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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
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: 1-13107
AUTONATION, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 73-1105145
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
110 S.E. 6TH STREET
FT. LAUDERDALE, FLORIDA 33301
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (954) 769-6000
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[ ]
On August 9, 2002 the registrant had 318,272,546 outstanding shares of
common stock, par value $.01 per share.
1
AUTONATION, INC.
INDEX
PART I. FINANCIAL INFORMATION
PAGE
----
ITEM 1. FINANCIAL STATEMENTS
Unaudited Consolidated Balance Sheets as
of June 30, 2002 and December 31, 2001........................ 3
Unaudited Consolidated Income Statements
for the Three and Six Months Ended June 30, 2002 and 2001..... 4
Unaudited Consolidated Statement of Shareholders'
Equity for the Six Months Ended June 30, 2002................. 5
Unaudited Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2002 and 2001............... 6
Notes to Unaudited Consolidated Financial Statements............... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................... 22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......... 36
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.................................................. 37
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................ 38
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................... 38
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AUTONATION, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
JUNE 30, DECEMBER 31,
2002 2001
---------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ..................................................................... $ 100.2 $ 128.1
Receivables, net .............................................................................. 795.1 802.2
Inventory ..................................................................................... 2,507.3 2,178.5
Other current assets .......................................................................... 97.7 43.7
---------- ----------
Total Current Assets .................................................................. 3,500.3 3,152.5
RESTRICTED ASSETS .................................................................................. 204.4 199.9
PROPERTY AND EQUIPMENT, NET ........................................................................ 1,612.8 1,583.3
INTANGIBLE ASSETS, NET ............................................................................. 2,954.0 2,865.2
OTHER ASSETS ....................................................................................... 232.0 264.5
---------- ----------
Total Assets .......................................................................... $ 8,503.5 $ 8,065.4
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Floorplan notes payable ....................................................................... $ 2,142.3 $ 1,900.7
Accounts payable .............................................................................. 152.4 149.7
Notes payable and current maturities of
long-term debt ........................................................................ 8.8 7.9
Other current liabilities ..................................................................... 520.0 519.8
---------- ----------
Total Current Liabilities ............................................................. 2,823.5 2,578.1
LONG-TERM DEBT, NET OF CURRENT MATURITIES .......................................................... 640.6 647.3
DEFERRED INCOME TAXES .............................................................................. 920.3 853.8
OTHER LIABILITIES .................................................................................. 160.2 158.3
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, par value $.01 per share;
5,000,000 shares authorized; none issued .................................................... -- --
Common stock, par value $.01 per share;
1,500,000,000 shares authorized;
483,051,432 and 476,472,730 shares
issued including shares held in
treasury, respectively ...................................................................... 4.8 4.8
Additional paid-in capital .................................................................... 4,757.8 4,674.0
Retained earnings ............................................................................. 1,077.1 881.6
Accumulated other comprehensive income ........................................................ 4.4 1.6
Treasury stock, at cost; 164,594,709 and
154,759,709 shares held, respectively ....................................................... (1,885.2) (1,734.1)
---------- ----------
Total Shareholders' Equity ............................................................ 3,958.9 3,827.9
---------- ----------
Total Liabilities and Shareholders' Equity ............................................ $ 8,503.5 $ 8,065.4
========== ==========
The accompanying notes are an integral part of these statements.
3
AUTONATION, INC.
UNAUDITED CONSOLIDATED INCOME STATEMENTS
(in millions, except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
Revenue
New vehicle ..................................................... $2,980.2 $2,941.2 $5,793.3 $5,808.9
Used vehicle .................................................... 998.7 972.4 1,945.7 1,949.5
Parts and service ............................................... 622.6 599.5 1,234.5 1,201.0
Finance and insurance ........................................... 133.4 122.2 254.5 233.7
Other ........................................................... 280.7 309.7 538.3 639.5
-------- -------- -------- --------
TOTAL REVENUE ............................................................. 5,015.6 4,945.0 9,766.3 9,832.6
-------- -------- -------- --------
Cost of Operations
New vehicle ..................................................... 2,763.0 2,734.1 5,372.4 5,408.3
Used vehicle .................................................... 893.5 860.8 1,732.0 1,730.9
Parts and service ............................................... 349.9 339.2 697.0 682.9
Other ........................................................... 258.6 287.8 492.6 594.9
-------- -------- -------- --------
TOTAL COST OF OPERATIONS .................................................. 4,265.0 4,221.9 8,294.0 8,417.0
-------- -------- -------- --------
Gross Margin
New vehicle ..................................................... 217.2 207.1 420.9 400.6
Used vehicle .................................................... 105.2 111.6 213.7 218.6
Parts and service ............................................... 272.7 260.3 537.5 518.1
Finance and insurance ........................................... 133.4 122.2 254.5 233.7
Other ........................................................... 22.1 21.9 45.7 44.6
-------- -------- -------- --------
TOTAL GROSS MARGIN ........................................................ 750.6 723.1 1,472.3 1,415.6
-------- -------- -------- --------
Selling, general and administrative expenses .............................. 555.6 544.5 1,103.7 1,094.6
Depreciation .............................................................. 16.9 16.4 32.6 32.0
Amortization .............................................................. .8 20.4 1.4 40.4
Loan and lease underwriting losses (income), net .......................... (2.7) 7.0 (2.9) 7.6
Restructuring and impairment charges, net ................................. 1.2 5.4 1.2 4.6
Other losses (gains) ...................................................... .7 (19.0) 1.1 (19.0)
-------- -------- -------- --------
OPERATING INCOME .......................................................... 178.1 148.4 335.2 255.4
Other interest expense .................................................... (12.1) (8.4) (23.7) (19.4)
Interest income ........................................................... 2.8 2.2 6.0 3.6
Other expense ............................................................. (.7) (.7) (.9) (.8)
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES ................................................ 168.1 141.5 316.6 238.8
Provision for income taxes ................................................ 64.3 55.2 121.1 92.6
-------- -------- -------- --------
NET INCOME ................................................................ $ 103.8 $ 86.3 $ 195.5 $ 146.2
======== ======== ======== ========
BASIC EARNINGS PER SHARE:
Net income ...................................................... $ .32 $ .26 $ .61 $ .43
======== ======== ======== ========
Weighted average common shares outstanding ...................... 320.5 334.7 321.0 339.3
======== ======== ======== ========
DILUTED EARNINGS PER SHARE:
Net income ...................................................... $ .32 $ .26 $ .60 $ .43
======== ======== ======== ========
Weighted average common shares outstanding ...................... 328.8 337.0 327.4 340.7
======== ======== ======== ========
The accompanying notes are an integral part of these statements.
4
AUTONATION, INC.
UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in millions)
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY
STOCK CAPITAL EARNINGS INCOME STOCK TOTAL
------ ---------- -------- ------------- --------- --------
BALANCE AT DECEMBER 31, 2001 .............. $4.8 $4,674.0 $ 881.6 $1.6 $(1,734.1) $3,827.9
Purchases of treasury stock ....... -- -- -- -- (151.1) (151.1)
Exercise of stock options ......... -- 74.7 -- -- -- 74.7
Income tax benefit on stock options
exercised ...................... -- 9.0 -- -- -- 9.0
Other comprehensive income ........ -- -- -- 2.8 -- 2.8
Other ............................. -- .1 -- -- -- .1
Net income ........................ -- -- 195.5 -- -- 195.5
---- -------- -------- ---- --------- --------
BALANCE AT JUNE 30, 2002 .................. $4.8 $4,757.8 $1,077.1 $4.4 $(1,885.2) $3,958.9
==== ======== ======== ==== ========= ========
The accompanying notes are an integral part of these statements.
5
AUTONATION, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
SIX MONTHS ENDED
JUNE 30,
-----------------------
2002 2001
-------- --------
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income ...................................................... $ 195.5 $ 146.2
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ................................................ 32.6 32.0
Amortization ................................................ 1.4 40.4
Amortization of debt issue costs and discounts .............. 2.4 .7
Deferred income tax provision ............................... 6.1 9.3
Non-cash restructuring and impairment charges, net .......... 1.2 4.6
Non-cash loan and lease underwriting losses ................. -- 4.1
Other (gains)losses ......................................... 1.1 (19.0)
Gain on sale of marketable securities, net .................. (.2) (.2)
Other ....................................................... .1 (2.3)
Changes in assets and liabilities, net of effects
from business combinations and divestitures:
Receivables ...................................... (8.0) 40.5
Inventory ........................................ (278.9) 268.9
Other assets ..................................... 6.7 (7.1)
Floorplan notes payable .......................... 207.5 (298.9)
Accounts payable ................................. 2.6 (.2)
Other liabilities ................................ 10.3 (30.6)
-------- --------
180.4 188.4
-------- --------
CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES:
Purchases of property and equipment excluding property
operating lease buy-outs .................................... (60.0) (52.8)
Property operating lease buy-outs ............................... (5.4) --
Proceeds from sale of property and equipment .................... 10.3 18.1
Proceeds from disposal of assets held for sale .................. 12.7 31.8
Cash used in business acquisitions, net of cash acquired ........ (131.6) (33.2)
Cash received from business divestitures ........................ 1.6 61.2
Collections of installment loan receivables
and other related items ..................................... 51.9 77.3
Funding of installment loan receivables ......................... -- (391.8)
Proceeds from securitizations of installment loan
receivables ................................................. -- 343.6
Sales of marketable securities .................................. -- .5
Net change in restricted cash ................................... (2.1) (20.3)
Purchases of restricted investments ............................. (49.2) --
Sales of restricted investments ................................. 49.4 --
Other ........................................................... (1.8) 3.3
-------- --------
(124.2) 37.7
-------- --------
CASH USED IN FINANCING ACTIVITIES:
Net payments under revolving credit facilities .................. -- (219.0)
Purchases of treasury stock ..................................... (151.1) (129.2)
Proceeds from other debt ........................................ -- 116.7
Payments of notes payable and long-term debt .................... (5.6) (51.1)
Exercises of stock options ...................................... 74.7 .4
Other ........................................................... .1 --
-------- --------
(81.9) (282.2)
-------- --------
CASH USED IN CONTINUING OPERATIONS ................................... (25.7) (56.1)
CASH USED IN DISCONTINUED OPERATIONS ................................. (2.2) --
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS ................................ (27.9) (56.1)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ..................... 128.1 84.6
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........................... $ 100.2 $ 28.5
======== ========
The accompanying notes are an integral part of these statements.
6
AUTONATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS, EXCEPT PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements include
the accounts of AutoNation, Inc. and its subsidiaries (the "Company"). All of
the Company's automotive dealership subsidiaries are indirectly wholly owned by
the parent company, AutoNation, Inc. However, independent third parties have
minority ownership interests in certain of our non-dealership subsidiaries. The
total amount of minority ownership interest is not material to the Company's
financial position, results of operations, or cash flows. The Company operates
in a single industry segment, automotive retailing. All intercompany accounts
and transactions have been eliminated.
The accompanying unaudited consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information related to the Company's
organization, significant accounting policies and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been omitted. These
unaudited consolidated financial statements reflect, in the opinion of
management, all material adjustments (which include only normal recurring
adjustments) necessary to fairly state, in all material respects, the financial
position and the results of operations for the periods presented.
Operating results for interim periods are not necessarily indicative of
the results that can be expected for a full year. These interim financial
statements should be read in conjunction with the Company's audited consolidated
financial statements and notes thereto included in the Company's most recent
Annual Report on Form 10-K.
In order to maintain consistency and comparability between periods
presented, certain amounts have been reclassified from the previously reported
financial statements to conform with the financial statement presentation of the
current period.
REVENUE RECOGNITION
Revenue consists of sales of new and used vehicles and related finance
and insurance ("F&I") products, sales from parts and service and sales of other
products. The Company recognizes revenue in the period in which products are
sold or services are provided. The Company recognizes vehicle revenue when a
sales contract has been executed and the vehicle has been delivered. Rebates and
holdbacks received from manufacturers are recorded as offsets to the cost of the
vehicle and recognized into income upon the sale of the vehicle or when earned
under a specific manufacturer program, whichever is later. Revenue on finance
products represents fees earned by the Company for loans and leases placed with
financial institutions in connection with customer vehicle purchases financed
and is recognized upon acceptance of customer credit by the financial
institution. The Company sells and receives commission on the following types of
insurance and other products: extended warranties, guaranteed auto protection
("GAP"--covers shortfall between loan balance and insurance payoff), credit
insurance, lease "wear and tear" insurance, and theft protection products.
