UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
COMMISSION FILE NUMBER: 1-13461
GROUP 1 AUTOMOTIVE, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 76-0506313
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
950 ECHO LANE, SUITE 100, HOUSTON, TEXAS 77024
(Address of principal executive offices) (Zip code)
Registrant's telephone number including area code (713) 647-5700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of exchange on which Registered
------------------- ------------------------------------
COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K/A or any amendment to
this Form 10-K/A. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
State the aggregate market value of voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was last sold, as of the last business day of the registrant's most
recently completed second fiscal quarter: $666.5 million.
As of February 28, 2005, there were 23,499,805 shares of our common stock,
par value $.01 per share, outstanding.
Documents incorporated by reference: Proxy Statement of Group 1
Automotive, Inc. for the Annual Meeting of Stockholders to be held on May 18,
2005, which is incorporated into Part III of this Form 10-K/A.
TABLE OF CONTENTS
AMENDMENT NO. 1 EXPLANATORY NOTE............................................................................. 1
PART I ................................................................................................. 1
Item 1. Business......................................................................................... 1
Item 2. Properties....................................................................................... 22
Item 3. Legal Proceedings................................................................................ 22
Item 4. Submission of Matters to a Vote of Security Holders.............................................. 22
PART II ................................................................................................. 23
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............................ 23
Item 6. Selected Financial Data.......................................................................... 24
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 25
Item 7A. Quantitative and Qualitative Disclosures about Market Risk....................................... 42
Item 8. Financial Statements and Supplementary Data...................................................... 43
Item 9. Changes in and Disagreements on Accounting and Financial Disclosure.............................. 43
Item 9A. Controls and Procedures.......................................................................... 43
PART III ................................................................................................. 46
Item 10. Directors and Executive Officers of the Registrant............................................... 46
Item 11. Executive Compensation........................................................................... 46
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters... 46
Item 13. Certain Relationships and Related Transactions................................................... 46
Item 14. Principal Accountant Fees and Services........................................................... 46
PART IV ................................................................................................. 46
Item 15. Exhibits......................................................................................... 46
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
This amended annual report includes certain "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. These statements include statements
regarding our plans, goals or current expectations with respect to, among other
things:
- our future operating performance;
- our ability to improve our margins;
- operating cash flows and availability of capital;
- the completion of future acquisitions;
- the future revenues of acquired dealerships;
- future stock repurchases;
- capital expenditures;
- changes in sales volumes in the new and used vehicle and parts and
service markets;
- business trends in the retail automotive industry, including the
level of manufacturer incentives, new and used vehicle retail sales
volume, customer demand, interest rates and changes in industrywide
inventory levels; and
- availability of financing for inventory and working capital.
Any such forward-looking statements are not assurances of future
performance and involve risks and uncertainties. Actual results may differ
materially from anticipated results in the forward-looking statements for a
number of reasons, including:
- the future economic environment, including consumer confidence,
interest rates, the price of gasoline, the level of manufacturer
incentives and the availability of consumer credit may affect the
demand for new and used vehicles, replacement parts, maintenance and
repair services and finance and insurance products;
- adverse international developments such as war, terrorism, political
conflicts or other hostilities may adversely affect the demand for
our products and services;
- the future regulatory environment, unexpected litigation or adverse
legislation, including changes in state franchise laws, may impose
additional costs on us or otherwise adversely affect us;
- our principal automobile manufacturers, especially Toyota/Lexus,
Ford, DaimlerChrysler, General Motors, Honda/Acura and
Nissan/Infiniti, may not continue to produce or make available to us
vehicles that are in high demand by our customers;
- requirements imposed on us by our manufacturers may limit our
acquisitions and require us to increase the level of capital
expenditures related to our dealership facilities;
- our dealership operations may not perform at expected levels or
achieve expected improvements;
- our failure to achieve expected future cost savings or future costs
being higher than we expect;
- available capital resources and various debt agreements may limit
our ability to complete acquisitions, complete construction of new
or expanded facilities and repurchase shares;
- our cost of financing could increase significantly;
- new accounting standards could materially impact our reported
earnings per share;
- our inability to complete additional acquisitions or changes in the
pace of acquisitions;
- the inability to adjust our cost structure to offset any reduction
in the demand for our products and services;
- our loss of key personnel;
- competition in our industry may impact our operations or our ability
to complete acquisitions;
- the failure to achieve expected sales volumes from our new
franchises;
- insurance costs could increase significantly and all of our losses
may not be covered by insurance; and
- our inability to obtain inventory of new and used vehicles and
parts, including imported inventory, at the cost, or in the volume,
we expect.
The information contained in this amended annual report, including the
information set forth under the headings "Business -- Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," identifies factors that could affect our operating results and
performance. We urge you to carefully consider those factors.
All forward-looking statements attributable to us are qualified in their
entirety by this cautionary statement. We undertake no responsibility to update
our forward-looking statements.
-ii-
AMENDMENT NO. 1 EXPLANATORY NOTE
We are filing Amendment No. 1 (this "Amendment") to the Group 1
Automotive, Inc. Annual Report on Form 10-K for the year ended December 31,
2004, to change the presentation of certain floorplan notes payable information.
We finance substantially all of our new, and a portion of our used, vehicle
inventories under revolving credit arrangements with a syndicated lending group
(which includes both lenders affiliated with manufacturers of new vehicles and
non-affiliated lenders) and, for certain new vehicle models, with lenders
affiliated with the manufacturers of those vehicles. Consistent with industry
practice, we previously reported all amounts outstanding under the caption
"Floorplan notes payable" in our consolidated balance sheets and substantially
all cash flows arising in connection with changes in floorplan notes payable as
an item of cash flows from operating activities in our consolidated statements
of cash flows.
In response to recent comments from the Staff of the Securities and
Exchange Commission (the "Staff") in connection with a customary review of our
2004 Annual Report on Form 10-K, we reevaluated our presentation of this
information. On January 30, 2006, our management and the Audit Committee of our
Board of Directors concluded to amend and restate our 2004 Annual Report on
Form 10-K and our September 30, 2005, Quarterly Report on Form 10-Q to reflect
certain information in conformity with guidance under the Securities and
Exchange Commission's rules and regulations and Statement of Financial
Accounting Standards No. 95, "Statement of Cash Flows." This amendment revises
our consolidated balance sheets to reflect floorplan notes payable to the
syndicated lending group separately from floorplan notes payable to lenders
affiliated with manufactures. It also revises our consolidated statements of
cash flows to reflect borrowings and repayments from the syndicated lending
group as an item of cash flows from financing activities with gross borrowings
reflected separately from gross repayments.
The changes in presentation have no effect on previously reported
consolidated net income, earnings per share, total assets or liabilities,
stockholders' equity, total cash flows or our conclusion that our disclosure
controls and procedures were effective as of December 31, 2004. This form 10-K/A
contains changes to Part II-Item 7, Item 8 and Item 9A to reflect this
restatement. There are no other significant changes to the original Form 10-K
other than those outlined above. This Form 10-K/A does not reflect events
occurring after the filing of the original Form 10-K, or modify or update
disclosures therein in any way other than as required to reflect the Amendment
set forth below. Among other things, forward looking statements made in the
original Form 10-K have not been revised to reflect events that occurred or
facts that became known to us after the filing of the original Form 10-K (other
than the restatement), and such forward looking statements should be read in
their historical context. In addition, currently-dated certifications from our
Chief Executive Officer and Chief Financial Officer have been included as
exhibits to this Amendment.
PART I
ITEM 1. BUSINESS
GENERAL
Group 1 Automotive, Inc. is a leading operator in the $1 trillion
automotive retailing industry. We own and operate 142 dealership franchises and
32 collision centers primarily located in major metropolitan markets in
California, Colorado, Florida, Georgia, Louisiana, Massachusetts, New Jersey,
New Mexico, New York, Oklahoma and Texas. Through our dealerships and Internet
sites, we:
- sell new and used cars and light trucks;
- arrange related financing, vehicle service and insurance contracts;
- provide maintenance and repair services; and
- sell replacement parts.
Geographic diversity is one of our strengths. The following table sets
forth our platforms and the states in which they operate, the percentage of new
vehicle retail units sold at each platform in the year ended December 31, 2004,
and the number of dealerships and franchises in each platform as of February 28,
2005:
PERCENTAGE OF OUR
NEW VEHICLE
RETAIL UNITS SOLD AS OF FEBRUARY 28, 2005
DURING THE TWELVE ---------------------------
MONTHS ENDED NUMBER OF NUMBER OF
PLATFORM STATE DECEMBER 31, 2004 DEALERSHIPS FRANCHISES
-------------------------------- ------------------- ----------------- ----------- ----------
Ira Motor Group Massachusetts 12.8% 11 14
Sterling McCall Automotive Group Texas 12.1 9 7
Bob Howard Auto Group Oklahoma 12.0 14 24
Miller Automotive Group California 11.3 8 9
Gene Messer Auto Group Texas 8.0 10 18
Maxwell Automotive Group Texas 7.9 8 11
Bohn Automotive Group Louisiana 6.4 7 10
Group 1 Florida Florida 6.1 4 4
Group 1 Atlanta Georgia 5.1 6 8
Peterson Automotive Group California 4.2 4 9
Rocky Mountain Automotive Group Colorado/New Mexico 4.0 4 8
Courtesy Auto Group Texas 3.5 2 4
David Michael Motor Cars New Jersey 2.9 3 3
Mike Smith Automotive Group Texas 2.6 2 9
Hassel Auto Group New York 1.1 4 4
----------------- ----------- ----------
Total 100.0% 96 142
================= =========== ==========
OPERATING STRATEGY
We follow an operating strategy comprised of the following elements:
- decentralized management of locally-branded operations;
- expansion of higher margin activities;
- commitment to customer service;
- effective capital and asset management;
- development and retention of human capital;
- technology initiatives; and
- cost and revenue synergies.
DECENTRALIZED MANAGEMENT OF LOCALLY-BRANDED OPERATIONS. Our 142 franchises
are organized into 15 platforms that are managed by local platform management
teams and, at the dealership level, by general managers who report to the
platform management. We believe our local management teams are in the best
position to
understand their markets and how to operate effectively within them, including
sales and marketing initiatives, inventory control and recruitment and retention
of dealership personnel. By managing our dealerships on a decentralized basis,
we seek to provide superior customer service and maintain a focused,
market-specific responsiveness in all areas of dealership operations. Our
market-specific approach to dealership management is especially important in
light of the diverse markets in which we operate. Further, we believe cost
savings are achieved in areas such as advertising and personnel utilization by
coordinating these activities on a local basis.
EXPANSION OF HIGHER MARGIN ACTIVITIES. Certain sectors of our business
generate higher margins than those generated by the retail sale of new vehicles.
These activities include:
- retail sales of used vehicles;
- sales of replacement parts;
- sales of maintenance and repair services; and
- arrangement of financing, vehicle service and insurance contracts.
While each of our local operations conducts business in a manner
consistent with its specific market's characteristics, they also pursue growth
in these higher margin businesses to enhance profitability and stimulate
internal growth. In conjunction with ongoing facility improvement and relocation
initiatives, we generally increase both the square footage and stall capacity of
our service departments in order to better service customers and to capture
additional business in the marketplace.
COMMITMENT TO CUSTOMER SERVICE. Our dealerships strive to cultivate
lasting relationships with their customers, which we believe is a key factor in
gaining repeat and referral business. As one example of our commitment in this
area, our dealerships regard their service and repair activities as essential
elements of the customer service experience that create additional opportunities
to foster ongoing relationships with customers and deepen customer loyalty. We
emphasize the importance of customer satisfaction to our key platform and
dealership personnel by basing a portion of their compensation, in most cases,
on the quality of customer service they provide in connection with vehicle sales
and service. In addition, our dealerships continually review their processes in
an effort to better meet the needs of their customers by implementing best
practices shared across our operations.
EFFECTIVE CAPITAL AND ASSET MANAGEMENT. We allocate discretionary capital
among competing investment opportunities based on expected returns on
investment. We also monitor our inventory and sales levels on a companywide
basis. In addition, we monitor our investments in parts and receivables to
maximize our financial results.
DEVELOPMENT AND RETENTION OF HUMAN CAPITAL. The success of our dealerships
is highly dependent on dealership personnel. We believe that our decentralized
operating approach, incentive compensation plans and training programs allow us
to attract, develop and retain automotive retailing talent. Our platform
presidents have worked in their platform's operations an average of 16 years.
TECHNOLOGY INITIATIVES. Our dealerships continue to find new ways to
benefit our customers through the use of the Internet. The locally-branded Web
sites of each of our platforms provide customers with a one-stop shopping
experience in their local market, with access to an extensive inventory of
multiple brands. New tools in use at our dealerships allow us to:
- display a distinctive look and feel to our customers that conveys
the "attitude" of the dealership while conforming to manufacturer
guidelines;
- display interactive new and used vehicle inventories with multiple
photographs and advanced search options;
- offer interactive online appraisal tools;
- offer customers an online credit application process;
- display and sell parts online;
- highlight dealership specials on new and used vehicles and services;
- display current dealership-specific advertising; and
-2-
- offer customers the convenience of online service scheduling,
progress monitoring, and completion notification.
In addition, we plan to use the Internet to enhance the interactive
service capabilities we offer our customers. During 2004, we sold more than
20,000 vehicles as a result of leads generated by our dealerships' dedicated
Internet sales departments. As franchised dealerships, we receive Internet leads
from manufacturers' e-commerce programs. We also receive leads from several
major portals through a contractual relationship with an e-commerce software
company. We continue to work with our vendors to ensure our dealerships have
access to current technology while remaining in compliance with manufacturer
brand imaging requirements.
COST AND REVENUE SYNERGIES. Our size and consolidated purchasing power
brings opportunities to benefit from cost and revenue synergies in some areas of
our business. For example, due to our expended access to capital, we can
generally obtain floorplan financing at rates significantly lower than those
received by smaller private dealerships. In addition, we have benefited from the
consolidation of administrative functions such as risk management, employee
benefits and employee training, as well as the sharing of best practices across
our operations. We have also enhanced revenues by benchmarking our dealerships
and by establishing preferred providers for retail finance and vehicle service
contracts.
DEALERSHIP OPERATIONS
Each of our local operations has a management structure that promotes and
rewards entrepreneurial spirit and the achievement of team goals. The general
manager of each dealership, with assistance from his managers of new vehicle
sales, used vehicle sales, parts and service, and finance and insurance, is
ultimately responsible for the operation, personnel and financial performance of
the dealership. Our dealerships are operated as distinct profit centers, and our
general managers have a high degree of autonomy within our organization. Our
platform presidents are responsible for the overall performance of their
platform and for overseeing the dealership general managers.
To capitalize on the combined experience of our dealership management, we
have formed brand-specific groups of general managers who meet regularly to
share best practices and identify incremental profit opportunities. The groups
meet in person and via teleconference at regular intervals to discuss
brand-specific trends and comparative rankings of operational results. We
believe the discussion and sharing of best practices that takes place among
these groups is a competitive advantage over smaller dealership groups that do
not have the diverse operations that we do. Each of our dealerships is also
compared to its operating forecast and our other dealerships on a monthly basis.
We also analyze our dealerships based on key operating, financial and customer
satisfaction measures.
