
procedures and methods in managing their operations. Each operating company also
operates in a similar regulatory environment. The Company's management evaluates
performance and allocates resources based on the operating results of the
individual operating companies.
3. BUSINESS COMBINATIONS:
During 2003, the Company acquired eight automobile dealership
franchises in Louisiana, Oklahoma and Texas, 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 $35.4
million in cash, net of cash received, the assumption of an estimated $52.7
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 $15.8
million of franchise value intangible assets, and $10.6 million of goodwill, of
which $9.7 million is deductible for tax purposes.
Included in the acquisitions and dispositions 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 $3.3 million and its intangible
asset for franchise value increased $0.5 million.
Additionally, during 2003, the Company disposed of the net assets,
including $3.6 million of goodwill, of three dealership franchises and received
$7.4 million in cash. No gain or loss was recognized on these transactions. See
the discussion in the preceding paragraph regarding the accounting for the sale
of the Mercedes-Benz franchise.
During 2002, the Company acquired 15 automobile dealership franchises.
The acquisitions were accounted for as purchases. The aggregate consideration
paid in completing the acquisitions included approximately $81.4 million in
cash, net of cash and cash equivalents received, and the assumption of an
estimated $59.0 million of inventory financing. The purchase price allocations
resulted in recording approximately $56.3 million of franchise value intangible
assets and $37.0 million of goodwill, of which $17.2 million is deductible for
tax purposes.
F-14
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Six of the franchises acquired were part of Miller Automotive Group, a
platform acquisition completed in August of 2002 in Southern California and
their results of operations have been included in our statements since that
time. The acquisition expanded the Company's geographic and brand diversity, and
represents its first operations in California. All of the businesses acquired
are now 100% wholly-owned subsidiaries of the Company. The Company paid $55.8
million in cash, net of cash and cash equivalents received, and assumed $40.5
million of floorplan notes payable in completing this acquisition. The purchase
price was arrived at based on a calculation including the tangible net worth of
the companies acquired, plus an amount equal to the estimated income before
taxes times an agreed upon multiple. The total purchase price paid in excess of
the net amounts assigned to the assets acquired, including franchise value
intangibles, and liabilities assumed was recognized as goodwill.
Additionally, during 2002, the Company disposed of the net assets,
including $4.2 million of goodwill, of five dealership franchises and received
$7.4 million in cash. A gain of $0.4 million was recognized on these sales and
is recorded in Other Income (Expense), net in the statement of operations.
During 2001, the Company acquired four automobile dealership
franchises. These acquisitions were accounted for as purchases. The aggregate
consideration paid in completing these acquisitions included approximately $11.0
million in cash, net of cash received, the assumption of an estimated $7.7
million of inventory financing and the assumption of approximately $0.3 million
of notes payable. The purchase price allocations resulted in recording
approximately $8.5 million of intangible assets, a portion of which was
amortized during 2001. Additionally, during 2001, the Company sold eight
dealership franchises for $5.4 million in cash. No gain or loss was recognized
on these sales as they were completed at net book value.
The following pro forma financial information consists of income
statement data from the consolidated financial statements plus (1) unaudited
income statement data for all acquisitions and dispositions completed between
January 1, 2002, and December 31, 2003, assuming that they occurred on January
1, 2002, and (2) certain pro forma adjustments discussed below:
2003 2002
---- ----
(in millions, except per share amounts)
(unaudited)
Revenues .................................... $ 4,568.9 $ 4,738.4
Gross profit ................................ 730.7 734.9
Income from operations ...................... 147.9 155.7
Net income .................................. 75.8 75.0
Basic earnings per share .................... 3.36 3.28
Diluted earnings per share .................. 3.25 3.13
Pro forma adjustments included in the amounts above primarily relate
to: (a) increases in revenues related to changes in the contractual commission
arrangements on certain third-party products sold by the dealerships; (b)
changes in interest expense resulting from net cash borrowings utilized to
complete acquisitions, net of interest rate reductions received; and (c)
incremental provisions for federal and state income taxes relating to the
compensation differential, S Corporation income and other pro forma adjustments.
F-15
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts and notes receivable consist of the following:
DECEMBER 31,
---------------------------
2003 2002
-------- --------
(in thousands)
Amounts due from manufacturers .............. $ 36,458 $ 32,156
Parts and service receivables ............... 12,856 11,244
Finance and insurance receivables ........... 7,439 7,531
Other ....................................... 9,121 10,012
-------- --------
Total accounts and notes receivable ...... 65,874 60,943
Less - Allowance for doubtful accounts ...... (2,270) (2,749)
-------- --------
Accounts and notes receivable, net ....... $ 63,604 $ 58,194
======== ========
Inventories, net of valuation reserves, consist of the following:
DECEMBER 31,
--------------------------
2003 2002
-------- --------
(in thousands)
New vehicles ..................... $536,289 $500,842
Used vehicles .................... 86,108 80,115
Rental vehicles .................. 10,744 11,254
Parts, accessories and other ..... 38,138 29,994
-------- --------
Total inventories ............. $671,279 $622,205
======== ========
The Company provides valuation reserves against its used vehicle
inventories based on a detailed review of its inventory, actual subsequent sales
of the inventory, the Company's historical loss experience and consideration of
current market trends. At December 31, 2003, the Company established a $1.1
million reserve for estimated used vehicle losses, as compared to a $6.6 million
reserve at December 31, 2002. The net decline of $5.5 million in the used
vehicle valuation reserve, based on $1.2 billion of used vehicle sales, was due
to the application of losses incurred retailing and wholesaling used vehicles
during 2003 against the reserve. Based on a detailed review of the used vehicle
inventory at December 31, 2003, subsequent sales of the inventory and economic
trends indicating an improved used vehicle market, the Company determined that
$1.1 million was the appropriate used vehicle valuation reserve in the current
environment, and it was not necessary to charge used vehicle cost of sales to
establish the used vehicle valuation reserve at the same level as at December
31, 2002.