Commission revenue on warranty and insurance products sold in connection with
vehicle sales is recognized upon sale. An estimated liability for chargebacks
against revenue recognized from sales of F&I products is established during the
period in which the related revenue is recognized. Chargeback liabilities were
$60.2 million and $55.5 million at June 30, 2002 and December 31, 2001,
respectively. The Company may reinsure through its captive insurance
subsidiaries some or all of the underwriting risk related to extended warranty
and credit insurance products sold and administered by certain independent third
parties. Revenue and related direct costs from these reinsurance transactions
are deferred and recognized over the life of the policies. For installment loans
and leases that in the past had been underwritten by the Company and not
securitized, revenue from retail financing and certain loan underwriting costs
are recognized over the term of the contract using the interest method. As
further discussed in Note 12, Finance Underwriting and Asset Securitizations, as
of December 2001, the Company has exited the auto loan underwriting business.
7
AUTONATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
ADVERTISING
The Company expenses the cost of advertising as incurred or when such
advertising initially takes place, net of earned manufacturer credits and other
discounts. Manufacturer advertising credits are earned in accordance with the
respective manufacturers' program, which is typically after the Company has
incurred the corresponding advertising expenses. Advertising allowances were
$18.0 million and $15.7 million for the three months ended June 30, 2002 and
2001, respectively. Advertising allowances were $34.8 million and $30.6 million
for the six months ended June 30, 2002 and 2001, respectively.
2. RECEIVABLES, NET
The components of receivables, net of allowance for doubtful accounts,
are as follows:
June 30, December 31,
2002 2001
-------- ------------
Contracts in transit and vehicle receivables ............... $ 408.7 $ 414.9
Finance receivables ........................................ 120.1 175.7
Trade receivables .......................................... 110.8 104.0
Manufacturer receivables ................................... 151.8 130.1
Other ...................................................... 107.4 128.7
------- -------
898.8 953.4
Less: Allowance for doubtful accounts ...................... (29.1) (42.7)
Finance receivables - long term ...................... (74.6) (108.5)
------- -------
Receivables, net ..................................... $ 795.1 $ 802.2
======= =======
Contracts in transit represent receivables from financial institutions
for the portion of the vehicle sales price financed by the Company's customers
through sources arranged by the Company.
The long-term portion of finance receivables are classified as Other
Assets in the accompanying Unaudited Consolidated Balance Sheets. For more
information on Finance Receivables, see Note 12, Finance Underwriting and Asset
Securitizations.
3. INVENTORY AND FLOORPLAN NOTES PAYABLE
Inventory consists of the following:
June 30, December 31,
2002 2001
-------- ------------
New vehicles ........................... $2,008.4 $1,757.5
Used vehicles .......................... 348.1 273.5
Parts, accessories and other ........... 150.8 147.5
-------- --------
$2,507.3 $2,178.5
======== ========
The Company finances new vehicle inventory through secured floorplan
facilities at a LIBOR-based rate of interest primarily with manufacturers'
captive finance subsidiaries, as well as independent financial institutions. At
June 30, 2002 and December 31, 2001, floorplan notes payable were $2.1 billion
and $1.9 billion, respectively. As of June 30, 2002, aggregate capacity under
the floorplan credit facilities was approximately $3.5 billion.
8
AUTONATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Floorplan interest expense is recognized as incurred. Floorplan
assistance is a non-refundable credit from the manufacturer that is recognized
when it is earned in accordance with the respective manufacturers' programs. A
summary of the Company's floorplan interest expense and floorplan assistance
from manufacturers for new vehicles, both components of Cost of Operations in
the accompanying Unaudited Consolidated Income Statements, is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
2002 2001 2002 2001
------ ------ ------ ------
Floorplan assistance ........................... $ 33.5 $ 36.7 $ 63.0 $ 74.6
Floorplan interest expense ..................... (18.5) (34.9) (36.7) (80.4)
------ ------ ------ ------
$ 15.0 $ 1.8 $ 26.3 $ (5.8)
====== ====== ====== ======
4. RESTRICTED ASSETS AND REINSURANCE
The Company has restricted cash and investments primarily held in trust
accounts in accordance with the terms and conditions of certain reinsurance
agreements to secure the payments of outstanding losses and loss adjustment
expenses relating to its captive insurance subsidiaries. Restricted investments
consist primarily of marketable corporate and government debt securities that
are classified as available-for-sale.
A summary of restricted assets is as follows:
June 30, December 31,
2002 2001
-------- ------------
Restricted cash .................................. $ 47.4 $ 43.7
Restricted investments ........................... 157.0 156.2
------ ------
$204.4 $199.9
====== ======
At June 30, 2002 and December 31, 2001, current unearned premiums and
loss reserves related to the Company's reinsurance programs are included in
Other Current Liabilities and long-term unearned premiums and loss reserves are
included in Other Liabilities in the Unaudited Consolidated Balance Sheets as
follows:
June 30, December 31,
2002 2001
-------- ------------
REINSURANCE RESERVES
Unearned premiums - current portion .............. $ 66.1 $ 76.4
Unearned premiums - long-term portion ............ 86.6 91.2
------ ------
Total unearned premiums ................. $152.7 $167.6
====== ======
Loss reserves - current portion .................. $ 16.5 $ 13.0
Loss reserves - long-term portion ................ 2.1 3.1
------ ------
Total loss reserves ..................... $ 18.6 $ 16.1
====== ======
5. INTANGIBLE ASSETS
Intangible assets, net, consist of the following:
June 30, December 31,
2002 2001
-------- ------------
Goodwill ......................................... $3,100.2 $3,086.1
Franchise rights - indefinite-lived .............. 110.9 35.4
Other intangibles ................................ 14.5 18.8
-------- --------
3,225.6 3,140.3
Less: accumulated amortization ................... (271.6) (275.1)
-------- --------
$2,954.0 $2,865.2
======== ========
9
AUTONATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 141, "Business Combinations" ("SFAS 141"), which
requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method, eliminating the pooling of interests
method. Additionally, acquired intangible assets are separately recognized if
the benefit of the intangible asset is obtained through contractual or other
legal rights, or if the intangible asset can be sold, transferred, licensed,
rented, or exchanged, regardless of the acquirer's intent to do so. The
Company's principal identifiable intangible assets are franchise agreements
with vehicle manufacturers. These franchise agreements have indefinite lives.
Effective January 1, 2002, the Company also adopted the provisions of
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). Goodwill and intangible assets with indefinite
lives existing at June 30, 2001 were amortized primarily over forty years on a
straight-line basis until December 31, 2001. Effective January 1, 2002, such
amortization ceased. Other intangibles continue to be amortized primarily over
three to fifteen years.
Pro forma net income and earnings per share for the three and six
months ended June 30, 2001, adjusted to eliminate historical amortization of
goodwill and related tax effects, are as follows:
Three Months Six Months
Ended Ended
June 30, 2001 June 30, 2001
------------- -------------
Reported net income ............................ $ 86.3 $ 146.2
Add: goodwill amortization, net of tax ......... 14.4 28.9
--------- ---------
Pro forma net income ........................... $ 100.7 $ 175.1
========= =========
Reported earnings per share:
Basic ................................... $ .26 $ .43
========= =========
Diluted ................................. $ .26 $ .43
========= =========
Pro forma earnings per share
Basic ................................... $ .30 $ .52
========= =========
Diluted ................................. $ .30 $ .51
========= =========
As required by SFAS 142, the Company has completed impairment tests as
of January 1, 2002 and June 30, 2002 for goodwill and intangibles with
indefinite lives. These tests include determining the fair value of the
reporting unit, as defined by SFAS 142, and comparing it to the carrying value
of the net assets allocated to the reporting unit. No impairment charges
resulted from the required impairment tests. Goodwill and intangibles with
indefinite lives will be tested for impairment annually or when events or
circumstances indicate that impairment may have occurred.
6. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consist of the following:
June 30, December 31,
2002 2001
--------- ------------
Revolving credit facilities .............................. $ -- $ --
Senior unsecured notes, net of unamortized discount
of $5.2 million and $5.5 million, respectively ....... 444.8 444.5
Mortgage facilities ...................................... 149.7 153.4
Other debt ............................................... 54.9 57.3
--------- ---------
649.4 655.2
Less: current portion .................................... (8.8) (7.9)
--------- ---------
Long-term debt, net of current maturities ................ $ 640.6 $ 647.3
========= =========
10
AUTONATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company has two revolving credit facilities with an aggregate
borrowing capacity of $500.0 million. The 364-day revolving credit facility
provides borrowings up to $200.0 million at a LIBOR-based interest rate, and
was renewed in August 2002 for another 364-day term to August 2003. The
five-year facility, which expires in August 2006, provides borrowings up to
$300.0 million at a LIBOR-based interest rate. These facilities are secured by
a pledge of the capital stock of certain subsidiaries of the Company, which
directly or indirectly own substantially all of the Company's dealerships, and
are guaranteed by substantially all of the Company's subsidiaries. As of June
30, 2002, no amounts were drawn on these revolving credit facilities.
The Company also has $450.0 million of 9.0% senior unsecured notes due
August 1, 2008 that were issued in August 2001 at a price of 98.731% of face
value. The senior unsecured notes are guaranteed by substantially all of the
Company's subsidiaries.
Within the meaning of Regulation S-X, Rule 3-10, AutoNation, Inc. (the
parent company) has no independent assets or operations, the guarantees of its
subsidiaries are full and unconditional and joint and several, and any
subsidiaries other than the guarantor subsidiaries are minor.
At June 30, 2002, the Company had $149.7 million outstanding under two
mortgage facilities with automotive manufacturers' captive finance subsidiaries
entered into in 2001. Each facility has an aggregate capacity of $150.0
million, bears interest at a LIBOR-based interest rate and is secured by
mortgages on certain of the Company's dealerships' real property.
The Company's revolving credit facilities and the indenture for the
Company's senior unsecured notes contain numerous customary financial and
operating covenants that place significant restrictions on the Company,
including the Company's ability to incur additional indebtedness, to create
liens or other encumbrances, to make certain payments (including dividends and
share repurchases) and investments, and to sell or otherwise dispose of assets
and merge or consolidate with other entities. The revolving credit facilities
also require the Company to meet certain financial ratios and tests, including
financial covenants requiring the maintenance of consolidated maximum cash flow
leverage, minimum interest coverage, and maximum balance sheet leverage. Over
the life of the credit facilities, certain of the financial covenants become
more restrictive as prescribed by a predetermined schedule. In addition, the
senior unsecured notes contain a minimum fixed charge coverage incurrence
covenant, and the mortgage facilities contain both maximum cash flow leverage
and minimum interest coverage covenants. At June 30, 2002, the Company was in
compliance with the requirements of all applicable covenants. In the event that
the Company were to default in the observance or performance of any of the
financial covenants in the revolving credit facility or mortgage facility and
such default were to continue beyond any cure period or waiver, the lender
under the respective facility could elect to terminate the facility and declare
all outstanding obligations under such facility immediately payable. Under the
senior unsecured notes, should the Company be in violation of the financial
covenant, it could be limited in incurring certain additional indebtedness. The
Company's revolving credit facilities, the indenture for the Company's senior
unsecured notes and the mortgage facilities have cross-default provisions that
trigger a default in the event of an uncured default under other material
indebtedness of the Company.
In the event of a downgrade in the Company's credit ratings, none of
the covenants described above would be impacted. The interest rates charged
under the revolving credit facilities are impacted by the credit ratings of
those facilities.
During 2000, the Company entered into a sale-leaseback transaction
with an unaffiliated third party involving its corporate headquarters facility
that resulted in net proceeds of approximately $52.1 million. This transaction
was accounted for as a financing lease, wherein the property remains on the
books and continues to be depreciated. The $18.2 million gain on this
transaction has been deferred and will be recognized subsequent to the ten-year
lease term. The Company has the option to renew the lease at the end of the
lease term subject to certain conditions.
11
AUTONATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
7. SHAREHOLDERS' EQUITY
During the six months ended June 30, 2002, the Company repurchased 9.8
million shares of its common stock for an aggregate purchase price of $151.1
million. From 1998 through June 30, 2002, an aggregate of 164.8 million shares
of common stock have been acquired under the Company's share repurchase
programs for an aggregate purchase price of $1.9 billion, leaving approximately
$109.2 million available for share repurchases under the current program
authorized by the Company's Board of Directors.
Proceeds from exercises of stock options were $74.7 million and $.4
million for the six months ended June 30, 2002 and 2001, respectively.
8. INCOME TAXES
Income taxes have been provided based upon the Company's anticipated
annual effective income tax rate.