-3-
NEW VEHICLE SALES
In 2004, we sold or leased 117,971 new vehicles representing 33 brands in
retail transactions at our dealerships. Our retail sales of new vehicles
accounted for approximately 28.5% of our gross profit in 2004. The following
table sets forth the brands we represented and the number and percentage of
total new vehicles of each brand that we sold in 2004, and the number of
franchises of each brand that we owned at February 28, 2005:
YEAR ENDED DECEMBER 31, 2004
----------------------------------
Number of Percentage of
New Vehicles New Vehicles Franchises Owned as
Sold Sold of February 28, 2005
------------ ------------- --------------------
Toyota / Scion 27,166 23.0% 11
Ford 20,410 17.3 14
Nissan 11,207 9.5 10
Honda 9,312 7.9 6
Chevrolet 8,832 7.5 7
Dodge 7,993 6.8 11
Lexus 5,552 4.7 2
Chrysler 3,278 2.8 9
Jeep 3,050 2.6 8
Mercedes-Benz 2,361 2.0 3
GMC 2,220 1.9 5
Acura 1,941 1.7 2
BMW 1,809 1.5 4
Infiniti 1,702 1.4 1
Mitsubishi 1,482 1.3 5
Lincoln 1,220 1.1 6
Mazda 1,088 0.9 2
Mercury 940 0.8 7
Subaru 860 0.7 2
Volkswagen 859 0.7 2
Kia 753 0.6 3
Pontiac 737 0.6 5
Hyundai 661 0.6 2
Audi 634 0.5 1
Volvo 527 0.4 2
Buick 439 0.4 4
Cadillac 302 0.3 2
Isuzu 212 0.2 2
Mini 169 0.1 1
Porsche 156 0.1 1
Hummer 94 0.1 1
Maybach 5 - 1
------- ----- ---
Total 117,971 100.0% 142
======= ===== ===
A typical new vehicle sale or lease transaction creates the following
profit opportunities for a dealership:
- from the retail transaction itself;
- from the resale of any trade-in purchased by the dealership;
- from the sale of third-party finance, vehicle service and insurance
contracts in connection with the retail sale; and
- from the service and repair of the vehicle both during and after the
warranty period.
Some new vehicles we sell are purchased by customers under lease or
lease-type financing arrangements with third-party lenders. These transactions
are typically favorable from a dealership's perspective. New vehicle leases
generally have shorter terms, bringing the customer back to the market, and our
dealerships specifically, sooner than if the purchase was debt financed. In
addition, leases provide our dealerships with a steady source of late-model,
off-lease vehicles for sale as used vehicles. Generally, leased vehicles remain
under factory warranty for the term of the lease, allowing the dealerships to
provide repair services to the lessee throughout the lease term. We typically do
not guarantee residual values on lease transactions.
-4-
Our dealerships finance their inventory purchases through the floorplan
portion of our revolving credit facility. Subject to floorplan limitations
imposed by us and our days' supply guidelines, inventory selection and
management occurs at the platform level. From time to time, and consistently
over the past several years, manufacturers have offered incentives to
dealerships to achieve the manufacturers' new vehicle sales goals. Most
manufacturers also offer interest assistance to offset floorplan interest
charges incurred in connection with inventory purchases.
USED VEHICLE SALES
We sell used vehicles at each of our franchised dealerships. In 2004, we
sold or leased 66,336 used vehicles at our dealerships, and sold 49,372 used
vehicles in wholesale markets. Our retail sales of used vehicles accounted for
approximately 14.5% of our gross profit in 2004, while losses from the sale of
vehicles on wholesale markets reduced our gross profit by approximately 1.0%.
Used vehicles sold at retail typically generate higher gross margins on a
percentage basis than new vehicles because of their limited comparability and
the subjective nature of their valuation, which is dependent on a vehicle's age,
mileage and condition, among other things. Valuations also vary based on supply
and demand factors, the level of new vehicle incentives, the availability of
retail financing, and general economic conditions. We believe that recent
downward trends in the used vehicle business are due both to the relative
affordability of new vehicles, largely as a result of manufacturer incentive
programs, and the general tightening of credit standards by lenders in the
lower-tier and sub-prime segments of the credit market.
Profit from the sale of used vehicles depends primarily on a dealership's
ability to obtain a high-quality supply of used vehicles at reasonable prices
and to effectively manage that inventory. Our new vehicle operations provide our
used vehicle operations with a large supply of high-quality trade-ins and
off-lease vehicles, the best sources of high-quality used vehicles. Our
dealerships supplement their used vehicle inventory from purchases at auctions,
including manufacturer-sponsored auctions available only to franchised dealers,
and from wholesalers. Each of our dealerships attempts to maintain no more than
a 30 days' supply of used vehicles. We offer used vehicles not held for resale
to other dealers and wholesalers. Sales to other dealers or wholesalers are
frequently close to, or below, our cost and therefore negatively affect our
gross margin on used vehicle sales. We may transfer vehicles among our
dealerships, on a local basis, to provide balanced inventories of used vehicles
at each of our dealerships.
In addition to active management of the quality and age of our used
vehicle inventory, we have attempted to increase the profitability of our used
vehicle operations by participating in manufacturer certification programs where
available. Manufacturer certified pre-owned vehicles typically sell at a premium
compared to other used vehicles and are available only from franchised new
vehicle dealerships. Certified pre-owned vehicles are eligible for new vehicle
benefits such as new vehicle finance rates and, in some cases, extension of the
manufacturer warranty.
PARTS AND SERVICE SALES
We sell replacement parts and provide maintenance and repair services at
each of our franchised dealerships and provide collision repair services at the
32 collision centers we own. Our parts and service business accounted for
approximately 37.3% of our gross profit in 2004. We perform both warranty and
non-warranty service work at our dealerships, primarily for the vehicle brand(s)
sold at a particular dealership. We realize approximately the same gross margin
on warranty repairs and customer-paid repairs. Warranty work accounted for
approximately 20.0% of the revenues from our parts and service business in 2004.
Our parts and service departments also perform used vehicle reconditioning and
new vehicle preparation services for which they realize a profit when a vehicle
is sold to a third party.
The automotive repair industry is highly fragmented, with a significant
number of independent maintenance and repair facilities in addition to those of
the franchised dealerships. We believe, however, that the increasing complexity
of new vehicles has made it difficult for many independent repair shops to
retain the expertise necessary to perform major or technical repairs. We have
made investments in obtaining and training qualified technicians to work in our
service and repair facilities. Additionally, manufacturers permit warranty work
to be performed only at franchised dealerships, and there is a trend in the
automobile industry towards longer new vehicle warranty periods. As a result, we
believe an increasing percentage of all repair work will be performed at
franchised dealerships that have the sophisticated equipment and skilled
personnel necessary to perform repairs and warranty work on today's complex
vehicles.
Our strategy to capture an increasing share of the parts and service work
performed by franchised dealerships includes the following elements:
- FOCUS ON CUSTOMER RELATIONSHIPS; EMPHASIZE PREVENTATIVE MAINTENANCE.
Our dealerships seek to retain new and used vehicle customers as
customers of our parts and service departments. To accomplish this
-5-
goal, we use systems that track customers' maintenance records and
notify owners of vehicles purchased or serviced at our dealerships
when their vehicles are due for periodic service. Vehicle service
contracts sold by our finance and insurance personnel also assist us
in the retention of customers after the manufacturer's warranty
expires. We believe our parts and service activities are an integral
part of the customer service experience, allowing us to create
ongoing relationships with our dealerships' customers thereby
deepening customer loyalty to the dealership as a whole.
- VARIABLE RATE PRICING STRUCTURE. The rates our dealerships charge
for their technicians' labor vary based on the difficulty and
technical sophistication of the repairs being performed. Similarly,
the percentage markups on parts are based on market conditions for
different parts. We believe this variable pricing allows our
dealerships to achieve parts and service gross margins superior to
those of our competitors who rely on fixed labor rates and
percentage markups. It also allows us to be competitive with
independent repair shops that provide discounted pricing on select
services.
- EFFICIENT MANAGEMENT OF PARTS INVENTORY. Our dealerships' parts
departments support their sales and service departments, selling
factory-approved parts for the vehicle makes and models sold by a
particular dealership. Parts are either used in repairs made in the
service department, sold at retail to customers, or sold at
wholesale to independent repair shops and other franchised
dealerships. Our dealerships employ parts managers who oversee parts
inventories and sales. Our dealerships also frequently share parts
with each other. In addition, we maintain a perpetual parts
inventory program, counting a percentage of our parts on a daily
basis. This allows us to monitor our parts inventories more closely
and make necessary adjustments more frequently.
FINANCE AND INSURANCE SALES
Revenues from our finance and insurance operations consist primarily of
fees for arranging financing, vehicle service and insurance contracts in
connection with the retail purchase of a new or used vehicle. Our finance and
insurance business accounted for approximately 20.7% of our gross profit in
2004. We offer a wide-variety of third-party finance and insurance products in a
convenient manner and at competitive prices. To increase transparency to our
customers, we offer all of our products on menus that display pricing and other
information, allowing customers to choose the products that suit their needs.
FINANCING. We arrange third-party purchase and lease financing for our
customers. In return, we receive a fee from the third-party lender upon
completion of the financing. These third-party lenders include manufacturers'
captive finance companies, selected commercial banks, and a variety of other
third-party lenders, including credit unions and regional auto finance lenders.
The fees we receive are subject to chargeback, or repayment to the lender, if a
customer defaults or prepays the loan, typically during some limited time period
at the beginning of the loan term. We have negotiated incentive programs with
some lenders pursuant to which we receive additional fees upon reaching a
certain volume of business. We do not own a finance company, and, generally, do
not retain substantial credit risk after a customer has received financing,
though we do retain limited credit risk in some circumstances.
EXTENDED WARRANTY, VEHICLE SERVICE AND INSURANCE PRODUCTS. We offer our
customers a variety of vehicle warranty and extended protection products in
connection with purchases of new and used vehicles, including:
- extended warranties;
- maintenance, or vehicle service, programs;
- guaranteed auto protection, or "GAP," insurance, which covers the
shortfall between a customer's loan balance and insurance payoff in
the event of a total vehicle loss;
- credit life and accident and disability insurance;
- lease "wear and tear" insurance; and
- theft protection.
The products our dealerships currently offer are generally underwritten
and administered by independent third parties, including the vehicle
manufacturers' captive finance subsidiaries. Under our arrangements with the
providers of these products, we either sell these products on a straight
commission basis, or we sell the product, recognize commission and participate
in future underwriting profit, if any, pursuant to a retrospective commission
arrangement. These commissions may be subject to chargeback, in full or in part,
if the contract is terminated prior to its scheduled maturity. We own a company
that reinsures the third-party credit life and accident and disability insurance
policies we sell.
-6-
ACQUISITION PROGRAM
Since our inception, we have pursued an acquisition program focused on the
following objectives:
- enhancing brand and geographic diversity;
- creating economies of scale;
- delivering a targeted return on investment; and
- enhancing stockholder value.
We have grown our business primarily through acquisitions. From January 1,
2000, through December 31, 2004, we:
- purchased 69 franchises with expected annual revenues, estimated at
the time of acquisition, of approximately $2.8 billion;
- disposed of 20 franchises with annual revenues of approximately
$267.2 million; and
- were granted nine new franchises by vehicle manufacturers.
These acquisitions included both "platform" acquisitions, which typically are
acquisitions of groups of dealerships in market areas where we previously
did not have a presence, and "tuck-in" acquisitions, which are acquisitions of
single-point dealerships in our existing market areas.
PLATFORM ACQUISITIONS. We make platform acquisitions to expand into
geographic markets we do not currently serve by acquiring large, profitable,
well-established megadealers that are leaders in their regional markets. We
typically pursue megadealers with superior operational and financial management
personnel whom we seek to retain. By retaining existing management personnel who
have experience and in-depth knowledge of their local market, we can more
readily transition to our decentralized operating model while avoiding the risks
involved with employing and training new and untested personnel.
TUCK-IN ACQUISITIONS. We make tuck-in acquisitions to expand our brand,
product and service offerings and to capitalize on economies of scale by
acquiring key single-point dealerships in our existing market areas. Tuck-in
acquisitions allow us to increase operating efficiency and cost savings on a
platform level in areas such as advertising, purchasing, data processing,
personnel utilization, and the cost of floorplan financing.
RECENT ACQUISITIONS AND DISPOSITIONS. In 2004, we acquired 23 franchises
with expected annual revenues of approximately $1.2 billion, exceeding our
acquisition target of $1.0 billion for the year. Our 2004 acquisition program
included the acquisition of new platforms in California, New Jersey and New York
and seven tuck-in acquisitions added to our existing platforms in California,
Massachusetts and Texas. We also opened two previously announced Nissan
add-points in California and Massachusetts during 2004. The following table
contains information regarding the platforms and dealerships we acquired in
2004, including the location of the operations and the franchises acquired:
No. of
Platform Location Franchises Franchises Included Month Completed
-------------------------------- ------------- ---------- ------------------------- ------------------
David Michael Motor Cars(1) New Jersey 3 Mercedes Benz, Honda, VW February
Maxwell Automotive Group Texas 3 Chevrolet, Pontiac, GMC February and April
Ira Motor Group Massachusetts 1 Toyota March
Sterling McCall Automotive Group Texas 1 BMW July
Miller Automotive Group California 2 Mercedes Benz and Maybach July
Peterson Automotive Group(1) California 9 Toyota, Kia (2), June
Chrysler, Dodge, Jeep,
Hyundai, Subaru, Isuzu
Hassel Auto Group(1) New York 4 BMW, Mini, Volvo (2) August
----------
(1) Platform acquisition
As a result of our 2004 acquisition program, we expanded into three
additional markets in which we previously had no presence, and shifted our brand
mix to include a greater percentage of import and luxury vehicles. We paid
approximately $221.7 million in cash, net of cash received, issued 394,313
shares of our common stock and assumed approximately $109.7 million of inventory
financing in completing our 2004 acquisition program. We did not dispose of any
dealerships in 2004.
OUTLOOK. Our acquisition target for 2005 is to complete acquisitions of
dealerships that have approximately $300 million in annual revenues.
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COMPETITION
We operate in a highly competitive industry. In each of our markets,
consumers have a number of choices in deciding where to purchase a new or used
vehicle or where to have a vehicle serviced. According to various industry
sources, there are approximately 22,000 franchised automobile dealerships and
approximately 54,000 independent used vehicle dealers in the retail automotive
industry.
Our competitive success depends, in part, on national and regional
automobile-buying trends, local and regional economic factors, and other
regional competitive pressures. Conditions and competitive pressures affecting
the markets in which we operate, or in any new markets we enter, could adversely
affect us, although the retail automobile industry as a whole might not be
affected. Some of our competitors may have greater financial, marketing and
personnel resources, and lower overhead and sales costs than we do. We cannot
guarantee that our strategy will be more effective than the strategies of our
competitors.
NEW AND USED VEHICLES. In the new vehicle market, our dealerships compete
with other franchised dealerships in their market areas, as well as auto
brokers, leasing companies, and Internet companies that provide referrals to or
broker vehicle sales with other dealerships or customers. We are subject to
competition from dealers that sell the same brands of new vehicles that we sell
and from dealers that sell other brands of new vehicles that we do not sell in a
particular market. Our new vehicle dealer competitors also have franchise
agreements with the various vehicle manufacturers and, as such, generally have
access to new vehicles on the same terms as we do. We do not have any cost
advantage in purchasing new vehicles from vehicle manufacturers, and our
franchise agreements do not grant us the exclusive right to sell a
manufacturer's product within a given geographic area. In the used vehicle
market, our dealerships compete with other franchised dealers, large
multi-location used vehicle retailers, local independent used vehicle dealers,
automobile rental agencies and private parties for the supply and resale of used
vehicles. We believe the principal competitive factors in the automotive
retailing business are location, the suitability of a franchise to the market in
which it is located, service, price and selection.
PARTS AND SERVICE. In the parts and service market, our dealerships
compete with other franchised dealers to perform warranty repairs and with other
automobile dealers, franchised and independent service center chains, and
independent repair shops for non-warranty repair and maintenance business. We
believe the principal competitive factors in the parts and service business are
the quality of customer service, the use of factory-approved replacement parts,
familiarity with a manufacturer's brands and models, convenience, the competence
of technicians, location, and price. A number of regional or national chains
offer selected parts and services at prices that may be lower than ours.
