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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 [ ]
As of July 28, 2004, the Company had 22,874,126 shares of common stock,
par value $.01, outstanding.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 25
Item 4. Controls and Procedures 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities 26
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 28
Signatures 29
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
JUNE 30, DECEMBER 31,
2004 2003
----------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash ................................................................... $ 37,711 $ 25,441
Contracts-in-transit and vehicle receivables, net ...................... 148,478 143,260
Accounts and notes receivable, net ..................................... 74,364 63,604
Inventories, net ....................................................... 840,064 671,279
Deferred income taxes .................................................. 16,025 11,163
Prepaid expenses and other current assets .............................. 8,659 16,176
----------- -----------
Total current assets ................................................. 1,125,301 930,923
----------- -----------
PROPERTY AND EQUIPMENT, net ............................................... 154,572 131,647
GOODWILL .................................................................. 361,852 314,211
INTANGIBLE ASSETS ......................................................... 125,805 76,656
INVESTMENTS RELATED TO INSURANCE POLICY SALES ............................. 16,376 16,025
DEFERRED COSTS RELATED TO INSURANCE POLICY AND VEHICLE SERVICE
CONTRACT SALES ..................................... ..................... 10,175 12,238
OTHER ASSETS .............................................................. 12,121 6,465
----------- -----------
Total assets ......................................................... $ 1,806,202 $ 1,488,165
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Floorplan notes payable ................................................ $ 803,190 $ 493,568
Current maturities of long-term debt ................................... 868 910
Accounts payable ....................................................... 100,111 87,675
Accrued expenses ....................................................... 81,949 72,240
----------- -----------
Total current liabilities ............................................ 986,118 654,393
----------- -----------
DEBT, net of current maturities ........................................... 12,340 12,703
SENIOR SUBORDINATED NOTES ................................................. 144,571 217,475
ACQUISITION LINE-OF-CREDIT ................................................ 22,000 --
DEFERRED INCOME TAXES ..................................................... 26,206 19,506
OTHER LIABILITIES ......................................................... 24,956 25,224
----------- -----------
Total liabilities before deferred revenues ........................... 1,216,191 929,301
----------- -----------
DEFERRED REVENUES FROM INSURANCE POLICY SALES ............................. 23,074 24,984
DEFERRED REVENUES FROM VEHICLE SERVICE CONTRACT SALES ..................... 9,790 12,952
DEFERRED REVENUES FROM VEHICLE MAINTENANCE AGREEMENT SALES ................ 2,387 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, 23,872,113 and 23,454,046 issued .......................... 239 235
Additional paid-in capital ............................................. 267,708 255,356
Retained earnings ...................................................... 317,351 291,150
Accumulated other comprehensive loss ................................... (459) (1,285)
Treasury stock, at cost, 1,044,475 and 1,002,506 shares ................ (30,079) (27,347)
----------- -----------
Total stockholders' equity ........................................... 554,760 518,109
----------- -----------
Total liabilities and stockholders' equity ........................... $ 1,806,202 $ 1,488,165
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
3
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
REVENUES:
New vehicle retail sales ............................. $ 813,918 $ 693,454 $ 1,489,895 $ 1,287,208
Used vehicle retail sales ............................ 241,342 230,956 471,997 456,154
Used vehicle wholesale sales ......................... 87,106 65,445 163,297 126,449
Parts and service sales .............................. 131,283 116,279 255,303 227,392
Retail finance fees .................................. 16,608 16,184 32,170 31,363
Vehicle service contract fees ........................ 15,166 15,436 30,712 30,634
Other finance and insurance revenues, net ............ 9,478 10,126 18,554 18,471
------------ ------------ ------------ ------------
Total revenues ..................................... $ 1,314,901 $ 1,147,880 $ 2,461,928 $ 2,177,671
COST OF SALES:
New vehicle retail sales ............................. 756,519 641,983 1,384,603 1,193,012
Used vehicle retail sales ............................ 212,154 202,782 414,239 399,840
Used vehicle wholesale sales ......................... 88,723 67,660 165,894 130,459
Parts and service sales .............................. 58,995 51,239 115,254 100,696
------------ ------------ ------------ ------------
Total cost of sales ................................ $ 1,116,391 $ 963,664 $ 2,079,990 $ 1,824,007
------------ ------------ ------------ ------------
GROSS PROFIT ........................................... 198,510 184,216 381,938 353,664
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ........... 159,884 140,179 306,548 275,017
DEPRECIATION AND AMORTIZATION EXPENSE .................. 4,078 3,691 8,166 6,941
------------ ------------ ------------ ------------
Income from operations ................................. 34,548 40,346 67,224 71,706
OTHER INCOME AND (EXPENSE):
Floorplan interest expense, excludes
manufacturer interest assistance ................... (5,723) (6,235) (10,362) (11,682)
Other interest expense, net .......................... (3,564) (2,334) (8,404) (4,703)
Loss on redemption of senior subordinated
notes .............................................. -- -- (6,381) --
Other expense, net ................................... (119) (63) (143) (89)
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES ............................. 25,142 31,714 41,934 55,232
PROVISION FOR INCOME TAXES ............................. 9,428 11,734 15,733 20,436
------------ ------------ ------------ ------------
NET INCOME ............................................. $ 15,714 $ 19,980 $ 26,201 $ 34,796
============ ============ ============ ============
EARNINGS PER SHARE:
Basic ................................................ $ 0.70 $ 0.89 $ 1.16 $ 1.55
Diluted .............................................. $ 0.67 $ 0.86 $ 1.12 $ 1.50
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic ................................................ 22,582,332 22,488,643 22,552,916 22,426,468
Diluted .............................................. 23,354,519 23,268,506 23,372,162 23,140,289
The accompanying notes are an integral part of these consolidated
financial statements
4
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
SIX MONTHS ENDED JUNE 30,
-------------------------
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................................... $ 26,201 $ 34,796
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ....................................... 8,166 6,941
Deferred income taxes ............................................... 1,711 4,975
Provision for doubtful accounts and uncollectible notes ............. (17) 291
Loss on sale of assets .............................................. 79 158
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 ................... (4,978) 32,405
Accounts receivable ............................................ (9,297) (1,402)
Inventories .................................................... (78,403) (53,190)
Prepaid expenses and other current assets ...................... 1,214 1,010
Floorplan notes payable ........................................ 81,535 15,721
Accounts payable, accrued expenses and deferred revenues ....... 22,137 (2,489)
--------- ---------
Total adjustments .......................................... 28,528 4,420
--------- ---------
Net cash provided by operating activities ......... 54,729 39,216
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable ........................................ (1,341) (2,011)
Collections on notes receivable ..................................... 994 704
Purchases of property and equipment ................................. (27,942) (18,248)
Proceeds from sales of property and equipment ....................... 196 4,999
Proceeds from sales of franchises ................................... -- 7,414
Escrow deposits for acquisition of franchises ....................... (6,500) --
Cash paid in acquisitions, net of cash received ..................... (94,540) (12,687)
--------- ---------
Net cash used in investing activities ............. (129,133) (19,829)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) on revolving lines-of-credit .............. 168,852 (23,960)
Principal payments of long-term debt ................................ (449) (602)
Redemption of senior subordinated notes ............................. (79,479) --
Proceeds from issuance of common stock to benefit plans, including
tax benefit ..................................................... 4,769 4,541
Repurchase of common stock, amounts based on settlement date ........ (7,019) (2,498)
--------- ---------
Net cash provided by (used in) financing activities 86,674 (22,519)
--------- ---------
NET INCREASE (DECREASE) IN CASH ......................................... 12,270 (3,132)
CASH, beginning of period ............................................... 25,441 24,333
--------- ---------
CASH, end of period ..................................................... $ 37,711 $ 21,201
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for -
Interest ........................................................ $ 30,604 $ 16,768
Taxes, net of refunds received .................................. $ 343 $ 5,292
The accompanying notes are an integral part of these consolidated
financial statements.