Deferred income tax liability and asset components are as follows:
June 30, December 31,
2002 2001
--------- ------------
Deferred income tax liabilities:
Book Basis in Assets Over Tax Basis:
Long-lived assets ............................... $ 302.6 $ 289.3
Other items ..................................... 58.3 63.7
--------- ---------
360.9 353.0
Items deducted for tax, not for book
(primarily accelerated future expenses) ......... 678.6 688.5
Deferred income tax assets:
Accruals not currently deductible:
Restructuring charges ........................... (54.3) (61.0)
Loan and lease items ............................ (68.4) (65.6)
Inventory and receivable reserves ............... (27.1) (32.0)
Warranty, chargeback and self-insurance
reserves ...................................... (41.1) (37.5)
Other accruals .................................. (94.8) (97.7)
--------- ---------
(285.7) (293.8)
Net operating losses .............................. (2.5) (2.9)
Valuation allowances .............................. 109.0 109.0
--------- ---------
Net deferred income tax liabilities ...................... $ 860.3 $ 853.8
========= =========
At June 30, 2002, net current deferred income tax assets of $60.0
million and net long-term deferred income tax liabilities of $920.3 million are
classified as Other Current Assets and Deferred Income Taxes, respectively, in
the accompanying Unaudited Consolidated Balance Sheet.
12
AUTONATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
In 1997 and 1999, the Company engaged in certain transactions that are
of a type that the Internal Revenue Service has indicated it intends to
challenge. Approximately $680 million of the Company's net deferred income tax
liabilities totaling $860.3 million at June 30, 2002 relates to these
transactions, including a significant portion that relates to a transaction
that generally had the effect of accelerating projected tax deductions relating
to employee health and welfare benefits to which the Company would have been
entitled upon providing such benefits in the future, and which deductions it is
currently foregoing. These transactions are currently under review by the
Internal Revenue Service, and the Company is engaged in ongoing discussions
with the Internal Revenue Service regarding the tax treatment of these
transactions. The Company believes that its tax returns appropriately reflect
such transactions, and that it has established adequate reserves with respect
to any tax liabilities relating to these transactions. However, an unfavorable
settlement or adverse resolution of these matters could have a material adverse
effect on the Company's cash flows, results of operations and financial
condition.
9. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the
weighted-average number of common shares outstanding during the period. Diluted
earnings per share is based on the combined weighted-average number of common
shares and common share equivalents outstanding which include, where
appropriate, the assumed exercise or conversion of options.
The computation of weighted-average common and common equivalent
shares used in the calculation of basic and diluted earnings per share is shown
below:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2002 2001 2002 2001
------- ------- ------- -------
Weighted-average common shares outstanding used to
calculate basic earnings per share................................ 320.5 334.7 321.0 339.3
Effect of dilutive options ......................................... 8.3 2.3 6.4 1.4
------- ------- ------- -------
Weighted-average common and common equivalent shares used to
calculate diluted earnings per share.............................. 328.8 337.0 327.4 340.7
======= ======= ======= =======
At June 30, 2002 and 2001, the Company had approximately 49.6 million
and 54.4 million stock options outstanding, respectively, of which 9.9 million
and 43.4 million, respectively, have been excluded from the computation of
diluted earnings per share since they are anti-dilutive.
In August 2002, 5.9 million stock options were granted to key
employees, in accordance with the Company's stock option plans.
10. COMPREHENSIVE INCOME
Comprehensive income (loss) is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2002 2001 2002 2001
------- ------- ------- -------
Net income ............................................... $ 103.8 $ 86.3 $ 195.5 $ 146.2
Other comprehensive income (loss) ........................ 3.7 (.2) 2.8 (.8)
------- ------- ------- -------
Comprehensive income ..................................... $ 107.5 $ 86.1 $ 198.3 $ 145.4
======= ======= ======= =======
13
AUTONATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
11. BUSINESS ACQUISITIONS AND DIVESTITURES
During the six months ended June 30, 2002, the Company acquired eight
automotive retail franchises. During the six months ended June 30, 2001, the
Company acquired one automotive franchise. The Company paid approximately
$125.0 million and $27.0 million, respectively, in cash for these acquisitions.
Businesses acquired through June 30, 2002 were accounted for under the purchase
method of accounting and are included in the unaudited consolidated financial
statements from the date of acquisition. During the six months ended June 30,
2002 and 2001, the Company also paid approximately $6.6 million and $6.2
million, respectively, in deferred purchase price for certain prior year
automotive retail acquisitions.
Purchase price allocations for 2002 are subject to final adjustment
due to their recent closing dates. Preliminary purchase price allocations for
business combinations during the six months ended June 30 are as follows:
2002 2001
-------- --------
Property and equipment ................................... $ 29.0 $ 20.9
Goodwill ................................................. 11.7 7.1
Franchise rights -- indefinite-lived ..................... 75.5 --
Other intangibles subject to amortization ................ .5 --
Working capital .......................................... 8.1 (12.4)
Debt assumed ............................................. -- 11.1
Other assets ............................................. .2 .3
-------- --------
Cash used in acquisitions, net of cash acquired .......... $ 125.0 $ 27.0
======== ========
The Company's unaudited pro forma consolidated results of operations,
assuming acquisitions accounted for under the purchase method of accounting had
occurred at January 1, 2001, are as follows for the six months ended June 30:
2002 2001
---------- ----------
Revenue ............................ $ 9,845.3 $ 10,094.8
Net income ......................... $ 197.9 $ 151.4
Diluted earnings per share ......... $ .60 $ .44
The unaudited pro forma results of operations are presented for
informational purposes only and may not necessarily reflect the future results
of operations of the Company or what the results of operations would have been
had the Company owned and operated these businesses as of the beginning of each
period presented.
During the six months ended June 30, 2002 and 2001, the Company
received $1.6 million and $61.2 million, respectively, of cash from the
divestiture of certain automotive dealerships.
12. FINANCE UNDERWRITING AND ASSET SECURITIZATIONS
In December 2001, the Company decided to exit the business of
underwriting retail automobile loans for customers at its dealerships, which it
determined was not a part of the Company's core automotive retail business. The
Company continues to provide automotive loans for its customers through
unrelated third party finance sources, which historically had provided more
than 95% of the auto loans made to its customers.
14
AUTONATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Through 2001, the Company sold installment loan finance receivables in
securitization transactions through unrelated financial institutions. When the
Company sold receivables in these securitization transactions, it retained
interest-only strips, one or more subordinated tranches, servicing rights, and
cash reserve accounts, all of which were classified as investments in
securitizations. The remaining finance leases, installment loans and
investments in securitizations are expected to be substantially collected over
the next three years. Finance receivables due within one year totaling $45.5
million and $67.2 million at June 30, 2002 and December 31, 2001, respectively,
are classified as Receivables, Net in the accompanying Unaudited Consolidated
Balance Sheets. Finance receivables due after one year totaling $74.6 million
and $108.5 million at June 30, 2002 and December 31, 2001, respectively, are
classified as Other Assets in the accompanying Unaudited Consolidated Balance
Sheets.
Finance receivables consist of the following:
June 30, December 31,
2002 2001
---------- ------------
Finance leases .................................. $ 12.8 $ 34.2
Installment loans ............................... 50.6 67.7
Investments in securitizations .................. 56.7 73.8
---------- ----------
Total finance receivables ....................... $ 120.1 $ 175.7
========== ==========
Interest-only strips, which represent the present value of the
estimated future residual cash flows from securitized receivables, are carried
at fair value. Certain of the Company's interest-only strips are marked to fair
value with unrealized gains or losses recorded directly to income. Other of the
Company's interest-only strips are marked to fair value with unrealized gains
and losses recorded through other comprehensive income, unless an other than
temporary impairment occurs in the valuation of the interest-only strip in
which case the impairment is recorded directly to income. The Company estimates
fair value utilizing valuation models based on the present value of future
expected cash flows which use the Company's best estimate and historical
experience of key assumptions, including credit losses, voluntary prepayment
speeds, and discount rates commensurate with the risks involved.
Until December 2001, the Company securitized installment loan
receivables through the issuance of asset-backed notes through non-consolidated
qualified special purpose entities under a shelf registration statement. The
Company provides credit enhancements related to these notes in the form of a 1%
over-collateralization, a reserve fund and a third party surety bond. The
Company retains responsibility for servicing the loans for which it is paid a
servicing fee. The Company in turn has a sub-servicing arrangement with a third
party. Included in Other Current Liabilities and Other Liabilities in the
accompanying Unaudited Consolidated Balance Sheets at June 30, 2002 and
December 31, 2001 is the current portion of the net servicing liability of $4.1
million and $3.0 million, respectively, and the long-term portion of the net
servicing liability of $9.9 million and $12.4 million, respectively, relating
to these arrangements. The servicing liability relates to loans that have been
sold and continue to be serviced by the Company. The servicing liability is the
present value, discounted at 7.4%, of the estimated excess of future
sub-servicing costs over the future estimated servicing income. Substantially
all of the beneficial interests in the debt of the qualified special purpose
entities are held by unrelated third parties. The investors and the
securitization trusts have no recourse to the Company's assets for failure of
debtors to pay when due, except to the extent of the Company's remaining
investments in securitizations.
During the three and six months ended June 30, 2001, the Company
recognized a pre-tax gain on the securitization of installment loan receivables
of $2.8 million and $6.0 million, respectively, which has been included in Loan
and Lease Underwriting Losses (Income), Net in the Unaudited Consolidated
Income Statements.
15
AUTONATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
At June 30, 2002, included in investments in securitizations are
interest-only strips valued at $38.7 million and cash reserve accounts valued
at $18.0 million, which have an aggregate weighted-average life of 1.09 years.
The sensitivity of the current fair value of the investments in securitizations
at June 30, 2002 to immediate 10 percent and 20 percent unfavorable changes in
assumptions are presented in the table below. These sensitivities are
hypothetical and should not be considered to be predictive of future
performance. As the figures indicate, the change in fair value based on a 10
percent variation in assumptions cannot necessarily be extrapolated because the
relationship of the change in assumption to the change in the indicated fair
value may not be linear. Also, in this table, the effect of a variation in a
particular assumption on the fair value of the investments in securitizations
is calculated independently from any change in the other assumptions. In
reality, changes in one factor may contribute to changes in another (for
example, increases in market interest rates may result in lower prepayments and
increased credit losses), which might magnify or counteract the sensitivities.
Furthermore, the disclosed estimated fair values should not be considered
indicative of future earnings on these assets. The current rate assumptions
below reflect the expected performance of the total loans securitized as of
June 30, 2002.
$ Effect on Investments in Securitizations of
---------------------------------------------
Current 10% Change 20% Change
Description Rate Assumption In Assumption In Assumption
- ----------- --------------- ------------- -------------
Voluntary prepayment speed (ABS) ................................ 1.50% $ 2.7 $ 4.9
Expected credit losses (annual rate, excluding accrued
interest) .................................................... 2.96% $ 3.8 $ 7.7
Discount rate on residual cash flows (annual rate) ............... 9.15% $ 0.8 $ 1.6
As of June 30, 2002 and 2001, the Company had expected static pool
credit losses on its total serviced installment loan portfolio of 3.72% and
2.87%, respectively, (3.42% and 2.57%, respectively, excluding accrued
interest). As of December 31, 2001, the amount was 3.89% (3.58% excluding
accrued interest). Static pool credit losses represent estimated lifetime
losses as a percentage of total amounts underwritten.
The following summarizes information about total serviced installment
loans and delinquencies and net credit losses:
June 30, 2002 December 31, 2001
------------------------------------------- --------------------------------------------
Total Principal Principal Amount of Loans Total Principal Principal Amount of Loans
Amount of Loans 60 Days or More Past Due Amount of Loans 60 Days or More Past Due
--------------- ------------------------- ---------------- -------------------------
Loans securitized ........................ $ 980.4 $ 10.4 $1,275.9 $ 12.3
Loans retained on balance sheet .......... 50.6 3.3 67.7 5.5
-------- -------- -------- --------
Total loans serviced ..................... $1,031.0 $ 13.7 $1,343.6 $ 17.8
======== ======== ======== ========
Net credit losses are charge-offs less recoveries and are based on
total installment loans serviced. Net credit losses, including accrued
interest, during the three and six months ended June 30, 2002 totaled $5.2
million and $14.1 million, respectively. Net credit losses, including accrued
interest, during the three and six months ended June 30, 2001 totaled $6.7
million and $15.5 million, respectively.
16
AUTONATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
13. RESTRUCTURING ACTIVITIES AND IMPAIRMENT CHARGES
During the fourth quarter of 1999, the Company approved a plan to
restructure certain of its operations. The restructuring plan was comprised of
two major components: (1) exiting the used vehicle megastore business and (2)
reducing the corporate workforce. The restructuring plan also included
divesting of certain non-core franchised dealerships. Approximately 2,000
positions were eliminated as a result of the restructuring plan of which 1,800
were megastore positions and 200 were corporate positions. These restructuring
activities resulted in pre-tax charges of $443.7 million in 1999, of which
$416.4 million appears as Restructuring and Impairment Charges (Recoveries),
Net in the Company's 1999 Consolidated Income Statement. These pre-tax charges
include $286.9 million of asset impairment charges; $103.3 million of reserves
for residual value guarantees for closed lease properties; $26.2 million of
severance and other exit costs; and $27.3 million of inventory related costs.