FINANCE AND INSURANCE. In addition to competition for vehicle sales and
service, we face competition in arranging financing for our customers' vehicle
purchases from a broad range of financial institutions. Many financial
institutions now offer finance and insurance products over the Internet, which
may reduce our profits from the sale of these products. We believe the
principal competitive factors in the finance and insurance business are
convenience, interest rates and flexibility in contract length.
ACQUISITIONS. We compete with other national dealer groups and individual
investors for acquisitions. Some of our competitors have greater financial
resources and competition may increase acquisition pricing. We cannot guarantee
that we will be able to complete acquisitions on terms acceptable to us.
RELATIONSHIPS AND AGREEMENTS WITH OUR MANUFACTURERS
Each of our dealerships operates under a franchise agreement with a
vehicle manufacturer (or authorized distributor). The franchise agreements grant
the franchised automobile dealership a non-exclusive right to sell the
manufacturer's or distributor's brand of vehicles and offer related parts and
service within a specified market area. These franchise agreements grant our
dealerships the right to use the manufacturer's or distributor's trademarks in
connection with their operations, and impose numerous operational requirements
and restrictions relating to, among other things:
- inventory levels;
- working capital levels;
- the sales process;
- minimum sales performance requirements;
- customer satisfaction standards;
- marketing and branding;
- facilities and signage;
- personnel;
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- changes in management; and
- monthly financial reporting.
Our dealerships' franchise agreements are for various terms, ranging from
one year to indefinite, and in most cases manufacturers have renewed such
franchises upon expiration so long as the dealership is in compliance with the
terms of the agreement. We generally expect our franchise agreements to survive
for the foreseeable future and, when the agreements do not have indefinite
terms, anticipate routine renewals of the agreements without substantial cost or
modification. Each of our franchise agreements may be terminated or not renewed
by the manufacturer for a variety of reasons, including unapproved changes of
ownership or management and performance deficiencies in such areas as sales
volume, sales effectiveness and customer satisfaction. However, in general, the
states in which we operate have automotive dealership franchise laws that
provide that, notwithstanding the terms of any franchise agreement, it is
unlawful for a manufacturer to terminate or not renew a franchise unless "good
cause" exists. It generally is difficult for a manufacturer to terminate, or not
renew, a franchise under these laws, which were designed to protect dealers. In
addition, in our experience and historically in the automotive retail industry,
dealership franchise agreements are rarely involuntarily terminated or not
renewed by the manufacturer. From time to time, certain manufacturers assert
sales and customer satisfaction performance deficiencies under the terms of our
framework and franchise agreements at a limited number of our dealerships. We
generally work with these manufacturers to address the asserted performance
issues.
In addition to the individual dealership franchise agreements discussed
above, we have entered into framework agreements with most major vehicle
manufacturers and distributors. These agreements impose a number of restrictions
on our operations, including on our ability to make acquisitions and obtain
financing, and on our management and the ownership of our common stock. For a
discussion of these restrictions and the risks related to our relationships with
vehicle manufacturers, please read "--Risk Factors."
The following table sets forth the percentage of our new vehicle retail
unit sales attributable to the manufacturers we represented during 2004 that
accounted for 10% or more of our new vehicle retail unit sales:
PERCENTAGE OF
NEW VEHICLE
RETAIL UNITS
SOLD DURING THE TWELVE
MONTHS ENDED
MANUFACTURER DECEMBER 31, 2004
-------------------------------- ----------------------
Toyota / Lexus ................. 27.7%
Ford............................ 20.5%
DaimlerChrysler................. 14.2%
Nissan / Infiniti............... 10.9%
General Motors.................. 10.8%
GOVERNMENTAL REGULATIONS
AUTOMOTIVE AND OTHER LAWS AND REGULATIONS
We operate in a highly regulated industry. A number of state and federal
laws and regulations affect our business. In every state in which we operate, we
must obtain various licenses in order to operate our businesses, including
dealer, sales and finance and insurance licenses issued by state regulatory
authorities. Numerous laws and regulations govern our conduct of business,
including those relating to our sales, operations, financing, insurance,
advertising and employment practices. These laws and regulations include state
franchise laws and regulations, consumer protection laws and other extensive
laws and regulations applicable to new and used motor vehicle dealers, as well
as a variety of other laws and regulations. These laws also include federal and
state wage-hour, anti-discrimination and other employment practices laws.
Our financing activities with customers are subject to federal
truth-in-lending, consumer leasing and equal credit opportunity laws and
regulations, as well as state and local motor vehicle finance laws, installment
finance laws, usury laws and other installment sales laws and regulations. Some
states regulate finance fees and charges that may be paid as a result of vehicle
sales. Claims arising out of actual or alleged violations of law may be asserted
against us or our dealerships by individuals or governmental entities and may
expose us to significant damages or other penalties, including revocation or
suspension of our licenses to conduct dealership operations and fines.
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Our operations are subject to the National Traffic and Motor Vehicle
Safety Act, Federal Motor Vehicle Safety Standards promulgated by the United
States Department of Transportation and the rules and regulations of various
state motor vehicle regulatory agencies. The imported automobiles we purchase
are subject to United States customs duties and, in the ordinary course of our
business we may, from time to time, be subject to claims for duties, penalties,
liquidated damages or other charges.
Our operations are subject to consumer protection laws known as Lemon
Laws. These laws typically require a manufacturer or dealer to replace a new
vehicle or accept it for a full refund within one year after initial purchase if
the vehicle does not conform to the manufacturer's express warranties and the
dealer or manufacturer, after a reasonable number of attempts, is unable to
correct or repair the defect. Federal laws require various written disclosures
to be provided on new vehicles, including mileage and pricing information.
ENVIRONMENTAL, HEALTH AND SAFETY LAWS AND REGULATIONS
Our operations involve the use, handling, storage and contracting for
recycling and/or disposal of materials such as motor oil and filters,
transmission fluids, antifreeze, refrigerants, paints, thinners, batteries,
cleaning products, lubricants, degreasing agents, tires and fuel. Consequently,
our business is subject to a complex variety of federal, state and local
requirements that regulate the environment and public health and safety.
Most of our dealerships utilize aboveground storage tanks, and to a lesser
extent underground storage tanks, primarily for petroleum-based products.
Storage tanks are subject to periodic testing, containment, upgrading and
removal under the Resource Conservation and Recovery Act and its state law
counterparts. Clean-up or other remedial action may be necessary in the event of
leaks or other discharges from storage tanks or other sources. In addition,
water quality protection programs under the federal Water Pollution Control Act
(commonly known as the Clean Water Act), the Safe Drinking Water Act and
comparable state and local programs govern certain discharges from some of our
operations. Similarly, certain air emissions from operations such as auto body
painting may be subject to the federal Clean Air Act and related state and local
laws. Certain health and safety standards promulgated by the Occupational Safety
and Health Administration of the United States Department of Labor and related
state agencies also apply.
Some of our dealerships are parties to proceedings under the Comprehensive
Environmental Response, Compensation, and Liability Act, or CERCLA, typically in
connection with materials that were sent to former recycling, treatment and/or
disposal facilities owned and operated by independent businesses. The
remediation or clean-up of facilities where the release of a regulated hazardous
substance occurred is required under CERCLA and other laws.
We generally obtain environmental studies on dealerships to be acquired
and, as necessary, implement environmental management or remedial activities to
reduce the risk of noncompliance with environmental laws and regulations.
Nevertheless, we currently own or lease, and in connection with our acquisition
program will in the future own or lease, properties that in some instances have
been used for auto retailing and servicing for many years. Although we have
utilized operating and disposal practices that were standard in the industry at
the time, it is possible that environmentally sensitive materials such as new
and used motor oil, transmission fluids, antifreeze, lubricants, solvents and
motor fuels may have been spilled or released on or under the properties owned
or leased by us or on or under other locations where such materials were taken
for disposal. Further, we believe that structures found on some of these
properties may contain suspect asbestos-containing materials, albeit in an
undisturbed condition. In addition, many of these properties have been operated
by third parties whose use, handling and disposal of such environmentally
sensitive materials were not under our control.
We incur significant costs to comply with applicable environmental, health
and safety laws and regulations in the ordinary course of our business. We do
not anticipate, however, that the costs of such compliance will have a material
adverse effect on our business, results of operations, cash flows or financial
condition, although such outcome is possible given the nature of our operations
and the extensive environmental, public health and safety regulatory framework.
In January 2003, we, along with some 100 other parties, received a letter
from a private party who is seeking all of our participation in a voluntary
mediation with the EPA and the U.S. Department of Justice regarding the remedial
liabilities of potentially responsible parties at the Double Eagle Refinery
Superfund site in Oklahoma City, Oklahoma. During 2003, we joined some 42 other
parties in a group that entered into negotiations with the EPA and DOJ regarding
potential liability for costs of remediating contamination and natural resource
damages at this Superfund site. Currently, negotiations between the parties are
at an advanced stage, with both sides having agreed in principle to a settlement
to resolve this matter. Based on the agreement in principle, we believe our pro
rata share of any
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settlement would be no higher than $50,000. However, because no agreement has
yet been finalized between the parties, we cannot make any assurances at this
time as to our potential liability with respect to this matter.
INSURANCE AND BONDING
Our operations expose us to the risk of various liabilities, including:
- claims by employees, customers or other third parties for personal
injury or property damage resulting from our operations; and
- fines and civil and criminal penalties resulting from alleged
violations of federal and state laws or regulatory requirements.
The automotive retailing business is also subject to substantial risk of
property loss as a result of the significant concentration of property values at
dealership locations. Under self-insurance programs, we retain various levels of
aggregate loss limits, per claim deductibles and claims handling expenses as
part of our various insurance programs, including property and casualty and
employee medical benefits. In most cases, we insure costs in excess of our
retained risk per claim under various contracts with third party insurance
carriers. We estimate the costs of these retained insurance risks based on
historical claims experience, adjusted for current trends and changes in
claims-handling procedures. Risk retention levels may change in the future as a
result of changes in the insurance market or other factors affecting the
economics of our insurance programs. Although we have, subject to certain
limitations and exclusions, substantial insurance, we cannot assure you that we
will not be exposed to uninsured or underinsured losses that could have a
material adverse effect on our business, financial condition, results of
operations or cash flows.
We make provisions for retained losses and deductibles by reflecting
charges to expense based upon periodic evaluations of the estimated ultimate
liabilities on reported and unreported claims. The insurance companies that
underwrite our insurance require that we secure certain of our obligations for
self-insured exposures with collateral. Our collateral requirements are set by
the insurance companies and, to date, have been satisfied by posting surety
bonds, letters of credit and/or cash deposits. Our collateral requirements may
change from time to time based on, among other things, our total insured
exposure and the related self-insured retention assumed under the policies. We
include additional details about our collateral requirements in the Notes to our
Consolidated Financial Statements.
EMPLOYEES
As of December 31, 2004, we employed approximately 8,800 people, of whom
approximately:
- 1,100 were employed in managerial positions;
- 2,600 were employed in non-managerial vehicle sales department
positions;
- 4,100 were employed in non-managerial parts and service department
positions; and
- 1,000 were employed in administrative support positions.
We believe our relationships with our employees are favorable. Sixty-six
of our employees at one platform are represented by a labor union. Because of
our dependence on vehicle manufacturers, we may be affected by labor strikes,
work slowdowns and walkouts at vehicle manufacturing facilities. Additionally,
labor strikes, work slowdowns and walkouts at businesses participating in the
distribution of manufacturers' products may also affect us.
SEASONALITY
We generally experience higher volumes of vehicle sales and service in the
second and third calendar quarters of each year. This seasonality is generally
attributable to consumer buying trends and the timing of manufacturer new
vehicle model introductions. In addition, in some regions of the United States,
vehicle purchases decline during the winter months. As a result, our revenues,
cash flows and operating income are typically lower in the first and fourth
quarters and higher in the second and third quarters. Other factors unrelated to
seasonality, such as changes in economic condition and manufacturer incentive
programs, may cause counter-seasonal fluctuations in our revenues and operating
income.
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RISK FACTORS
IF WE FAIL TO OBTAIN A DESIRABLE MIX OF POPULAR NEW VEHICLES FROM MANUFACTURERS
OUR PROFITABILITY WILL BE NEGATIVELY AFFECTED.
We depend on the manufacturers to provide us with a desirable mix of new
vehicles. The most popular vehicles usually produce the highest profit margins
and are frequently difficult to obtain from the manufacturers. If we cannot
obtain sufficient quantities of the most popular models, our profitability may
be adversely affected. Sales of less desirable models may reduce our profit
margins. Several manufacturers generally allocate their vehicles among their
franchised dealerships based on the sales history of each dealership. If our
dealerships experience prolonged sales slumps, these manufacturers may cut back
their allotments of popular vehicles to our dealerships and new vehicle sales
and profits may decline. Similarly, the delivery of vehicles, particularly
newer, more popular vehicles, from manufacturers at a time later than scheduled
could lead to reduced sales during those periods.
IF WE FAIL TO OBTAIN RENEWALS OF ONE OR MORE OF OUR FRANCHISE AGREEMENTS ON
FAVORABLE TERMS OR SUBSTANTIAL FRANCHISES ARE TERMINATED, OUR OPERATIONS MAY BE
SIGNIFICANTLY IMPAIRED.
Each of our dealerships operates under a franchise agreement with one of
our manufacturers (or authorized distributors). Without a franchise agreement,
we cannot obtain new vehicles from a manufacturer. As a result, we are
significantly dependent on our relationships with these manufacturers, which
exercise a great degree of influence over our operations through the franchise
agreements. Each of our franchise agreements may be terminated or not renewed by
the manufacturer for a variety of reasons, including any unapproved changes of
ownership or management and other material breaches of the franchise agreements.
Manufacturers may also have a right of first refusal if we seek to sell
dealerships. We cannot guarantee all of our franchise agreements will be renewed
or that the terms of the renewals will be as favorable to us as our current
agreements. In addition, actions taken by manufacturers to exploit their
bargaining position in negotiating the terms of renewals of franchise agreements
or otherwise could also have a material adverse effect on our revenues and
profitability. Our results of operations may be materially and adversely
affected to the extent that our franchise rights become compromised or our
operations restricted due to the terms of our franchise agreements or if we lose
substantial franchises.
Our franchise agreements do not give us the exclusive right to sell a
manufacturer's product within a given geographic area. As a result, a
manufacturer may grant another dealer a franchise to start a new dealership near
one of our locations, or an existing dealership may move its dealership to a
location that would directly compete against us. The location of new dealerships
near our existing dealerships could materially adversely affect our operations
and reduce the profitability of our existing dealerships.
MANUFACTURERS' RESTRICTIONS ON ACQUISITIONS MAY LIMIT OUR FUTURE GROWTH.
We must obtain the consent of the manufacturer prior to the acquisition of
any of its dealership franchises. Delays in obtaining, or failing to obtain,
manufacturer approvals for dealership acquisitions could adversely affect our
acquisition program. Obtaining the consent of a manufacturer for the acquisition
of a dealership could take a significant amount of time or might be rejected
entirely. In determining whether to approve an acquisition, manufacturers may
consider many factors, including the moral character and business experience of
the dealership principals and the financial condition, ownership structure,
customer satisfaction index scores and other performance measures of our
dealerships.
Our manufacturers attempt to measure customers' satisfaction with
automobile dealerships through systems generally known as the customer
satisfaction index or CSI. Manufacturers may use these performance indicators,
as well as sales performance numbers, as factors in evaluating applications for
additional acquisitions. The manufacturers have modified the components of their
CSI scores from time to time in the past, and they may replace them with
different systems at any time. From time to time, we may not meet all of the
manufacturers' requirements to make acquisitions. We cannot assure you that all
of our proposed future acquisitions will be approved.