5
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.
6
Had compensation expense for the stock incentive and employee stock
purchase plans been determined based on the provisions of SFAS No. 123, the
impact on the Company's net income would have been as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -----------------------
2004 2003 2004 2003
---------- ---------- --------- ----------
(dollars in thousands, except per share amounts)
Net income, as reported .................................... $ 15,714 $ 19,980 $ 26,201 $ 34,796
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects ............................. (832) (402) (1,856) (1,661)
---------- ---------- --------- ----------
Pro forma net income ....................................... $ 14,882 $ 19,578 $ 24,345 $ 33,135
========== ========== ========== ==========
Earnings per share:
Basic - as reported .................................... $ 0.70 $ 0.89 $ 1.16 $ 1.55
Basic - pro forma ...................................... $ 0.66 $ 0.87 $ 1.08 $ 1.48
Diluted - as reported .................................. $ 0.67 $ 0.86 $ 1.12 $ 1.50
Diluted - pro forma .................................... $ 0.64 $ 0.84 $ 1.04 $ 1.43
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 creditworthiness 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 estimated 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
("VIEs"), 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 VIEs and thus,
to improve comparability between enterprises engaged in similar activities even
if some of those activities are conducted through VIEs. 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.
7
The Company adopted the provisions of the interpretation as of March 31,
2004. 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Common stock issued, beginning of period ..................... 23,558,862 23,373,326 23,454,046 23,183,226
Weighted average common stock issued (1) -
Acquisitions ......................................... 90,886 - 87,865 -
Employee Stock Purchase Plan ......................... 34,064 57,088 43,996 73,615
Stock options exercised .............................. 16,098 53,418 78,889 176,781
Weighted average treasury shares held and weighted average
shares purchased and cancelled ........................... (1,117,578) (995,189) (1,111,880) (1,007,154)
---------- ---------- ---------- ----------
Shares used in computing basic earnings per share ............ 22,582,332 22,488,643 22,552,916 22,426,468
Dilutive effect of stock options, net of assumed repurchase of
treasury stock ........................................... 772,187 779,863 819,246 713,821
---------- ---------- ---------- ----------
Shares used in computing diluted earnings per share .......... 23,354,519 23,268,506 23,372,162 23,140,289
========== ========== ========== ==========
(1) Weighted average common stock issued derived from -
Acquisitions .................................... 306,321 - 360,693 -
Employee Stock Purchase Plan .................... 34,064 57,088 61,028 102,001
Stock options exercised ......................... 45,969 104,400 149,438 294,500
4. BUSINESS COMBINATIONS AND DISPOSITIONS:
During the first six months of 2004, the Company purchased 16 automobile
dealership franchises in California, Massachusetts, New Jersey, and Texas. The
acquisitions were accounted for as purchases. The aggregate consideration paid
in completing the acquisitions included approximately $94.5 million in cash, net
of cash received, the assumption of an estimated $81.2 million of inventory
financing and the issuance of 360,693 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 $49.1 million of franchise value
intangible assets and $47.9 million of goodwill, of which $45.4 million of
goodwill is expected to be deductible for tax purposes.
8
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 may, prior to August 15, 2006, 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, prior to August 15, 2008, redeem all or a portion
of the 8 1/4% Notes at a redemption price equal to the principal
amount plus a make-whole premium to be determined, plus accrued
interest.
- The Company may, during the twelve-month periods beginning August
15, 2008, 2009, 2010 and 2011 and thereafter, redeem all or a
portion of the 8 1/4% Notes at redemption prices of 104.125%,
102.750%, 101.375% and 100.000%, respectively, of the principal
amount plus accrued interest.
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
costs. Total cash used in completing the redemption, excluding accrued interest
of $4.1 million, totaled $79.5 million.
6. COMPREHENSIVE INCOME:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------- -----------------
2004 2003 2004 2003
------- ------- ------- -------
(dollars in thousands)
Net income .................................................... $15,714 $19,980 $26,201 $34,796
Other comprehensive income:
Change in fair value of interest rate swaps, net of tax ... 506 612 826 1,037
------- ------- ------- -------
Comprehensive income .......................................... $16,220 $20,592 $27,027 $35,833
======= ======= ======= =======
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 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 filed
a motion for rehearing of the denial on May 10, 2004, along with supporting
briefs. The plaintiff class responded to the motion for rehearing on June 14,
2004. The defendant parties filed a reply brief on June 24, 2004, and the
plaintiff class sur-replied on July 9, 2004. The parties await the Court's
decision on the motion for rehearing. 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.
9
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.
In addition to the foregoing cases, there are currently no legal
proceedings pending against or involving the Company that, in management's
opinion, and based on current known facts and circumstances, are expected to
have a material adverse effect on the Company's financial position.
8. SUBSEQUENT EVENTS:
ACQUISITIONS:
In July 2004, the Company completed two acquisitions: one in Houston,
Texas and one in Beverly Hills, California. The aggregate consideration paid was
approximately $77.5 million in cash, net of cash received, and the assumption of
$31.7 million of inventory financing. Preliminary allocations of the purchase
prices, which are subject to final adjustments, resulted in the Company
recording approximately $45.6 million of franchise value intangible assets and
$15.2 million of goodwill, of which all of the goodwill is expected to be
deductible for tax purposes.
INCREASE IN CREDIT FACILITY COMMITMENTS:
On July 28, 2004, the Company obtained $162.0 million in additional
commitments under its Revolving Credit Agreement. These additional commitments
serve to increase the Company's total commitments under its various credit
facilities to approximately $1.2 billion. As of July 28, 2004, after giving
effect to these additional commitments, the Company has approximately $345.4
million of total remaining availability under these credit facilities. This
availability will be used, as needed, to fund the Company's floorplan,
acquisition and general corporate needs.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following should be read in conjunction with the response to Part I,
Item 1 of this Report and our other filings with the Securities and Exchange
Commission ("SEC").
OVERVIEW
We are a leading operator in the $1 trillion automotive retailing
industry. Through a series of acquisitions, we operate 137 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 31 collision service centers.