The $286.9 million asset impairment charge consists of: $244.9 million of
megastore and other property impairments; $26.6 million of goodwill impairment
reserves for the divestiture of certain non-core franchised automotive
dealerships; and $15.4 million of information systems impairments. Of the
$443.7 million restructuring reserve recorded, $10.8 million of severance was
paid in 1999 and $53.7 million of asset impairments and write-offs were
recorded during the fourth quarter of 1999. Asset reserve amounts are treated
as a direct reduction of the carrying amounts of related assets.
The Company continues to dispose of its closed megastores and other
properties, including closed lease properties, through sales to third parties.
At June 30, 2002, properties held for sale are $79.2 million, including
properties with total asset value of $68.5 million remaining to be sold of the
total $285.3 million identified as part of the restructuring plan. These
properties continue to be aggressively marketed. The Company expects that the
majority of these remaining properties will be disposed of by the end of 2002.
The following table summarizes activity and the remaining number of properties
identified in the restructuring plan:
Megastore &
Other Non-core
Properties Dealerships Total
----------- ----------- -------
Total, December 31, 1999 ......................................... 64 14 78
Properties sold .................................................. (30) (6) (36)
Properties placed back into service .............................. (3) (5) (8)
------- ------- -------
Total, December 31, 2000 ......................................... 31 3 34
Properties sold .................................................. (16) (2) (18)
Properties placed back into service .............................. (1) -- (1)
------- ------- -------
Total, December 31, 2001 ......................................... 14 1 15
Properties sold/placed back into service ......................... -- -- --
------- ------- -------
Total, June 30, 2002 ............................................. 14 1 15
======= ======= =======
17
AUTONATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The following summarizes the activity in the Company's restructuring
and impairment reserves for the six months ended June 30, 2002:
Deductions
Balance Amounts Charged ---------------------- Balance
December 31, 2001 to Income Cash Non-cash June 30, 2002
----------------- --------------- ------ -------- -------------
Asset reserves:
Asset impairment ............ $ 68.4 $ 1.2 $ -- $ (.9) $ 68.7
Accrued liabilities:
Severance and other
exit costs ................ .2 -- -- -- .2
------ ------ ------ ------ ------
$ 68.6 $ 1.2 $ -- $ (.9) $ 68.9
====== ====== ====== ====== ======
During the six months ended June 30, 2002, amounts charged to income
include an additional impairment charge of $1.2 million based on the
re-evaluation of the fair value of a certain property held for sale.
The following summarizes the activity in the Company's restructuring
and impairment reserves for the six months ended June 30, 2001:
Deductions
Balance Amounts Charged ---------------------- Balance
December 31, 2000 to Income Cash Non-cash June 30, 2001
----------------- --------------- ------ -------- -------------
Asset reserves:
Asset impairment ............ $161.4 $ 4.3 $ -- $(54.5) $111.2
Accrued liabilities:
Severance and other
exit costs ................ 1.2 .3 (.8) -- .7
------ ------ ------ ------ ------
$162.6 $ 4.6 $ (.8) $(54.5) $111.9
====== ====== ====== ====== ======
During the six months ended June 30, 2001, amounts charged to income
include an additional impairment charge totaling $5.3 million based on the
re-evaluation of the fair value of certain properties held for sale offset by
the net gain on sold properties of $1.0 million.
18
AUTONATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
14. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
The Company is involved, and will continue to be involved, in numerous
legal proceedings arising out of the conduct of its business, including
litigation with customers, employment related lawsuits, class actions,
purported class actions and actions brought by governmental authorities.
In an action filed in Florida state court in 1999, one of the
Company's subsidiaries was accused of violating, among other things, the
Florida Motor Vehicle Retail Sales Finance Act and the Florida Deceptive and
Unfair Trade Practices Act by allegedly failing to deliver executed copies of
retail installment contracts to customers of the Company's former used vehicle
megastores. On October 31, 2000, the court certified the class of customers on
whose behalf the action would proceed. In July 2001, Florida's Fourth District
Court of Appeals upheld the certification of the class.
In October 2000, the California Department of Motor Vehicles
("California DMV") brought an action against one of the Company's dealerships
for alleged customer fraud as well as several other claims. In April 2001, the
Company settled the California DMV action and a related action by the State of
California. In April 2002, the Company reached a settlement of the three class
actions related to its California dealership for alleged customer fraud and
other claims. The Court has approved the final settlement, and the settlement
was paid by the Company in July 2002, consisting of cash payments aggregating
approximately $1.1 million as well as vouchers for free oil changes to the
customers who were class members. There are no other material lawsuits pending
with respect to this matter.
Many of the Company's Texas dealership subsidiaries have been named in
three class action lawsuits brought against the Texas Automobile Dealers
Association ("TADA") and new vehicle dealerships in Texas that are members of
the TADA. 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 as well. In April 2002, in two of the actions (which
have been consolidated) the state court certified two classes of consumers on
whose behalf the action would proceed. The Company intends to appeal this
decision.
The Company intends to vigorously defend itself and assert available
defenses with respect to each of the foregoing matters. Further, the Company
may have certain insurance coverage and rights of indemnification with respect
to certain aspects of the foregoing matters. However, a settlement or an
adverse resolution of one or more of these matters may result in the payment of
significant costs and damages, which could have a material adverse effect on
the Company's business, financial condition, results of operations, cash flows
and prospects.
In addition to the foregoing cases, the Company is also a party to
numerous other legal proceedings that arose in the conduct of its business. The
Company does not believe that the ultimate resolution of these matters will
have a material adverse effect on its business, results of operations,
financial condition or cash flows. However, the results of these matters cannot
be predicted with certainty, and an unfavorable resolution of one or more of
these matters could have a material adverse effect on its business, financial
condition, results of operations, cash flows and prospects.
In the ordinary course of business, the Company is subject to numerous
laws and regulations, including automotive, environmental, health and safety
and other laws and regulations. The Company does not anticipate that the costs
of complying with these laws and regulations will have a material adverse
effect on its business, consolidated results of operations, cash flows or
financial condition although such outcome is possible given the nature of the
Company's operations and the extensive legal and regulatory framework
applicable to its business. The Company does not have any material known
environmental commitments or contingencies.
19
AUTONATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
OTHER MATTERS
In the ordinary course of business, the Company is required to post
performance and surety bonds, letters of credit, and/or cash deposits as
financial guarantees of the Company's performance. At June 30, 2002, surety
bonds and letters of credit totaled $54.9 million and have various expiration
dates. The Company does not currently provide cash collateral for outstanding
letters of credit. It has negotiated a letter of credit line as part of its
multi-year revolving credit facility. The amount available to be borrowed under
the $300 million multi-year revolving credit facility is reduced on a
dollar-for-dollar basis by the cumulative face amount of any outstanding
letters of credit. As of June 30, 2002, the Company had $15.9 million in
letters of credit outstanding.
15. DISCONTINUED OPERATIONS
On June 30, 2000, the Company completed the tax-free spin-off of ANC
Rental Corporation ("ANC Rental"). In connection with the spin-off of ANC
Rental, the Company agreed to provide certain guarantees and credit
enhancements with respect to financial and other performance obligations of ANC
Rental, including acting as a guarantor under certain motor vehicle and real
property leases between ANC Rental and Mitsubishi Motor Sales of America, Inc.
("Mitsubishi") and acting as an indemnitor with respect to certain surety bonds
issued on ANC Rental's behalf. The Company is also a party to certain
agreements with ANC Rental (the "ANC Rental Agreements"), including a
separation and distribution agreement, a reimbursement agreement and a tax
sharing agreement, pursuant to which both ANC Rental and the Company have
certain obligations. On November 13, 2001, ANC Rental filed voluntary petitions
for reorganization under Chapter 11 of the U.S. Bankruptcy Code with the U.S.
Bankruptcy Court in Wilmington, Delaware. In connection with ANC Rental's
bankruptcy, the Company was called on to perform under nine of the twelve real
property leases between ANC Rental and Mitsubishi for which it provided
guarantees. As a result, the Company agreed to assume these real property
leases, which expire in 2017, in order to control and attempt to mitigate its
exposure relating thereto. In the fourth quarter of 2001, the Company incurred
a pre-tax charge of $20.0 million to reflect its assumption of the nine leases
with Mitsubishi and certain other costs that it expects to incur as a result of
ANC Rental's bankruptcy. The Company continues to guarantee the remaining three
leases with Mitsubishi until their expiration in 2017, and the Company remains
subject to various other ANC Rental obligations. ANC Rental has been accounted
for as a discontinued operation and, accordingly, the Company expects that
additional charges recorded by it pursuant to the foregoing credit enhancements
and guarantees or with respect to claims under the ANC Rental Agreements, if
any, would not impact its reported results from continuing operations.
The Company reached an agreement with Mitsubishi in 2001 pursuant to
which its aggregate financial exposure relating to motor vehicles leased by ANC
Rental from Mitsubishi is capped at $10.0 million. Although the Company
believes its financial exposure under the agreement will likely decrease
significantly in 2002, it could have potential exposure under the agreement for
up to five to ten years. The Company's indemnification obligations with respect
to the surety bonds issued on behalf of ANC Rental are capped at $29.5 million
in the aggregate. The Company could have potential exposure under the
indemnification obligations for approximately five years. Due to the bankruptcy
of ANC Rental, obligations of ANC Rental to the Company under the terms of the
ANC Rental Agreements may be extinguished or its claims against ANC Rental
under such agreements may be unenforceable. These claims could include
reimbursement obligations that ANC Rental may have to the Company in connection
with payments made by the Company with respect to the foregoing credit
enhancements and guarantees, as well as indemnification rights with respect to
any payments that the Company makes to the Internal Revenue Service as a result
of audit adjustments in its consolidated federal income tax returns relating to
ANC Rental's automotive rental businesses prior to the spin-off. Such audit
adjustments, if any, would likely be resolved in the next three to five years.
The Company estimates that, based on its assessment of the risks involved in
each matter and excluding the liabilities associated with the $20.0 million
charge it incurred in the fourth quarter of 2001, its remaining potential
pre-tax financial exposure related to ANC Rental may be in the range of $25.0
million to $60.0 million. However, the exposure is difficult to estimate and
the Company cannot assure that its aggregate obligations under these credit
enhancements, guarantees and ANC Rental Agreements will not be materially above
the range indicated above or that it will not be subject to additional claims
20
AUTONATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
as a result of ANC Rental's bankruptcy filing, which could have a material
adverse effect on the Company's business, financial condition, cash flows and
prospects.
16. NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2002, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supercedes
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed of", and
Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effect of the Disposal of a Segment of a Business
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions"
("APB 30"). SFAS 144 establishes a single accounting model for assets to be
disposed of by sale whether previously held and used or newly acquired. SFAS
144 retains the provisions of APB 30 for the presentation of discontinued
operations in the income statement but broadens the presentation to include a
component of an entity. The adoption of SFAS 144 did not have a material impact
on the Company's consolidated financial position, results of operations or cash
flows.
In June 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 supercedes
Emerging Issues Task Force Issue No. 94-3. SFAS 146 requires that the liability
for a cost associated with an exit or disposal activity be recognized when the
liability is incurred, not at the date of an entity's commitment to an exit or
disposal plan. The provisions of SFAS 146 are effective for exit or disposal
activities initiated after December 31, 2002. The Company does not anticipate
that the adoption of SFAS 146 will have a material impact on its consolidated
financial position, results of operations, or cash flows.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
unaudited consolidated financial statements and notes thereto included under
Item 1. In addition, reference should be made to the Company's audited
consolidated financial statements and notes thereto and related Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in the Company's most recent Annual Report on Form 10-K.
CONSOLIDATED RESULTS OF OPERATIONS
For the three months ended June 30, 2002 and 2001, the Company had net
income of $103.8 million and $86.3 million, respectively, and diluted earnings
per share of $.32 and $.26, respectively. For the six months ended June 30,
2002 and 2001, the Company had net income of $195.5 million and $146.2 million,
respectively, and diluted earnings per share of $.60 and $.43, respectively.
The Company's results were driven primarily by higher gross margins, lower
inventory carrying costs and the elimination of goodwill amortization.
