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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number: 1-13461
GROUP 1 AUTOMOTIVE, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 76-0506313
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
950 Echo Lane, Suite 100
Houston, Texas 77024
(Address of Principal Executive Offices) (Zip Code)
(713) 647-5700
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Title Outstanding
----- -----------
Common stock, par value $.01 22,479,697
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
MARCH 31, DECEMBER 31,
2004 2003
----------- ------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash .......................................................... $ 32,315 $ 25,441
Contracts-in-transit and vehicle receivables, net ............. 140,406 143,260
Accounts and notes receivable, net ............................ 68,995 63,604
Inventories, net .............................................. 766,937 671,279
Deferred income taxes ......................................... 11,786 11,163
Prepaid expenses and other assets ............................. 8,509 16,176
----------- -----------
Total current assets ................................... 1,028,948 930,923
----------- -----------
PROPERTY AND EQUIPMENT, net ..................................... 144,163 131,647
GOODWILL ........................................................ 337,823 314,211
INTANGIBLE ASSETS ............................................... 95,698 76,656
INVESTMENTS RELATED TO INSURANCE POLICY SALES ................... 16,121 16,025
DEFERRED COSTS RELATED TO INSURANCE POLICY
AND VEHICLE SERVICE CONTRACT SALES ............................ 11,093 12,238
OTHER ASSETS .................................................... 6,142 6,465
----------- -----------
Total assets ........................................... $ 1,639,988 $ 1,488,165
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Floorplan notes payable ....................................... $ 709,977 $ 493,568
Current maturities of long-term debt .......................... 895 910
Accounts payable .............................................. 96,169 87,675
Accrued expenses .............................................. 66,100 72,240
----------- -----------
Total current liabilities .............................. 873,141 654,393
----------- -----------
DEBT, net of current maturities ................................. 12,507 12,703
SENIOR SUBORDINATED NOTES ....................................... 144,444 217,475
DEFERRED INCOME TAXES ........................................... 21,520 19,506
OTHER LIABILITIES ............................................... 23,922 25,224
----------- -----------
Total liabilities before deferred revenues ............. 1,075,534 929,301
----------- -----------
DEFERRED REVENUES FROM INSURANCE POLICY SALES ................... 23,744 24,984
DEFERRED REVENUES FROM VEHICLE SERVICE
CONTRACT SALES ............................................... 11,537 12,952
DEFERRED REVENUES FROM VEHICLE MAINTENANCE
AGREEMENT SALES ............................................. 2,571 2,819
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, 23,558,862 and 23,454,046 issued ................ 236 235
Additional paid-in capital .................................... 257,878 255,356
Retained earnings ............................................. 301,637 291,150
Accumulated other comprehensive loss .......................... (965) (1,285)
Treasury stock, at cost, 1,117,578 and 1,002,506 shares ....... (32,184) (27,347)
----------- -----------
Total stockholders' equity ............................. 526,602 518,109
----------- -----------
Total liabilities and stockholders' equity ............. $ 1,639,988 $ 1,488,165
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
2
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
THREE MONTHS ENDED
------------------
MARCH 31,
---------
2004 2003
------------ ------------
REVENUES:
New vehicle retail sales .......................................................... $ 675,977 $ 593,754
Used vehicle retail sales ......................................................... 230,655 225,198
Used vehicle wholesale sales ...................................................... 76,191 61,004
Parts and service sales ........................................................... 124,020 111,113
Retail finance fees ............................................................... 15,562 15,179
Vehicle service contract fees ..................................................... 15,546 15,198
Other finance and insurance revenues, net ......................................... 9,076 8,345
------------ ------------
Total revenues .............................................................. 1,147,027 1,029,791
COST OF SALES:
New vehicle retail sales .......................................................... 628,084 551,029
Used vehicle retail sales ......................................................... 202,085 197,058
Used vehicle wholesale sales ...................................................... 77,171 62,799
Parts and service sales ........................................................... 56,259 49,457
------------ ------------
Total cost of sales ......................................................... 963,599 860,343
------------ ------------
GROSS PROFIT ........................................................................ 183,428 169,448
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ........................................ 146,664 134,838
DEPRECIATION AND AMORTIZATION EXPENSE ............................................... 4,088 3,250
------------ ------------
Income from operations .............................................................. 32,676 31,360
OTHER INCOME AND (EXPENSE):
Floorplan interest expense, excludes manufacturer interest assistance ............. (4,639) (5,447)
Other interest expense, net ....................................................... (4,840) (2,369)
Loss on redemption of senior subordinated notes ................................... (6,381) --
Other expense, net ................................................................ (24) (26)
------------ ------------
INCOME BEFORE INCOME TAXES .......................................................... 16,792 23,518
PROVISION FOR INCOME TAXES .......................................................... 6,305 8,702
------------ ------------
NET INCOME .......................................................................... $ 10,487 $ 14,816
============ ============
EARNINGS PER SHARE:
Basic ............................................................................. $ 0.47 $ 0.66
Diluted ........................................................................... $ 0.45 $ 0.64
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic ............................................................................ 22,523,499 22,363,602
Diluted .......................................................................... 23,389,805 23,010,648
The accompanying notes are an integral part of these
consolidated financial statements.