F-16
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and equipment consist of the following:
ESTIMATED DECEMBER 31,
USEFUL LIVES -----------------------------
IN YEARS 2003 2002
-------------- -------- ---------
(in thousands)
Land.................................. - $ 22,282 $ 20,168
Buildings............................. 30 to 40 29,672 22,958
Leasehold improvements................ 7 to 15 33,559 28,413
Machinery and equipment............... 7 to 20 32,450 30,044
Furniture and fixtures................ 3 to 10 42,328 35,808
Company vehicles...................... 3 to 5 5,879 5,285
-------- --------
Total............................... 166,170 142,676
Less - Accumulated depreciation and
amortization........................ (44,102) (35,255)
Construction in progress.............. 9,579 8,849
-------- --------
Property and equipment, net......... $131,647 $116,270
======== ========
Depreciation expense totaled approximately $12.5, $10.1, and $8.2
million for the years ended December 31, 2003, 2002 and 2001, respectively.
5. INTANGIBLE ASSETS AND GOODWILL:
The following is a roll forward of the Company's intangible asset and
goodwill accounts:
FRANCHISE VALUE
INTANGIBLE GOODWILL
---------- --------
Balance, December 31, 2000 ............................ $ - $ 285,892
Additions through acquisitions ..................... 4,614 3,861
Amortization expense ............................... - (7,488)
Reductions from sales of dealerships ............... - (4,352)
--------- ---------
Balance, December 31, 2001 ............................ 4,614 277,913
Additions through acquisitions ..................... 56,265 37,034
Reductions from sales of dealerships ............... - (4,161)
Realization of tax benefits ........................ - (2,879)
--------- ---------
Balance, December 31, 2002 ............................ 60,879 307,907
Additions through acquisitions .................... 15,777 10,618
Reductions from sales of dealerships .............. - (3,615)
Realization of tax benefits ....................... - (699)
--------- ---------
Balance, December 31, 2003 ............................ $ 76,656 $ 314,211
========= =========
The reduction in goodwill related to the realization of certain tax
benefits is due to differences between the book and tax bases of the goodwill.
The following table computes the impact on net income of the change in
accounting for intangible assets, required by SFAS No. 142:
YEAR ENDED
DECEMBER 31, 2001
----------------------
(dollars in thousands,
except per share amounts)
Net income .......................................... $55,442
Goodwill amortization expense, net of tax ........... 5,611
-------
Pro forma net income ................................ $61,053
=======
Pro forma earnings per share:
Basic ............................................ $ 3.03
Diluted .......................................... $ 2.85
F-17
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. FLOORPLAN NOTES PAYABLE:
The Company obtains its floorplan financing through its Revolving
Credit Agreement with a lending group (the "Credit Facility"), a floorplan
arrangement with Ford Motor Credit Company (the "FMCC Facility"), and
arrangements with several of the automobile manufacturers for financing of its
rental vehicle inventory. The floorplan notes payable reflect amounts payable
for the purchase of specific vehicle inventory and consist of the following:
DECEMBER 31,
--------------------------
2003 2002
-------- --------
(in thousands)
New vehicles-Credit Facility .......................... $229,495 $585,204
New vehicles-FMCC Facility ............................ 192,897 --
Used vehicles-Credit Facility ......................... 60,570 56,164
Rental vehicles-Credit Facility ....................... 1,682 1,220
Rental vehicles-others ................................ 8,924 9,950
-------- --------
Total floorplan notes payable ................ $493,568 $652,538
======== ========
The Credit Facility lending group is comprised of 14 major financial
institutions, including two manufacturer captive finance companies. The
manufacturer captive finance companies are Toyota Motor Credit Corporation and
BMW Financial Services NA, LLC. The Credit Facility provides $581.2 million of
floorplan financing for new and used vehicles and matures on June 30, 2006, and
can be expanded to a maximum capacity of $800 million. The notes payable bear
interest at the London Interbank Offered Rate ("LIBOR") plus 112.5 basis points
for new vehicle inventory and LIBOR plus 125 basis points for used vehicle
inventory. As of December 31, 2003 and 2002, the interest rate on the notes
payable outstanding was 2.31% and 2.53%, respectively. See the discussion of the
Company's interest rate swaps under Note 2.
During 2003, the Company entered into the FMCC Facility for the
financing of its entire Ford, Lincoln and Mercury new vehicle inventory. The
arrangement provides for $300.0 million of floorplan financing and matures on
June 2, 2006. The notes payable bear interest at a rate of Prime plus 100 basis
points minus certain incentives. As of December 31, 2003, the interest rate on
the notes payable outstanding was 2.90%, before considering non-interest related
incentives. After all incentives received, the effective interest rate
approximates the interest rate on the Credit Facility.
As discussed more fully in Note 2, the Company receives interest
assistance from certain automobile manufacturers. The assistance, has ranged
from approximately 80% to 160% of the Company's floorplan interest expense, over
the past three years.