The following table provides a detailed reconciliation of how certain
after-tax charges and gains have impacted net income and diluted earnings per
share for the periods indicated (in millions, except earnings per share data):
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2002 2001 2002 2001
------- ------- ------- -------
Net income, as reported .................................. $ 103.8 $ 86.3 $ 195.5 $ 146.2
Certain charges and gains, net of tax:
Goodwill amortization .............................. -- 14.4 -- 28.9
Gain on sale of Flemington
dealership group ................................ -- (11.8) -- (11.8)
Other items, net(1)................................. -- 6.0 -- 5.5
------- ------- ------- -------
Net income, excluding certain charges
and gains .......................................... $ 103.8 $ 94.9 $ 195.5 $ 168.8
======= ======= ======= =======
Diluted earnings per share, as reported .................. $ .32 $ .26 $ .60 $ .43
Goodwill amortization .............................. -- .04 -- .08
Gain on sale of Flemington dealership
group ........................................... -- (.04) -- (.04)
Other items, net(1) ................................ -- .02 -- .02
------- ------- ------- -------
Diluted earnings per share, excluding certain
charges and gains .................................. $ .32 $ .28 $ .60 $ .49
======= ======= ======= =======
- ------------------
(1) Other items, net relate to exited business activities and consist of
restructuring and impairment charges and write-downs of finance lease
receivable residual values.
22
REPORTED OPERATING DATA
The following table sets forth: (1)the components of total revenue;
(2)the components of gross margin; (3) selling, general and administrative
expenses; (4) store performance; (5) retail vehicle unit sales; and (6) gross
margin per vehicle retailed:
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------------------ -----------------------------------------------
2002 2001 $ Variance % Variance 2002 2001 $ Variance % Variance
-------- -------- ---------- ---------- -------- -------- ----------- ----------
($ in millions, except per
vehicle data)
Revenue:
New vehicle ............ $2,980.2 $2,941.2 $ 39.0 1.3 $5,793.3 $5,808.9 $ (15.6) (.3)
Used vehicle ........... 998.7 972.4 26.3 2.7 1,945.7 1,949.5 (3.8) (.2)
Parts and service ...... 622.6 599.5 23.1 3.9 1,234.5 1,201.0 33.5 2.8
Finance and insurance .. 133.4 122.2 11.2 9.2 254.5 233.7 20.8 8.9
Other .................. 280.7 309.7 (29.0) (9.4) 538.3 639.5 (101.2) (15.8)
-------- -------- ------- -------- -------- ---------
$5,015.6 $4,945.0 $ 70.6 1.4 $9,766.3 $9,832.6 $ (66.3) (.7)
Gross margin:
New vehicle ............ $ 217.2 $ 207.1 $ 10.1 4.9 $ 420.9 $ 400.6 $ 20.3 5.1
Used vehicle ........... 105.2 111.6 (6.4) (5.7) 213.7 218.6 (4.9) (2.2)
Parts and service ...... 272.7 260.3 12.4 4.8 537.5 518.1 19.4 3.7
Finance and insurance .. 133.4 122.2 11.2 9.2 254.5 233.7 20.8 8.9
Other .................. 22.1 21.9 .2 .9 45.7 44.6 1.1 2.5
-------- -------- ------- -------- -------- ---------
750.6 723.1 27.5 3.8 1,472.3 1,415.6 56.7 4.0
S,G&A - Store............... 520.7 511.3 (9.4) (1.8) 1,033.7 1,020.7 (13.0) (1.3)
-------- -------- ------- -------- -------- ---------
Store performance .......... 229.9 211.8 18.1 8.5 438.6 394.9 43.7 11.1
S,G&A - Corporate .......... 34.9 33.2 (1.7) (5.1) 70.0 73.9 3.9 5.3
Depreciation ............... 16.9 16.4 (.5) 32.6 32.0 (.6)
Amortization ............... .8 20.4 19.6 1.4 40.4 39.0
Loan and lease underwriting
losses (income), net ... (2.7) 7.0 9.7 (2.9) 7.6 10.5
Restructuring and impairment
losses, net ............ 1.2 5.4 4.2 1.2 4.6 3.4
Other losses (gains) ....... .7 (19.0) (19.7) 1.1 (19.0) (20.1)
-------- -------- ------- -------- -------- ---------
Operating income............ $ 178.1 $ 148.4 $ 29.7 20.0 $ 335.2 $ 255.4 $ 79.8 31.2
======== ======== ======= ======== ======== =========
Retail vehicle unit sales:
New vehicle ............ 110,138 112,059 (1,921) (1.7) 213,945 221,064 (7,119) (3.2)
Used vehicle ........... 64,745 64,410 335 .5 127,570 128,935 (1,365) (1.1)
-------- -------- ------- -------- -------- ---------
174,883 176,469 (1,586) (.9) 341,515 349,999 (8,484) (2.4)
======== ======== ======= ======== ======== =========
Gross margin per vehicle retailed:
New vehicle ............ $ 1,972 $ 1,848 $ 124 6.7 $ 1,967 $ 1,812 $ 155 8.6
Used vehicle ........... $ 1,625 $ 1,733 $ (108) (6.2) $ 1,675 $ 1,695 $ (20) (1.2)
Finance and insurance .. $ 763 $ 692 $ 71 10.3 $ 745 $ 668 $ 77 11.5
23
The following tables set forth: (1) revenue mix percentages; (2)
operating items as a percentage of revenue; (3) other operating items as a
percentage of total gross margin; and (4) floorplan assistance and interest
expense:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
--------- --------- -------- --------
Revenue mix percentages:
New vehicle ........................ 59.4% 59.5% 59.3% 59.1%
Used vehicle ....................... 19.9 19.7 19.9 19.8
Parts and service .................. 12.4 12.1 12.6 12.2
Finance and insurance .............. 2.7 2.5 2.6 2.4
Other .............................. 5.6 6.2 5.6 6.5
-------- -------- -------- --------
100.0% 100.0% 100.0% 100.0%
======== ======== ======== ========
Operating items as a percentage of revenue:
Gross margin:
New vehicle ........................ 7.3 7.0 7.3 6.9
Used vehicle ....................... 10.5 11.5 11.0 11.2
Parts and service .................. 43.8 43.4 43.5 43.1
Finance and insurance .............. 100.0 100.0 100.0 100.0
Other .............................. 7.9 7.1 8.5 7.0
Total ......................... 15.0 14.6 15.1 14.4
S,G&A - Store ...................... 10.4 10.3 10.6 10.4
Store performance .................. 4.6 4.3 4.5 4.0
S,G&A - Corporate .................. .7 .7 .7 .8
Operating income ................... 3.6 3.0 3.4 2.6
Net income ......................... 2.1 1.7 2.0 1.5
Other operating items as a percentage of
total gross margin:
S,G&A - Store ...................... 69.4 70.7 70.2 72.1
Store performance .................. 30.6 29.3 29.8 27.9
S,G&A - Corporate .................. 4.6 4.6 4.8 5.2
Total S,G&A ........................ 74.0 75.3 75.0 77.3
Operating income ................... 23.7 20.5 22.8 18.0
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------- ------------------------------------
Floorplan assistance and interest expense: 2002 % 2001 % 2002 % 2001 %
($ in millions) ------ --- ------ --- ------ --- ------ ---
New vehicle gross margin, before floorplan .. $202.2 6.8 $205.3 7.0 $394.6 6.8 $406.4 7.0
Floorplan assistance ........................ 33.5 1.1 36.7 1.2 63.0 1.1 74.6 1.3
Floorplan interest expense .................. (18.5) (.6) (34.9) (1.2) (36.7) (.6) (80.4) (1.4)
------ ------ ------ ------
New vehicle gross margin, as presented ...... $217.2 7.3 $207.1 7.0 $420.9 7.3 $400.6 6.9
====== ====== ====== ======
New vehicle revenue increased 1.3% to $3.0 billion for the three months
ended June 30, 2002 primarily due to the impact of acquisitions completed during
the latter part of the first quarter of 2002. New vehicle revenue decreased 0.3%
to $5.8 billion for the six months ended June 30, 2002. On a same store basis,
new vehicle revenue for the three months ended June 30, 2002 decreased 1.6% due
to a 3.4% decrease in units partially offset by a 1.8% increase in average
revenue per unit. On a same store basis, new vehicle revenue decreased 1.8% for
the six months ended June 30, 2002 due to a 3.9% decrease in units partially
offset by a 2.1% increase in average revenue per unit. The Company has
experienced new vehicle volume declines that are consistent with industry
declines year over year. The Company anticipates that its new vehicle volume
trends will continue to be consistent with the industry during the remainder of
2002.
New vehicle gross margin reflects the net results of the sales price
from the sale of a vehicle less the cost of acquisition, including vehicle net
inventory carrying cost (floorplan interest expense net of floorplan assistance
from manufacturers). Despite a decrease in volume in 2002, new vehicle gross
margin increased 4.9% to $217.2 million and 5.1% to $420.9 million for the three
and six months ended June 30, 2002, respectively. On a same store basis, new
vehicle gross margin increased 1.3% and 2.9% for the three and six months ended
June 30, 2002, respectively. The increase was primarily the result of lower
inventory carrying costs for the six months ended June 30, 2002 compared to the
same periods in 2001 with the Company benefiting equally from lower interest
rates and reduced average inventory and associated floorplan levels. Interest
rates declined significantly in the latter part of 2001, and although
24
interest rates are expected to remain low, the Company may not realize the same
level of year-over-year benefit from lower inventory carrying costs through the
remainder of 2002 as compared to 2001.
Used vehicle revenue increased 2.7% to $998.7 million during the three
months ended June 30, 2002, primarily due to the impact of acquisitions
completed during the latter part of the first quarter of 2002. Used vehicle
revenue decreased 0.2% to $1.9 billion during the six months ended June 30,
2002. On a same store basis, used vehicle revenue decreased by 0.7% and 1.7%
for the three and six months ended June 30, 2002, respectively, primarily
attributable to a decrease in volume in part due to strong manufacturer
incentives for new vehicles. Used vehicle gross margin as a percentage of
revenue decreased 100 basis points to 10.5% for the three months ended June 30,
2002 and 20 basis points to 11.0% for the six months ended June 30, 2002. On a
same store basis, gross margin as a percent of revenue decreased 80 basis
points to 10.6% and 20 basis points to 11.0% for the three and six months ended
June 30, 2002, respectively. Decreases in gross margin in 2002 are primarily
due to higher manufacturer incentives and attractive financing alternatives for
new vehicles as well as used vehicle category mix.
Parts and service revenue increased 3.9% to $622.6 million and 2.8% to
$1.2 billion during the three and six months ended June 30, 2002, respectively.
On a same store basis, parts and service revenue increased 1.2% and 1.7% for
the three and six months ended June 30, 2002, respectively. Parts and service
gross margin increased 4.8% to $272.7 million for the three months ended June
30, 2002 and 3.7% to $537.5 million for the six months ended June 30, 2002.
Revenue was impacted by a soft collision repair market in 2002 and was lower
compared to a period last year that included a large manufacturer recall. On a
same store basis, parts and service gross margin increased 1.8% and 2.4% for
the three and six months ended June 30, 2002, respectively. As a percentage of
revenue, parts and service gross margin increased 40 basis points for the three
and six months ended June 30, 2002, as a result of the Company's continuing
focus on initiatives to implement a pricing strategy, a team-based service
process and a comprehensive parts and service marketing plan.
Finance and insurance revenue and gross margin increased 9.2% to
$133.4 million and 8.9% to $254.5 million for the three and six months ended
June 30, 2002, respectively. On a same store basis, finance and insurance
revenue and gross margin increased 7.7% for the three and six months ended June
30, 2002. Finance and insurance gross margin per vehicle retailed increased
10.3% to $763 and 11.5% to $745 for the three and six months ended June 30,
2002, respectively, as compared to the same period in 2001. Increases were
primarily due to increased penetration as a result of the continued usage of
the Company's menu-based finance and insurance sales process and standardized
product pricing.
Other revenue decreased 9.4% to $280.7 million and 15.8% to $538.3
million during the three and six months ended June 30, 2002, respectively,
primarily due to decreased used car wholesale activity.
Store level selling, general and administrative expenses were $520.7
million or 69.4% of total gross margin and $1.0 billion or 70.2% of total gross
margin for the three and six months ended June 30, 2002, respectively, compared
to 70.7% and 72.1% of total gross margin for the three and six months ended
June 30, 2001, respectively, as the Company continues to focus on cost-cutting
initiatives and operational improvements.
Store performance was $229.9 million or 30.6% as a percentage of total
gross margin for the three months ended June 30, 2002 compared to 29.3% for the
three months ended June 30, 2001. Store performance margin was $438.6 million
or 29.8% as a percentage of total revenue for the six months ended June 30,
2002 compared to 27.9% for the six months ended June 30, 2001.