3
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
THREE MONTHS ENDED
------------------
MARCH 31,
---------
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................................................ $ 10,487 $ 14,816
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ................................................... 4,088 3,250
Deferred income taxes ........................................................... 1,047 1,114
Provision for doubtful accounts and uncollectible notes ......................... (63) 240
Loss on sale of assets .......................................................... 23 --
Loss on redemption of senior subordinated notes ................................. 6,381 --
Changes in operating assets and liabilities, net of effects of acquisitions
and dispositions:
Contracts-in-transit and vehicle receivables ................................. 3,094 49,102
Accounts receivable .......................................................... (3,936) 2,980
Inventories .................................................................. (60,497) (57,295)
Prepaid expenses and other assets ............................................ 1,144 2,772
Floorplan notes payable ...................................................... 53,511 10,014
Accounts payable, accrued expenses and deferred revenues ..................... 2,469 (11,519)
--------- ---------
Total adjustments ......................................................... 7,261 658
--------- ---------
Net cash provided by operating activities ......................... 17,748 15,474
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable ..................................................... (675) (1,162)
Collections on notes receivable .................................................. 420 354
Purchases of property and equipment .............................................. (14,992) (12,234)
Proceeds from sales of property and equipment .................................... 88 4,713
Proceeds from sales of franchises ................................................ -- 7,414
Cash paid in acquisitions, net of cash received .................................. (43,690) (12,687)
--------- ---------
Net cash used by investing activities ............................. (58,849) (13,602)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) on revolving credit facility ........................... 132,023 (4,775)
Principal payments of long-term debt ............................................. (255) (385)
Redemption of senior subordinated notes .......................................... (79,479) --
Proceeds from issuance of common stock to benefit plans, including
tax benefit ..................................................................... 2,705 1,677
Repurchase of common stock, amounts based on settlement date ..................... (7,019) (2,498)
--------- ---------
Net cash provided (used) by financing activities .................. 47,975 (5,981)
--------- ---------
NET INCREASE (DECREASE) IN CASH ..................................................... 6,874 (4,109)
CASH, beginning of period ........................................................... 25,441 24,333
--------- ---------
CASH, end of period ................................................................. $ 32,315 $ 20,224
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for -
Interest ........................................................................ $ 19,372 $ 10,038
Taxes, net of refunds received .................................................. $ (229) $ 373
The accompanying notes are an integral part of these
consolidated financial statements.
4
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Group 1 Automotive, Inc., a Delaware corporation, is a leading operator
in the automotive retailing industry. Group 1 Automotive, Inc. is a holding
company with no independent assets or operations other than its investments in
its subsidiaries, which are located in California, Colorado, Florida, Georgia,
Louisiana, Massachusetts, New 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 initially assigned and recorded based on estimates of
fair value. All significant intercompany balances and transactions have been
eliminated in consolidation.
Interim Financial Information
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments of a normal and recurring nature considered
necessary for a fair presentation have been included. Due to seasonality and
other factors, the results of operations for the interim periods are not
necessarily indicative of the results that will be realized for the entire
fiscal year. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 2003.
Stock Compensation
In October 1995, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," which, if fully adopted, requires the Company to
record stock-based compensation at fair value. The Company has adopted the
disclosure requirements of SFAS No. 123 and has elected to record employee
compensation expense in accordance with APB No. 25, "Accounting for Stock Issued
to Employees." Accordingly, compensation expense is recorded for stock options
based on the excess of the fair market value of the common stock on the date the
options were granted over the aggregate exercise price of the options. As the
exercise price of options granted 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.
5
Had compensation expense for the stock incentive and employee stock
purchase plans been determined based on the provisions of SFAS No. 123, the
impact on the Company's net income would have been as follows:
FOR THE THREE MONTHS
--------------------
ENDED MARCH 31,
---------------
2004 2003
---- ----
(in thousands, except per
share amounts)
Net income, as reported ............................................................. $ 10,487 $ 14,816
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects .......... (1,024) (1,259)
---------- ----------
Pro forma net income ................................................................ $ 9,463 $ 13,557
========== ==========
Earnings per share:
Basic - as reported ............................................................... $ 0.47 $ 0.66
Basic - pro forma ................................................................. $ 0.42 $ 0.61
Diluted - as reported ............................................................. $ 0.45 $ 0.64
Diluted - pro forma ............................................................... $ 0.40 $ 0.59
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 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.
Income Taxes
The Company operates in ten different states, each of which has unique
tax rates and payment calculations. As the amount of income generated in each
state varies from period to period, the Company's effective tax rate will vary
based on the proportion of taxable income generated in each state.
Recent Accounting Pronouncements
In January 2003, FIN No. 46, "Consolidation of Variable Interest
Entities" was issued. FIN No. 46 clarifies the application of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," to variable
interest entities, which are certain entities in which equity investors do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated support from other parties. The interpretation is
intended to achieve more consistent application of consolidation policies to
variable interest entities and thus, to improve
6
comparability between enterprises engaged in similar activities even if some of
those activities are conducted through variable interest entities. 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.
The provisions of the interpretation were adopted as of March 31, 2004,
for the Company's interests in all variable interest entities ("VIEs"). The
implementation of the interpretation did not require the Company to change its
historical presentation for the entities determined to be VIEs. Certain
wholly-owned subsidiaries were determined to be VIEs due to their capital
structures. As the Company was determined to be the primary beneficiary, the
Company continues to consolidate the operations of these subsidiaries.
Additionally, the Company determined that certain arrangements that allow the
Company to participate in the residual profits on certain products sold are also
VIEs. However, for these arrangements, the Company determined that it was not
the primary beneficiary and it believes the Company has no exposure to loss as a
result of these arrangements.
Reclassifications
Certain reclassifications have been made in the 2003 financial
statements to conform to the current period presentation.