The Credit Facility and FMCC Facility arrangements permit the Company
to borrow up to $881.2 million, dependent upon new and used vehicle inventory
levels. As of December 31, 2003, total available borrowings under the
arrangements were approximately $396.6 million.
Payments on the floorplan notes payable are due as the vehicles are
sold. The floorplan notes payable are collateralized by substantially all of the
vehicle inventories of the Company. Additionally, under the FMCC Facility, the
Company is required to maintain a $1.5 million balance in a Ford Money Market
Account as additional collateral. This balance is reflected in other long term
assets on the balance sheet at December 31, 2003.
Excluding rental vehicles financed through the Credit Facility,
financing for rental vehicles is typically obtained directly from the automobile
manufacturers. The financing arrangements generally require small monthly
payments and mature in varying amounts between 2004 and 2006. The weighted
average interest rate charged as of December 31, 2003, was 3.9%. Rental vehicles
are typically moved to used vehicle inventory when they are removed from rental
service and repayment of the borrowing is required at that time.
F-18
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LONG-TERM DEBT:
DECEMBER 31,
---------------------------
2003 2002
-------- --------
(in thousands)
Credit Facility (described below) ............................... $ -- $ --
Various notes payable, maturing in varying amounts
through August 2018 with a weighted average interest
rate of 10.38% ................................................ 13,613 10,070
-------- --------
Total long-term debt ............................................ 13,613 10,070
Less - Current portion ........................................ (910) (997)
-------- --------
Long-term portion ............................................... $ 12,703 $ 9,073
======== ========
In addition to floorplan notes payable, the Credit Facility provides an
acquisition line of credit of up to $193.8 million for the financing of
acquisitions, general corporate purposes or capital expenditures. The
acquisition line can be expanded to a maximum capacity of $200.0 million. The
amount of funds available under the acquisition line is dependent upon a
calculation based on the Company's cash flow. Based on the December 31, 2003
financial statements, $188.8 million was available under the acquisition line,
after deducting $5.0 million for outstanding letters of credit. The acquisition
line of credit of the Credit Facility bears interest based on LIBOR plus a
margin varying from 175 to 325 basis points, determined based on a ratio of debt
to equity. Additionally, the Credit Facility contains various covenants
including financial ratios, such as, fixed-charge coverage, interest coverage
and a minimum net worth requirement, among others, and other requirements that
must be maintained by the Company. As of December 31, 2003, the Company was in
compliance with these requirements. The Credit Facility permits up to 33% of the
Company's net income to be used for cash dividends and stock repurchases. The
interest rate on borrowings under the acquisition line of credit of the Credit
Facility would have been 3.62% based on LIBOR at December 31, 2003, but there
were no amounts outstanding at that time. Land, buildings or other assets secure
all of the notes payable listed above.
Total interest incurred on long-term debt was approximately $2.8, $3.0
and $5.2 million for the years ended December 31, 2003, 2002 and 2001,
respectively, which included approximately $1.0, $1.3, and $0.9 million of
capitalized interest on construction projects in 2003, 2002 and 2001,
respectively. The aggregate maturities of long-term debt as of December 31,
2003, were as follows (in thousands):
2004 $ 910
2005 ..................... 935
2006 ..................... 732
2007 ..................... 707
2008 ..................... 775
Thereafter ............... 9,554
-------
Total long-term debt ... $13,613
=======
8. 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.
F-19
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- 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 date of
March 1, 2004. See further discussion of the redemption in Note 16. 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.
During 2001 and 2002, the Company repurchased a portion of its Notes.
The Company recorded a $1.2 million loss during 2002 related to the repurchases,
which is included in Other income (expense), net in the statement of operations.
The purchases during 2001 were completed at or near the Company's carrying value
of the Notes.
At the time of the issuances of the Notes and the 8 1/4% Notes, the
Company incurred certain costs, which are included in long-term Other Assets on
the balance sheets. The balances in the deferred cost accounts at December 31,
2003 and 2002, totaled $0.9 and $0.1 million, respectively.
Total interest expense on the Notes for the years ended December 31,
2003, 2002 and 2001, was approximately $12.9, $8.8 and $10.1 million,
respectively.
9. STOCK-BASED COMPENSATION PLANS:
In 1996, Group 1 adopted the 1996 Stock Incentive Plan, as amended,
(the "Plan"), which provides for the granting or awarding of stock options,
stock appreciation rights and restricted stock to employees and directors. The
number of shares authorized and reserved for issuance under the Plan is 4.5
million shares, of which 414,148 are available for future issuance as of
December 31, 2003. The terms of the option awards (including vesting schedules)
are established by the Compensation Committee of the Company's Board of
Directors. All outstanding options are exercisable over a period not to exceed
10 years and vest over three- to six-year periods.