The following table sets forth our brand diversity, based on new vehicle
retail unit sales, and the number of franchises we own:
SIX MONTHS ENDED JUNE 30, 2004
-------------------------------------
ACTUAL NUMBER PERCENTAGE OF NUMBER OF
OF NEW TOTAL NEW FRANCHISES OWNED
BRAND VEHICLES SOLD VEHICLES SOLD AS OF JULY 30, 2004
- --------------------- ------------- ------------- -------------------
Toyota/Scion......... 12,127 22.5 11
Ford................. 10,210 18.9 14
Nissan............... 4,890 9.1 10
Honda................ 4,653 8.6 6
Chevrolet............ 4,165 7.7 7
Dodge................ 3,838 7.1 10
Lexus................ 2,654 4.9 2
Chrysler............. 1,456 2.7 8
Jeep................. 1,450 2.7 8
GMC.................. 1,046 1.9 5
Acura................ 943 1.8 2
Infiniti............. 864 1.6 1
Mitsubishi........... 764 1.4 6
Lincoln.............. 597 1.1 6
Mercedes-Benz........ 580 1.1 3(1)
Mazda................ 550 1.0 2
Mercury.............. 481 0.9 7
Volkswagen........... 413 0.8 2
Subaru............... 369 0.7 2
Pontiac.............. 334 0.6 5
Audi................. 329 0.6 1
BMW.................. 253 0.5 3(1)
Buick................ 200 0.4 4
Hyundai............... 190 0.4 2
Kia................... 154 0.3 3
Cadillac.............. 150 0.3 2
Isuzu................. 98 0.2 2
Porsche............... 76 0.1 1
Hummer................ 39 0.1 1
Maybach............... -- -- 1(1)
------ ----- ---
TOTAL............ 53,873 100.0% 137
====== ===== ===
(1) Includes one franchise acquired subsequent to June 30, 2004.
11
The following table sets forth our geographic diversity, based on new
vehicle retail unit sales, and the number of dealerships and franchises we own:
PERCENTAGE OF OUR
NEW VEHICLE
RETAIL UNITS AS OF JULY 30, 2004
SOLD DURING THE SIX -----------------------
MONTHS ENDED NUMBER OF NUMBER OF
MARKET AREA JUNE 30, 2004 DEALERSHIPS FRANCHISES
- ---------------------- ------------------- ----------- ----------
New England........... 13.0% 11 14
Oklahoma.............. 12.7 13 22
California............ 12.2 12(1) 18(1)
Houston............... 12.1 9(2) 7(2)
Central Texas......... 8.0 8 11
New Orleans........... 7.0 7 10
West Texas............ 6.8 8 15
Florida............... 6.6 4 4
Dallas................ 5.9 4 7
Atlanta............... 5.7 6 8
New Mexico............ 3.0 3 7
Beaumont.............. 2.9 2 10
New Jersey............ 2.9 3 3
Denver................ 1.2 1 1
----- -- ---
TOTAL.............. 100.0% 91 137
===== == ===
(1) Includes one dealership with two franchises acquired subsequent to June
30, 2004.
(2) Includes two dealerships with one franchise acquired subsequent to June
30, 2004.
We have diverse sources of automotive retailing revenues, including: new
car sales, new truck sales, used car sales, used truck sales, parts sales,
service sales, collision repair service sales, financing fees, vehicle service
contract fees and insurance fees. 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 contracts and insurance contracts, net of a provision
for anticipated chargebacks. Finance and insurance revenues also include the
results from our reinsuring of certain insurance products we sell.
Our total gross margin varies as our merchandise mix (the mix between new
vehicle sales, used vehicle sales (retail and wholesale), parts (retail and
wholesale) 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 significant portion of our
selling, general and administrative expenses are variable, allowing us to adjust
our cost structure based on business trends. However, it may take several months
to adjust our cost structure when business conditions change significantly and,
accordingly, our results may be adversely affected.
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, which in some cases are also based on variable
interest rates. This assistance, which is reflected as a reduction of cost of
sales, has ranged between approximately 120% and 180% 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. From January 1, 1999,
through June 30, 2004, we purchased 95 franchises with expected annual revenues,
estimated at the time of acquisition, of approximately $3.2 billion, disposed of
22 franchises with annual revenues of approximately $277.2 million and were
granted 12 new
12
franchises by the manufacturers. Our acquisition target for 2004 was to
complete platform and tuck-in acquisitions of franchises having approximately
$1.0 billion in expected annual revenues. From December 31, 2003, through June
30, 2004, we acquired 16 franchises with expected annual revenues of
approximately $690.0 million. From June 30, 2004, through July 30, 2004, we
acquired two additional franchises in California and one franchise in Houston
with total expected annual revenues of approximately $315.0 million. This brings
our total acquisitions during 2004 to 19 franchises with expected annual
revenues of $1.0 billion. We continue to find qualified acquisition candidates
that meet our stringent criteria and will endeavor to make additional
acquisitions during 2004, although at a much slower pace than in the first half
of the year. Including our acquisition activity since June 30, 2004, we have
acquired, since January 1, 1999, 98 franchises with expected annual revenues,
estimated at the time of acquisition, of approximately $3.6 billion.
SELECTED OPERATIONAL AND FINANCIAL DATA FOR THE THREE MONTH PERIODS ENDED JUNE
30, 2004 AND JUNE 30, 2003
NEW VEHICLE DATA
(dollars in thousands,
except per unit amounts)
THREE MONTHS ENDED JUNE 30,
---------------------------- INCREASE/ PERCENT
2004 2003 (DECREASE) CHANGE
------------ ------------ ------------ ---------
Retail unit sales ........................... 29,441 25,463 3,978 15.6%
Retail sales revenues ....................... $ 813,918 $ 693,454 $ 120,464 17.4%
Gross profit (1) ............................ $ 57,399 $ 51,471 $ 5,928 11.5%
Average gross profit per retail unit sold ... $ 1,950 $ 2,021 $ (71) (3.5)%
Gross margin (1) ............................ 7.1% 7.4% (0.3)%
- -------------
(1) Interest assistance is recorded as a reduction of cost of sales, as the
vehicles are sold to third parties. A portion of our interest assistance
varies with changes in interest rates. Accordingly, a change in interest
rates will impact our gross margin.
USED VEHICLE DATA
(dollars in thousands,
except per unit amounts)
THREE MONTHS ENDED JUNE 30,
----------------------------- INCREASE/ PERCENT
2004 2003 (DECREASE) CHANGE
------------ ------------ ------------ ---------
Retail unit sales ................. 16,425 16,167 258 1.6%
Wholesale unit sales .............. 11,894 10,714 1,180 11.0%
Retail sales revenues ............. $ 241,342 $ 230,956 $ 10,386 4.5%
Wholesale sales revenues .......... 87,106 65,445 21,661 33.1%
------------ ------------ ------------
Total revenues .................... $ 328,448 $ 296,401 $ 32,047 10.8%
Total gross profit ................ $ 27,571 $ 25,959 $ 1,612 6.2%
Total gross margin (1) ............ 8.4% 8.8% (0.4)%
Average gross profit per retail
unit sold (2) ................... $ 1,679 $ 1,606 $ 73 4.5%
Retail gross margin (3) ........... 11.4% 11.2% 0.2%
Net wholesale loss ................ $ (1,617) $ (2,215) $ 598 27.0%
Average wholesale loss per
wholesale unit sold ............ $ (136) $ (207) $ 71 34.3%
Wholesale gross margin ............ (1.9)% (3.4)% 1.5%
- ----------------------
(1) Total gross margin equals total gross profit divided by total revenues.