3. EARNINGS PER SHARE:
SFAS No. 128, "Earnings per Share" requires the presentation of basic
earnings per share and diluted earnings per share in financial statements of
public enterprises. Under the provisions of this statement, basic earnings per
share is computed based on weighted average shares outstanding and excludes
dilutive securities. Diluted earnings per share is computed including the
impacts of all potentially dilutive securities. The following table sets forth
the shares outstanding for the earnings per share calculations:
THREE MONTHS ENDED
------------------
MARCH 31,
---------
2004 2003
---- ----
Common stock issued, beginning of period ........................ 23,454,046 23,183,226
Weighted average common stock issued -
Acquisitions ............................................... 30,472 --
Employee Stock Purchase Plan ............................... 26,964 44,913
Stock options exercised .................................... 38,210 109,302
Less: Weighted average treasury shares held and
weighted average shares repurchased and cancelled ........... (1,026,193) (973,839)
---------- ----------
Shares used in computing basic earnings per share ............... 22,523,499 22,363,602
Dilutive effect of stock options, net of assumed
repurchase of treasury stock ............................... 866,306 647,046
---------- ----------
Shares used in computing diluted earnings per share ............. 23,389,805 23,010,648
========== ==========
The weighted average common stock issued amounts above, for the three
month period ended March 31, 2004, were derived from total shares issued during
the period of:
Acquisitions.................................... 54,372
Employee Stock Purchase Plan.................... 26,964
Stock options exercised......................... 103,469
4. BUSINESS COMBINATIONS AND DISPOSITIONS:
During the first three months of 2004, the Company purchased five
automobile dealership franchises in New Jersey, Central Texas and Boston. The
acquisitions were accounted for as purchases. The aggregate consideration paid
in completing the acquisitions included approximately $43.7 million in cash, net
of cash received, the assumption of an estimated $30.9 million of inventory
financing and the
7
issuance of 54,372 shares of common stock. 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 $19.0 million of franchise value
intangible assets and $23.8 million of goodwill.
5. SENIOR SUBORDINATED NOTES:
During August 2003, the Company issued 8 1/4% Senior Subordinated Notes
due 2013 (the "8 1/4% Notes") with a face amount of $150.0 million. The 8 1/4%
Notes pay interest semi-annually on February 15 and August 15, each year
beginning February 15, 2004. The 8 1/4% Notes have the following redemption
provisions:
- The Company, before August 15, 2006, may redeem up to $52.5
million of the 8 1/4% Notes with the proceeds of certain
public offerings of common stock at a redemption price of
108.250% of the principal amount plus accrued interest.
- The Company may redeem all or a portion of the 8 1/4% Notes
prior to August 15, 2008, at a redemption price equal to the
principal amount plus a make-whole premium to be determined,
plus accrued interest.
- The Company may redeem all or a portion of the 8 1/4% Notes at
redemption prices of 104.125%, 102.750%, 101.375% and 100.000%
of the principal amount plus accrued interest during the
twelve-month periods beginning August 15, 2008, 2009, 2010 and
2011 and thereafter, respectively.
The 8 1/4% Notes are jointly and severally and fully and
unconditionally guaranteed, on an unsecured senior subordinated basis, by all
subsidiaries of the Company, other than certain minor subsidiaries (the
"Subsidiary Guarantors"). All of the Subsidiary Guarantors are wholly-owned
subsidiaries of the Company. Additionally, the 8 1/4% Notes are subject to
various covenants, including financial ratios, and other requirements that must
be maintained by the Company.
On March 1, 2004, the Company completed the redemption of all of its 10
7/8% senior subordinated notes at a redemption price of 105.438% of the
principal amount of the 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.
6. COMPREHENSIVE INCOME:
THREE MONTHS ENDED
------------------
MARCH 31,
---------
2004 2003
---- ----
(dollars in thousands)
Net income ...................................................... $10,487 $14,816
Other comprehensive income:
Change in fair value of interest rate swaps, net of tax .... 320 425
------- -------
Comprehensive income ............................................ $10,807 $15,241
======= =======
7. COMMITMENTS AND CONTINGENCIES:
From time to time, the Company's dealerships are named in claims
involving the manufacturer of automobiles, contractual disputes and other
matters arising in the ordinary course of business.
The Texas Automobile Dealers Association ("TADA") and certain new
vehicle dealerships in Texas that are members of the TADA, including a number of
the Company's Texas dealership subsidiaries, have been named in two state court
class action lawsuits and one federal court class action lawsuit. The three
actions allege that since January 1994, Texas dealers have deceived customers
with respect to a vehicle
8
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 court actions. The defendant parties petitioned the Texas Supreme
Court for review of that certification decision on appeal, and on March 26,
2004, the court denied those petitions. The defendant parties intend to seek a
rehearing of the petitions for review, which is due May 10, 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.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following should be read in conjunction with the response to Part
I, Item 1 of this Report and our other filings with the Securities and Exchange
Commission ("SEC").
OVERVIEW
We are a leading operator in the $1 trillion automotive retailing
industry. Through a series of acquisitions, we operate 123 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 30 collision service centers.