F-20
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the Company's outstanding stock options:
WEIGHTED
AVERAGE
NUMBER EXERCISE PRICE
---------- --------------
Options outstanding, December 31, 2000 ............... 3,542,129 $13.36
Grants (exercise prices between $11.31 and
$28.97 per share) ............................... 559,500 25.18
Exercised .......................................... (182,090) 12.29
Forfeited .......................................... (334,230) 15.75
---------- ------
Options outstanding, December 31, 2001 ............... 3,585,309 15.04
Grants (exercise prices between $19.47 and
$44.96 per share) ............................... 505,950 34.61
Exercised .......................................... (383,245) 11.16
Forfeited .......................................... (189,665) 20.26
---------- ------
Options outstanding, December 31, 2002 ............... 3,518,349 18.00
Grants (exercise prices between $22.93 and
$34.85 per share) ............................... 176,000 29.78
Exercised .......................................... (482,509) 10.60
Forfeited .......................................... (374,205) 23.28
---------- ------
Options outstanding, December 31, 2003 ............... 2,837,635 $19.29
========== ======
At December 31, 2003, 2002 and 2001, 1,767,339, 1,771,538 and 1,309,079
options, respectively, were exercisable at weighted average exercise prices of
$15.44, $13.49 and $13.02, respectively. The weighted average fair value per
share of options granted during the years ended December 31, 2003, 2002 and 2001
is $18.02, $21.73 and $18.67, respectively. The fair value of options granted is
estimated on the date of grant using the Black-Scholes option pricing model. The
Black-Scholes option pricing model is not designed to measure not-for-sale
options, but is the most widely used method for option valuation. The following
table summarizes the weighted average information used in determining the fair
value of the options granted during the years ended December 31, 2003, 2002 and
2001:
2003 2002 2001
------ ------- --------
Weighted average risk-free interest rate .............. 3.8% 4.6% 5.1%
Weighted average expected life of options ............. 8 years 8 years 10 years
Weighted average expected volatility .................. 51.9% 52.5% 57.7%
Weighted average expected dividends ................... -- -- --
The following table summarizes information regarding stock options
outstanding as of December 31, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- ---------------------------------
NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 12/31/03 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/03 EXERCISE PRICE
--------------- ----------- ---------------- -------------- ----------- --------------
$ 2.90 26,000 3.2 years $ 2.90 26,000 $ 2.90
$9.00 to $13.99 988,915 5.6 11.11 759,475 11.09
$14.00 to $19.99 946,813 5.6 17.08 761,763 16.83
$20.00 to $24.99 342,307 7.3 24.49 106,569 24.58
$25.00 to $44.99 533,600 8.4 35.85 113,532 29.44
--------- --------- --------- --------- ---------
Total 2,837,635 6.3 years $ 19.29 1,767,339 $ 15.44
========= ========= ========= ========= =========
In September 1997, Group 1 adopted the Group 1 Automotive, Inc. 1998
Employee Stock Purchase Plan, as amended, (the "Purchase Plan"). The Purchase
Plan authorizes the issuance of up to 2.0 million shares of common stock and
provides that no options to purchase shares may be granted under the Purchase
Plan after June 30, 2007. As of December 31, 2003, there were 628,272 shares
remaining in reserve for future issuance under the Purchase Plan. The Purchase
F-21
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Plan is available to all employees of the Company and its participating
subsidiaries and is a qualified plan as defined by Section 423 of the Internal
Revenue Code. At the end of each fiscal quarter (the "Option Period") during the
term of the Purchase Plan, the employee contributions are used to acquire shares
of common stock at 85% of the fair market value of the common stock on the first
or the last day of the Option Period, whichever is lower. During 2003, 2002 and
2001, the Company issued 191,063, 153,954 and 257,235 shares, respectively, of
common stock to employees participating in the Purchase Plan.
10. EMPLOYEE SAVINGS PLANS:
The Company has a deferred compensation plan to provide selected
employees with the opportunity to accumulate additional savings for retirement
on a tax-deferred basis. Participants in the plan are allowed to defer receipt
of a portion of their salary and/or bonus compensation earned. The participants
can choose from various defined investment options to determine their earnings
crediting rate, however, the Company has complete discretion over how the funds
are utilized. Participants in the plan are unsecured creditors of the Company.
The balances due to participants of the deferred compensation plan as of
December 31, 2003 and 2002 were $12.3 and $7.5 million, respectively.
The Company offers a 401k plan to all of its employees and provides a
matching contribution to those employees that participate. The matching
contributions paid by the Company totaled $3.2, $2.7 and $2.2 million for the
years ended December 31, 2003, 2002 and 2001, respectively.
11. OPERATING LEASES:
The Company leases various facilities and equipment under long-term
operating lease agreements. These leases expire on various dates through
December 2031 and, in general, have renewal or cancellation options, at the
Company's option, at various times during the lease term.
Future minimum lease payments for operating leases as of December 31,
2003, are as follows (in thousands):
RELATED THIRD
YEAR ENDED DECEMBER 31, PARTIES PARTIES TOTAL
- ------------------------------- ------- -------- --------
2004........................... $10,326 $ 38,877 $ 49,203
2005........................... 10,198 37,648 47,846
2006........................... 10,198 37,296 47,494
2007........................... 10,078 37,125 47,203
2008........................... 7,307 34,194 41,501
Thereafter..................... 51,837 172,552 224,389
------- -------- --------
Total.......................... $99,944 $357,692 $457,636
======= ======== ========
Total rent expense under all operating leases, including operating
leases with related parties, was approximately $46.5, $36.8 and $30.7 million
for the years ended December 31, 2003, 2002 and 2001, respectively. Rental
expense on related party leases, which is included in the above amounts, totaled
approximately $9.5, $8.4 and $7.9 million for the years ended December 31, 2003,
2002 and 2001, respectively.
In addition to the transactions discussed in Note 3, 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.