(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.
(3) 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.
13
PARTS AND SERVICE DATA
(dollars in thousands)
THREE MONTHS ENDED JUNE 30,
-------------------------- INCREASE/ PERCENT
2004 2003 (DECREASE) CHANGE
----------- ------------ ---------- --------
Sales revenues........................ $ 131,283 $ 116,279 $ 15,004 12.9%
Gross profit.......................... $ 72,288 $ 65,040 $ 7,248 11.1%
Gross margin.......................... 55.1% 55.9% (0.8)%
FINANCE AND INSURANCE DATA
(dollars in thousands,
except per unit amounts)
THREE MONTHS ENDED JUNE 30,
-------------------------- INCREASE/ PERCENT
2004 2003 (DECREASE) CHANGE
----------- ------------ ---------- --------
Retail new and used unit sales................... 45,866 41,630 4,236 10.2%
Retail finance fees.............................. $ 16,608 $ 16,184 $ 424 2.6%
Vehicle service contract fees.................... 15,166 15,436 (270) (1.7)%
Other finance and insurance revenues, net........ 9,478 10,126 (648) (6.4)%
----------- ------------ ----------
Total finance and insurance revenues, net.... $ 41,252 $ 41,746 $ (494) (1.2)%
Finance and insurance revenues, net per
retail unit sold........................... $ 899 $ 1,003 $ (104) (10.4)%
SAME STORE REVENUES COMPARISON (1)
(dollars in thousands)
THREE MONTHS ENDED JUNE 30,
-------------------------- INCREASE/ PERCENT
2004 2003 (DECREASE) CHANGE
----------- ------------ ---------- -------
REVENUES:
New vehicle retail sales...................... $ 718,915 $ 683,121 $ 35,794 5.2%
Used vehicle retail sales..................... 218,872 227,098 (8,226) (3.6)%
Used vehicle wholesale sales.................. 78,878 64,611 14,267 22.1%
Parts and service sales....................... 117,727 114,739 2,988 2.6%
Retail finance fees........................... 15,223 15,962 (739) (4.6)%
Vehicle service contract fees................. 12,822 13,658 (836) (6.1)%
Other finance and insurance
revenues, net.............................. 8,290 8,875 (585) (6.6)%
----------- ------------ ----------
Total same store revenues............... $ 1,170,727 $ 1,128,064 $ 42,663 3.8%
- -----------------
(1) Includes only those dealerships owned during all of the months of both
periods in the comparison.
THREE MONTHS ENDED JUNE 30, 2004 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2003
OVERVIEW. Net income decreased $4.3 million, or 21.5%, to $15.7 million
for the three months ended June 30, 2004, from $20.0 million for the three
months ended June 30, 2003. Diluted earnings per share decreased $0.19, or
22.1%, to $0.67 from $0.86. For the three month period ended June 30, 2004, as
compared to the same period of 2003, acquired dealerships added approximately
$3.3 million to income from operations; however, declines in same store results
negatively affected our results between these two periods. Although we saw
increases in revenue across our operations, including both from acquisitions and
same store sales, we experienced pressure on gross margin on new vehicles in
some of our key markets and brands due to increased competition among dealers
during 2004. In addition, changes in our product mix between retail and
wholesale revenues, within both our used vehicle and parts operations,
negatively impacted gross margin. Finally, we saw increases in selling, general
and administrative ("SG&A") expenses during the quarter, primarily as a result
of acquisitions but also from same store and corporate activities, that exceeded
the gross profit growth.
REVENUES. Revenues increased $167.0 million, or 14.6%, to $1.3 billion for
the three months ended June 30, 2004, from $1.2 billion for the three months
ended June 30, 2003. This increase resulted primarily from acquisitions, in
addition to same store revenue increases of $42.7 million.
14
New vehicle revenues increased $120.5 million, due to the impact of
acquisitions and same store revenue increases of $35.8 million. The same store
revenue increases reflected the increase in demand for new vehicles in the
United States for the three months ended June 30, 2004, as compared to the
second quarter of 2003. In particular, our Toyota, Dodge and Nissan franchises
showed the greatest increases in unit sales, while our Ford and Mitsubishi
franchises showed the largest declines.
Our used vehicle retail revenues increased $10.4 million as revenues from
acquired operations were partially offset by an $8.2 million decrease 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 influenced by the
level of, and changes in, manufacturer incentives. Incentives on new vehicles
were higher during the second quarter of 2004, as compared to the second quarter
of 2003. In addition, it has become increasingly difficult to arrange financing
for some used vehicle buyers. These factors negatively impacted our used vehicle
retail sales volume. Because of this decrease in used retail volume, coupled
with the increase in trade-ins received on higher new vehicle sales, we
wholesaled more used vehicles to keep inventory levels in line with expected
retail sales volumes. Same store wholesale sales increased $14.3 million.
The increase in parts and service revenues of $15.0 million was primarily
attributable to acquisitions along with a same store revenue increase of $3.0
million. The same store revenue increase was primarily driven by increased
wholesale parts sales. The increase in wholesale parts sales is due primarily to
growth in our Oklahoma City and Dallas wholesale parts operations.
Finance and insurance revenues, in total, decreased $0.5 million during
the second quarter of 2004, as compared to 2003. Increases from acquisitions
were offset by a $2.2 million decrease in same store revenue. We had a decline
in our profit per retail unit from $1,003 for the quarter ended June 30, 2003,
to $899 for the current quarter. This decline was due to lower finance and
insurance contract penetrations, primarily on used vehicles as a result of a
challenging credit market for used vehicles and a shift in used vehicle mix. We
also experienced pressure on finance fee revenue due to ongoing manufacturer
financing incentives. Furthermore, as we have expanded through acquisitions, our
overall profit per retail unit sold has declined as acquisitions, particularly
of luxury franchises, typically have lower finance and insurance profits per
retail unit than our average.
GROSS PROFIT. Gross profit increased $14.3 million, or 7.8%, to $198.5
million for the three months ended June 30, 2004, from $184.2 million for the
three months ended June 30, 2003. This increase was attributable to higher unit
sales of new and used vehicles, due to acquisitions and an increase in same
store sales, resulting in increased revenues. These increases were partially
offset by a decline in total gross margin, to 15.1% for the three months ended
June 30, 2004, from 16.0% for the three months ended June 30, 2003. Gross margin
decreased primarily as lower margin new vehicle revenues increased as a
percentage of total revenues and we had lower gross margins in all product
lines.