The following table sets forth our brand diversity, based on new
vehicle retail unit sales, and the number of franchises we own:
THREE MONTHS ENDED MARCH 31, 2004
---------------------------------
ACTUAL NUMBER PERCENTAGE OF NUMBER OF
OF NEW TOTAL NEW FRANCHISES OWNED
BRAND VEHICLES SOLD VEHICLES SOLD AS OF APRIL 26, 2004
----- ------------- ------------- --------------------
Toyota/Scion......... 5,343 21.8% 10
Ford................. 4,801 19.6 14
Nissan............... 2,411 9.9 10
Honda................ 2,093 8.6 6
Chevrolet............ 1,828 7.5 7
Dodge................ 1,754 7.2 9
Lexus................ 1,229 5.0 2
Jeep................. 692 2.8 7
Chrysler............. 558 2.3 7
GMC.................. 432 1.8 4
Infiniti............. 428 1.7 1
Acura................ 428 1.7 2
Mitsubishi........... 408 1.7 6
Lincoln.............. 288 1.2 6
Mazda................ 248 1.0 2
Mercedes-Benz........ 228 0.9 2
Mercury.............. 212 0.9 7
Subaru............... 162 0.7 1
Audi................. 146 0.6 1
Pontiac.............. 146 0.6 4
Volkswagen........... 145 0.6 2
Buick................ 101 0.4 4
BMW.................. 99 0.4 2
Hyundai.............. 75 0.3 1
Cadillac............. 74 0.3 2
Kia.................. 38 0.2 1
Porsche.............. 31 0.1 1
Isuzu................ 20 0.1 1
Hummer............... 14 0.1 1
------ ----- ---
TOTAL........... 24,432 100.0% 123
====== ===== ===
10
The following table sets forth our geographic diversity, based on new
vehicle retail unit sales, and the number of dealerships and franchises we own:
PERCENTAGE OF OUR
NEW VEHICLE
RETAIL UNITS AS OF APRIL 26, 2004
SOLD DURING THE THREE ---------------------------------------
MONTHS ENDED NUMBER OF NUMBER OF
MARKET AREA MARCH 31, 2004 DEALERSHIPS FRANCHISES
----------- -------------- ----------- ----------
Oklahoma.............. 12.7% 13 22
Houston............... 12.5 7 6
New England........... 12.5 11 14
California............ 12.1 7 7
Central Texas......... 7.7 7 9
New Orleans........... 7.2 7 10
West Texas............ 7.2 8 15
Florida............... 6.7 4 4
Dallas................ 6.1 4 7
Atlanta............... 5.7 6 8
Beaumont.............. 3.0 2 10
New Mexico............ 3.0 3 7
New Jersey............ 2.4 3 3
Denver................ 1.2 1 1
----- ---- ---
TOTAL.............. 100.0% 83 123
===== ==== ===
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. However, 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 90% 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. Since January 1, 1999,
we have purchased 84 dealership franchises with annual revenues, estimated at
the time of acquisition, of approximately $2.9 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.
11
SELECTED OPERATIONAL AND FINANCIAL DATA FOR THE THREE MONTH PERIODS ENDED MARCH
31, 2004 AND MARCH 31, 2003
NEW VEHICLE DATA
(dollars in thousands, INCREASE/ PERCENT
except per unit amounts) 2004 2003 (DECREASE) CHANGE
---- ---- ---------- ------
Retail unit sales ..................................... 24,432 22,177 2,255 10.2%
Retail sales revenues ................................. $675,977 $593,754 $ 82,223 13.8%
Gross profit (1) ...................................... $ 47,893 $ 42,725 $ 5,168 12.1%
Average gross profit per retail unit sold ............. $ 1,960 $ 1,927 $ 33 1.7%
Gross margin (1) ...................................... 7.1% 7.2% (0.1)%
- ------------------
(1) Interest assistance is recorded as a reduction of cost of sales, as the
vehicles are sold to third parties. Interest assistance varies with
changes in interest rates and will impact gross margin.
USED VEHICLE DATA
(dollars in thousands, INCREASE/ PERCENT
except per unit amounts) 2004 2003 (DECREASE) CHANGE
---- ---- ---------- -------
Retail unit sales ........................... 16,186 16,312 (126) (0.8)%
Wholesale unit sales ........................ 10,790 10,097 693 6.9 %
Retail sales revenues ....................... $ 230,655 $ 225,198 $ 5,457 2.4%
Wholesale sales revenues .................... 76,191 61,004 15,187 24.9%
--------- --------- ---------
Total revenues ........................... $ 306,846 $ 286,202 $ 20,644 7.2%
Total gross profit .......................... $ 27,590 $ 26,345 $ 1,245 4.7%
Total gross margin (1) ...................... 9.0% 9.2% (0.2)%
Average gross profit per retail
unit sold (2) ............................ $ 1,705 $ 1,615 $ 90 5.6%
Retail gross margin (1) ..................... 12.0% 11.7% 0.3%
Net wholesale loss .......................... $ (980) $ (1,795) $ 815 (45.4)%
Average wholesale loss per
wholesale unit sold ...................... $ (91) $ (178) $ 87 (48.9)%
Wholesale gross margin ...................... (1.3)% (2.9)% 1.6%
- ------------------
(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 is included in this number, as these transactions
facilitate retail vehicle sales and are not expected to generate
profit.
(2) Average gross profit per retail unit sold equals total gross profit,
which includes net wholesale loss, divided by retail unit sales. The
profit or loss on wholesale sales is included in this number, as these
transactions facilitate retail vehicle sales and are not expected to
generate profit.