F-22
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. INCOME TAXES:
Federal and state income taxes are as follows:
DECEMBER 31,
--------------------------------------------
2003 2002 2001
-------- -------- --------
(in thousands)
Federal -
Current ................................... $ 22,837 $ 31,026 $ 32,514
Deferred .................................. 11,091 6,336 (1,129)
State -
Current ................................... 2,158 2,308 2,691
Deferred .................................. 860 547 (96)
-------- -------- --------
Provision for income taxes .................. $ 36,946 $ 40,217 $ 33,980
======== ======== ========
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 35% in 2003, 2002 and
2001 to income before income taxes as follows:
DECEMBER 31,
---------------------------------------------
2003 2002 2001
-------- -------- --------
(in thousands)
Provision at the statutory rate .................. $ 39,575 $ 37,549 $ 31,298
Increase (decrease) resulting
from -
State income tax, net of benefit
for federal deduction ....................... 2,058 1,856 1,669
Non-deductible portion of
goodwill amortization ....................... - - 776
Resolution of tax contingencies ............... (5,423) - -
Other .......................................... 736 812 237
-------- -------- --------
Provision for income taxes ....................... $ 36,946 $ 40,217 $ 33,980
======== ======== ========
During 2003, the Company resolved certain tax contingencies as various
state and federal tax audits were concluded providing certainty and resolution
on various formation, financing, acquisition and structural matters. In
addition, various other tax exposures of acquired companies have been favorably
resolved. As a result the Company recorded a reduction in its tax reserve, which
reduced the effective tax rate for 2003 to 32.7% as compared to 37.5% for 2002.
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets (liabilities) result principally from the following:
DECEMBER 31,
---------------------------
2003 2002
-------- --------
(in thousands)
Loss reserves and accruals ............................ $ 24,911 $ 27,150
Goodwill amortization ................................. (20,030) (13,855)
Depreciation expense .................................. (9,583) (5,785)
Reinsurance operations ................................ (2,258) (2,490)
Interest rate swaps ................................... 771 2,059
Other ................................................. (2,154) (3,937)
-------- --------
Net deferred tax asset (liability) ................. $ (8,343) $ 3,142
======== ========
F-23
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The net deferred tax assets (liabilities) are comprised of the
following:
DECEMBER 31,
------------
2003 2002
-------- --------
(in thousands)
Deferred tax assets -
Current ............................................ $ 13,585 $ 14,297
Long-term .......................................... 19,302 24,264
Deferred tax liabilities -
Current ............................................ (2,421) (3,504)
Long-term .......................................... (38,809) (31,915)
-------- --------
Net deferred tax asset (liability) ................... $ (8,343) $ 3,142
======== ========
The Company believes it is more likely than not, that the deferred tax
assets will be realized, based primarily on the assumption of future taxable
income.
13. COMMITMENTS AND CONTINGENCIES:
Legal Proceedings
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. Such briefing was
completed on February 6, 2004. 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. Briefing on the merits of
defendants' appeal was completed on February 13, 2004. The parties participated
in mediation in 2003. That mediation resulted in a settlement proposal from the
plaintiff class representatives to the defendant dealers, including the
Company's Texas dealership subsidiaries. The proposal was contingent on
achieving a certain minimum level of participation among the defendant dealers
based on the number of transactions in which each dealer engaged. Because the
participation threshold was not satisfied, the proposal failed. 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.
Insurance
Because of their vehicle inventory and nature of business, automobile
dealerships generally require significant levels of insurance covering a broad
variety of risks. The Company's insurance includes umbrella policies with a
$105.0 million aggregate limit, as well as insurance on its real property,
comprehensive coverage for its vehicle inventory, general liability insurance,
employee dishonesty coverage, employment practices liability insurance,
pollution coverage and errors and omissions insurance in connection with its
vehicle sales and financing activities.
F-24
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Additionally, the Company retains some risk of loss under its self-insured
medical and property / casualty plans. See further discussion under Note 2. The
Company has a $4.9 million letter of credit outstanding, supporting its
obligations with respect to its property/casualty insurance program.
Split Dollar Life Insurance
On January 23, 2002, the Company, with the approval of the Compensation
Committee of the Board of Directors, entered into an agreement with a trust
established by B.B. Hollingsworth, Jr., the Company's Chairman, President and
Chief Executive Officer, and his wife (the "Split-Dollar Agreement"). Under the
Split-Dollar Agreement, the Company committed to make advances of a portion of
the insurance premiums on a life insurance policy purchased by the trust on the
joint lives of Mr. and Mrs. Hollingsworth. Under the terms of the Split-Dollar
Agreement, the Company committed to pay the portion of the premium on the
policies not related to term insurance each year for a minimum of seven years.
The obligations of the Company under the Split-Dollar Agreement to pay premiums
on the split-dollar insurance are not conditional, contingent or terminable
under the express terms of the contract. Premiums to be paid by the Company are
approximately $300,000 per year. The face amount of the policy is $7.5 million.
The Company is entitled to reimbursement of the amounts paid, without interest,
upon the first to occur of (a) the death of the survivor of Mr. and Mrs.
Hollingsworth and (b) the termination of the Split-Dollar Agreement. In no event
will the Company's reimbursement exceed the accumulated cash value of the
insurance policy, which will be less than the premiums paid in the early years.
The Split-Dollar Agreement terminates upon the later to occur of the following:
(a) the date that Mr. Hollingsworth ceases to be an officer, director,
consultant or employee of the Company for any reason other than total and
permanent disability and (b) January 23, 2017. The insurance policy has been
assigned to the Company as security for repayment of the amounts which the
Company contributes toward payments due on such policy.