In addition, a manufacturer may limit the number of its dealerships that
we may own or the number that we may own in a particular geographic area. If we
reach a limitation imposed by a manufacturer for a particular geographic market,
we will be unable to make additional tuck-in acquisitions in that market of that
manufacturer's franchises, which could limit our ability to grow in that
geographic area. In addition, geographic limitations imposed by manufacturers
could restrict our ability to acquire platforms whose markets overlap with those
already served by us. The following is a summary of the restrictions imposed by
those manufacturers that accounted for 10% or more of our new vehicle retail
unit sales in 2004:
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TOYOTA / LEXUS. Toyota restricts the number of dealerships that we may own
and the time frame over which we may acquire them. Under Toyota's standard
Multiple Ownership Agreement, we may acquire additional dealerships, over a
minimum of seven semi-annual periods, up to a maximum number of dealerships
equal to 5% of Toyota's aggregate national annual retail sales volume. In
addition, Toyota restricts the number of Toyota dealerships that we may acquire
in any Toyota-defined region and "Metro" market, as well as any contiguous
market. We may acquire only four primary Lexus dealerships or six outlets
nationally, including only two Lexus dealerships in any one of the four Lexus
geographic areas. Our Lexus companion dealership located south of Houston is not
considered by Lexus to be a primary Lexus dealership for purposes of the
restriction on the number of Lexus dealerships we may acquire. Currently, we own
11 Toyota dealership franchises, representing approximately 1.5% of the national
retail sales of Toyota for 2004, and two primary Lexus dealership franchises.
Under the terms of our current agreement with Toyota, we own the maximum number
of Toyota dealerships we are currently permitted to own in the Gulf states
region, which is comprised of Texas, Oklahoma, Louisiana, Mississippi and
Arkansas.
FORD. Ford currently limits the number of dealerships that we may own to
the greater of (1) 15 Ford and 15 Lincoln and Mercury dealerships and (2) that
number of Ford, Lincoln and Mercury dealerships accounting for 5% of the
preceding year's total Ford, Lincoln and Mercury retail sales of those brands in
the United States. Currently, we own a total of 27 Ford, Lincoln and Mercury
dealership franchises, representing approximately 0.7% of the national retail
sales of Ford, Lincoln and Mercury for 2004. In addition, Ford limits us to one
Ford dealership in a Ford-defined market area having two or less authorized Ford
dealerships and one-third of Ford dealerships in any Ford-defined market area
having more than three authorized Ford dealerships. In many of its dealership
franchise agreements Ford has the right of first refusal to acquire, subject to
applicable state law, a Ford franchised dealership when its ownership changes.
Currently, Ford is emphasizing increased sales performance from all of its
franchised dealers, including our Ford dealerships. To this end, Ford has
requested that we focus on the performance of owned dealerships as opposed to
acquiring additional Ford dealerships. We intend to comply with this request.
DAIMLERCHRYSLER. Currently, we have no agreement with Chrysler restricting
our ability to acquire Chrysler dealerships. Chrysler has advised us that in
determining whether to approve an acquisition of a Chrysler dealership, Chrysler
considers the number of Chrysler dealerships the acquiring company already owns.
Chrysler currently carefully considers, on a case-by-case basis, any acquisition
that would cause the acquiring company to own more than 10 Chrysler dealerships
nationally, six in the same Chrysler-defined zone and two in the same market.
Our agreement with Mercedes-Benz, in addition to limitations on the number of
dealership franchises in particular metropolitan markets and regions, limits us
to a maximum of the greater of four Mercedes-Benz dealership franchises or the
number of dealership franchises that would account for up to 3% of the preceding
year's total Mercedes-Benz retail sales. Currently, we own 28 Chrysler
(including two acquired in January 2005), three Mercedes-Benz and one Maybach
dealership franchise. Our three Mercedes-Benz dealership franchises represented
approximately 1.1% of total Mercedes-Benz retail sales in 2004.
GENERAL MOTORS. General Motors, or GM, currently evaluates our
acquisitions of GM dealerships on a case-by-case basis. GM, however, limits the
maximum number of GM dealerships that we may acquire at any time to 50% of the
GM dealerships, by franchise line, in a GM-defined geographic market area.
Currently, we own 24 GM dealership franchises. Additionally, our current
agreement with GM does not include Saturn dealerships and any future acquisition
of a Saturn dealership will be subject to GM approval on a case-by-case basis.
NISSAN / INFINITI. Nissan currently limits the number of dealerships that
we may own up to a maximum number of dealerships that would equal 5% of Nissan's
(or Infiniti's, as applicable) aggregate national annual vehicle registrations.
In addition, Nissan restricts the number of dealerships that we may own in any
Nissan-defined region to 20% of the aggregate regional registrations for the
applicable area. Currently we own 10 Nissan franchises and one Infiniti
franchise, representing approximately 1.3% of the combined national vehicle
registrations for Nissan and Infiniti.
MANUFACTURERS' RESTRICTIONS COULD NEGATIVELY IMPACT OUR ABILITY TO OBTAIN
CERTAIN TYPES OF FINANCINGS.
Provisions in our agreements with our manufacturers may restrict, in the
future, our ability to obtain certain types of financing. A number of our
manufacturers prohibit pledging the stock of their franchised dealerships. For
example, our agreement contains provisions prohibiting pledging the stock of our
GM franchised dealerships. Our agreement with Ford permits pledging our Ford
franchised dealerships' stock and assets, but only for Ford dealership-related
debt. Moreover, our Ford agreement permits our Ford franchised dealerships to
guarantee, and to use Ford franchised dealership assets to secure our debt, but
only for Ford dealership-related debt. Ford waived that
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requirement with respect to our March 1999 and August 2003 senior subordinated
notes offerings and the subsidiary guarantees of those notes. Certain of our
manufacturers require us to meet certain financial ratios, which, if we fail to
meet these ratios the manufacturers may reject proposed acquisitions, and may
give them the right to purchase their franchises for fair value.
CERTAIN RESTRICTIONS RELATING TO OUR MANAGEMENT AND OWNERSHIP OF OUR COMMON
STOCK COULD DETER PROSPECTIVE ACQUIRERS FROM ACQUIRING CONTROL OF US AND
ADVERSELY AFFECT OUR ABILITY TO ENGAGE IN EQUITY OFFERINGS.
As a condition to granting their consent to our previous acquisitions and
our initial public offering, some of our manufacturers have imposed other
restrictions on us. These restrictions prohibit, among other things:
- any one person, who in the opinion of the manufacturer is
unqualified to own its franchised dealership or has interests
incompatible with the manufacturer, from acquiring more than a
specified percentage of our common stock (ranging from 20% to 50%
depending on the particular manufacturer's restrictions) and this
trigger level can fall to as low as 5% if another vehicle
manufacturer is the entity acquiring the ownership interest or
voting rights;
- certain material changes in our business or extraordinary corporate
transactions such as a merger or sale of a material amount of our
assets;
- the removal of a dealership general manager without the consent of
the manufacturer; and
- a change in control of our Board of Directors or a change in
management.
Our manufacturers may also impose additional similar restrictions on us in
the future. Actions by our stockholders or prospective stockholders that would
violate any of the above restrictions are generally outside our control. If we
are unable to comply with or renegotiate these restrictions, we may be forced to
terminate or sell one or more franchises, which could have a material adverse
effect on us. These restrictions may prevent or deter prospective acquirers from
acquiring control of us and, therefore, may adversely impact the value of our
common stock. These restrictions also may impede our ability to acquire
dealership groups, to raise required capital or to issue our stock as
consideration for future acquisitions.
IF MANUFACTURERS DISCONTINUE SALES INCENTIVES, WARRANTIES AND OTHER PROMOTIONAL
PROGRAMS, OUR RESULTS OF OPERATIONS MAY BE MATERIALLY ADVERSELY AFFECTED.
We depend on our manufacturers for sales incentives, warranties and other
programs that are intended to promote dealership sales or support dealership
profitability. Manufacturers historically have made many changes to their
incentive programs during each year. Some of the key incentive programs include:
- customer rebates;
- dealer incentives on new vehicles;
- below market financing on new vehicles and special leasing terms;
- warranties on new and used vehicles; and
- sponsorship of used vehicle sales by authorized new vehicle dealers.
A discontinuation or change in our manufacturers' incentive programs could
adversely affect our business. Moreover, some manufacturers use a dealership's
CSI scores as a factor for participating in incentive programs. Failure to
comply with the CSI standards could adversely affect our participation in
dealership incentive programs, which could have a material adverse effect on us.
OUR MANUFACTURERS REQUIRE US TO MEET CERTAIN IMAGE AND FACILITY GUIDELINES AND
TO MAINTAIN MINIMUM WORKING CAPITAL, WHICH MAY REQUIRE US TO DIVERT FINANCIAL
RESOURCES FROM USES THAT MANAGEMENT BELIEVES MAY BE OF BETTER VALUE TO OUR
STOCKHOLDERS.
Our franchise agreements specify that, in certain situations, we cannot
operate a dealership franchised by another manufacturer in the same building as
that manufacturer's franchised dealership. In addition, some manufacturers, like
GM, are in the process of realigning their franchised dealerships along defined
"channels," such as combining Pontiac, Buick and GMC in one dealership location.
As a result, GM, as well as other manufacturers, may require us to move or sell
some dealerships.
Our manufacturers generally require that the dealership premises meet
defined image and facility standards and may direct us to implement costly
capital improvements to dealerships as a condition for renewing certain
franchise agreements. All of these requirements could impose significant capital
expenditures on us in the future. We anticipate spending approximately $0.6
million in 2005 in connection with various manufacturers' required imaging
projects and approximately $23.5 million to expand or relocate existing
facilities as required by manufacturer facility guidelines.
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Pursuant to our franchise agreements, our dealerships are required to
maintain a certain minimum working capital, as determined by the manufacturers.
This requirement could force us to utilize available capital to maintain
manufacturer-required working capital levels at our dealerships thereby limiting
our ability to apply profits generated from one subsidiary for use in other
subsidiaries or, in some cases, at the parent company.
These factors, either alone or in combination, could cause us to divert
our financial resources to capital projects from uses that management believes
may be of higher long-term value to us.
OUR SUCCESS DEPENDS UPON THE CONTINUED VIABILITY AND OVERALL SUCCESS OF A
LIMITED NUMBER OF MANUFACTURERS.
Toyota / Lexus, Ford, DaimlerChrysler, Nissan / Infiniti and GM
dealerships represented approximately 84.1% of our total new vehicle retail
sales in 2004. As a result, demand for these manufacturers' vehicles, as well as
the financial condition, management, marketing, production and distribution
capabilities, reputation and labor relations of these manufacturers may have a
substantial affect our business. Events such as labor disputes and other
production disruptions that adversely affect one of these manufacturers may also
have a material adverse affect on us. Similarly, the late delivery of vehicles
from manufacturers, which sometimes occurs during periods of new product
introductions, can lead to reduced sales during those periods. Moreover, any
event that causes adverse publicity involving any of our manufacturers may have
an adverse effect on us regardless of whether such event involves any of our
dealerships. Additionally, the inability of a manufacturer to continue
operations will not only impact our vehicle sales and profitability, but could
also result in the partial or complete impairment, and a corresponding
write-down, of our recorded goodwill and/or intangible franchise rights.
GROWTH IN OUR REVENUES AND EARNINGS WILL BE IMPACTED BY OUR ABILITY TO ACQUIRE
AND SUCCESSFULLY INTEGRATE AND OPERATE DEALERSHIPS.
Growth in our revenues and earnings depends substantially on our ability
to acquire and successfully integrate and operate dealerships. We cannot
guarantee that we will be able to identify and acquire dealerships in the
future. In addition, we cannot guarantee that any acquisitions will be
successful or on terms and conditions consistent with past acquisitions.
Restrictions by our manufacturers, as well as covenants contained in our debt
instruments, may directly or indirectly limit our ability to acquire additional
dealerships. In addition, increased competition for acquisitions may develop,
which could result in fewer acquisition opportunities available to us and/or
higher acquisition prices. Some of our competitors may have greater financial
resources than us.
We will continue to need substantial capital in order to acquire
additional automobile dealerships. In the past, we have financed these
acquisitions with a combination of cash flow from operations, proceeds from
borrowings under our credit facility, bond issuances, stock offerings, and the
issuance of our common stock to the sellers of the acquired dealerships.
We currently intend to finance future acquisitions by using cash and
issuing shares of our common stock as partial consideration for acquired
dealerships. The use of common stock as consideration for acquisitions will
depend on three factors: (1) the market value of our common stock at the time of
the acquisition, (2) the willingness of potential acquisition candidates to
accept common stock as part of the consideration for the sale of their
businesses, and (3) our determination of what is in our best interests. If
potential acquisition candidates are unwilling to accept our common stock, we
will rely solely on available cash or proceeds from debt or equity financings,
which could adversely affect our acquisition program. Accordingly, our ability
to make acquisitions could be adversely affected if the price of our common
stock is depressed.
In addition, managing and integrating additional dealerships into our
existing mix of dealerships may result in substantial costs, diversion of our
management's attention, delays, or other operational or financial problems.
Acquisitions involve a number of special risks, including:
- incurring significantly higher capital expenditures and operating
expenses;
- failing to integrate the operations and personnel of the acquired
dealerships;
- entering new markets with which we are not familiar;
- incurring undiscovered liabilities at acquired dealerships;
- disrupting our ongoing business;
- failing to retain key personnel of the acquired dealerships;
- impairing relationships with employees, manufacturers and customers;
and
- incorrectly valuing acquired entities,
some or all of which could have a material adverse effect on our business,
financial condition, cash flows and results of operations. Although we conduct
what we believe to be a prudent level of investigation regarding the operating
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condition of the businesses we purchase in light of the circumstances of each
transaction, an unavoidable level of risk remains regarding the actual operating
condition of these businesses.
Acquired entities may subject us to unforeseen liabilities that we are
unable to detect prior to completing the acquisition or liabilities that turn
out to be greater than those we had expected. These liabilities may include
liabilities that arise from non-compliance with environmental laws by prior
owners for which we, as a successor owner, will be responsible. Until we
actually assume operating control of such business assets, we may not be able to
ascertain the actual value of the acquired entity.
IF STATE DEALER LAWS ARE REPEALED OR WEAKENED, OUR DEALERSHIPS WILL BE MORE
SUSCEPTIBLE TO TERMINATION, NON-RENEWAL OR RENEGOTIATION OF THEIR FRANCHISE
AGREEMENTS.
State dealer laws generally provide that a manufacturer may not terminate
or refuse to renew a franchise agreement unless it has first provided the dealer
with written notice setting forth good cause and stating the grounds for
termination or nonrenewal. Some state dealer laws allow dealers to file protests
or petitions or attempt to comply with the manufacturer's criteria within the
notice period to avoid the termination or nonrenewal. Though unsuccessful to
date, manufacturers' lobbying efforts may lead to the repeal or revision of
state dealer laws. If dealer laws are repealed in the states in which we
operate, manufacturers may be able to terminate our franchises without providing
advance notice, an opportunity to cure or a showing of good cause. Without the
protection of state dealer laws, it may also be more difficult for our dealers
to renew their franchise agreements upon expiration.
In addition, these state dealer laws restrict the ability of automobile
manufacturers to directly enter the retail market in the future. If
manufacturers obtain the ability to directly retail vehicles and do so in our
markets, such competition could have a material adverse effect on us.
IF WE LOSE KEY PERSONNEL OR ARE UNABLE TO ATTRACT ADDITIONAL QUALIFIED
PERSONNEL, OUR BUSINESS COULD BE ADVERSELY AFFECTED BECAUSE WE RELY ON THE
INDUSTRY KNOWLEDGE AND RELATIONSHIPS OF OUR KEY PERSONNEL.
We believe our success depends to a significant extent upon the efforts
and abilities of our executive officers, senior management and key employees,
including the principals of our dealerships. Additionally, our business is
dependent upon our ability to continue to attract and retain qualified
personnel, such as managers, as well as our ability to retain the senior
management of acquired dealerships. The market for qualified employees in the
industry and in the regions in which we operate, particularly for general
managers and sales and service personnel, is highly competitive and may subject
us to increased labor costs during periods of low unemployment. We do not have
employment agreements with most of our dealership general managers and other key
dealership personnel.