The gross margin on new retail vehicle sales decreased to 7.1% from 7.4%
due, in part, to an increase in the average selling price of vehicles sold
without a corresponding increase in gross profit. Our new vehicle gross profit
per retail unit sold decreased to $1,950 for the three months ended June 30,
2004, from $2,021 for the three months ended June 30, 2003, as increased
competition has put pressure on new vehicle margins.
Our used vehicle gross profit per retail unit sold increased to $1,679 for
the three months ended June 30, 2004, from $1,606 for the three months ended
June 30, 2003 and our wholesale loss per wholesale unit sold decreased to $136
from $207, resulting in reduced wholesale losses in total. However, because of
the change in mix between retail and wholesale used vehicle sales this quarter,
as compared to the second quarter of 2003, our total used vehicle gross margin
decreased from 8.8% to 8.4%. As noted previously, wholesale sales, as a
percentage of total used vehicle sales, increased during the second quarter as
compared to the second quarter of 2003.
Our parts and service gross margin decreased from 55.9% for the three
months ended June 30, 2003, to 55.1% for the three months ended June 30, 2004.
This decrease was due primarily to our wholesale parts revenues, which have a
lower margin, growing faster than our higher margin retail parts and service
revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased
$19.7 million, or 14.1%, to $159.9 million for the three months ended June 30,
2004, from $140.2 million for the three months ended June 30, 2003.
Approximately $14.1 million of this increase was attributable to acquisitions,
while an additional $1.0 million was attributable to same store activity. The
remainder was primarily attributable to incurring higher losses from our
15
property and casualty retained insurance risk, most notably the $2.8 million
loss related to a hailstorm that damaged or destroyed more than 1,000 vehicles,
or about 95% of the inventory, at our Amarillo, Texas, dealerships during June
2004. SG&A expenses increased as a percentage of gross profit to 80.5% from
76.1% due primarily to the decline in same store gross profit, without a
corresponding decline in SG&A expenses and the insurance losses noted. While we
had a same store decrease in personnel related costs during the period, as
compared to the same period last year, this decrease was offset by increases in
advertising, rent and other facility expenses and other semi-variable
departmental costs. Although we believe a significant portion of our dealership
expenses are variable, we were not able to materially adjust them in response to
recent declines in operations.
INTEREST EXPENSE. Floorplan interest expense, net, decreased $0.5 million,
or 8.1%, to $5.7 million for the three months ended June 30, 2004, from $6.2
million for the three months ended June 30, 2003. This decrease was primarily
due to the expiration, in July 2003, of an interest rate swap with a notional
amount of $100.0 million. This benefit was partially offset by increases in the
average balances of our floorplan and acquisition line-of-credit amounts
outstanding.
Other interest expense, net, increased $1.3 million, or 56.5%, to $3.6
million for the three months ended June 30, 2004, from $2.3 million for the
second quarter of 2003. This increase was primarily attributable to an increase
in the amount of outstanding senior subordinated notes between the periods.
During the second quarter of 2003, we had $74.2 million of 10 7/8% senior
subordinated notes outstanding, which were redeemed in March 2004. During the
second quarter of 2004, we had $144.6 million of 8 1/4 % senior subordinated
notes outstanding issued in August 2003. The increase in interest expense
attributable to these amounts outstanding was partially offset by a decrease
between the rates charged on these two series of notes.
16
SELECTED OPERATIONAL AND FINANCIAL DATA FOR THE SIX MONTH PERIODS ENDED JUNE 30,
2004 AND JUNE 30, 2003
NEW VEHICLE DATA
(dollars in thousands,
except per unit amounts)
SIX MONTHS ENDED JUNE 30,
--------------------------- INCREASE/ PERCENT
2004 2003 (DECREASE) CHANGE
------------ ------------ ---------- -------
Retail unit sales................................. 53,873 47,640 6,233 13.1%
Retail sales revenues............................. $ 1,489,895 $ 1,287,208 $ 202,687 15.7%
Gross profit (1).................................. $ 105,292 $ 94,196 $ 11,096 11.8%
Average gross profit per retail unit sold......... $ 1,954 $ 1,977 $ (23) (1.2)%
Gross margin (1).................................. 7.1% 7.3% (0.2)%
- ------------
(1) Interest assistance is recorded as a reduction of cost of sales, as the
vehicles are sold to third parties. A portion of our interest assistance
varies with changes in interest rates. Accordingly, a change in interest
rates will impact our gross margin.
USED VEHICLE DATA
(dollars in thousands,
except per unit amounts)
SIX MONTHS ENDED JUNE 30,
------------------------- INCREASE/ PERCENT
2004 2003 (DECREASE) CHANGE
--------- --------- --------- ---------
Retail unit sales ............. 32,611 32,479 132 0.4%
Wholesale unit sales .......... 22,684 20,811 1,873 9.0%
Retail sales revenues ......... $ 471,997 $ 456,154 $ 15,843 3.5%
Wholesale sales revenues ...... 163,297 126,449 36,848 29.1%
--------- --------- ---------
Total revenues ........ $ 635,294 $ 582,603 $ 52,691 9.0%
Total gross profit ............ $ 55,161 $ 52,304 $ 2,857 5.5%
Total gross margin (1) ........ 8.7% 9.0% (0.3)%
Average gross profit per retail
unit sold (2) ................ $ 1,691 $ 1,610 $ 81 5.0%
Retail gross margin (3) ....... 11.7% 11.5% 0.2%
Net wholesale loss ............ $ (2,597) $ (4,010) $ 1,413 35.2%
Average wholesale loss per
wholesale unit sold ......... $ (114) $ (193) $ 79 40.9%
Wholesale gross margin ........ (1.6)% (3.2)% 1.6%
- -----------
(1) Total gross margin equals total gross profit divided by total revenues.
(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.
(3) 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.
PARTS AND SERVICE DATA
(dollars in thousands)
SIX MONTHS ENDED JUNE 30,
------------------------- INCREASE/ PERCENT
2004 2003 (DECREASE) CHANGE
--------- --------- ---------- ---------
Sales revenues ............... $ 255,303 $ 227,392 $ 27,911 12.3%
Gross profit ................. $ 140,049 $ 126,696 $ 13,353 10.5%
Gross margin ................. 54.9% 55.7% (0.8)%
17
FINANCE AND INSURANCE DATA
(dollars in thousands,
except per unit amounts)
SIX MONTHS ENDED JUNE 30,
------------------------- INCREASE/ PERCENT
2004 2003 (DECREASE) CHANGE
--------- --------- ---------- ---------
Retail new and used unit sales ................... 86,484 80,119 6,365 7.9%
Retail finance fees .............................. $ 32,170 $ 31,363 $ 807 2.6%
Vehicle service contract fees .................... 30,712 30,634 78 0.3%
Other finance and insurance revenues, net ........ 18,554 18,471 83 0.4%
--------- --------- -------
Total finance and insurance revenues, net .... $ 81,436 $ 80,468 $ 968 1.2%
Finance and insurance revenues, net per
retail unit sold ............................... $ 942 $ 1,004 $ (62) (6.2)%
SAME STORE REVENUES COMPARISON (1)
(dollars in thousands)
SIX MONTHS ENDED JUNE 30,
------------------------- INCREASE/ PERCENT
2004 2003 (DECREASE) CHANGE
---------- ---------- ---------- ---------
REVENUES:
New vehicle retail sales ....................... $1,314,188 $1,233,007 $ 81,181 6.6%
Used vehicle retail sales ...................... 426,943 439,156 (12,213) (2.8)%
Used vehicle wholesale sales ................... 147,858 121,777 26,081 21.4%
Parts and service sales ........................ 231,150 220,511 10,639 4.8%
Retail finance fees ............................ 29,362 30,101 (739) (2.5)%
Vehicle service contract fees .................. 25,537 26,477 (940) (3.6)%
Other finance and insurance revenues, net ...... 15,503 16,545 (1,042) (6.3)%
---------- ---------- ----------
Total same store revenues ................. $2,190,541 $2,087,574 $ 102,967 4.9%
- -------------
(1) Includes only those dealerships owned during all of the months of both
periods in the comparison.