PARTS AND SERVICE DATA
INCREASE/ PERCENT
(dollars in thousands) 2004 2003 (DECREASE) CHANGE
- ---------------------- ---- ---- ---------- -------
Sales revenues ................. $124,020 $111,113 $ 12,907 11.6 %
Gross profit ................... $ 67,761 $ 61,656 $ 6,105 9.9 %
Gross margin ................... 54.6% 55.5% (0.9)%
12
FINANCE AND INSURANCE DATA
(dollars in thousands, INCREASE/ PERCENT
except per unit amounts) 2004 2003 (DECREASE) CHANGE
---- ---- ---------- ------
Retail new and used unit sales .............. 40,618 38,489 2,129 5.5%
Retail finance fees ......................... $15,562 $15,179 $ 383 2.5%
Vehicle service contract fees ............... 15,546 15,198 348 2.3%
Other finance and insurance revenues ........ 9,076 8,345 731 8.8%
------- ------- -------
Total finance and insurance revenues ..... $40,184 $38,722 $ 1,462 3.8%
Finance and insurance, net per
retail unit sold .......................... $ 989 $ 1,006 $ (17) (1.7)%
SAME STORE REVENUES COMPARISON (1)
INCREASE/ PERCENT
(dollars in thousands) 2004 2003 (DECREASE) CHANGE
---- ---- ---------- -------
New vehicle retail sales .......... $ 613,167 $ 571,520 $ 41,647 7.3%
Used vehicle retail sales ......... 213,249 217,510 (4,261) (2.0)%
Used vehicle wholesale sales ...... 70,937 59,159 11,778 19.9%
Parts and service sales ........... 115,431 107,974 7,457 6.9%
Retail finance fees ............... 14,410 14,409 1 --
Vehicle service contract fees ..... 12,909 13,056 (147) (1.1)%
Other finance and insurance
revenues, net ................... 7,370 7,787 (417) (5.4)%
---------- ---------- ----------
Total same store revenues ...... $1,047,473 $ 991,415 $ 56,058 5.7%
- ---------------
(1) Includes only those dealerships owned during all of the months of both
periods in the comparison.
THREE MONTHS ENDED MARCH 31, 2004 COMPARED WITH THREE MONTHS ENDED MARCH 31,
2003
OVERVIEW. Net income decreased $4.3 million, or 29.1%, to $10.5 million
for the three months ended March 31, 2004, from $14.8 million for the three
months ended March 31, 2003. Diluted earnings per share decreased $0.19, or
29.7%, to $0.45 from $0.64. The decrease in net income and diluted earnings per
share was primarily the result of the $6.4 million pretax charge related to the
redemption of all of our outstanding 10 7/8% senior subordinated notes. We
benefited from growth in same store sales and the accretive impact of
acquisitions and were negatively impacted by increased interest expense from our
issuance of $150.0 million principal amount of 8 1/4% senior subordinated notes
in August 2003, and continued unfavorable results from our Atlanta operations.
REVENUES. Revenues increased $117.2 million, or 11.4%, to $1,147.0
million for the three months ended March 31, 2004, from $1,029.8 million for the
three months ended March 31, 2003. The growth in total revenues came from a same
store revenues increase of $56.1 million and acquisitions.
New vehicle revenues increased $82.2 million, due to a same store
revenues increase of $41.6 million and revenues from acquired operations. The
same store revenues increase reflected the growth in the new vehicle market in
the United States for the three months ended March 31, 2004. In particular, our
Toyota, Nissan and Dodge franchises showed the greatest increases in unit sales,
while our Ford, Mitsubishi and Honda franchises showed the largest declines, as
was the case in the United States' new vehicle market in general.
Our used vehicle retail revenues increased $5.5 million as revenues
from acquired operations were partially offset by a $4.3 million decline in our
same store sales. Used vehicle retail sales volumes are significantly impacted
by the volume and prices of new vehicle sales, and thus are strongly influenced
by the level of, and changes in, manufacturer incentives on new vehicle sales.
Incentives on new vehicle sales during the first three months of 2004, though
higher than during the first three months of 2003, were consistent with the
incentive levels during the last three months of 2003. As such, the used vehicle
market
13
began stabilizing during the first three months of 2004 and our used vehicle
same store retail sales declined only 2.0%, as compared to a decline of 11.6%
for all of 2003. Used vehicle wholesale sales increased $15.2 million as the
increase in trade-ins received on higher new vehicle sales, without a
corresponding increase in used vehicle retail sales, required us to wholesale
more used vehicles to keep inventory turns on target and inventory levels in
line with expected retail sales volumes.
The increase in parts and service revenues of $12.9 million included a
same store revenues increase of $7.5 million. The same store revenues increase
was driven by increased customer-pay and warranty parts and service sales and
wholesale parts sales. The increase in wholesale parts sales is due primarily to
growth in our Oklahoma City and Dallas wholesale parts operations.
Retail finance fee revenues increased $0.4 million from acquisitions as
same store sales were flat, on consistent retail unit sales.
Vehicle service contract fee revenues increased $0.3 million, net of a
$0.4 million decline in the revenues recognized related to contracts requiring
revenue deferral over the life of the contracts. During 2004 we have not sold
any contracts requiring revenue and cost deferral. We expect the deferred
revenues balance at March 31, 2004, and the associated deferred costs, to be
recognized over the next four years. The increases were partially offset by a
slight same store sales decrease of $0.1 million.
Other finance and insurance revenues increased $0.7 million, of which
$0.4 million was from an increase in the revenues recognized 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 companies we
own. The remainder is related to certain products sold in two platforms in prior
years. The platforms have not sold a significant number of contracts requiring
revenue and cost deferral during 2004, 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 a slight same
store sales decline of $0.4 million.