The unexpected or unanticipated loss of the services of one or more
members of our senior management team could have a material adverse effect on us
and materially impair the efficiency and productivity of our operations. We do
not have key man insurance for any of our executive officers or key personnel.
In addition, the loss of any of our key employees or the failure to attract
qualified managers could have a material adverse effect on our business and may
materially impact the ability of our dealerships to conduct their operations in
accordance with our national standards.
THE IMPAIRMENT OF OUR GOODWILL, OUR INDEFINITE-LIVED INTANGIBLES AND OUR OTHER
LONG-LIVED ASSETS HAS HAD, AND MAY HAVE IN THE FUTURE, A MATERIAL ADVERSE EFFECT
ON OUR REPORTED RESULTS OF OPERATIONS.
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets,"
we assess goodwill and other indefinite-lived intangibles for impairment on an
annual basis, or more frequently when events or circumstances indicate that an
impairment may have occurred. We also assess the carrying value of our other
long-lived assets, in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," when events or circumstances
indicate that an impairment may have occurred. Based on the organization and
management of our business, we have determined that each of our platforms
currently qualify as reporting units for the purpose of assessing goodwill for
impairment. However, we are required to evaluate the carrying value of our
indefinite-lived, intangible franchise rights at a dealership level.
To determine the fair value of our reporting units in assessing the
carrying value of our goodwill for impairment, we use a discounted cash flow
approach. Included in this analysis are assumptions regarding revenue growth
rates, future gross margin estimates, future selling, general and administrative
expense rates and our weighted average cost of capital. We also must estimate
residual values at the end of the forecast period and future capital expenditure
requirements. Each of these assumptions requires us to use our knowledge of (1)
our industry, (2) our recent transactions, and (3) reasonable performance
expectations for our operations. If any one of the above assumptions changes, in
some cases insignificantly, or fails to materialize, the resulting decline in
our estimated fair
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value could result in a material impairment charge to the goodwill associated
with the applicable platform(s), especially with respect to those platforms
acquired prior to July 1, 2001.
To test the carrying value of each individual franchise right for
impairment, we also use a discounted cash flow based approach. Included in this
analysis are assumptions, at a dealership level, regarding revenue growth rates,
future gross margin estimates and future selling, general and administrative
expense rates. Using our weighted average cost of capital, estimated residual
values at the end of the forecast period and future capital expenditure
requirements, we calculate the fair value of each dealership's franchise rights
after considering estimated values for tangible assets, working capital and
workforce. If any one of the above assumptions changes, in some cases
insignificantly, or fails to materialize, the resulting decline in our estimated
fair value could result in a material impairment charge to the intangible
franchise right associated with the applicable dealership.
CHANGES IN INTEREST RATES COULD ADVERSELY IMPACT OUR PROFITABILITY.
All of the borrowings under our various credit facilities bear interest
based on a floating rate. Therefore, our interest expenses will rise with
increases in interest rates. Rising interest rates may also have the effect of
depressing demand in the interest rate sensitive aspects of our business,
particularly new and used vehicle sales, because many of our customers finance
their vehicle purchases. As a result, rising interest rates may have the effect
of simultaneously increasing our costs and reducing our revenues. We receive
credit assistance from certain automobile manufacturers, which is reflected as a
reduction in cost of sales on our statements of operations. Please see
"Quantitative and Qualitative Disclosures about Market Risk" for a discussion
regarding our interest rate sensitivity.
A DECLINE OF AVAILABLE FINANCING IN THE SUB-PRIME LENDING MARKET HAS, AND MAY
CONTINUE TO, ADVERSELY AFFECT OUR SALES OF USED VEHICLES.
A significant portion of vehicle buyers, particularly in the used car
market, finance their purchases of automobiles. Sub-prime lenders have
historically provided financing for consumers who, for a variety of reasons
including poor credit histories and lack of a down payment, do not have access
to more traditional finance sources. Our recent experience suggests that
sub-prime lenders have tightened their credit standards and may continue to
apply these higher standards in the future. This has adversely affected our used
vehicle sales. If sub-prime lenders continue to apply these higher standards, if
there is any further tightening of credit standards used by sub-prime lenders,
or if there is any additional decline in the overall availability of credit in
the sub-prime lending market, the ability of these consumers to purchase
vehicles could be limited, which could have a material adverse effect on our
used car business, revenues, cash flows and profitability.
OUR INSURANCE DOES NOT FULLY COVER ALL OF OUR OPERATIONAL RISKS, AND CHANGES IN
THE COST OF INSURANCE OR THE AVAILABILITY OF INSURANCE COULD MATERIALLY INCREASE
OUR INSURANCE COSTS OR RESULT IN A DECREASE IN OUR INSURANCE COVERAGE.
The operation of automobile dealerships is subject to compliance with a
wide range of laws and regulations and is subject to a broad variety of risks.
While we have insurance on our real property, comprehensive coverage for our
vehicle inventory, general liability insurance, workers' compensation insurance,
employee dishonesty coverage, employment practices liability insurance,
pollution coverage and errors and omissions insurance in connection with vehicle
sales and financing activities, we are self-insured for a portion of our
potential liabilities. Additionally, changes in the cost of insurance or the
availability of insurance in the future could substantially increase our costs
to maintain our current level of coverage or could cause us to reduce our
insurance coverage and increase the portion of our risks that we self-insure.
WE ARE SUBJECT TO A NUMBER OF RISKS ASSOCIATED WITH IMPORTING INVENTORY.
A portion of our new vehicle business involves the sale of vehicles,
vehicle parts or vehicles composed of parts that are manufactured outside the
United States. As a result, our operations are subject to customary risks
associated with imported merchandise, including fluctuations in the value of
currencies, import duties, exchange controls, differing tax structures, trade
restrictions, transportation costs, work stoppages and general political and
economic conditions in foreign countries.
The United States or the countries from which our products are imported
may, from time to time, impose new quotas, duties, tariffs or other
restrictions, or adjust presently prevailing quotas, duties or tariffs on
imported merchandise. Any of those impositions or adjustments could affect our
operations and our ability to purchase imported vehicles and parts at reasonable
prices, which could have an adverse effect on our business.
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THE SEASONALITY OF THE AUTOMOBILE RETAIL BUSINESS MAGNIFIES THE IMPORTANCE OF
OUR SECOND AND THIRD QUARTER RESULTS.
The automobile industry experiences seasonal variations in revenues.
Demand for automobiles is generally lower during the winter months than in other
seasons, particularly in regions of the United States with harsh winters. A
higher amount of vehicle sales generally occurs in the second and third fiscal
quarters of each year due in part to weather-related factors, consumer buying
patterns, the historical timing of major manufacturer incentive programs, and
the introduction of new vehicle models. Therefore, if conditions surface in the
second or third quarters that depress or affect automotive sales, such as major
geopolitical events, high fuel costs, depressed economic conditions or similar
adverse conditions, our revenues for the year will be disproportionately
adversely affected. Our dealerships located in the northeastern states are
affected by seasonality more than our dealerships in other regions.
OUR BUSINESS AND THE AUTOMOTIVE RETAIL INDUSTRY IN GENERAL ARE SUSCEPTIBLE TO
ADVERSE ECONOMIC CONDITIONS, INCLUDING CHANGES IN CONSUMER CONFIDENCE, FUEL
PRICES AND CREDIT AVAILABILITY, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON
OUR BUSINESS, REVENUES AND PROFITABILITY.
We believe the automotive retail industry is influenced by general
economic conditions and particularly by consumer confidence, the level of
personal discretionary spending, interest rates, fuel prices, unemployment rates
and credit availability. Historically, unit sales of motor vehicles,
particularly new vehicles, have been cyclical, fluctuating with general economic
cycles. During economic downturns, retail new vehicle sales typically experience
periods of decline characterized by oversupply and weak demand. Although
incentive programs initiated by manufacturers in late 2001 abated these
historical trends, the automotive retail industry may experience sustained
periods of decline in vehicle sales in the future. Any decline or change of this
type could have a material adverse effect on our business, revenues, cash flows
and profitability.
In addition, local economic, competitive and other conditions affect the
performance of our dealerships. Our revenues, cash flows and profitability
depend substantially on general economic conditions and spending habits in those
regions of the United States where we maintain most of our operations.
SUBSTANTIAL COMPETITION IN AUTOMOTIVE SALES AND SERVICES MAY ADVERSELY AFFECT
OUR PROFITABILITY DUE TO OUR NEED TO LOWER PRICES TO SUSTAIN SALES AND
PROFITABILITY.
The automotive retail industry is highly competitive. Depending on the
geographic market, we compete with:
- franchised automotive dealerships in our markets that sell the same
or similar makes of new and used vehicles that we offer,
occasionally at lower prices than we do;
- other national or regional affiliated groups of franchised
dealerships;
- private market buyers and sellers of used vehicles;
- Internet-based vehicle brokers that sell vehicles obtained from
franchised dealers directly to consumers;
- service center chain stores; and
- independent service and repair shops.
We also compete with regional and national vehicle rental companies that
sell their used rental vehicles. In addition, automobile manufacturers may
directly enter the retail market in the future, which could have a material
adverse effect on us. As we seek to acquire dealerships in new markets, we may
face significant competition as we strive to gain market share. Some of our
competitors have greater financial, marketing and personnel resources and lower
overhead and sales costs than we have. We do not have any cost advantage in
purchasing new vehicles from vehicle manufacturers and typically rely on
advertising, merchandising, sales expertise, service reputation and dealership
location in order to sell new vehicles. Our franchise agreements do not grant us
the exclusive right to sell a manufacturer's product within a given geographic
area. Our revenues and profitability may be materially and adversely affected if
competing dealerships expand their market share or are awarded additional
franchises by manufacturers that supply our dealerships.
In addition to competition for vehicle sales, our dealerships compete with
franchised dealerships to perform warranty repairs and with other automotive
dealers, franchised and independent service center chains and independent
garages for non-warranty repair and routine maintenance business. Our
dealerships compete with other automotive dealers, service stores and auto parts
retailers in their parts operations. We believe that the principal competitive
factors in service and parts sales are the quality of customer service, the use
of factory-approved replacement parts, familiarity with a manufacturer's brands
and models, convenience, the competence of technicians, location, and price. A
number of regional or national chains offer selected parts and services at
prices that may be lower than our dealerships' prices. We also compete with a
broad range of financial institutions in arranging financing for our customers'
vehicle purchases.
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Some automobile manufacturers have in the past acquired and may in the
future attempt to acquire automotive dealerships in certain states. Our revenues
and profitability could be materially adversely affected by the efforts of
manufacturers to enter the retail arena.
In addition, the Internet is becoming a significant part of the sales
process in our industry. We believe that customers are using the Internet as
part of the sales process to compare pricing for cars and related finance and
insurance services, which may reduce gross profit margins for new and used cars
and profits for related finance and insurance services. Some websites offer
vehicles for sale over the Internet without the benefit of having a dealership
franchise, although they must currently source their vehicles from a franchised
dealer. If Internet new vehicle sales are allowed to be conducted without the
involvement of franchised dealers, or if dealerships are able to effectively use
the Internet to sell outside of their markets, our business could be materially
adversely affected. We would also be materially adversely affected to the extent
that Internet companies acquire dealerships or align themselves with our
competitors' dealerships.
Please see "Business -- Competition" for more discussion of competition in
our industry.
DUE TO THE NATURE OF THE AUTOMOTIVE RETAILING BUSINESS, WE MAY BE INVOLVED IN
LEGAL PROCEEDINGS OR SUFFER LOSSES THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON
OUR BUSINESS.
We will continue to be involved in legal proceedings in the ordinary
course of business. A significant judgment against us, the loss of a significant
license or permit or the imposition of a significant fine could have a material
adverse effect on our business, financial condition and future prospects. In
addition, it is possible that we could suffer losses at individual dealerships
due to fraud or theft.
OUR AUTOMOTIVE DEALERSHIPS ARE SUBJECT TO SUBSTANTIAL REGULATION WHICH MAY
ADVERSELY AFFECT OUR PROFITABILITY AND SIGNIFICANTLY INCREASE OUR COSTS IN THE
FUTURE.
A number of state and federal laws and regulations affect our business. We
are also subject to laws and regulations relating to business corporations
generally. In every state in which we operate, we must obtain various licenses
in order to operate our businesses, including dealer, sales, finance and
insurance-related licenses issued by state authorities. These laws also regulate
our conduct of business, including our advertising, operating, financing,
employment and sales practices. Other laws and regulations include state
franchise laws and regulations and other extensive laws and regulations
applicable to new and used motor vehicle dealers, as well as federal and state
wage-hour, anti-discrimination and other employment practices laws.
Our financing activities with customers are subject to federal
truth-in-lending, consumer leasing and equal credit opportunity laws and
regulations, as well as state and local motor vehicle finance laws, installment
finance laws, insurance laws, usury laws and other installment sales laws and
regulations. Some states regulate finance fees and charges that may be paid as a
result of vehicle sales. Claims arising out of actual or alleged violations of
law may be asserted against us or our dealerships by individuals or governmental
entities and may expose us to significant damages or other penalties, including
revocation or suspension of our licenses to conduct dealership operations and
fines.
Our operations are also subject to the National Traffic and Motor Vehicle
Safety Act, the Magnusson-Moss Warranty Act, Federal Motor Vehicle Safety
Standards promulgated by the United States Department of Transportation and
various state motor vehicle regulatory agencies. The imported automobiles we
purchase are subject to U.S. customs duties and, in the ordinary course of our
business, we may, from time to time, be subject to claims for duties, penalties,
liquidated damages, or other charges.
Our operations are subject to consumer protection laws known as Lemon
Laws. These laws typically require a manufacturer or dealer to replace a new
vehicle or accept it for a full refund within one year after initial purchase if
the vehicle does not conform to the manufacturer's express warranties and the
dealer or manufacturer, after a reasonable number of attempts, is unable to
correct or repair the defect. Federal laws require various written disclosures
to be provided on new vehicles, including mileage and pricing information.
Possible penalties for violation of any of these laws or regulations
include revocation or suspension of our licenses and civil or criminal fines and
penalties. In addition, many laws may give customers a private cause of action.
Violation of these laws, the cost of compliance with these laws, or changes in
these laws could result in adverse financial consequences to us.
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OUR AUTOMOTIVE DEALERSHIPS ARE SUBJECT TO FEDERAL, STATE AND LOCAL ENVIRONMENTAL
REGULATIONS THAT MAY RESULT IN CLAIMS AND LIABILITIES, WHICH COULD BE MATERIAL.
We are subject to a wide range of federal, state and local environmental
laws and regulations, including those governing discharges into the air and
water, the operation and removal of underground and aboveground storage tanks,
the use, handling, storage and disposal of hazardous substances and other
materials and the investigation and remediation of contamination. As with
automotive dealerships generally, and service, parts and body shop operations in
particular, our business involves the use, storage, handling and contracting for
recycling or disposal of hazardous materials or wastes and other environmentally
sensitive materials. Operations involving the management of hazardous and
non-hazardous materials are subject to requirements of the federal Resource
Conservation and Recovery Act, or RCRA, and comparable state statutes. Most of
our dealerships utilize aboveground storage tanks, and to a lesser extent
underground storage tanks, primarily for petroleum-based products. Storage tanks
are subject to periodic testing, containment, upgrading and removal under RCRA
and its state law counterparts. Clean-up or other remedial action may be
necessary in the event of leaks or other discharges from storage tanks or other
sources. We may also have liability in connection with materials that were sent
to third-party recycling, treatment, and/or disposal facilities under the
Comprehensive Environmental Response, Compensation and Liability Act, and
comparable state statutes, which impose liability for investigation and
remediation of contamination without regard to fault or the legality of the
conduct that contributed to the contamination. Similar to many of our
competitors, we have incurred and will continue to incur, capital and operating
expenditures and other costs in complying with such laws and regulations.