SIX MONTHS ENDED JUNE 30, 2004 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2003
OVERVIEW. Net income decreased $8.6 million, or 24.7%, to $26.2 million
for the six months ended June 30, 2004, from $34.8 million for the six months
ended June 30, 2003. Diluted earnings per share decreased $0.38, or 25.3%, to
$1.12 from $1.50. For the six months ended June 30, 2004, as compared to the
same period of 2003, acquired dealerships added approximately $4.8 million to
income from operations; however, declines in same store results negatively
affected our results between these two periods. Although we saw increases in
revenue across our operations, including both from acquisitions and same store
sales, we experienced pressure on gross margin on new vehicles in some of our
key markets and brands due to increased competition among dealers during 2004.
In addition, changes in our product mix between retail and wholesale revenues,
within both our used vehicle and parts operations, negatively impacted gross
margin. We also saw increases in SG&A expenses during the first six months of
2004, as compared to the same period of 2003, primarily as a result of
acquisitions but also from same store and corporate activities, that exceeded
the gross profit growth. Finally, during the first quarter of 2004, we incurred
a $6.4 million pretax charge related to the redemption of all of our outstanding
10 7/8% senior subordinated notes.
REVENUES. Revenues increased $284.3 million, or 13.1%, to $2.5 billion for
the six months ended June 30, 2004, from $2.2 billion for the six months ended
June 30, 2003. This increase resulted primarily from acquisitions, in addition
to same store revenue increases of $103.0 million.
New vehicle revenues increased $202.7 million, due to the impact of
acquisitions and same store revenue increases of $81.2 million. The same store
revenue increases reflected the increase in demand for new vehicles in the
United States for the six months ended June 30, 2004, as compared to the prior
year. In particular, our Toyota and Nissan franchises showed the greatest
increases in unit sales, while our Ford and Mitsubishi franchises showed the
largest declines.
Our used vehicle retail revenues increased $15.8 million as revenues from
acquired operations were partially offset by a $12.2 million decrease in our
same store sales. Used vehicle retail sales volumes are significantly
18
impacted by the volume and prices of new vehicle sales, and thus are influenced
by the level of, and changes in, manufacturer incentives. Incentives on new
vehicles were higher during the first six months of 2004, as compared to the
same period last year. In addition, it has become increasingly difficult to
arrange financing for some used vehicle buyers. These factors negatively
impacted our used vehicle retail sales volume. Because of this decrease in used
retail volume, coupled with the increase in trade-ins received on higher new
vehicle sales, we wholesaled more used vehicles to keep inventory levels in line
with expected retail sales volumes. Same store wholesale sales increased $26.1
million during the first six months of 2004 compared to the first six months of
2003.
The increase in parts and service revenues of $27.9 million was primarily
attributable to acquisitions, along with a same store revenue increase of $10.6
million. The same store revenue increase was primarily driven by increased
wholesale and customer-pay parts sales. The increase in wholesale parts revenue
is due primarily to growth in our Oklahoma City and Dallas wholesale parts
operations.
Finance and insurance revenues, in total, increased $1.0 million during
the first six months of 2004, as compared to 2003. Increases attributable to
acquisitions were partially offset by a $2.7 million decrease in same store
revenue. We had a decline in our profit per retail unit from $1,004 for the six
months ended June 30, 2003, to $942 for the current year. This decline was due
to lower finance and insurance contract penetrations, primarily on used vehicles
as a result of a challenging credit market for used vehicles and a shift in used
vehicle mix. We also experienced pressure on finance fee revenue due to ongoing
manufacturer financing incentives. Furthermore, as we have expanded through
acquisitions, our overall profit per retail unit sold has declined as
acquisitions, particularly of luxury franchises, typically have lower finance
and insurance profits per retail unit than our average.
GROSS PROFIT. Gross profit increased $28.2 million, or 8.0%, to $381.9
million for the six months ended June 30, 2004, from $353.7 million for the six
months ended June 30, 2003. The increase was attributable to higher unit sales
of new and used vehicles, due to acquisitions and an increase in same store
sales, resulting in increased revenues. These increases were partially offset by
a decline in total gross margin, to 15.5% for the six months ended June 30,
2004, from 16.2% for the six months ended June 30, 2003. Our gross margin
decreased as lower margin new vehicle revenues increased as a percentage of
total revenues, and we had lower gross margins in all product lines.
The gross margin on new retail vehicle sales decreased to 7.1% from 7.3%,
due, in part, to an increase in the average selling price of vehicles sold,
without a corresponding increase in gross profit. Our new vehicle gross profit
per retail unit sold decreased to $1,954 for the six months ended June 30, 2004,
from $1,977 for the six months ended June 30, 2003, as increased competition has
put pressure on new vehicle margins.
Our used vehicle gross profit per retail unit sold increased to $1,691 for
the six months ended June 30, 2004, from $1,610 for the six months ended June
30, 2003, and our wholesale loss per wholesale unit sold decreased to $114 from
$193, resulting in reduced wholesale losses in total. However, because of the
change in mix between retail and wholesale used vehicle sales this year, as
compared to 2003, our gross margin decreased from 9.0% to 8.7%. As noted
previously, wholesale sales, as a percentage of total used vehicle sales,
increased during the first six months of 2004 as compared to 2003.
Our parts and service gross margin decreased from 55.7% for the six months
ended June 30, 2003, to 54.9% for the six months ended June 30, 2004. This
decrease was due primarily to our wholesale parts revenues, which have a lower
margin, growing faster than our higher margin retail parts and service revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased
$31.5 million, or 11.5%, to $306.5 million for the six months ended June 30,
2004, from $275.0 million for the six months ended June 30, 2003. Approximately
$20.4 million of this increase was attributable to acquisitions, while an
additional $3.2 million was attributable to same store activity. The remainder
was primarily attributable to incurring higher losses from our property and
casualty retained insurance risk, most notably the $2.8 million loss we
sustained as a result of severe hail damage at our Amarillo, Texas, dealerships
during June 2004. SG&A expenses increased as a percentage of gross profit to
80.3% from 77.8%, due primarily to the decline in same store gross profit,
without a corresponding decline in SG&A expenses and the insurance losses noted.