Corporate selling, general and administrative expenses increased by
$1.7 million or 5.1% during the three months ended June 30, 2002 primarily as a
result of investments made by the Company to drive strategic initiatives.
Corporate selling, general and administrative expenses decreased by $3.9
million or 5.3% during the six months ended June 30, 2002. The decrease is
primarily the result of the continued disposal of excess properties.
Amortization was $.8 million and $1.4 million for the three and six
months ended June 30, 2002, respectively, as compared to $20.4 million and $40.4
million for the three and six months ended June 30, 2001, respectively. The
decrease is due to the elimination of goodwill amortization as a result of the
adoption of new goodwill accounting rules effective January 1, 2002.
25
As required by SFAS 142, the Company has completed impairment tests as
of January 1, 2002 and June 30, 2002 for goodwill and intangibles with
indefinite lives. These tests include determining the fair value of the
reporting unit, as defined by SFAS 142, and comparing it to the carrying value
of the net assets allocated to the reporting unit. No impairment charges
resulted from the required impairment tests. Goodwill and intangibles with
indefinite lives will be tested for impairment annually or when events or
circumstances indicate that impairment may have occurred. Under the application
of SFAS 142, future impairment of goodwill would result in a material, non-cash
writedown of goodwill and could have a material adverse impact on the Company's
results of operations and shareholders' equity.
SAME STORE OPERATING DATA
Same store operating results include the results of stores for
identical months in both years included in the comparison, starting with the
first full month of the Company's ownership or operation. The following table
sets forth: (1) the components of same store revenue;(2) the components of same
store gross margin;(3) same store selling, general and administrative
expenses;(4) same store performance;(5) retail vehicle same store unit sales;
and(6) gross margin per vehicle retailed:
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------------------- -----------------------------------------------
2002 2001 $ Variance % Variance 2002 2001 $ Variance % Variance
-------- -------- ---------- ---------- -------- -------- ---------- ----------
($ in millions, except
per vehicle data)
Revenue:
New vehicle ............ $2,884.9 $2,932.4 $(47.5) (1.6) $5,637.5 $5,741.2 $ (103.7) (1.8)
Used vehicle ........... 962.9 970.1 (7.2) (.7) 1,893.5 1,926.6 (33.1) (1.7)
Parts and service ...... 602.1 594.8 7.3 1.2 1,201.8 1,181.8 20.0 1.7
Finance and insurance .. 130.0 120.7 9.3 7.7 248.9 231.0 17.9 7.7
Other .................. 263.9 304.4 (40.5) (13.3) 509.0 614.3 (105.3) (17.1)
-------- -------- ------- -------- -------- --------
$4,843.8 $4,922.4 $(78.6) (1.6) $9,490.7 $9,694.9 $ (204.2) (2.1)
======== ======== ======= ======== ======== ========
Gross margin:
New vehicle ............ $ 209.5 $ 206.9 $ 2.6 1.3 $ 408.2 $ 396.7 $ 11.5 2.9
Used vehicle ........... 101.9 110.3 (8.4) (7.6) 208.7 216.4 (7.7) (3.6)
Parts and service ...... 263.3 258.6 4.7 1.8 522.4 510.1 12.3 2.4
Finance and insurance .. 130.0 120.7 9.3 7.7 248.9 231.0 17.9 7.7
Other .................. 18.8 19.3 (.5) (2.6) 38.1 38.0 .1 .3
-------- -------- ------ -------- -------- --------
723.5 715.8 7.7 1.1 1,426.3 1,392.2 34.1 2.4
S,G&A - Store .............. 501.2 509.1 7.9 1.6 1,001.1 1,003.7 2.6 .3
-------- -------- ------ -------- -------- --------
Store performance .......... $ 222.3 $ 206.7 $ 15.6 7.5 $ 425.2 $ 388.5 $ 36.7 9.4
======== ======== ====== ======== ======== ========
Retail vehicle unit sales:
New vehicle ............ 107,845 111,640 (3,795) (3.4) 210,010 218,428 (8,418) (3.9)
Used vehicle ........... 63,502 64,210 (708) (1.1) 125,592 127,395 (1,803) (1.4)
-------- -------- ------ -------- -------- --------
171,347 175,850 (4,503) (2.6) 335,602 345,823 (10,221) (3.0)
======== ======== ====== ======== ======== ========
Gross margin per vehicle retailed:
New vehicle ............ $ 1,943 $ 1,853 $ 90 4.9 $ 1,944 $ 1,816 $ 128 7.0
Used vehicle ........... $ 1,605 $ 1,718 $(113) (6.6) $ 1,662 $ 1,699 $ (37) (2.2)
Finance and insurance .. $ 759 $ 686 $ 73 10.6 $ 742 $ 668 $ 74 11.1
26
The following table sets forth: (1) same store revenue mix
percentages; (2) same store operating items as a percentage of revenue; and (3)
same store other operating items as a percentage of total gross margin:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
------- -------- ------- ------
Revenue mix percentages:
New vehicle ........................ 59.6% 59.6% 59.4% 59.2%
Used vehicle ....................... 19.9 19.7 20.0 19.9
Parts and service .................. 12.4 12.1 12.7 12.2
Finance and insurance .............. 2.7 2.5 2.6 2.4
Other .............................. 5.4 6.1 5.3 6.3
----- ----- ----- -----
100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
Operating items as a percentage of revenue:
Gross margin:
New vehicle ........................ 7.3 7.1 7.2 6.9
Used vehicle ....................... 10.6 11.4 11.0 11.2
Parts and service .................. 43.7 43.5 43.5 43.2
Finance and insurance .............. 100.0 100.0 100.0 100.0
Other .............................. 7.1 6.3 7.5 6.2
Total ......................... 14.9 14.5 15.0 14.4
S,G&A - Store ...................... 10.3 10.3 10.5 10.4
Store performance .................. 4.6 4.2 4.5 4.0
Other operating items as a percentage of
total gross margin:
S,G&A - Store ...................... 69.3 71.1 70.2 72.1
Store performance .................. 30.7 28.9 29.8 27.9
BUSINESS ACQUISITIONS AND DIVESTITURES
From 1996 through 1999, the Company aggressively expanded its
automotive retail operations through the acquisition of franchised automotive
dealerships. Since 1999, the Company has not completed and does not expect to
complete acquisitions at the same pace as in the past. The Company expects that
future acquisitions will primarily target single dealerships or dealership
groups focused in key existing markets.
During the six months ended June 30, 2002, the Company acquired eight
automotive retail dealerships. The Company paid approximately $125.0 million in
cash for these acquisitions. During the six months ended June 30, 2002, the
Company also paid approximately $6.6 million in deferred purchase price for
certain prior year automotive retail acquisitions.
In the normal course of business, the Company will periodically divest
of dealerships that do not meet certain operational, financial or strategic
criteria. Revenue for the operations disposed and to be disposed, including the
Flemington dealership group until its disposition in March 2001, was $116.0
million and $219.0 million during the six months ended June 30, 2002 and 2001,
respectively. Operating income (loss) for the operations disposed or to be
disposed was $.9 million and $(.5) million for the six months ended June 30,
2002 and 2001, respectively.
27
RESTRUCTURING ACTIVITIES AND IMPAIRMENT CHARGES
During the fourth quarter of 1999, the Company approved a plan to
restructure certain of its operations. The restructuring plan was comprised of
two major components: (1) exiting the used vehicle megastore business and (2)
reducing the corporate workforce. The restructuring plan also included
divesting of certain non-core franchised dealerships. Approximately 2,000
positions were eliminated as a result of the restructuring plan of which 1,800
were megastore positions and 200 were corporate positions. These restructuring
activities resulted in pre-tax charges of $443.7 million in 1999, of which
$416.4 million appears as Restructuring and Impairment Charges (Recoveries),
Net in the Company's 1999 Consolidated Income Statement. These pre-tax charges
include $286.9 million of asset impairment charges; $103.3 million of reserves
for residual value guarantees for closed lease properties; $26.2 million of
severance and other exit costs; and $27.3 million of inventory related costs.
The $286.9 million asset impairment charge consists of: $244.9 million of
megastore and other property impairments; $26.6 million of goodwill impairment
reserves for the divestiture of certain non-core franchised automotive
dealerships; and $15.4 million of information systems impairments. Of the
$443.7 million restructuring reserve recorded, $10.8 million of severance was
paid in 1999 and $53.7 million of asset impairments and write-offs were
recorded during the fourth quarter of 1999. Asset reserve amounts are treated
as a direct reduction of the carrying amounts of related assets.
The Company continues to dispose of its closed megastores and other
properties, including closed lease properties, through sales to third parties.
At June 30, 2002, properties held for sale are $79.2 million, including
properties with total asset value of $68.5 million remaining to be sold of the
total $285.3 million identified as part of the restructuring plan. These
properties continue to be aggressively marketed. The Company expects that the
majority of these remaining properties will be disposed of by the end of 2002.
The following table summarizes activity and the remaining number of properties
identified in the restructuring plan:
Megastore &
Other Non-core
Properties Dealerships Total
----------- ----------- -----
Total, December 31, 1999 ......................................... 64 14 78
Properties sold .................................................. (30) (6) (36)
Properties placed back into service .............................. (3) (5) (8)
----- ----- -----
Total, December 31, 2000 ......................................... 31 3 34
Properties sold .................................................. (16) (2) (18)
Properties placed back into service .............................. (1) -- (1)
----- ----- -----
Total, December 31, 2001 ......................................... 14 1 15
Properties sold/placed back into service ......................... -- -- --
----- ----- -----
Total, June 30, 2002 ............................................. 14 1 15
===== ===== =====
The following summarizes the activity in the Company's restructuring
and impairment reserves for the six months ended June 30, 2002 (in millions):
Deductions
Balance Amounts Charged --------------------- Balance
December 31, 2001 to Income Cash Non-cash June 30, 2002
----------------- --------------- ------- -------- -------------
Asset reserves:
Asset impairment ............ $ 68.4 $ 1.2 $ -- $ (.9) $ 68.7
Accrued liabilities:
Severance and other
exit cost ................ .2 -- -- -- .2
------- ------- ------- ------- -------
$ 68.6 $ 1.2 $ -- $ (.9) $ 68.9
======= ======= ======= ======= =======
During the six months ended June 30, 2002, amounts charged to income
include an additional impairment charge of $1.2 million based on the
re-evaluation of the fair value of a certain property held for sale.
28
The following summarizes the activity in the Company's restructuring
and impairment reserves for the six months ended June 30, 2001 (in millions):
Deductions
Balance Amounts Charged --------------------- Balance
December 31, 2000 to Income Cash Non-cash June 30, 2001
----------------- -------------------- ------- -------- -------------
Asset reserves:
Asset impairment........... $ 161.4 $ 4.3 $ -- $ (54.5) $ 111.2
Accrued liabilities:
Severance and other
exit cost............... 1.2 .3 (.8) -- .7
------- ------- ------- ------- --------
$ 162.6 $ 4.6 $ (.8) $ (54.5) $ 111.9
======= ======= ======= ======= ========
During the six months ended June 30, 2001, amounts charged to income
include an additional impairment charge totaling $5.3 million based on the
re-evaluation of the fair value of certain properties held for sale offset by
the net gain on sold properties of $1.0 million.
NON-OPERATING INCOME (EXPENSE)
Other Interest Expense
Other interest expense for the three and six months ended June 30,
2002 was incurred primarily on borrowings under mortgage facilities and
outstanding senior unsecured notes issued in August 2001. Other interest
expense was $12.1 million and $8.4 million for the three months ended June 30,
2002 and 2001, respectively, and $23.7 million and $19.4 million for the six
months ended June 30, 2002 and 2001, respectively.
Interest Income
Interest income was $2.8 million and $2.2 million for the three months
ended June 30, 2002 and 2001, respectively, and $6.0 million and $3.6 million
for the six months ended June 30, 2002 and 2001, respectively. The increase is
primarily due to higher average cash and investment balances in 2002, partially
offset by lower interest rates.
Income Taxes
The provision for income taxes was $64.3 million and $55.2 million for
the three months ended June 30, 2002 and 2001, respectively, and $121.1 million
and $92.6 million for the six months ended June 30, 2002 and 2001,
respectively. Income taxes have been provided based upon the Company's
anticipated annual effective income tax rate. The decrease in the effective tax
rate in 2002 primarily reflects the impact of the elimination of goodwill
amortization, partially offset by anticipated increases to the Company's
blended state tax rates.
FINANCIAL CONDITION
At June 30, 2002, the Company had $100.2 million of unrestricted cash
and cash equivalents. The Company has two revolving credit facilities with an
aggregate borrowing capacity of $500.0 million. The 364-day revolving credit
facility provides borrowings up to $200.0 million at a LIBOR-based interest
rate and was renewed in August 2002 for another 364-day term to August 2003.