Soil and groundwater contamination is known to exist at some of our
current or former properties. Further, environmental laws and regulations are
complex and subject to change. In addition, in connection with our acquisitions,
it is possible that we will assume or become subject to new or unforeseen
environmental costs or liabilities, some of which may be material. In connection
with our dispositions, or prior dispositions made by companies we acquire, we
may retain exposure for environmental costs and liabilities, some of which may
be material. We may be required to make material additional expenditures to
comply with existing or future laws or regulations, or as a result of the future
discovery of environmental conditions. Please see "Business -- Governmental
Regulations -- Environmental, Health and Safety Laws and Regulations" for a
discussion of the effect of such regulations on us.
CHANGES IN ACCOUNTING ESTIMATES COULD ADVERSELY IMPACT OUR PROFITABILITY.
We are required to make estimates and assumptions in the preparation of
financial statements in conformity with accounting principles generally accepted
in the United States. Please see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Critical Accounting Policies
and Accounting Estimates" for a discussion of what we believe are our critical
accounting policies and accounting estimates.
OUR SIGNIFICANT INDEBTEDNESS AND LEASE OBLIGATIONS COULD MATERIALLY ADVERSELY
AFFECT OUR FINANCIAL HEALTH, LIMIT OUR ABILITY TO FINANCE FUTURE ACQUISITIONS
AND CAPITAL EXPENDITURES, AND PREVENT US FROM FULFILLING OUR FINANCIAL
OBLIGATIONS.
As of December 31, 2004, our total outstanding indebtedness and lease and
other obligations were approximately $1,711.2 million, including the following:
- $632.6 million under the floorplan portion of our revolving credit
facility;
- $562.3 million of future commitments under various operating leases;
- $195.5 million under our Ford Motor Credit floorplan facility;
- $144.7 million in 8-1/4% senior subordinated notes due 2013;
- $90.5 million under the acquisition portion of our revolving credit
facility; and
- $85.6 million of other short- and long-term commitments.
As of December 31, 2004, we had approximately $136.7 million available for
additional borrowings under the floorplan portion of our revolving credit
facility, $72.3 million available for additional borrowings under the
acquisition portion of our revolving credit facility, and $104.5 million
available for additional borrowings under the Ford Motor Credit floorplan
facility. In addition, the indenture relating to our senior subordinated notes
and other debt instruments allow us to incur additional indebtedness and enter
into additional operating leases.
Our significant amount of indebtedness and lease obligations could have
important consequences to us, including the following:
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- our ability to obtain additional financing for acquisitions, capital
expenditures, working capital or general corporate purposes may be
impaired in the future;
- a substantial portion of our current cash flow from operations must
be dedicated to the payment of principal and interest on our
indebtedness and the payment of lease obligations, thereby reducing
the funds available to us for our operations and other purposes;
- some of our borrowings are and will continue to be at variable rates
of interest, which exposes us to the risk of increasing interest
rates; and
- we may be substantially more leveraged than some of our competitors,
which may place us at a relative competitive disadvantage and make
us more vulnerable to changing market conditions and regulations.
In addition, our debt instruments contain numerous covenants that limit
our discretion with respect to business matters, including mergers or
acquisitions, paying dividends, incurring additional debt, making capital
expenditures or disposing of assets. A breach of any of these covenants could
result in a default under the applicable agreement or indenture. In addition, a
default under one agreement or indenture could result in a default and
acceleration of our repayment obligations under the other agreements or
indentures under the cross default provisions in those agreements or indentures.
If a default or cross default were to occur, we may not be able to pay our debts
or borrow sufficient funds to refinance them. Even if new financing were
available, it may not be on terms acceptable to us. As a result of this risk, we
could be forced to take actions that we otherwise would not take, or not take
actions that we otherwise might take, in order to comply with the covenants in
these agreements and indentures.
OUR STOCKHOLDER RIGHTS PLAN AND OUR CERTIFICATE OF INCORPORATION AND BYLAWS
CONTAIN PROVISIONS THAT MAKE A TAKEOVER OF GROUP 1 DIFFICULT.
Our stockholder rights plan and certain provisions of our certificate of
incorporation and bylaws could make it more difficult for a third party to
acquire control of Group 1, even if such change of control would be beneficial
to our stockholders. These include provisions:
- providing for a board of directors with staggered, three-year terms,
permitting the removal of a director from office only for cause;
- allowing only the board of directors to set the number of directors;
- requiring super-majority or class voting to affect certain
amendments to our certificate of incorporation and bylaws;
- limiting the persons who may call special stockholders' meetings;
- limiting stockholder action by written consent;
- establishing advance notice requirements for nominations for
election to the board of directors or for proposing matters that can
be acted upon at stockholders' meetings; and
- allowing our board of directors to issue shares of preferred stock
without stockholder approval.
Certain of our franchise agreements prohibit the acquisition of more than
a specified percentage of our common stock without the consent of the relevant
manufacturer. These terms of our franchise agreements could also make it more
difficult for a third party to acquire control of Group 1.
INTERNET WEB SITE AND AVAILABILITY OF PUBLIC FILINGS
Our Internet address is www.group1auto.com. We make the following
information available free of charge on our Internet Web site:
- Annual Report on Form 10-K;
- Quarterly Reports on Form 10-Q;
- Current Reports on Form 8-K;
- Amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934;
- Corporate Governance Guidelines;
- Charters for our Audit, Compensation and Nominating/Governance
Committees;
- Code of Conduct for Directors, Officers and Employees; and
- Code of Ethics for our Chief Executive Officer, Chief Financial
Officer, Controller, and all of our financial and accounting
officers.
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We make our SEC filings available on our Web site as soon as reasonably
practicable after we electronically file such material with, or furnish such
material to, the SEC. We make our SEC filings available via a link to our
filings on the SEC Web site. The above information is available in print to
anyone who requests it.
ITEM 2. PROPERTIES
We use a number of facilities to conduct our dealership operations. Each
of our dealerships may include facilities for (1) new and used vehicle sales,
(2) vehicle service operations, (3) retail and wholesale parts operations, (4)
collision service operations, (5) storage, and (6) general office use. We try to
structure our operations so as to avoid the ownership of real property. In
connection with our acquisitions, we generally seek to lease rather than acquire
the facilities on which the acquired dealerships are located. We generally enter
into lease agreements with respect to such facilities that have 30-year total
terms with 15-year initial terms and three five-year option periods, at our
option. As a result, we lease the majority of our facilities under long-term
operating leases.
ITEM 3. LEGAL PROCEEDINGS
From time to time, our dealerships are named as defendants in claims
involving the manufacture or sale of automobiles, contractual disputes, and
other matters arising in the ordinary course of business.
The Texas Automobile Dealers Association, or TADA, and certain new vehicle
dealerships in Texas that are members of TADA, including a number of our Texas
dealership subsidiaries, have been named as defendants in two state court class
action lawsuits and one federal court class action lawsuit. The three actions
allege that since January 1994, Texas dealers have deceived customers with
respect to a vehicle inventory tax and violated federal antitrust and other
laws. In April 2002, the state court in which two of the actions are pending
certified classes of consumers on whose behalf the action would proceed. In
October 2002, the Texas Court of Appeals affirmed the trial court's order of
class certification in the state action. The defendants requested that the Texas
Supreme Court review that decision, and the Court declined that request on March
26, 2004. The defendants petitioned the Texas Supreme Court to reconsider its
denial, and that petition was denied on September 10, 2004. In the federal
antitrust action, in March 2003, the federal district court also certified a
class of consumers. Defendants appealed the district court's certification to
the Fifth Circuit Court of Appeals, which on October 5, 2004, reversed the class
certification order and remanded the case back to the federal district court for
further proceedings. In February 2005, the plaintiffs in the federal action
sought a writ of certiorari to the United States Supreme Court in order to
obtain review of the Fifth Circuit's order. The defendants notified the U.S
Supreme Court that they would not respond to the writ unless requested to do so
by the Court. Also in February 2005, settlement discussions with the plaintiffs
in the three cases culminated in formal settlement offers pursuant to which we
could settle the state and federal cases. We have not entered into the
settlements at this time, and, if we do, the settlements will be contingent upon
court approval. The proposed settlements contemplate our dealerships issuing
certificates for discounts off future vehicle purchases, refunding cash in some
circumstances, and paying attorneys' fees and certain costs. Dealers
participating in the settlements would agree to certain disclosures regarding
inventory tax charges when itemizing such charges on customer invoices. If we do
not enter into the settlements, or if the settlements are not approved, we will
continue to vigorously assert available defenses in connection with these
lawsuits. While we do not believe this litigation will have a material adverse
effect on our financial condition or results of operations, no assurance can be
given as to its ultimate outcome. A settlement on different terms or an adverse
resolution of this matter in litigation could result in the payment of
significant costs and damages.
In addition to the foregoing cases, there are currently no legal
proceedings pending against or involving us that, in our opinion, based on
current known facts and circumstances, are expected to have a material adverse
effect on our financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-22-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock is listed on the New York Stock Exchange under
the symbol "GPI." There were 104 holders of record of our common stock as of
February 28, 2005.
The following table presents the quarterly high and low sales prices for
our common stock for 2003 and 2004, as reported on the New York Stock Exchange
Composite Tape under the symbol "GPI."
HIGH LOW
------- -------
2003:
First Quarter............... $ 27.35 $ 19.91
Second Quarter.............. 33.94 20.80
Third Quarter............... 40.19 32.17
Fourth Quarter.............. 39.04 31.60
2004:
First Quarter............... $ 38.74 $ 34.30
Second Quarter.............. 37.83 29.18
Third Quarter............... 33.27 26.32
Fourth Quarter.............. 31.70 26.49
We have never declared or paid dividends on our common stock. Generally,
we have retained earnings to finance the development and expansion of our
business. Any decision to pay dividends will be made by our Board of Directors
after considering our results of operations, financial condition, cash flows,
capital requirements, outlook for our business, general business conditions and
other factors.
Provisions of our credit facilities and our senior subordinated notes
require us to maintain certain financial ratios and limit the amount of
disbursements we may make outside the ordinary course of business. These include
limitations on the payment of cash dividends and on stock repurchases, which are
limited to a percentage of cumulative net income.
EQUITY COMPENSATION PLANS
We disclose information regarding our equity compensation plans as of
December 31, 2004, in Item 12 "Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters."
-23-
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical financial data as of December 31, 2004,
2003, 2002, 2001 and 2000, and for the five years in the period ended December
31, 2004 have been derived from our audited financial statements, subject to
certain reclassifications to make prior years' conform to the current year
presentation. This selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and related notes included
elsewhere in this Form 10-K/A.
We have accounted for all of our dealership acquisitions using the
purchase method of accounting and, as a result, we do not include in our
financial statements the results of operations of these dealerships prior to the
date we acquired them. As a result of the effects of our acquisitions and other
potential factors in the future, the historical financial information described
in the selected financial data is not necessarily indicative of the results of
operations and financial position of Group 1 in the future or the results of
operations and financial position that would have resulted had such acquisitions
occurred at the beginning of the periods presented in the selected financial
data.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
2004 2003 2002 2001 2000
------------ ------------ ------------- ------------- ------------
(dollars in thousands, except per share amounts)
INCOME STATEMENT DATA:
Revenues............................. $ 5,435,033 $ 4,518,560 $ 4,214,364 $ 3,996,374 $ 3,586,146
Cost of sales........................ 4,603,267 3,795,149 3,562,069 3,389,122 3,058,709
------------ ------------ ------------- ------------- ------------
Gross profit...................... 831,766 723,411 652,295 607,252 527,437
Selling, general and
administrative expenses........... 672,068 561,698 503,066 458,734 393,838
Depreciation and amortization........ 15,836 12,510 10,137 15,739 14,539
Impairment of assets................. 44,711 -- -- -- --
------------ ------------ ------------- ------------- ------------
Income from operations............ 99,151 149,203 139,092 132,779 119,060
Other income (expense):
Floorplan interest expense........ (25,349) (21,571) (20,187) (28,674) (38,219)
Other interest expense, net....... (19,299) (15,191) (10,578) (14,555) (16,157)
Loss on redemption of senior
subordinated notes.............. (6,381) -- (1,173) -- --
Other income (expense), net....... (170) 631 128 (128) 1,142
------------ ------------ ------------- ------------- ------------
Income before income taxes........ 47,952 113,072 107,282 89,422 65,826
Provision for income taxes........... 20,171 36,946 40,217 33,980 25,014
------------ ------------ ------------- ------------- ------------
Net income........................ $ 27,781 $ 76,126 $ 67,065 $ 55,442 $ 40,812
============ ============ ============= ============= ============
Earnings per share:
Basic............................. $ 1.22 $ 3.38 $ 2.93 $ 2.75 $ 1.91
Diluted........................... $ 1.18 $ 3.26 $ 2.80 $ 2.59 $ 1.88
Weighted average shares outstanding:
Basic............................. 22,807,922 22,523,825 22,874,918 20,137,661 21,377,902
Diluted........................... 23,493,899 23,346,221 23,968,072 21,415,154 21,709,833
DECEMBER 31,
----------------------------------------------------------------------
2004 2003 2002 2001 2000
------------ ------------ ------------- ------------- ------------
(in thousands)
BALANCE SHEET DATA:
Working capital....................... $ 155,453 $ 275,582 $ 95,704 $ 154,361 $ 54,769
Inventories, net...................... 877,575 671,279 622,205 454,961 527,101
Total assets.......................... 1,947,220 1,502,445 1,437,590 1,052,823 1,097,721
Floorplan notes payable............... 848,260 493,568 652,538 364,954 536,707
Acquisition line...................... 84,000 -- -- -- 35,250
Long-term debt, including current
portion............................ 157,801 231,088 82,847 95,584 104,817
Stockholders' equity.................. 567,174 518,109 443,417 392,243 247,416
Long-term debt to capitalization(1)... 30% 31% 16% 20% 36%
(1) Includes long-term debt and acquisition line
-24-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (RESTATED)
You should read the following discussion in conjunction with Part I,
including the matters set forth in the "Risk Factors" section of this Form
10-K/A, and our Consolidated Financial Statements and notes thereto included
elsewhere in this Form 10-K/A.
RESTATEMENT
As discussed under the heading "Amendment No. 1 Explanatory Note" on page
1 and further described in the Notes to Consolidated Financial Statements, we
have restated our consolidated financial statements and other financial
information.
OVERVIEW
During 2004, as throughout our seven-year history, we grew our business
primarily through acquisitions. We typically seek to acquire large, profitable,
well-established and well-managed dealers that are leaders in their respective
market areas. Over the past five years, we have acquired 69 dealership
franchises with annual revenues of approximately $2.8 billion, disposed of 20
dealership franchises with annual revenues of approximately $267.2 million, and
been granted nine new dealership franchises by the manufacturers. Each
acquisition has been accounted for as a purchase and is included in our
financial statements from the date of acquisition. In the following discussion
and analysis, we report certain performance measures of our newly acquired
dealerships separately from those of our existing dealerships.
Our operating results reflect the combined performance of each of our
inter-related business activities, which include the sale of new vehicles, used
vehicles, finance and insurance products, and parts, service and collision
repair services. Each of these activities has historically been directly or
indirectly impacted by a variety of supply / demand factors, including vehicle
inventories, consumer confidence, discretionary spending, availability and
affordability of consumer credit, manufacturer incentives, weather patterns, and
interest rates. For example, during periods of sustained economic downturn or
significant supply / demand imbalances, certain of these factors may negatively
impact new vehicle sales, as consumers tend to shift their purchases to used
vehicles or less expensive new vehicles. Some consumers may even delay their
purchasing decisions altogether, electing instead to repair their existing
vehicles. In such cases, however, we believe the impact on our overall business
is mitigated due to our ability to offer other products and services, such as
used vehicles and parts, service and collision repair services.