While we had a same store decrease in personnel related costs during the period,
as compared to the same period last year, this decrease was offset by increases
in advertising, rent and other facility expenses and other semi-variable
departmental costs. Although we believe a significant portion of our dealership
expenses are variable, we were not able to materially adjust them in response to
recent declines in operations.
19
INTEREST EXPENSE. Floorplan interest expense, net, decreased $1.3 million,
or 11.1%, to $10.4 million for the six months ended June 30, 2004, from $11.7
million for the six months ended June 30, 2003. This decrease was primarily due
to the expiration, in July 2003, of an interest rate swap with a notional amount
of $100.0 million. This benefit was partially offset by increases in the average
balances of our floorplan and acquisition line-of-credit amounts outstanding.
Other interest expense, net, increased $3.7 million, or 78.7%, to $8.4
million for the six months ended June 30, 2004, from $4.7 million for 2003. This
increase was primarily attributable to the change in outstanding senior
subordinated notes during the periods. During the first six months of 2004, as
compared to the same period of 2003, our average senior subordinated debt
outstanding increased due to the addition, in August 2003, of $150.0 million of
8 1/4% senior subordinated notes, to our then outstanding 10 7/8% senior
subordinated notes. All of our 10 7/8% senior subordinated notes were redeemed
in March 2004, thereby reducing our total amount of senior subordinated notes
outstanding for the remainder of the first half of 2004. In addition, a
favorable decrease in the rate of interest charged between these two series of
notes offset a portion of our interest expense for the period attributable to
higher average balances outstanding.
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 debt and equity offerings.
CASH FLOWS
Total cash at June 30, 2004, was $37.7 million.
OPERATING ACTIVITIES. Net income, after adding back 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 six months ended June 30, 2004, we generated $54.7 million in net
cash from operating activities, primarily driven by net income, after adding
back depreciation and amortization and the impact from the $6.4 million pretax
loss on the redemption of our 10 7/8% senior subordinated notes in March 2004.
In addition, we had an approximately $13.0 million increase in accrued expenses
attributable to amounts due for current income taxes.
During the first six months of 2003, we generated $39.2 million of cash
flow from operations, primarily driven by net income, after adding back
depreciation and amortization. Amounts received from reduction of
contracts-in-transit and vehicle receivables outstanding were used to pay down
the floorplan balance.
INVESTING ACTIVITIES. During the first six months of 2004, the $129.1
million of cash used in investing activities was primarily attributable to the
use of $94.5 million of cash for acquisitions, net of cash balances obtained,
and $27.9 million for purchases of property and equipment. Approximately $17.2
million of the property and equipment purchases were for the purchase of land
and construction of new or expanded facilities.
During the first six months of 2003, we used approximately $19.8 million
in investing activities. We paid $18.2 million for purchases of property and
equipment, of which $12.8 million was used for the purchase of land and
construction of facilities for new or expanded operations. We received $5.0
million in proceeds from the sales of property and equipment. We 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 $86.7 million from
financing activities during the first six months of 2004, primarily from
borrowings. The funds obtained through borrowings were primarily used to fund
acquisitions and complete the redemption of all of our 10 7/8% senior
subordinated notes in March 2004. Additionally, we spent $7.0 million for
repurchases of common stock.
During the first six months of 2003, we used approximately $22.5 million
from financing activities, primarily for repayment of borrowings and repurchases
of our common stock, net of issuances of stock to our benefit plans.
WORKING CAPITAL. At June 30, 2004, we had working capital of $139.2
million. Historically, we have funded our operations with internally generated
cash flow and borrowings. While we cannot guarantee it, based on current facts
and circumstances, including our recently obtained additional commitments under
our Revolving Credit
20
Agreement discussed below, we believe we have adequate cash flow coupled with
borrowing capacity under our credit facilities to fund our current operations,
capital expenditures and remaining acquisitions expected 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. Borrowings on our new vehicle floorplan notes payable,
subject to agreed upon pay off terms when vehicles are sold, 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 when vehicles are sold, 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 can 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 six month period ended June 30, 2004,
we reborrowed amounts previously used to pay down our floorplan borrowings in
order to fund acquisitions and complete the redemption of all of our 10 7/8%
senior subordinated notes and acquisitions, among other uses. The uses of funds
resulted in an approximately $146.9 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
From December 31, 2003, through July 30, 2004, we have completed
acquisitions of 19 franchises with expected annual revenues of approximately
$1.0 billion. One of the acquisitions, with three franchises, is a new platform
in New Jersey. A second, with nine fanchises and one collision center, is a new
platform in California. The other franchises were acquired in tuck-in
acquisitions and complement platform operations in California, Massachusetts
and Texas. The aggregate consideration paid in completing these acquisitions
was approximately $172.0 million in cash, net of cash received, 360,693 shares
of common stock and the assumption of $112.9 million of inventory financing.
Our acquisition target for 2004 was to complete platform and tuck-in
acquisitions that have approximately $1.0 billion in expected annual revenues.
We continue to find qualified acquisition candidates that meet our stringent
criteria and will endeavor to make additional acquisitions during 2004, although
at a much slower pace than in the first half of the year. We expect the cash
needed for future acquisitions will come from excess working capital, operating
cash flows and borrowings under our credit facilities. Depending on the market
value of our common stock, we may issue common stock to fund a portion of the
purchase price of future acquisitions. We purchase businesses based on expected
return on investment. Generally, the purchase price is approximately 15% to 20%
of the annual revenue.
21
On July 28, 2004, we obtained $162.0 million in additional commitments
under our Revolving Credit Agreement. These additional commitments serve to
increase our total commitments under our various credit facilities to
approximately $1.2 billion. As of July 28, 2004, after giving effect to these
additional commitments, we have approximately $345.4 million of total remaining
availability under these credit facilities. This availability will be used, as
needed, to fund our floorplan, acquisition and general corporate needs.
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 debt 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 six 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 June 30, 2004, $18.9 million remained under the board of directors' March
2004 authorization. This amount is less than that allowed by our most
restrictive agreement with respect to stock repurchases, the indenture governing
our 8 1/4% senior subordinated notes. The amount we are able to repurchase under
this indenture 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. Our floorplan notes payable have
increased from $493.6 million at December 31, 2003, to $803.2 million at June
30, 2004, due to increased inventory levels and increased leverage on our
inventory, as we borrowed the funds to complete acquisitions and redeem all of
our 10 7/8% senior subordinated notes. As of June 30, 2004, we had borrowings of
$22.0 million under our acquisition line-of-credit to fund acquisitions and for
general corporate purposes. Since June 30, 2004, we have borrowed an additional
$74.0 million under our credit facilities to fund acquisitions and for general
corporate purposes. We have repaid approximately $17.6 million of our floorplan
notes payable as the increases attributable to financing inventory acquired in
our acquisitions was offset by decreases attributable to reduced inventory
levels in our existing stores. As a result, as of July 28, 2004, we had $886.6
million outstanding under our credit facilities and, after giving effect to the
above mentioned additional commitments under our Revolving Credit Agreement, we
have $345.4 million of remaining availability under our credit facilities to
fund future floorplan increases and acquisitions and for general corporate
purposes.