The five-year facility, which expires in August 2006, provides borrowings up to
$300.0 million at a LIBOR-based interest rate. These facilities are secured by
a pledge of the capital stock of certain subsidiaries of the Company, which
directly or indirectly own substantially all of the Company's dealerships, and
are guaranteed by substantially all of the Company's subsidiaries. As of June
30, 2002, no amounts were drawn on these revolving credit facilities.
The Company also has $450.0 million of 9.0% senior unsecured notes due
August 1, 2008. The senior unsecured notes are guaranteed by substantially all
of the Company's subsidiaries.
29
In conjunction with the revolving credit facilities and senior
unsecured notes offering, the Company received corporate credit ratings from
rating agencies. The revolving credit facilities and the senior unsecured notes
have provisions linked to credit ratings. The interest rates for the revolving
credit facilities are impacted by changes in credit ratings, and certain
covenants related to the senior unsecured notes would be eliminated with
certain upgrades in ratings. In the event of a downgrade in the Company's
credit ratings, none of the covenants would be impacted and the Company would
continue to have access to the revolving credit facilities, but at higher rates
of interest.
At June 30, 2002, the Company had $149.7 million outstanding under two
mortgage facilities with automotive manufacturers' captive finance
subsidiaries. Each facility has an aggregate capacity of $150.0 million, bears
interest at a LIBOR-based interest rate and is secured by mortgages on certain
of the Company's dealerships' real property.
The Company finances its new vehicle inventories through secured
financings, primarily floorplan facilities, with automotive manufacturers'
captive finance subsidiaries as well as independent financial institutions. As
of June 30, 2002, aggregate capacity of the facilities was approximately $3.5
billion. The Company finances its used vehicle inventory primarily through cash
flow from operations and revolving credit facilities.
The Company sells and receives commission on the following types of
insurance and other products: extended warranties, guaranteed auto protection,
credit insurance, lease "wear and tear" insurance, and theft protection
products. The products it offers include products that are sold and
administered by independent third parties, including the vehicle manufacturers'
captive finance subsidiaries. Pursuant to its arrangements with these
third-party finance and insurance product providers, the Company either sells
the products on a straight commission basis or it sells the product, recognizes
commission and may assume some or all of the underwriting risk through
reinsurance agreements with its captive insurance subsidiaries. The Company
maintains restricted cash and investments in trust accounts in accordance with
the terms and conditions of certain reinsurance agreements to secure the
payments of outstanding losses and loss adjustment expenses related to its
captive insurance subsidiaries.
During the six months ended June 30, 2002, the Company repurchased 9.8
million shares of its common stock for an aggregate purchase price of $151.1
million. From 1998 through June 30, 2002, an aggregate of 164.8 million shares
of common stock have been acquired under the Company's share repurchase
programs for an aggregate purchase price of $1.9 billion, leaving approximately
$109.2 million available for share repurchases under the current program
authorized by the Company's Board of Directors. While the Company expects to
continue repurchasing shares under these programs, the decision to make
additional share repurchases will be based on such factors as the market price
of its common stock, the potential impact on its capital structure, proceeds
from stock option exercises and the expected return on competing uses of
capital such as strategic dealership acquisitions and capital investments in
the Company's current businesses. Future share repurchases are also subject to
limitations contained in the indenture relating to the Company's senior
unsecured notes and credit agreements for its two revolving credit facilities.
On June 30, 2000, the Company completed the tax-free spin-off of ANC
Rental. In connection with the spin-off of ANC Rental, the Company agreed to
provide certain guarantees and credit enhancements with respect to financial
and other performance obligations of ANC Rental, including acting as a
guarantor under certain motor vehicle and real property leases between ANC
Rental and Mitsubishi Motor Sales of America, Inc. ("Mitsubishi") and acting as
an indemnitor with respect to certain surety bonds issued on ANC Rental's
behalf. The Company is also a party to certain agreements with ANC Rental (the
"ANC Rental Agreements"), including a separation and distribution agreement, a
reimbursement agreement and a tax sharing agreement, pursuant to which both ANC
Rental and the Company have certain obligations. On November 13, 2001, ANC
Rental filed voluntary petitions for reorganization under Chapter 11 of the
U.S. Bankruptcy Code with the U.S. Bankruptcy Court in Wilmington, Delaware. In
connection with ANC Rental's bankruptcy, the Company was called on to perform
under nine of the twelve real property leases between ANC Rental and Mitsubishi
for which it provided guarantees. As a result, the Company agreed to assume
these real property leases, which expire in 2017, in order to control and
attempt to mitigate its exposure relating thereto. In the fourth quarter of
2001, the Company incurred a pre-tax charge of $20.0 million to reflect its
assumption of the nine leases with Mitsubishi and certain other costs that it
expects to incur as a result of ANC Rental's bankruptcy. The Company continues
to guarantee the remaining three leases with Mitsubishi until their expiration
in 2017, and the Company remains subject to various other ANC Rental
obligations. ANC Rental has been accounted for as a discontinued operation and,
accordingly, the Company expects that additional charges recorded by it
pursuant to the foregoing credit enhancements and guarantees or with respect to
claims under the ANC Rental Agreements, if any, would not impact its reported
results from continuing operations.
30
The Company reached an agreement with Mitsubishi in 2001 pursuant to
which its aggregate financial exposure relating to motor vehicles leased by ANC
Rental from Mitsubishi is capped at $10.0 million. Although the Company
believes its financial exposure under the agreement will likely decrease
significantly in 2002, it could have potential exposure under the agreement for
up to five to ten years. The Company's indemnification obligations with respect
to the surety bonds issued on behalf of ANC Rental are capped at $29.5 million
in the aggregate. The Company could have potential exposure under the
indemnification obligations for approximately five years. Due to the bankruptcy
of ANC Rental, obligations of ANC Rental to the Company under the terms of the
ANC Rental Agreements may be extinguished or its claims against ANC Rental
under such agreements may be unenforceable. These claims could include
reimbursement obligations that ANC Rental may have to the Company in connection
with payments made by the Company with respect to the foregoing credit
enhancements and guarantees, as well as indemnification rights with respect to
any payments that the Company makes to the Internal Revenue Service as a result
of audit adjustments in its consolidated federal income tax returns relating to
ANC Rental's automotive rental businesses prior to the spin-off. Such audit
adjustments, if any, would likely be resolved in the next three to five years.
The Company estimates that, based on its assessment of the risks involved in
each matter and excluding the liabilities associated with the $20.0 million
charge it incurred in the fourth quarter of 2001, its remaining potential
pre-tax financial exposure related to ANC Rental may be in the range of $25.0
million to $60.0 million. However, the exposure is difficult to estimate and
the Company cannot assure that its aggregate obligations under these credit
enhancements, guarantees and ANC Rental Agreements will not be materially above
the range indicated above or that it will not be subject to additional claims
as a result of ANC Rental's bankruptcy filing, which could have a material
adverse effect on the Company's business, financial condition, cash flows and
prospects.
At June 30, 2002 and December 31, 2001, the Company had $860.3 million
and $853.8 million, respectively, of net deferred income tax liabilities. The
Company provides for deferred income taxes in its unaudited consolidated
financial statements to show the effect of temporary differences between the
recognition of revenue and expenses for financial and income tax reporting
purposes and between the tax basis of assets and liabilities and their reported
amounts in the financial statements. In 1997 and 1999, the Company engaged in
certain transactions that are of a type that the Internal Revenue Service has
indicated it intends to challenge. Approximately $680 million of the Company's
net deferred tax liabilities relates to these transactions, including a
significant portion that relates to a transaction that generally had the effect
of accelerating projected tax deductions relating to employee health and
welfare benefits to which the Company would have been entitled upon providing
such benefits in the future, and which deductions it is currently foregoing.
These transactions are currently under review by the Internal Revenue Service,
and the Company is engaged in ongoing discussions with the Internal Revenue
Service regarding the tax treatment of these transactions. The Company believes
that its tax returns appropriately reflect such transactions, and that it has
established adequate reserves with respect to any tax liabilities relating to
these transactions. However, an unfavorable settlement or adverse resolution of
these matters could have a material adverse effect on the Company's financial
condition, results of operations and cash flows.
LEGAL PROCEEDINGS
The Company is involved, and will continue to be involved, in numerous
legal proceedings arising out of the conduct of its business, including
litigation with customers, employment related lawsuits, class actions,
purported class actions and actions brought by governmental authorities.
In an action filed in Florida state court in 1999, one of the
Company's subsidiaries was accused of violating, among other things, the
Florida Motor Vehicle Retail Sales Finance Act and the Florida Deceptive and
Unfair Trade Practices Act by allegedly failing to deliver executed copies of
retail installment contracts to customers of the Company's former used vehicle
megastores. On October 31, 2000, the court certified the class of customers on
whose behalf the action would proceed. In July 2001, Florida's Fourth District
Court of Appeals upheld the certification of the class.
In October 2000, the California Department of Motor Vehicles
("California DMV") brought an action against one of the Company's dealerships
for alleged customer fraud as well as several other claims. In April 2001, the
Company settled the California DMV action and a related action by the State of
California. In April 2002, the Company reached a settlement of the three class
actions related to its California dealership for alleged customer fraud and
other claims. The Court has approved the final settlement, and the settlement
was paid by the Company in July 2002, consisting of cash payments aggregating
approximately $1.1 million as well as vouchers for free oil changes to the
31
customers who were class members. There are no other material lawsuits pending
with respect to this matter.
Many of the Company's Texas dealership subsidiaries have been named in
three class action lawsuits brought against the Texas Automobile Dealers
Association ("TADA") and new vehicle dealerships in Texas that are members of
the TADA. 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 as well. In April 2002, in two of the actions (which
have been consolidated) the state court certified two classes of consumers on
whose behalf the action would proceed. The Company intends to appeal this
decision.
The Company intends to vigorously defend itself and assert available
defenses with respect to each of the foregoing matters. Further, the Company
may have certain insurance coverage and rights of indemnification with respect
to certain aspects of the foregoing matters. However, a settlement or an
adverse resolution of one or more of these matters may result in the payment of
significant costs and damages, which could have a material adverse effect on
the Company's business, financial condition, results of operations, cash flows
and prospects.
In addition to the foregoing cases, the Company is also a party to
numerous other legal proceedings that arose in the conduct of its business. The
Company does not believe that the ultimate resolution of these matters will
have a material adverse effect on its business, results of operations,
financial condition or cash flows. However, the results of these matters cannot
be predicted with certainty, and an unfavorable resolution of one or more of
these matters could have a material adverse effect on its business, financial
condition, results of operations, cash flows and prospects.
In the ordinary course of business, the Company is subject to numerous
laws and regulations, including automotive, environmental, health and safety
and other laws and regulations. The Company does not anticipate that the costs
of complying with these laws and regulations will have a material adverse
effect on its business, consolidated results of operations, cash flows or
financial condition although such outcome is possible given the nature of the
Company's operations and the extensive legal and regulatory framework
applicable to its business. The Company does not have any material known
environmental commitments or contingencies.
LOAN AND LEASE UNDERWRITING ACTIVITIES
In December 2001, the Company decided to exit the business of
underwriting retail automobile loans for customers at its dealerships, which it
determined was not a part of the Company's core automotive retail business. The
Company continues to provide automotive loans for its customers through
unrelated third party finance sources, which historically had provided more
than 95% of the auto loans made to its customers. At June 30, 2002 and December
31, 2001, the Company had finance receivables totaling $120.1 million and
$175.7 million, respectively, including investments in securitizations of $56.7
million and $73.8 million, respectively. The remaining finance leases,
installment loans and investments in securitizations are expected to be
substantially collected over the next three years. See discussion in Note 12,
Finance Underwriting and Asset Securitizations, of the Notes to Unaudited
Consolidated Financial Statements.
CASH FLOWS
Cash and cash equivalents decreased by $27.9 million and $56.1 million
during the six months ended June 30, 2002 and 2001, respectively. The major
components of these changes are discussed below.
Cash Flows from Operating Activities
Cash provided by operating activities was $180.4 million and $188.4
million during the six months ended June 30, 2002 and 2001, respectively.
Cash flows from operating activities include net income adjusted for
non-cash items and the effects of changes in working capital including changes
in floorplan notes payable, which directly relate to vehicle inventory.
Cash Flows from Investing Activities
Cash flows from investing activities consist primarily of cash used in
capital additions, activity from acquisitions and divestitures, activity of
installment loan receivables, purchases and sales of investments and other
32
transactions as further described below.