GROSS PROFIT. Gross profit increased $14.0 million, or 8.3%, to $183.4
million for the three months ended March 31, 2004, from $169.4 million for the
three months ended March 31, 2003. The increase was attributable to increased
revenues and was partially offset by a decline in gross margin to 16.0% for the
three months ended March 31, 2004, from 16.5% for the three months ended March
31, 2003.
The gross margin decreased as lower margin new vehicle revenues
increased as a percentage of total revenues, and we had slightly lower gross
margins in new and used vehicle sales and parts and service sales and slightly
reduced finance and insurance revenues per retail unit sold.
Our new vehicle gross profit per retail unit sold increased slightly to
$1,960 for the three months ended March 31, 2004, from $1,927 for the three
months ended March 31, 2003. The gross margin on new retail vehicle sales
decreased slightly to 7.1% from 7.2%, due to an increase in the average selling
price of vehicles sold.
Our used vehicle gross profit per retail unit sold increased to $1,705
for the three months ended March 31, 2004, from $1,615 for the three months
ended March 31, 2003 and our wholesale loss per wholesale unit sold decreased to
$91 from $178, resulting in reduced wholesale losses in total. Our retail and
wholesale gross profit per unit improvements resulted from improved used vehicle
market conditions as the level of incentives on new vehicle sales stabilized,
resulting in reduced pricing pressure on used vehicles.
Our parts and service gross margin declined from 55.5% for the three
months ended March 31, 2003, to 54.6% for the three months ended March 31, 2004.
The decline was due to parts wholesale sales revenues, which have a lower gross
margin, growing faster than our other higher gross margin parts and service
revenues.
The slight decrease in finance and insurance revenues per retail unit
sold from $1,006 per retail unit sold for the three months ended March 31, 2003,
to $989 per retail unit sold for the three months ended March 31, 2004, was due
primarily to the newly acquired New Jersey operations contributing less revenue
per retail unit than the existing group average.
14
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $11.9 million, or 8.8%, to $146.7 million for
the three months ended March 31, 2004, from $134.8 million for the three months
ended March 31, 2003. The increase was primarily attributable to the additional
operations acquired. Selling, general and administrative expenses increased
slightly as a percentage of gross profit to 80.0% from 79.6% due primarily to
below expected operating performance in our Atlanta operations. Excluding the
gross profit and selling, general and administrative expenses of our Atlanta
operations from the three month periods ended March 31, 2003 and 2004, our
selling, general and administrative expenses as a percentage of gross profit
would have been consistent when comparing the two periods.
INTEREST EXPENSE. Floorplan and other interest expense, net, increased
$1.7 million, or 21.8%, to $9.5 million for the three months ended March 31,
2004, from $7.8 million for the three months ended March 31, 2003. The increase
was due to an increase in the average balance of debt outstanding, partially
offset by lower interest rates.
During the first three months of 2004, our average debt outstanding
increased due to the issuance, in August 2003, of $150.0 million of 8 1/4%
senior subordinated notes, partially offset by reduced average floorplan
borrowings outstanding and the redemption of our outstanding 10 7/8% senior
subordinated notes on March 1, 2004. Average floorplan borrowings decreased
because we used the proceeds from our 8 1/4% senior subordinated notes offering,
completed in August 2003, to temporarily pay down our floorplan notes payable.
During the first three months of 2004 we reborrowed a portion of the amounts
used to pay down our floorplan borrowings for acquisitions and the redemption of
all of our 10 7/8% senior subordinated notes.
Interest expense on our floorplan notes payable and acquisition
borrowings under the bank credit facility is based on LIBOR plus a spread.
During the first three months of 2004, there was an approximately 24 basis point
reduction in the average LIBOR rate as compared to the first three months of
2003.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity are cash on hand; cash from
operations; our credit facilities, which provide floorplan, working capital and
acquisition financing; and future equity and debt offerings.
CASH FLOWS
Total cash at March 31, 2004, was $32.3 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 time frame, 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 months ended March 31, 2004, we generated $17.7 million
in net cash from operating activities, primarily driven by net income plus
depreciation and amortization. Also impacting cash flows from operations for the
three months ended March 31, 2004, was the $6.4 million pretax loss on the
redemption of our 10 7/8% senior subordinated notes.
For the three months ended March 31, 2003, we generated $15.5 million
of net cash from operating activities, primarily driven by net income plus
depreciation and amortization.
INVESTING ACTIVITIES. During the first three months of 2004, the $58.8
million of cash used for investing activities was primarily attributable to the
use of $43.7 million of cash in acquisitions, net of cash balances obtained in
the acquisitions, and $15.0 million for purchases of property and equipment.
Approximately $11.7 million of the property and equipment purchases were for the
purchase of land and construction of new or expanded facilities.
During the three months ended March 31, 2003, we used approximately
$13.6 million in investing activities. We paid $12.2 million for purchases of
property and equipment, of which $9.8 million was used
15
for the purchase of land and construction of facilities for new or expanded
operations. We received $4.7 million in proceeds from the sales of property and
equipment. We used $12.7 million in the acquisitions of three franchises and
received $7.4 million from the sale of one franchise, for which no gain was
recognized.
FINANCING ACTIVITIES. We obtained approximately $48.0 million in
financing activities during the first three months of 2004, primarily from
borrowings. Partially offsetting the funds obtained through borrowings was the
use of $79.5 million to complete the redemption of all of our 10 7/8% senior
subordinated notes. Additionally, we spent $7.0 million for repurchases of
common stock.