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,
future chargebacks on finance and vehicle service contract fees, valuation of
intangible assets, self-insured property and casualty and medical plan
exposures, and legal proceedings. 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 of time, valuation reserves
are provided against the inventory balances based on the historical loss
experience and market trends. Additionally, used vehicles add complexity to the
inventory
22
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, VEHICLE SERVICE AND INSURANCE CONTRACT REVENUE RECOGNITION
We arrange financing for customers through various institutions and
receive financing fees based on either the difference between the loan rates
charged to customers over predetermined financing rates or fixed amounts, both
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.
We consolidate the operations of our reinsurance companies. We reinsure
the credit life and accident and health insurance policies sold by our
dealerships. All of the revenues and related direct costs from the sales of
these policies are deferred and recognized over the life of the policies, in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 60,
"Accounting and Reporting by Insurance Enterprises." Investments related to
insurance policy sales are regulated by state insurance commissions and consist
of permitted investments, in general, government-backed securities and
obligations of government agencies. These investments are carried at market
value.
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 impairment in the future.
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.
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."
23
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:
- our future operating performance
- our ability to improve our margins
- operating cash flows and availability of capital
- the completion of future acquisitions
- the future revenues of acquired dealerships
- future stock repurchases
- capital expenditures
- changes in sales volumes in the new and used retail vehicle and
parts and service markets
- business trends in the retail automotive industry, including the
level of manufacturer incentives, new and used vehicle retail sales
volume, customer demand, interest rates and changes in industry-wide
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, replacement parts, maintenance and
repair services and finance and insurance products
- adverse international developments such as war, terrorism, political
conflicts or other hostilities may affect the demand for our
products and services
- the future regulatory environment, adverse legislation, or
unexpected litigation may impose additional costs on us or otherwise
adversely affect us
- our principal automobile manufacturers, especially Toyota / Lexus,
Ford, DaimlerChrysler, General Motors, Honda/Acura 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 the level of 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 expect
- 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 to any reduction in
the demand for our products and services
- we may lose key personnel
- competition in our industry may impact our operations or our ability
to complete acquisitions
- insurance costs could increase significantly and all our losses may
not be covered by insurance
- we may not achieve expected sales volumes from our new franchises
- we may not obtain inventory of new and used vehicles and parts,
including imported inventory, at the cost, or in the volume, we
expect
These factors, as well as additional factors that could affect our
operating results and performance are described in our Form 10-K under the
headings "Business - Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." We urge you to
carefully consider this information. We undertake no duty to update the
forward looking statements.
All forward-looking statements attributable to us are qualified in their
entirety by this cautionary statement.
24
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 variable-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. In addition, our variable-rate acquisition line-of-credit has
increased due to acquisition activity and general corporate purposes. A 100
basis point increase in interest rates would have increased floorplan and
acquisition line-of-credit interest expense approximately $3.2 million for the
six-month period ended June 30, 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 $0.5 million for the six-month period ended June 30, 2004.
The net result on our variable-rate interest expense of a 100 basis point
increase in interest rates would have been an increase of $2.7 million for the
six months ended June 30, 2004, after combining the increase in expense on our
variable-rate borrowings and the decrease in expense from our swaps.
Additionally, we receive floorplan interest assistance from the majority
of our manufacturers, which in some cases is based on variable interest rates.
This assistance, which has ranged from approximately 120% to 180% of our
floorplan interest expense over the past three years, totaled $15.0 million
during the first six months of 2004 and $12.8 million during the first six
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.
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 June 30, 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 six months ended June 30, 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 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 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
25
defendant parties filed a motion for rehearing of the denial on May 10, 2004,
along with supporting briefs. The plaintiff class responded to the motion for
rehearing on June 14, 2004. The defendant parties filed a reply brief on June
24, 2004, and the plaintiff class sur-replied on July 9, 2004. The parties await
the Court's decision on the motion for rehearing. 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.
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.
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. No repurchases were made during the
three months ended June 30, 2004. As of June 30, 2004, $18.9 million remained
under the board of director's March 2004 authorization.
26
During the second quarter of 2004, the Company acquired certain assets and
assumed certain liabilities of various automobile dealerships for cash and
shares of our common stock. The following is the only transaction in which stock
was issued:
Date Securities
Date of Agreement Issued Acquisitions Shares
- ----------------- --------------- ------------------------- -------
February 12, 2004 June 7, 2004 Peterson Automotive Group 306,321
We relied on Regulation D 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 Company's 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the May 19, 2004, Annual Meeting of Stockholders, our stockholders
voted on three matters.
1) Election of three directors:
The stockholders elected three (3) nominees as directors for a
three-year term based on the following voting results:
VOTES CAST:
------------------------------
NOMINEES ELECTED FOR WITHHELD
- ---------------- ---------- ----------
John L. Adams 18,487,305 2,773,854
Max P. Watson, Jr. 9,194,119 12,067,040
J. Terry Strange 20,578,595 682,564
Our other continuing directors are:
B.B. Hollingsworth, Jr.
Robert E. Howard II
Louis E. Lataif
Stephen D. Quinn
2) Amendment to Group 1 Automotive, Inc. 1996 Stock Incentive Plan:
The stockholders approved the amendment to the 1996 Stock Incentive
Plan. The results of the voting were as follows:
For 16,792,204
Against 1,844,912
Abstain 14,168
3) Ratification of the appointment of Ernst & Young LLP as Independent
Auditors:
The stockholders ratified the appointment of Ernst & Young LLP as
independent auditors for the year ended December 31, 2004. The
results of the voting were as follows:
For 21,230,874
Against 23,716
Abstain 6,569
27
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 Chief Executive Officer under Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer under Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer under Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer under Section 906 of the
Sarbanes-Oxley Act of 2002.
B. REPORTS ON FORM 8-K:
On July 29, 2004, the Company filed a Current Report on Form 8-K reporting
under items 5, 7 and 12.
On July 15, 2004, the Company filed a Current Report on Form 8-K reporting
under items 5, 7 and 12.
On July 1, 2004, the Company filed a Current Report on Form 8-K reporting
under items 7 and 9.
On June 4, 2004, the Company filed a Current Report on Form 8-K reporting
under items 5 and 7.
On June 3, 2004, the Company filed a Current Report on Form 8-K reporting
under items 7 and 9.
On May 19, 2004, the Company filed a Current Report on Form 8-K reporting
under items 7 and 9.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Group 1 Automotive, Inc.
July 30, 2004 By:/s/ Robert T. Ray
- ------------- --------------------------------------------
Date Robert T. Ray, Senior Vice President,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
29
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
11.1 Statement re: computation of earnings per share is included under
Note 3 to the financial statements.
31.1 Certification of Chief Executive Officer under Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer under Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer under Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer under Section 906 of the
Sarbanes-Oxley Act of 2002.