Capital expenditures, excluding property operating lease buy-outs, were
$60.0 million and $52.8 million during the six months ended June 30, 2002 and
2001, respectively. Property operating lease buy-outs were $5.4 million for the
six months ended June 30, 2002. The Company is in the process of analyzing
certain of its higher cost operating leases and evaluating alternatives in order
to lower the effective financing costs.
Cash used in business acquisitions was $131.6 million and $33.2
million for the six months ended June 30, 2002 and 2001, respectively. The
increase in cash used in business acquisitions was due to acquisitions in 2002
of the Chicago-based Laurel dealership group and Hudiburg Chevrolet in Fort
Worth, Texas.
During the six months ended June 30, 2002 and 2001, the Company
received $1.6 million and $61.2 million, respectively, of cash from the
divestiture of certain automotive dealerships. Amounts received in 2001
primarily relate to the sale of the Company's New Jersey-based Flemington
dealership group.
Collections of installment loan receivables and other related items
totaled $51.9 million and $77.3 million for the six months ended June 30, 2002
and 2001, respectively. There was no funding or proceeds from securitizations
of installment loans receivables for the six months ended June 30, 2002, as a
result of the Company's decision to exit the business of underwriting retail
automobile loans in December 2001.
Cash Flows from Financing Activities
Cash flows from financing activities consisted primarily of treasury
stock purchases and proceeds from stock option exercises.
During the six months ended June 30, 2002 and 2001, the Company spent
approximately $151.1 million and $129.2 million, respectively, to repurchase
shares of common stock under the Company's Board approved share repurchase
programs.
During the six months ended June 30, 2002 and 2001, proceeds from the
exercises of stock options were $74.7 million and $.4 million, respectively.
Increased activity in 2002 was due to higher market prices for the Company's
common stock which resulted in more exercises of stock options outstanding. A
substantial portion of stock option exercises during the first six months of
2002 were made by former employees of the Company who had retained stock
options as part of the ANC Rental spin-off on June 30, 2000. These options
expired on June 30, 2002.
LIQUIDITY
The Company requires cash to fund working capital needs, finance
acquisitions of new dealerships and fund capital expenditures. These
requirements are met principally from cash flows from operations, borrowings
under floorplan financings, mortgage notes and credit facilities.
The Company believes that its funds generated through future
operations and availability of borrowings under its floorplan facilities,
revolving credit facilities and mortgage facilities will be sufficient to fund
its debt service and working capital requirements, commitments and
contingencies and any seasonal operating requirements for the foreseeable
future. The Company intends to finance capital expenditures, business
acquisitions, and share repurchases through cash flow from operations, its
revolving credit facilities and other financings. The Company does not foresee
any difficulty in continuing to comply with the covenants of its various
financing facilities.
SEASONALITY
The Company's operations generally experience higher volumes of vehicle
sales in the second and third quarters of each year in part due to consumer
buying trends and the introduction of new vehicle models. Also, demand for cars
and light trucks is generally lower during the winter months than in other
seasons, particularly in regions of the United States where dealerships may be
subject to harsh winters. Accordingly, the Company expects its revenue and
operating results to be generally lower in the first and fourth quarters as
compared to the second and third quarters. However, revenue may be impacted
significantly from quarter to quarter by other factors unrelated to season, such
as automotive manufacturer incentives programs. Comparisons of the Company's
sales and operating results between different quarters within a single
33
year are, therefore, not necessarily indicators of future performance.
FORWARD-LOOKING STATEMENTS
The Company's business, financial condition, results of operations,
cash flows and prospects, and the prevailing market price and performance of
its common stock, may be adversely affected by a number of factors, including
the matters discussed below. Certain statements and information set forth in
this Form 10-Q, as well as other written or oral statements made from time to
time by the Company or by its authorized executive officers on the Company's
behalf, constitute "forward-looking statements" within the meaning of the
Federal Private Securities Litigation Reform Act of 1995. The Company intends
for its forward-looking statements to be covered by the safe harbor provisions
for forward-looking statements contained in the Private Securities Litigation
Reform Act of 1995, and it sets forth this statement and these risk factors in
order to comply with such safe harbor provisions. It should be noted that the
Company's forward-looking statements speak only as of the date of this Form
10-Q or when made and the Company undertakes no duty or obligation to update or
revise its forward-looking statements, whether as a result of new information,
future events or otherwise. Although the Company believes that the
expectations, plans, intentions and projections reflected in its
forward-looking statements are reasonable, such statements are subject to known
and unknown risks, uncertainties and other factors that may cause actual
results, performance or achievements to be materially different from any future
results, performance or achievements expressed or implied by the
forward-looking statements. The risks, uncertainties and other factors that the
Company's shareholders and prospective investors should consider include, but
are not limited to, the following:
o The automotive retailing industry is cyclical and is sensitive to
changing economic conditions and manufacturer incentive programs;
retail sales of new vehicles in the United States during 2002 are
expected to decrease as compared to 2001 on a unit basis;
significantly lower actual sales levels could materially adversely
impact the Company's business.
o The Company has engaged in certain transactions that are under review
by the IRS and may have a material adverse effect on its financial
condition and cash flows.
o ANC Rental Corporation filed for Chapter 11 bankruptcy protection in
November 2001. Accordingly, the Company has been called on to perform
under certain guarantees with respect to ANC Rental, it may be called
on to perform under additional credit enhancements and guarantees in
the future, and it may have claims against ANC Rental that may be
discharged in bankruptcy, any of which could have a material adverse
effect on its business, financial condition, cash flows and prospects.
o The Company is subject to residual value risk and consumer credit risk
in connection with its lease portfolio, consumer credit risk in
connection with its finance receivables and related assets and
underwriting risk in connection with its reinsurance of warranty and
protection products.
o The Company's revolving credit facilities and the indenture relating
to its senior unsecured notes contain certain restrictions on the
Company's ability to conduct its business.
o The Company is subject to interest rate risk in connection with its
floorplan notes payable, revolving credit facilities and mortgage
facilities. Increases in interest rates may adversely affect its
results of operations and cash flows.
o The Company's dealerships are dependent on the programs and operations
of vehicle manufacturers and, therefore, any changes to such programs
and operations may adversely affect its dealership operations and, in
turn, affect its business, results of operations, financial condition,
cash flows and prospects.
o The Company is subject to restrictions imposed by vehicle
manufacturers that may adversely impact its business, financial
condition, results of operations, cash flows and prospects, including
its ability to acquire new dealerships.
o The Company is subject to numerous legal and administrative
proceedings, which, if the outcomes are adverse to the Company, could
adversely affect its business, operating results and prospects.
34
o The Company is subject to extensive governmental regulation and if it
is found to be in violation of any of these regulations, its business,
operating results and prospects could suffer.
o The Company may encounter limitations on its ability to acquire
automotive dealerships in key markets on favorable terms or at all,
which may materially adversely affect its ability to execute its
acquisition strategy.
o The Company must test its intangibles for impairment at least
annually. Under the application of SFAS 142, future impairment of
goodwill would result in a material, non-cash writedown of goodwill
and could have a material adverse impact on the Company's results of
operations and shareholders' equity.
Please refer to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2001, and to the Company's subsequent filings
with the SEC for additional discussion of the foregoing risk factors.
35
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's major market risk exposure is changing interest rates.
The Company's policy is to manage interest rate risk through the use of a
combination of fixed and floating rate debt. Interest rate derivatives may be
used to adjust interest rate exposures when appropriate, based upon market
conditions. At June 30, 2002 and December 31, 2001, the Company did not have
any derivative instruments outstanding.
Reference is made to the Company's quantitative disclosures about
market risk as of December 31, 2001 included in the Company's Annual Report on
Form 10-K.
36
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In October 2000, the California Department of Motor Vehicles
("California DMV") brought an action against one of the Company's dealerships
for alleged customer fraud as well as several other claims. (This matter was
previously discussed in the Legal Proceedings section of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2001.) In April
2001, the Company settled the California DMV action and a related action by the
State of California. In April 2002, the Company reached a settlement of the
three class actions related to its California dealership for alleged customer
fraud and other claims. (This matter was previously discussed in the Legal
Proceedings sections of the Company's Annual Reports on Form 10-K for the
fiscal years ended December 31, 2001 and 2000.) The Court has approved the
final settlement, and the settlement was paid by the Company in July 2002,
consisting of cash payments aggregating approximately $1.1 million as well as
vouchers for free oil changes to the customers who were class members. There
are no other material lawsuits pending with respect to this matter.
Many of the Company's Texas dealership subsidiaries have been named in
three class action lawsuits brought against the Texas Automobile Dealers
Association ("TADA") and new vehicle dealerships in Texas that are members of
the TADA. The actions (Jett Jones, et al. v. Alford Chevrolet-Geo, et al.,
Case No. 30-96 in the District Court of Marion County, Texas, 115th Judicial
District, filed January 25, 1996; Pat Murphy v. Alford Chevrolet-Geo, et al.,
Case No. 168-96, in the District Court of Marion County, Texas, 115th Judicial
District, filed August 23, 1996; and Bert A. Robinson, et al. v. Texas
Automobile Dealers Association, et al., Civil Action No. 5:97 CV 273 (E.D.
Tex.), filed October 3, 1997) allege that since January 1994 Texas dealers have
deceived customers with respect to a vehicle inventory tax and violated federal
antitrust and other laws as well. (This matter was previously discussed in the
Legal Proceedings section of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2001.) In April 2002, in the Jett Jones and Pat
Murphy cases (which have been consolidated) the state court certified two
classes of consumers on whose behalf the action would proceed. The Company
intends to appeal this decision.
The Company intends to vigorously defend itself and assert available
defenses with respect to each of the foregoing matters. Further, the Company
may have certain insurance coverage and rights of indemnification with respect
to certain aspects of the foregoing matters. However, a settlement or an
adverse resolution of one or more of these matters may result in the payment of
significant costs and damages, which could have a material adverse effect on
its business, financial condition, results of operations, cash flows and
prospects.
In addition to the foregoing cases, the Company is also a party to
numerous other legal proceedings that arose in the conduct of its business. The
Company does not believe that the ultimate resolution of these matters will
have a material adverse effect on its business, results of operations,
financial condition or cash flows. However, the results of these matters cannot
be predicted with certainty, and an unfavorable resolution of one or more of
these matters could have a material adverse effect on its business, financial
condition, results of operations, cash flows and prospects.
In the ordinary course of business, the Company is subject to numerous
laws and regulations, including automotive, environmental, health and safety
and other laws and regulations. The Company does not anticipate that the costs
of complying with these laws and regulations will have a material adverse
effect on its business, consolidated results of operations, cash flows or
financial condition although such outcome is possible given the nature of the
Company's operations and the extensive legal and regulatory framework
applicable to its business. The Company does not have any material known
environmental commitments or contingencies.
37
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's 2002 Annual Meeting of Stockholders on May 16, 2002,
the stockholders of the Company voted upon and elected the following directors,
and approved and adopted the following proposal:
Director Nominee Votes Cast For Votes Withheld
---------------- -------------- --------------
H. Wayne Huizenga 291,072,010 5,125,055
Mike Jackson 293,127,825 3,069,240
Harris W. Hudson 288,047,456 8,149,609
Robert J. Brown 293,341,311 2,855,744
J.P. Bryan 291,749,673 4,447,392
Rick L. Burdick 290,140,099 6,056,966
William C. Crowley 292,154,147 4,042,918
Michael G. DeGroote 293,330,824 2,866,241
George D. Johnson, Jr. 293,357,719 2,839,346
Edward S. Lampert 292,141,159 4,055,906
John J. Melk 292,378,452 3,818,613
Irene B. Rosenfeld 291,738,451 4,458,614
Votes Cast Votes Cast Shares
For Against Abstaining
----------- ---------- ----------
Approval of the
AutoNation, Inc. Senior
Executive Incentive
Bonus Plan 286,442,449 7,752,211 2,022,405
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Employment Agreement dated July 24, 2002 between
AutoNation, Inc. and Michael J. Jackson, Chief
Executive Officer.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of Sarbanes-Oxley
Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K:
Form 8-K, dated May 30, 2002 (filed June 3, 2002), Item 2,
reporting that on May 31, 2002, AutoNation, Inc. appointed
Deloitte & Touche, LLP as its new independent public
accountant and that effective May 30, 2002, AutoNation, Inc.
dismissed Arthur Andersen, LLP as its independent public
accountant.
Form 8-KA, dated May 30, 2002 (filed July 10, 2002), Item 7,
including revised letter of Arthur Andersen, LLP regarding
change in certifying accountant.
38
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant, AutoNation, Inc., has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AUTONATION, INC.
By: /s/ Patricia A. McKay
-----------------------------
Patricia A. McKay
Senior Vice President-Finance
(PRINCIPAL ACCOUNTING OFFICER)
Date: August 14, 2002
39