For the years ended December 31, 2004, 2003 and 2002, we realized net
income of $27.8 million, $76.1 million and $67.1 million, respectively, and
diluted earnings per share of $1.18, $3.26 and $2.80, respectively. The
following factors impacted our financial condition and results of operations in
2004, 2003 and 2002, and may cause our reported financial data not to be
indicative of our future financial condition and operating results.
YEAR ENDED DECEMBER 31, 2004:
- IMPAIRMENT OF GOODWILL AND LONG-LIVED ASSETS: As a result of the
further deterioration of our Atlanta platform's financial results,
we concluded that the carrying amount of the reporting unit exceeded
its fair value as of September 30, 2004. Accordingly, in the third
quarter, we recorded a total pretax charge of $41.4 million, or
$29.4 million on an after-tax basis or $1.25 per diluted share,
related to the impairment of the carrying value of its goodwill and
certain long-lived assets.
- LOSS ON REDEMPTION OF SENIOR SUBORDINATED NOTES: In March 2004, we
completed the redemption of all of our outstanding 10 7/8% senior
subordinated notes and incurred a $6.4 million pretax charge, or
$4.0 million on an after-tax basis or $0.17 per diluted share.
- IMPAIRMENT OF INDEFINITE-LIVED INTANGIBLE ASSET: During our annual
assessment of the carrying value of our goodwill and
indefinite-lived intangible assets in connection with our year-end
financial statement preparation process, we determined that the
carrying value of one of our dealership's intangible franchise
rights was in excess of its fair market value. Accordingly, we
recorded a pretax charge of $3.3 million, or $2.0 million on an
after-tax basis or $0.08 per diluted share.
YEAR ENDED DECEMBER 31, 2003:
- RESOLUTION OF TAX CONTINGENCIES: During 2003, we recognized a $5.4
million reduction, or $0.23 per diluted share, in our estimated tax
liabilities as a result of the favorable resolution of tax
contingencies at the conclusion of various state and federal tax
audits.
-25-
YEAR ENDED DECEMBER 31, 2002:
- LOSS ON REDEMPTION OF SENIOR SUBORDINATED NOTES: During 2002, we
repurchased $11.6 million of our 10 7/8% senior subordinated notes
and incurred a $1.2 million pretax charge, or $0.7 million on an
after-tax basis or $0.03 per diluted share.
These items, and other variances between the periods presented, are
covered in the following discussion.
KEY PERFORMANCE INDICATORS
The following table highlights certain of the key performance indicators
we use to manage our business:
CONSOLIDATED STATISTICAL DATA
FOR THE YEAR ENDED
------------------------------------
2004 2003 2002
---------- ----------- ---------
Unit Sales
Retail Sales
New Vehicle 117,971 99,971 95,005
Used Vehicle 66,336 62,721 65,698
---------- ----------- ---------
Total Retail Sales 184,307 162,692 160,703
Wholesale Sales 49,372 43,616 39,754
---------- ----------- ---------
Total Vehicle Sales 233,679 206,308 200,457
Gross Margin
New Vehicle Retail Sales 7.1% 7.3% 7.5%
Used Vehicle Total Adjusted Retail Sales(1) 11.3% 11.3% 10.4%
Parts and Service Sales 54.8% 55.7% 56.0%
Total Gross Margin 15.3% 16.0% 15.5%
SG&A(2) as a % of Gross Profit 80.8% 77.6% 77.1%
Operating Margin 1.8% 3.3% 3.3%
Operating Margin Excluding Impairment 2.6% 3.3% 3.3%
Pretax Margin 0.9% 2.5% 2.5%
Pretax Margin Excluding Impairment 1.7% 2.5% 2.5%
Finance and Insurance
Revenues per Retail Unit Sold $ 938 $ 1,003 $ 880
(1) We monitor a statistic we call "used vehicle total adjusted retail sales
gross margin" which equals total used vehicle gross profit, which includes
the total net loss from the wholesale sale of used vehicles, divided by
retail used vehicle sales revenues. The profit or loss on wholesale used
vehicle sales are included in this number, as these transactions
facilitate retail used vehicle sales and management of inventory levels.
(2) Selling, general and administrative expenses.
Our 2004 retail unit sales increased, as compared to 2003, as a result of
acquisitions, as same store new vehicle unit sales were relatively flat and same
store retail unit sales of used vehicles decreased 4.5%.
Over the past three years, our new vehicle gross margin has declined from
7.5% for the twelve months ended December 31, 2002, to 7.3% for 2003 and 7.1%
for 2004. At the same time, however, our consolidated gross profit per retail
unit sold has risen slightly from $1,996 per unit in 2002, to $2,001 per unit in
2003 and $2,007 per unit in 2004. During 2004, decreases in gross profit per
retail unit sold in our same store results were offset by increases attributable
to the impact of acquired luxury franchises. We believe our same store results
were negatively impacted by rising retail prices, without a corresponding
increase in gross profit, as a result of increased competition placing pressure
on realized margins. We expect margin pressures to continue in 2005.
Our used vehicle results are directly affected by the level of
manufacturer incentives on new vehicles, the number and quality of trade-ins and
lease turn-ins and the availability of consumer credit. Over the last three
years, we have seen a decline in same store retail sales of used vehicle units,
partially offset by the benefit received from
-26-
acquisitions. During this same time period, however, we have seen pricing begin
to stabilize and our adjusted retail sales margin has increased from 10.4% in
2002 to 11.3% in 2003 and 2004.
Our consolidated parts and service gross margin decreased to 54.8% in
2004, from 55.7% in 2003, as a result of an increase in contribution from our
parts business in relation to our service business. Since our parts business has
lower gross margins than our service business, this change in mix has caused our
overall parts and service gross margin to decline.
Our finance and insurance revenues decreased from $1,003 per retail unit
sold in 2003 to $938 in 2004, reflecting a decline in penetration rates of
finance and insurance products for new and used vehicle sales and the dilutive
effect of acquisitions, as their finance and insurance revenues per retail unit
sold were significantly below our average.
Our selling, general and administrative expenses (SG&A) increased as a
percentage of gross profit from 77.6% during 2003, to 80.8% in 2004. This
increase resulted primarily from increases in same store, non-variable costs.
Our same store variable costs, namely personnel-related items and advertising,
decreased in approximately the same percentages as our gross profit.
Acquisitions also had a negative effect on our overall average, as their SG&A
levels were higher than our same store average.
The combination of the above factors, together with the impairment charges
recorded in 2004 and an increase in our floorplan and other net interest
expense, caused a decline in our operating margin to 1.8%, from 3.3% in 2003,
and in our pretax margin to 0.9%, from 2.5% in 2003. Our floorplan and other net
interest expense increased primarily as a result of higher average borrowings
due to acquisition activity and rising interest rates.
While we believe that the new vehicle market will remain extremely
competitive in 2005, we expect some improvement in the current oversupply of new
vehicles and also believe that manufacturers will continue providing
low-interest financing and other incentives in order to stimulate demand. These
incentives will also likely continue to negatively impact the used vehicle
market, as they serve to make new vehicles more affordable and, therefore, more
desirable than used vehicles. Tightened credit standards by lenders serving the
lower-tier and sub-prime markets may also continue to negatively affect the used
vehicle market.
A factor that will impact our financial performance in 2005 is the
adoption of a new accounting standard. Specifically, in accordance with SFAS
123(R), "Share-Based Payment," which was issued by the Financial Accounting
Standards Board in December 2004, we will begin recognizing compensation expense
related to stock option and employee stock purchase plan grants in our statement
of operations during the third quarter of 2005.
We believe that our future success depends, among other things, on our
ability to successfully acquire and integrate new dealerships, while at the same
time achieving optimum performance from our diverse franchise mix, attracting
and retaining high-caliber employees, and reinvesting as needed to maintain
top-quality facilities. During 2005, we expect to spend approximately $68.9
million to construct new facilities and upgrade or expand existing facilities,
although we expect to sell and lease back facilities accounting for
approximately $15.7 million of these expenditures, resulting in net expenditures
of $53.2 million. In addition, we expect to complete acquisitions of dealerships
with approximately $300 million in expected aggregate annual revenues.
CRITICAL ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES
Our consolidated financial statements are impacted by the accounting
policies we use and the estimates and assumptions we make during their
preparation. The following is a discussion of our critical accounting policies
and critical accounting estimates.
CRITICAL ACCOUNTING POLICIES
We have identified below what we believe to be the most pervasive
accounting policies that are of particular importance to the portrayal of our
financial position, results of operations and cash flows. See Note 2 to our
Consolidated Financial Statements for further discussion of all our significant
accounting policies.
INVENTORIES. We carry our new, used and demonstrator vehicle inventories,
as well as our parts and accessories inventories, at the lower of cost or market
in our consolidated balance sheets. Vehicle inventory cost consists of the
amount paid to acquire the inventory, plus reconditioning cost, cost of
equipment added and transportation. Additionally, we receive interest assistance
from some of our manufacturers. This assistance is accounted for as a vehicle
purchase price discount and is reflected as a reduction to the inventory cost on
our balance sheets and as a reduction to cost of sales in our statements of
operation as the vehicles are sold. As the market value of our inventory
typically declines over time, we establish reserves based on our historical loss
experience and market
-27-
trends. These reserves are charged to cost of sales and reduce the carrying
value of our inventory on hand. Used vehicles are complex to value as there is
no standardized source for determining exact values and each vehicle and each
market in which we operate is unique. As a result, the value of each used
vehicle taken at trade-in, or purchased at auction, is subjectively determined
based on the industry expertise of the responsible used vehicle manager. Our
valuation risk is mitigated, somewhat, by how quickly we turn this inventory. At
December 31, 2004, our used vehicle days' supply was 29 days.
RETAIL FINANCE, INSURANCE AND VEHICLE SERVICE CONTRACT REVENUES
RECOGNITION. We arrange financing for customers through various institutions and
receive financing fees based on the difference between the loan rates charged to
customers and predetermined financing rates set by the financing institution. In
addition, we receive fees from the sale of insurance and vehicle service
contracts to customers.
We may be charged back for unearned financing, insurance contract or
vehicle service contract fees in the event of early termination of the contracts
by customers. Revenues from these fees are recorded at the time of the sale of
the vehicles and a reserve for future amounts which might be charged back is
established based on our historical charge back results and the termination
provisions of the applicable contracts. While our charge back results vary
depending on the type of contract sold, a 10% change in the historical charge
back results used in determining our estimates of future amounts which might be
charged back would have changed our reserve at December 31, 2004, by
approximately $1.2 million.
CRITICAL ACCOUNTING ESTIMATES
The preparation of our financial statements in conformity with generally
accepted accounting principals requires management to make certain estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosures of contingent assets and liabilities at
the balance sheet date and the amounts of revenues and expenses recognized
during the reporting period. We analyze our estimates based on our historical
experience and various other assumptions that we believe to be reasonable under
the circumstances. However, actual results could differ from such estimates. The
following is a discussion of our critical accounting estimates.
GOODWILL. Goodwill represents the excess of the purchase price of
businesses acquired over the fair value, at the date of acquisition, of the net
tangible and intangible assets acquired. In June 2001, the Financial Accounting
Standards Board, or FASB, issued SFAS No. 141, "Business Combinations." Prior to
our adoption of SFAS No. 141 on January 1, 2002, we recorded purchase prices in
excess of the net tangible assets acquired as goodwill and did not separately
record any intangible assets apart from goodwill as all were amortized over
similar lives. During 2001, the FASB also issued SFAS No. 142, "Goodwill and
Other Intangible Assets," which changed the treatment of goodwill to:
- no longer permit the amortization of goodwill and indefinite-lived
intangible assets;
- require goodwill and intangible assets, of which franchise rights is
our most significant, to be recorded separately; and
- require, at least annually, an assessment for impairment of goodwill
by reporting unit, which we currently define as each of our
platforms, using a fair-value based, two-step test.
We perform the annual impairment assessment at the end of each calendar
year, or more frequently if events or circumstances at a reporting unit occur
that would more likely than not reduce the fair value of the reporting unit
below its carrying value.
To determine the fair value of our reporting units, we use a discounted
cash flow approach. Included in this analysis are assumptions regarding revenue
growth rates, future gross margin estimates, future selling, general and
administrative expense rates and our weighted average cost of capital. We also
must estimate residual values at the end of the forecast period and future
capital expenditure requirements. Each of these assumptions requires us to use
our knowledge of (1) our industry, (2) our recent transactions, and (3)
reasonable performance expectations for our operations. If any one of the above
assumptions changes, in some cases insignificantly, or fails to materialize, the
resulting decline in our estimated fair value could result in a material
impairment charge to the goodwill associated with the applicable platform(s),
especially with respect to those platforms acquired prior to July 1, 2001.
INTANGIBLE FRANCHISE RIGHTS. Our only significant identified intangible
assets are rights under our franchise agreements with manufacturers. We expect
these franchise agreements to continue for an indefinite period but, when these
agreements do not have indefinite terms, we believe that renewal of these
agreements can be obtained without substantial cost. As such, we believe that
our franchise agreements will contribute to cash flows for an indefinite period.
Therefore, we do not amortize the carrying amount of our franchise rights.
Franchise rights
-28-
acquired in acquisitions prior to July 1, 2001, were not separately recorded,
but were recorded and amortized as part of goodwill and remain a part of
goodwill at December 31, 2004 and 2003 in the accompanying consolidated balance
sheets. Like goodwill, and in accordance with SFAS No. 142, we test our
franchise rights for impairment annually, or more frequently if events or
circumstances indicate possible impairment, using a fair-value method.
To test the carrying value of each individual franchise right for
impairment, we use a discounted cash flow based approach. Included in this
analysis are assumptions, at a dealership level, regarding revenue growth rates,
future gross margin estimates and future selling, general and administrative
expense rates. Using our weighted average cost of capital, estimated residual
values at the end of the forecast period and future capital expenditure
requirements, we calculate the fair value of each dealership's franchise rights
after considering estimated values for tangible assets, working capital and
workforce. If any one of the above assumptions changes, in some cases
insignificantly, or fails to materialize, the resulting decline in our estimated
fair value could result in a material impairment charge to the intangible
franchise right associated with the applicable dealership.
SELF-INSURANCE PROPERTY AND CASUALTY INSURANCE RESERVES. We are
self-insured for a portion of the claims related to our property and casualty
insurance programs, requiring us to make estimates regarding expected claims to
be incurred. These estimates, for the portion of claims not covered by
insurance, are based primarily on our historical claims experience and projected
inflation in claims costs in future periods. Changes in the frequency or
severity of claims from historical levels could impact our reserve for claims
and our financial position, results of operations and cash flows. A 10% change
in the historical loss history used in determining our estimate of future losses
would have changed our reserve at December 31, 2004, by $1.8 million.
Our current total exposure under our self-insured property and casualty
plans totals approximately $40 million, before consideration of accruals we have
recorded related to our loss projections. After consideration of these accruals,
our remaining potential loss exposure under these plans totals approximately
$23.9 million at December 31, 2004.
FAIR VALUE OF ASSETS ACQUIRED AND LIABILITIES ASSUMED. We estimate the
values of assets acquired and liabilities assumed in business combinations,
which involves the use of various assumptions. The most significant assumptions,
and those requiring the most judgment, involve the estimated fair values of
property and equipment and intangible franchise rights, with the remaining
attributable to goodwill, if any.
RESULTS OF OPERATIONS
The following tables present comparative financial and non-financial data
of our "Same Store" locations, those locations acquired or disposed of
("Transactions") during the periods and the consolidated company for the twelve
months ended December 31, 2004, 2003 and 2002. Same Store amounts include the
results of dealerships for the identical months in each period presented in the
comparison, commencing with the first month in which the dealership was owned by
us and, in the case of dispositions, ending with the last month it was owned by
us. Same Store results also include the activities of the corporate office. This
presentation differs from prior years, in which Same Store amounts would have
included only those dealerships owned during all of the months of both periods
in the comparison, as well as the activities of the corporate office.