In accordance with the terms of the Split-Dollar Agreement, the Company
paid the 2002 premium in the amount of $299,697 in January 2002. However, due to
the uncertainty surrounding the applicability of the Sarbanes-Oxley Act of 2002
("Sarbanes-Oxley Act") to split-dollar life insurance arrangements, the Company,
Mr. and Mrs. Hollingsworth and the trustees of the trust have agreed to the
deferral of the Company's then-current obligations to pay premiums in 2003 and
2004 on the split-dollar life insurance policies until January 2005 or such
earlier time as the parties mutually determine that such payments are not
prohibited by the Sarbanes-Oxley Act. Due to the uncertainty surrounding the
resolution of this matter, nothing has been recorded in the financial statements
for the premium payments scheduled, but deferred for 2003 and 2004, of
approximately $300,000 each. If the 2003 payment had been made as scheduled, the
Company would have recorded approximately $26,000 as expense in the statement of
operations, with the remainder being recorded as an increase in the cash
surrender value of the insurance policy, which is reflected as an asset on the
balance sheet.
Vehicle Service Contract Obligations
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 is an obligor under vehicle service contracts previously
sold in two states. The 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 received, 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
purchased 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 are being 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.
14. RECLASSIFICATIONS:
Certain reclassifications have been made in the 2002 and 2001 financial
statements to conform to the current year presentation. The following are the
reclassifications made:
- Documentary fees, which are fees charged to retail new and
used vehicle customers for processing vehicle purchase
documentation, were reclassified from other dealership
revenues, net to new vehicle retail sales and used vehicle
retail sales. The impact of this reclassification was as
follows:
F-25
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED
DECEMBER 31, 2001
---------------------
(dollars in thousands)
Increase new vehicle retail sales revenues ............ $ 8,291
Increase used vehicle retail sales revenues ........... 6,585
Decrease other dealership revenues, net ............... (14,876)
--------
Net impact on revenues ........................ $ -
========
- Used vehicle retail and used vehicle wholesale sales and their
respective cost of sales have been reclassified to separately
present them on the face of 2001 statements of operations. The
retail and wholesale amounts were combined in the used vehicle
sales and used vehicle cost of sales line items in the 2001
statements of operations.
- Retail finance fees, vehicle service contract fees and other
finance and insurance revenues, net have been reclassified to
separately present them on the face of the statements of
operations. The amounts were combined in the other dealership
revenues, net line item in the 2001 statements of operations.
- Contracts-in-transit were reclassified from the cash line to a
separate line item in the 2001 balance sheet. As a result of
this reclassification, contracts-in-transit are now presented
under changes in operating assets and liabilities in the
operating activities section of the 2001 statements of cash
flows. In 2001, the impact of this change was to reduce net
cash provided by operating activities and the net increase
(decrease) in cash by $12.7 million in the 2001 statement of
cash flows.
- Changes in the borrowings on the revolving credit facilities
resulting from cash flow from operating activities were
reclassified from changes in floorplan notes payable to be
presented as changes in net borrowings (payments) on revolving
credit facility in the 2002 and 2001 consolidated statements
of cash flows. The impact of the changes was to increase net
cash provided by operating activities and reduce net cash
provided by (used in) financing activities by $1.3 million and
$2.4 million in the 2002 and 2001 statements of cash flows,
respectively.
- Debt issue costs related to the underwriters' discount were
reclassified from long term other assets to be presented as a
reduction of senior subordinated notes on the December 31,
2002 balance sheet. The effect was to reduce the long term
other assets balance by $1.4 million and reduce the senior
subordinated notes balance by $1.4 million.
- Deferred revenues related to the sale of vehicle maintenance
agreements were reclassified from accrued expenses and long
term other liabilities to be presented separately as deferred
revenues from vehicle maintenance agreement sales on the
December 31, 2002 balance sheet. The effect of the reduction
was to reduce accrued liabilities and long term other
liabilities by $1.1 million each.
F-26
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
QUARTER
---------------------------------------------------------- FULL
YEAR ENDED DECEMBER 31, FIRST SECOND THIRD FOURTH YEAR
- ----------------------- ----- ------ ----- ------ ----
(in thousands, except per share data)
2003
Total revenues .............................. $1,029,791 $1,147,880 $1,239,490 $1,101,399 $4,518,560
Gross profit ................................ 169,448 184,216 194,447 175,300 723,411
Net income .................................. 14,816 19,980 21,694 19,636 76,126
Basic earnings per share .................... 0.66 0.89 0.96 0.87 3.38
Diluted earnings per share .................. 0.64 0.86 0.92 0.84 3.26
2002
Total revenues .............................. $ 946,074 $1,033,104 $1,202,588 $1,032,598 $4,214,364
Gross profit ................................ 151,509 160,763 180,508 159,515 652,295
Net income .................................. 15,493 19,137 20,141 12,294 67,065
Basic earnings per share .................... 0.68 0.83 0.88 0.55 2.93
Diluted earnings per share .................. 0.64 0.78 0.84 0.53 2.80
During the fourth quarter of 2003, the Company realized a tax benefit
from the resolution of tax contingencies, resulting in a $4.8 million decrease
in tax expense.
During the fourth quarter of 2002, the Company revised its estimates
related to certain exposures of its dealership properties resulting in a $2
million decrease in the estimate. The Company also increased its revenue
deferrals related to certain warranty contracts sold to its customers by $3.8
million and increased related deferred costs by $0.9 million.