During the three months ended March 31, 2003, we used approximately
$6.0 million in financing activities, primarily for payments on our revolving
credit facility and repurchases of common stock, net of proceeds from the
issuances of stock to our benefit plans.
WORKING CAPITAL. At March 31, 2004, we had working capital of $155.8
million, which is approximately $30 million higher than we believe we need to
operate our existing business. We expect to use the 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, capital expenditures and acquisitions
budgeted for 2004. If our capital expenditure or acquisition plans for 2004
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, 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. During the three month period ended March 31, 2004, we reborrowed
amounts previously used to pay down our floorplan borrowings in order to
complete the redemption of our 10 7/8% senior subordinated notes and
acquisitions, among other uses. The uses of funds resulted in an approximately
$132.0 million increase in floorplan notes payable, before considering the
impact of increased inventories, which also resulted in additional floorplan
borrowings.
SENIOR SUBORDINATED NOTES REDEMPTION
On March 1, 2004, we completed the redemption of all of our 10 7/8%
senior subordinated notes. We 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.
CAPITAL EXPENDITURES
Our capital expenditures include expenditures to extend the useful life
of current facilities and expenditures to start or expand operations.
Historically, our annual capital expenditures, exclusive of new or expanded
operations, have approximately equaled our annual depreciation charge.
Expenditures relating to the construction or expansion of dealership facilities,
generally, are driven by new franchises being awarded to us by a manufacturer,
significant growth in sales at an existing facility or manufacturer imaging
programs.
ACQUISITIONS AND ACQUISITION FINANCING
Our acquisition target for 2004 is to complete platform and tuck-in
acquisitions that have approximately $1 billion in annual revenues. We expect
the cash needed to complete our acquisitions will come from excess working
capital, operating cash flows of our dealerships 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
16
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 five
franchises with expected annual revenues of approximately $315 million. One of
the acquisitions, with three franchises, is a new platform in New Jersey. The
other franchises were acquired in tuck-in acquisitions and complement platform
operations in Central Texas and Boston. The aggregate consideration paid in
completing these acquisitions was approximately $43.7 million in cash, net of
cash received, 54,372 shares of common stock and the assumption of $30.9 million
of inventory financing.
STOCK REPURCHASE
In March 2004, the board of directors authorized us to repurchase up to
$25.0 million of our stock, subject to management's judgment and the
restrictions of our various debt agreements. Our agreements, subject to other
covenants, allow us to use a percentage of our cumulative net income to
repurchase stock and pay dividends. During the first three months of 2004, we
repurchased approximately 195,000 shares for approximately $7.0 million, a
portion of which were purchased under the board authorization established in
February 2003, with the remainder purchased under the March 2004 authorization.
As of March 31, 2004, $18.9 million remained under the board of directors' March
2004 authorization. However, as of March 31, 2004, our most restrictive
agreement with respect to stock repurchases, our 8 1/4% senior subordinated
notes, limits our capacity to repurchase stock to $17.6 million. This amount
adjusts based on future net income and issuances of common stock. See additional
stock repurchase information set forth under the heading "Other Information -
Changes in Securities."
CHANGES IN CONTRACTUAL OBLIGATIONS
The following information about our contractual obligations updates the
information provided as of December 31, 2003, in our Annual Report on Form 10-K.
Since December 31, 2003, we have redeemed all $75.4 million principal amount of
our 10 7/8% senior subordinated notes due 2009. Also, our floorplan notes
payable have increased from $493.6 million at December 31, 2003, to $710.0
million at March 31, 2004, due to increased inventory levels and increased
leverage on our inventory, as we borrowed the funds to complete acquisitions and
redeem the 10 7/8% senior subordinated notes.
DISCUSSION OF CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires us to make estimates
and assumptions in determining the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The significant estimates made by us in the accompanying
consolidated financial statements relate to reserves for inventory valuations
and future chargebacks on finance and vehicle service contract fees, and
valuation of intangible assets. Actual results could differ from those
estimates.
Critical accounting policies are those that are both most important to
the portrayal of a company's financial position and results of operations, and
require management's most difficult, subjective or complex judgments. Below is a
discussion of what we believe are our critical accounting policies. See Note 2
to our consolidated financial statements included in our Annual Report on Form
10-K for the year ended December 31, 2003.
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
17
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 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. As of December 31,
2003, no impairment of any intangible assets or goodwill resulted from the
required assessment; however, changes in facts and circumstances surrounding
this estimate could result in an impairment 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. See further discussion set forth under the heading "Other
Information - 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.
18
CAUTIONARY STATEMENT ABOUT FORWARD LOOKING STATEMENTS
This quarterly report includes certain "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. These statements include statements
regarding our plans, goals, beliefs or current expectations, including those
plans, goals, beliefs and expectations of our officers and directors with
respect to, among other things:
- the completion of future acquisitions
- operating cash flows and availability of capital
- future stock repurchases
- capital expenditures
- changes in sales volumes in the new and used vehicle and parts
and service markets
- business trends, including incentives, product cycles and
interest rates
- availability of financing for inventory and working capital
- inventory levels
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, GM 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
- insurance costs could increase significantly
- we may not achieve expected sales volumes from the new
franchises granted to us
- we may not obtain inventory of new and used vehicles and
parts, including imported inventory, at the cost, or in the
volume, we expect
This information and additional factors that could affect our operating
results and performance are described in our filings with the SEC. We urge you
to carefully consider those factors.
All forward-looking statements attributable to us are qualified in
their entirety by this cautionary statement.