16. SUBSEQUENT EVENTS (UNAUDITED):
Recent Acquisitions
Since December 31, 2003, the Company has completed acquisitions of four
franchises. One of the acquisitions, with three franchises, is a new platform in
New Jersey. The other franchise was acquired in a tuck-in acquisition and will
complement platform operations in Central Texas. The aggregate consideration
paid in completing these acquisitions was approximately $38.6 million in cash,
net of cash received, 54,372 shares of Common Stock and the assumption of $29.8
million of inventory financing.
Bond Redemption
On March 1, 2004, the Company completed the redemption of all of its 10
7/8% senior subordinated notes. The Company incurred a $6.4 million pretax
charge in completing the redemption, consisting of a $4.1 million redemption
premium and a $2.3 million non-cash write-off of unamortized bond discount and
deferred cost. Total cash used in completing the redemption, excluding accrued
interest of $4.1 million, totaled $79.5 million.
F-27
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 -- Restated Certificate of Incorporation of the Company
(Incorporated by reference to Exhibit 3.1 of the Company's
Registration Statement on Form S-1 Registration No.
333-29893).
3.2 -- Certificate of Designation of Series A Junior Participating
Preferred Stock (Incorporated by reference to Exhibit 3.2
of the Company's Registration Statement on Form S-1
Registration No. 333-29893).
3.3 -- Bylaws of the Company (Incorporated by reference to Exhibit
3.3 of the Company's Registration Statement on Form S-1
Registration No. 333-29893).
4.1 -- Specimen Common Stock Certificate (Incorporated by
reference to Exhibit 4.1 of the Company's Registration
Statement on Form S-1 Registration No. 333-29893).
4.2 -- 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).
4.3 -- 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).
4.4 -- Form of Subordinated Debt Securities (included in
Exhibit 4.3).
10.1* -- Employment Agreement between the Company and B.B.
Hollingsworth, Jr. effective March 1, 2002 (Incorporated by
reference to Exhibit 10.1 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2001).
10.2* -- Employment Agreement between the Company and John T. Turner
dated November 3, 1997 (Incorporated by reference to
Exhibit 10.5 of the Company's Annual Report on Form 10-K
for the year ended December 31, 1997).
10.3* -- Employment Agreement between the Company and Scott L.
Thompson dated November 3, 1997 (Incorporated by reference
to Exhibit 10.6 of the Company's Annual Report on Form 10-K
for the year ended December 31, 1997).
10.4* -- 1996 Stock Incentive Plan (Incorporated by reference to
Exhibit 10.7 of the Company's Registration Statement on
Form S-1 Registration No. 333-29893).
10.5* -- First Amendment to 1996 Stock Incentive Plan (Incorporated
by reference to Exhibit 10.8 of the Company's Registration
Statement on Form S-1 Registration No. 333-29893).
10.6 -- Lease Agreement between Howard Pontiac GMC and Robert E.
Howard II (Incorporated by reference to Exhibit 10.9 of the
Company's Registration Statement on Form S-1 Registration
No. 333-29893).
10.7 -- Lease Agreement between Bob Howard Motors and Robert E.
Howard II (Incorporated by reference to Exhibit 10.9 of the
Company's Registration Statement on Form S-1 Registration
No. 333-29893).
10.8 -- Lease Agreement between Bob Howard Chevrolet and Robert E.
Howard II (Incorporated by reference to Exhibit 10.9 of the
Company's Registration Statement on Form S-1 Registration
No. 333-29893).
10.9 -- Lease Agreement between Bob Howard Automotive-H and North
Broadway Real Estate (Incorporated by reference to Exhibit
10.9 of the Company's Registration Statement on Form S-1
Registration No. 333-29893).
10.10 -- Rights Agreement between Group 1 Automotive, Inc. and
ChaseMellon Shareholder Services, L.L.C., as rights agent
dated October 3, 1997 (Incorporated by reference to Exhibit
10.10 of the Company's Registration Statement on Form S-1
Registration No. 333-29893).
10.11* -- 1998 Employee Stock Purchase Plan (Incorporated by
reference to Exhibit 10.11 of the Company's Registration
Statement on Form S-1 Registration No. 333-29893).
10.12 -- Form of Agreement between Toyota Motor Sales, U.S.A., and
Group 1 Automotive, Inc. (Incorporated by reference to
Exhibit 10.12 of the Company's Registration Statement on
Form S-1 Registration No. 333-29893).
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.13 -- Form of Supplemental Agreement to General Motors
Corporation Dealer Sales and Service Agreement
(Incorporated by reference to Exhibit 10.13 of the
Company's Registration Statement on Form S-1 Registration
No. 333-29893).
10.14 -- Supplemental Terms and Conditions between Ford Motor
Company and Group 1 Automotive, Inc. dated September 4,
1997 (Incorporated by reference to Exhibit 10.16 of the
Company's Registration Statement on Form S-1 Registration
No. 333-29893).
10.15 -- Toyota Dealer Agreement between Gulf States Toyota, Inc.
and Southwest Toyota, Inc. dated April 5, 1993
(Incorporated by reference to Exhibit 10.17 of the
Company's Registration Statement on Form S-1 Registration
No. 333-29893).
10.16 -- Lexus Dealer Agreement between Toyota Motor Sales, U.S.A.,
Inc. and SMC Luxury Cars, Inc. dated August 21, 1995
(Incorporated by reference to Exhibit 10.18 of the
Company's Registration Statement on Form S-1 Registration
No. 333-29893).
10.17 -- Form of General Motors Corporation U.S.A. Sales and Service
Agreement (Incorporated by reference to Exhibit 10.25 of
the Company's Registration Statement on Form S-1
Registration No. 333-29893).
10.18 -- Fifth Amended and Restated Revolving Credit Agreement,
dated as of June 2, 2003 (Incorporated by reference to
Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2003).
10.19 -- Form of Ford Motor Credit Company Automotive Wholesale
Plan Application for Wholesale Financing and Security
Agreement (Incorporated by reference to Exhibit 10.2 of the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2003).
10.20 -- First Amendment to Fifth Restated Revolving Credit
Agreement, dated as of July 25, 2003 (Incorporated by
reference to Exhibit 10.37 of the Company's Registration
Statement on Form S-4 Registration No. 333-109080).
10.21 -- Stock Pledge Agreement dated December 19, 1997
(Incorporated by reference to Exhibit 10.54 of the
Company's Annual Report on Form 10-K for the year ended
December 31, 1997).
10.22* -- First Amendment to Group 1 Automotive, Inc. 1998 Employee
Stock Purchase Plan (Incorporated by reference to Exhibit
10.35 of the Company's Annual Report on Form 10-K for the
year ended December 31, 1998).
10.23 -- Form of Ford Motor Company Sales and Service Agreement
(Incorporated by reference to Exhibit 10.38 of the
Company's Annual Report on Form 10-K for the year ended
December 31, 1998).
10.24 -- Form of Chrysler Corporation Sales and Service Agreement
(Incorporated by reference to Exhibit 10.39 of the
Company's Annual Report on Form 10-K for the year ended
December 31, 1998).
10.25 -- Form of Nissan Division Dealer Sales and Service Agreement.
10.26 -- Form of Infiniti Division Dealer Sales and Service Agreement.
10.27* -- Second Amendment to the 1996 Stock Incentive Plan
(Incorporated by reference to Exhibit 10.1 of the Company's
Quarterly Report on Form 10-Q for the quarter ended March
31, 1999).
10.28* -- Group 1 Automotive, Inc. Deferred Compensation Plan, as
Amended and Restated (Incorporated by reference
to Exhibit 4.1 of the Company's Registration Statement on
Form S-8 Registration No. 333-83260).
10.29* -- Second Amendment to Group 1 Automotive, Inc. 1998 Employee
Stock Purchase Plan (Incorporated by reference to Exhibit
4.1 of the Company's Registration Statement on Form S-8
Registration No. 333-75754).
10.30* -- Third Amendment to Group 1 Automotive, Inc. 1996 Stock
Incentive Plan (Incorporated by reference to Exhibit 4.1 of
the Company's Registration Statement on Form S-8
Registration No. 333-75784).
10.31 -- ISDA Master Agreement (Incorporated by reference to Exhibit
10.33 of the Company's Annual Report on Form 10-K for the
year ended December 31, 2001).
10.32 -- Interest Rate Swap Confirmation, dated as of October 19,
2001 (Incorporated by reference to Exhibit 10.35 of the
Company's Annual Report on Form 10-K for the year ended
December 31, 2001).
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.33* -- Split Dollar Life Insurance Agreement between Group 1
Automotive, Inc., and Leslie Hollingsworth and Leigh
Hollingsworth Copeland, as Trustees of the Hollingsworth
2000 Children's Trust, dated as of January 23, 2002
(Incorporated by reference to Exhibit 10.36 of the
Company's Annual Report on Form 10-K for the year ended
December 31, 2002).
10.34 -- Lease Agreement between Bob Howard Automotive-East, Inc.
and REHCO East, L.L.C (Incorporated by reference to Exhibit
10.37 of the Company's Annual Report on Form 10-K for the
year ended December 31, 2002).
10.35 -- Lease Agreement between Howard-H, Inc. and REHCO, L.L.C
(Incorporated by reference to Exhibit 10.38 of the
Company's Annual Report on Form 10-K for the year ended
December 31, 2002).
10.36 -- Lease Agreement between Howard Pontiac-GMC, Inc. and North
Broadway Real Estate Limited Liability Company
(Incorporated by reference to Exhibit 10.39 of the
Company's Annual Report on Form 10-K for the year ended
December 31, 2002).
10.37* -- Employment Agreement between the Company and Kevin H.
Whalen dated November 3, 2002 (Incorporated by reference to
Exhibit 10.40 of the Company's Annual Report on Form 10-K
for the year ended December 31, 2002).
10.38 -- Lease Agreement between Howard-Ford, Inc. and REHCO EAST,
LLC dated as of February 28, 2003.
10.39 -- Amendment and Assignment of Lease between Howard Ford,
Inc., Howard-FLM, Inc. and REHCO EAST, LLC dated as of
November 1, 2003.
10.40* -- First Amendment to Employment Agreement between the Company
and B.B. Hollingsworth, Jr. effective March 1, 2002.
10.41* -- Split Dollar Life Insurance Payment Deferral Letter dated
January 28, 2004.
11.1 -- Statement re: computation of earnings per share is included
under Note 2 to the financial statements.
14.1 -- Code of Ethics for Specified Officers of Group 1
Automotive, Inc. dated as of May 14, 2003.
21.1 -- Group 1 Automotive, Inc. Subsidiary List.
23.1 -- Consent of Ernst & Young LLP.
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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* Management contract or compensatory plan