19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following information about our market sensitive financial
instruments updates the information provided as of December 31, 2003, in our
Annual Report on Form 10-K and constitutes a "forward-looking statement." Our
major market risk exposure is changing interest rates. Our policy is to manage
interest rate exposure through the use of a combination of fixed and floating
rate debt. Additionally, interest rate swaps may be used to adjust our exposure
to interest rate movements. These swaps are entered into with financial
institutions with investment grade credit ratings, thereby minimizing the risk
of credit loss. All interest rate swaps are non-trading and qualify for hedge
accounting.
Since December 31, 2003, our variable rate floorplan notes payable have
increased due to increases in inventory levels and increased leverage on our
inventory. A 100 basis point increase in interest rates would have increased
floorplan interest expense approximately $1.4 million for the three-month period
ended March 31, 2004, before the impact of our interest rate swaps. We have had
no other significant balances outstanding under variable rate borrowing
agreements.
At times, we have used interest rate swaps to reduce our exposure to
interest rate fluctuations. Currently, we have one interest rate swap
outstanding, with a notional amount of $100.0 million, that converts 30-day
LIBOR to a fixed rate. As the swap hedges our floorplan interest rate exposure,
the impact on interest expense is included in floorplan interest expense in our
statements of operations. A 100 basis point increase in interest rates would
have reduced the cost of our swaps and, thus, would have reduced our floorplan
interest expense by $0.3 million for the three-month period ended March 31,
2004.
The net result on floorplan interest expense of a 100 basis point
increase in interest rates would have been an increase of $1.1 million for the
three months ended March 31, 2004, 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 90% to 160% of our floorplan interest expense over the past three
years, totaled $6.7 million during the first three months of 2004 and $5.9
million during the first three months of 2003. We treat this interest assistance
as a purchase discount, and reflect it as a reduction of new vehicle cost of
sales as new vehicles are sold. Approximately half of the assistance we receive
varies with changes in interest rates.
ITEM 4. CONTROLS AND PROCEDURES
Our principal executive officer and principal 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 March 31, 2004, to ensure that material information was accumulated and
communicated to our management, including our principal executive officer and
principal financial officer, as appropriate to allow timely decisions regarding
required disclosure. During the three months ended March 31, 2004, 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 II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, our dealerships are named in claims involving the
manufacture of automobiles, contractual disputes and other matters arising in
the ordinary course of business.
The Texas Automobile Dealers Association ("TADA") and certain new
vehicle dealerships in Texas that are members of the TADA, including a number of
our Texas dealership subsidiaries, have been named in two state court class
action lawsuits and one federal court class action lawsuit. The three actions
allege that since January 1994, Texas dealers have deceived customers with
respect to a vehicle inventory tax and violated federal antitrust and other
laws. In April 2002, the state court in which two of the actions are
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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 court actions. The defendant parties
petitioned the Texas Supreme Court for review of that certification decision on
appeal, and on March 26, 2004, the court denied those petitions. The defendant
parties intend to seek a rehearing of the petitions for review, which is due May
10, 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 2. CHANGES IN SECURITIES
From time to time the board of directors authorizes management to
repurchase shares of its common stock, subject to the restrictions of various
debt agreements and management's judgment. The first such authorization occurred
in October 2000, and was disclosed in our Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2000. We have reported subsequent changes
to the authorization in our SEC filings since that date. At its February 2003
meeting, the board of directors authorized management to repurchase up to $25.0
million of its common stock. At the time of the March 2004 meeting, $9.7 million
remained under the February 2003 authorization and, at management's request, the
board of directors increased its authorization for management to repurchase
shares of common stock up to $25.0 million. The following table summarizes the
share repurchase activity during the period covered by the report:
Maximum Dollar
Total Number Value of Shares
of Shares that May Yet be
Purchased Under Purchased Under
Total Number of Average Price Board of Directors' Board of Directors'
Period Shares Purchased Paid per Share Authorizations Authorization
- ----------------------------- -------------------- ----------------- ------------------------ -------------------
January 1, 2004 - January
31, 2004 - - - $10.6 million
February 1, 2004 - February
29, 2004 - - - $10.6 million
March 1, 2004 - March 31,
2004 195,000 $35.99 195,000 $18.9 million
------- ------ ------- -------------
Total 195,000 $35.99 195,000 $18.9 million
======= ====== ======= =============
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
11.1 Statement re: computation of earnings per share is included
under Note 3 to the financial statements.
31.1 Certification of Principal Executive Officer under Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer under Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer under Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Financial Officer under Section 906
of the Sarbanes-Oxley Act of 2002.
B. REPORTS ON FORM 8-K:
On April 29, 2004, the Company filed a Current Report on Form 8-K
reporting under Items 7 and 12.
On April 28, 2004, the Company filed a Current Report on Form 8-K
reporting under Items 5 and 7.
On April 8, 2004, the Company filed a Current Report on Form 8-K
reporting under items 5 and 7.
On April 7, 2004, the Company filed a Current Report on Form 8-K
reporting under item 9.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Group 1 Automotive, Inc.
April 30, 2004 By:/s/ Michael J. Poppe
Date --------------------------------------------
Michael J. Poppe
Vice President and Corporate Controller
(principal financial and accounting officer)
23
INDEX TO EXHIBITS
EXHIBITS:
NO: DESCRIPTION
- --------- -----------
11.1 Statement re: computation of earnings per share is included
under Note 3 to the financial statements.
31.1 Certification of Principal Executive Officer under Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer under Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer under Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Financial Officer under Section
906 of the Sarbanes-Oxley Act of 2002.