For example, using our prior methodology, a dealership acquired in June
2004 would not show up in our full-year Same Store results until 2006 when
comparing to 2005. This would be the earliest it would be owned by us for all of
the months of both periods in the annual comparison. However, under our current
methodology, the results from this dealership will now appear in our Same Store
comparison beginning in 2005, for the period July 2005 through December 2005,
when comparing to July 2004 through December 2004 results.
We believe our current methodology will enable readers of our financial
statements to assess the results of acquired operations on a more timely basis.
-29-
NEW VEHICLE RETAIL DATA
(dollars in thousands,
except per unit amounts)
FOR THE YEAR ENDED FOR THE YEAR ENDED
---------------------------------- -------------------------------------
2004 % CHANGE 2003 2003 % CHANGE 2002
----------- -------- ----------- ----------- -------- -----------
Retail Unit Sales
Same Stores 99,862 0.6% 99,250 87,621 (6.4)% 93,645
Transactions 18,109 721 12,350 1,360
----------- ----------- ----------- -----------
Total 117,971 18.0% 99,971 99,971 5.2% 95,005
Retail Sales Revenues
Same Stores $ 2,783,249 2.4% $ 2,717,746 $ 2,415,231 (2.5)% $ 2,477,654
Transactions 565,626 21,569 324,084 49,193
----------- ----------- ----------- -----------
Total $ 3,348,875 22.3% $ 2,739,315 $ 2,739,315 8.4% $ 2,526,847
Gross Profit
Same Stores $ 195,745 (1.5)% $ 198,745 $ 176,681 (4.7)% $ 185,330
Transactions 40,990 1,251 23,315 4,294
----------- ----------- ----------- -----------
Total $ 236,735 18.4% $ 199,996 $ 199,996 5.5% $ 189,624
Average Gross Profit
per Retail Unit Sold
Same Stores $ 1,960 (2.1)% $ 2,002 $ 2,016 1.9% $ 1,979
Transactions $ 2,264 $ 1,735 $ 1,888 $ 3,157
Total $ 2,007 0.3% $ 2,001 $ 2,001 0.3% $ 1,996
Gross Margin
Same Stores 7.0% 7.3% 7.3% 7.5%
Transactions 7.2% 5.8% 7.2% 8.7%
Total 7.1% 7.3% 7.3% 7.5%
Inventory Days Supply (1)
Same Stores 72 (4.0)% 75 73 (5.2)% 77
Transactions 64 103
Total 70 (6.7)% 75 75 (2.6)% 77
----------
(1) Inventory days supply equals units in inventory at the end of the
period, divided by units sales for the month then ended, multiplied by 30
days.
During 2004, as compared to 2003, our Same Store unit sales increased
slightly as significant declines in sales of Ford and Mitsubishi units were
offset by increases in sales of Toyota/Scion and Nissan models, in addition to
slight variances between other brands. We believe these changes are consistent
with industry trends for our brands and markets. Although Same Store unit sales
increased in 2004 from 2003, our Same Store average gross profit per retail unit
sold decreased, resulting in lower gross profit. We believe this decrease was
largely due to high industrywide inventory levels and intense competition. Our
total average gross profit per retail unit sold did benefit from the impact of
luxury franchises acquired this year, which generally yield higher gross profit
than domestic or import non-luxury franchises.
During 2003, as compared to 2002, we experienced significant declines in
Same Store sales of Ford, Mitsubishi and Toyota without any notable offsetting
increases from other brands. These decreases, which we also believe to be
consistent with industry trends for our brands and markets, were partially
offset by an increase in our Same Store average gross profit per retail unit
sold.
Most manufacturers offer interest assistance to offset floorplan interest
charges incurred in connection with inventory purchases. This assistance varies
by manufacturer, but generally provides for a defined amount regardless of our
actual floorplan rate or the length of time for which the inventory is financed.
The amount of interest assistance we recognize in a given period is primarily a
function of the specific terms of the respective manufacturers' interest
assistance programs and wholesale interest rates, the average wholesale price of
inventory sold, and our rate of inventory turn. For these reasons, this
assistance has ranged from approximately 105% to 160% of our total floorplan
interest expense over the past three years. We record these incentives as a
reduction of new vehicle cost of sales as the vehicles are sold, which therefore
impact the gross profit and gross margin detailed above. The total assistance
recognized in cost of goods sold during the years ended December 31, 2004, 2003
and 2002, was $33.2 million, $27.4 million and $26.7 million, respectively.
Finally, our days' supply of new vehicle inventory continues to decrease,
from 77 days' supply at December 31, 2002, to 75 days' supply at December 31,
2003, and 70 days' supply at December 31, 2004, as we work towards our target
level of 60 days' supply. Our 70 days' supply at December 31, 2004, was heavily
weighted
-30-
toward our domestic inventory, which stood at 104 days' supply, versus our
import brands in which we had a 50 days' supply.
USED VEHICLE RETAIL DATA
(dollars in thousands,
except per unit amounts)
FOR THE YEAR ENDED FOR THE YEAR ENDED
----------------------------- ---------------------------------
2004 % CHANGE 2003 2003 % CHANGE 2002
--------- -------- --------- --------- -------- ---------
Retail Unit Sales
Same Stores 59,358 (4.5)% 62,177 56,546 (12.7)% 64,737
Transactions 6,978 544 6,175 961
--------- --------- --------- ---------
Total 66,336 5.8% 62,721 62,721 (4.5)% 65,698
Retail Sales Revenues
Same Stores $ 870,301 (0.7)% $ 876,864 $ 798,583 (11.6)% $ 903,672
Transactions 118,496 7,955 86,236 17,687
--------- --------- --------- ---------
Total $ 988,797 11.8% $ 884,819 $ 884,819 (4.0)% $ 921,359
Gross Profit
Same Stores $ 106,601 0.8% $ 105,783 $ 97,197 (4.9)% $ 102,236
Transactions 13,845 770 9,356 1,738
--------- --------- --------- ---------
Total $ 120,446 13.0% $ 106,553 $ 106,553 2.5% $ 103,974
Average Gross Profit
per Retail Unit Sold
Same Stores $ 1,796 5.6% $ 1,701 $ 1,719 8.9% $ 1,579
Transactions $ 1,984 $ 1,415 $ 1,515 $ 1,809
Total $ 1,816 6.9% $ 1,699 $ 1,699 7.3% $ 1,583
Gross Margin
Same Stores 12.2% 12.1% 12.2% 11.3%
Transactions 11.7% 9.7% 10.8% 9.8%
Total 12.2% 12.0% 12.0% 11.3%
USED VEHICLE WHOLESALE DATA
(dollars in thousands,
except per unit amounts)
FOR THE YEAR ENDED FOR THE YEAR ENDED
----------------------------- ------------------------------
2004 % CHANGE 2003 2003 % CHANGE 2002
--------- -------- --------- --------- --------- ---------
Wholesale Unit Sales
Same Stores 43,276 (0.2)% 43,362 39,003 0.0% 38,996
Transactions 6,096 254 4,613 758
--------- --------- --------- ---------
Total 49,372 13.2% 43,616 43,616 9.7% 39,754
Wholesale Sales Revenues
Same Stores $ 310,202 17.9% $ 263,055 $ 237,948 10.3% $ 215,637
Transactions 49,045 2,132 27,239 6,892
--------- --------- --------- ---------
Total $ 359,247 35.5% $ 265,187 $ 265,187 19.2% $ 222,529
Net Loss
Same Stores $ (7,740) (27.2)% $ (6,083) $ (5,434) 27.2% $ (7,469)
Transactions (526) (58) (707) (426)
--------- --------- --------- ---------
Total $ (8,266) (34.6)% $ (6,141) $ (6,141) 22.2% $ (7,895)
Average Wholesale Loss per
Wholesale Unit Sold
Same Stores $ (179) (27.9)% $ (140) $ (139) 27.6% $ (192)
Transactions $ (86) $ (228) $ (153) $ (562)
Total $ (167) (18.4)% $ (141) $ (141) 29.1% $ (199)
Gross Margin
Same Stores (2.5)% (2.3)% (2.3)% (3.5)%
Transactions (1.1)% (2.7)% (2.6)% (6.2)%
Total (2.3)% (2.3)% (2.3)% (3.5)%
-31-
TOTAL USED VEHICLE DATA
(dollars in thousands,
except per unit amounts)
FOR THE YEAR ENDED FOR THE YEAR ENDED
---------------------------------- -----------------------------------
2004 % CHANGE 2003 2003 % CHANGE 2002
----------- -------- ----------- ----------- -------- -----------
Used Vehicle Unit Sales
Same Stores 102,634 (2.8)% 105,539 95,549 (7.9)% 103,733
Transactions 13,074 798 10,788 1,719
----------- ----------- ----------- -----------
Total 115,708 8.8% 106,337 106,337 0.8% 105,452
Sales Revenues
Same Stores $ 1,180,503 3.6% $ 1,139,919 $ 1,036,531 (7.4)% $ 1,119,309
Transactions 167,541 10,087 113,475 24,579
----------- ----------- ----------- -----------
Total $ 1,348,044 17.2% $ 1,150,006 $ 1,150,006 0.5% $ 1,143,888
Gross Profit
Same Stores $ 98,861 (0.8)% $ 99,700 $ 91,763 (3.2)% $ 94,767
Transactions 13,319 712 8,649 1,312
----------- ----------- ----------- -----------
Total $ 112,180 11.7% $ 100,412 $ 100,412 4.5% $ 96,079
Gross Margin
Same Stores 8.4% 8.7% 8.9% 8.5%
Transactions 7.9% 7.1% 7.6% 5.3%
Total 8.3% 8.7% 8.7% 8.4%
Average Gross Profit per
Used Vehicle Unit Sold
Same Stores $ 963 1.9% $ 945 $ 960 5.0% $ 914
Transactions $ 1,019 $ 892 $ 802 $ 763
Total $ 970 2.8% $ 944 $ 944 3.6% $ 911
Inventory Days Supply (1)
Same Stores 29 (6.5)% 31 31 (3.1)% 32
Transactions 32 34
Total 29 (6.5)% 31 31 (3.1)% 32
Adjusted Retail Gross Margin (2)
Same Stores 11.4% 11.4% 11.5% 10.5%
Transactions 11.2% 9.0% 10.0% 7.4%
Total 11.3% 11.3% 11.3% 10.4%
Average Adjusted Gross Profit
per Retail Unit Sold (3)
Same Stores $ 1,666 3.9% $ 1,603 $ 1,623 10.9% $ 1,464
Transactions $ 1,909 $ 1,309 $ 1,401 $ 1,365
Total $ 1,691 5.6% $ 1,601 $ 1,601 9.5% $ 1,462
----------
(1) Inventory days supply equals units in inventory at the end of the
period, divided by units sales for the month then ended, multiplied by 30
days.
(2) Adjusted retail gross margin equals total gross profit, which includes net
wholesale loss, divided by retail sales revenues. The profit or loss on
wholesale sales are included in this number, as these transactions
facilitate retail vehicle sales and management of inventory levels.
(3) Average adjusted gross profit per retail unit sold equals total used
vehicle gross profit, which includes net wholesale loss, divided by retail
unit sales. The profit or loss on wholesale sales are included in this
number, as these transactions facilitate retail vehicle sales and
management of inventory levels.
At times, including during 2004 and 2003, manufacturer incentives such as
significant rebates and below-market retail financing rates on new vehicles,
have resulted in a reduction of the price difference to the customer between a
late model used vehicle and a new vehicle, thus driving more customers to new
vehicles.
Over the last three years, we have experienced declines in our Same Store
used vehicle sales volume. The impact of these declines in volume was partially
offset by increases in both the average gross profit from retail sales of used
vehicles as well as overall increases in total gross profit per retail unit sold
(including the impact on total used vehicle gross profit from the losses
incurred on wholesale vehicle transactions).
-32-
For the twelve months ended December 31, 2004, compared to 2003, our Same
Store locations sold 4.5% fewer retail used vehicles, but realized 5.6% higher
average gross profit per retail unit sold. We believe that our decline in retail
unit sales volume is consistent with overall results for used vehicles in the
markets we operate. The increase in our average gross profit per retail unit
sold was the result of an increase in our gross profit from both the sale of
used cars and trucks and an increase in the number of used trucks sold in
proportion to used cars. Our average gross profit from the sale of used trucks
is generally higher than our average gross profit from the sale of used cars.
Although we had a $95.00 increase in our Same Store average gross profit per
retail unit sold, we also had an increase of $39.00 in average wholesale loss
per wholesale unit sold, which when taken together resulted in a slight increase
of $18.00 in our Same Store average gross profit per used vehicle sold.
The dealerships we acquired during 2004, although yielding a lower used
vehicle retail gross margin than our Same Stores, realized a higher average
gross profit per retail vehicle sold than our Same Stores. We believe both of
these factors result from the impact of luxury dealerships acquired, whose used
vehicle businesses typically have higher retail sales prices and higher gross
profit per unit. These dealerships also realized a lower average loss per
vehicle sold in the wholesale market bringing our total gross margin from
acquired dealerships to a point comparable to our existing stores.
For the twelve months ended December 31, 2003, compared to 2002, our Same
Store locations sold 12.7% fewer retail used vehicles, but realized an 8.9%
higher average gross profit per retail unit sold. We believe our decline in used
vehicle unit sales between 2003 and 2002 was also consistent with the overall
results for used vehicles in the markets we operated during that time period.
The increase in our average gross profit between these periods was also the
result of an increase in our gross profit from the sale of used cars and trucks
and an increase in the number of used trucks sold in proportion to used cars. In
addition to the $140.00 increase in our Same Store average gross profit per
retail unit sold, we also saw a decrease of $53.00 in average wholesale loss per
wholesale unit sold, which when taken together resulted in an increase of $46.00
in our Same Store average gross profit per used vehicle sold. In addition, as a
result of continued weakness in the used vehicle market at December 31, 2002, we
had reserved approximately $6.6 million for estimated used vehicle losses to be
incurred during 2003. This reserve was applied against losses incurred retailing
and wholesaling used vehicles during 2003. Based on a detailed review of our
used vehicle inventory at December 31, 2003, subsequent sales of this inventory
and economic trends indicating an improved used vehicle market, we determined
that a $1.1 million reserve at December 31, 2003, was the appropriate used
vehicle reserve and it was not necessary to charge used vehicle cost of sales to
establish the used vehicle reserve at the same level as at December 31, 2002.
Finally, our days' supply of used vehicle inventory has continued to
decrease, from 32 days' supply at December 31, 2002, to 31 days' supply at
December 31, 2003, and 29 days' supply at December 31, 2004, as we target 30
days' supply.
PARTS AND SERVICE DATA
(dollars in thousands)
FOR THE YEAR ENDED FOR THE YEAR ENDED
------------------------------- ------------------------------
2004 % CHANGE 2003 2003 % CHANGE 2002
--------- -------- --------- --------- -------- ---------
Parts and Service Revenues
Same Stores $ 477,558 3.2% $ 462,579 $ 419,747 6.6% $ 393,775
Transactions 87,655 3,410 46,242 8,394
--------- --------- --------- ---------
Total $ 565,213 21.3% $ 465,989 $ 465,989 15.9% $ 402,169
Parts and Service Gross Profit
Same Stores $ 262,211 1.6% $ 258,006 $ 233,495 5.7% $ 220,869
Transactions 47,739 1,747 26,258 4,263
--------- --------- --------- ---------
Total $ 309,950 19.3% $ 259,753 $ 259,753 15.4% $ 225,132
Gross Margin
Same Stores 54.9% 55.8% 55.6% 56.1%
Transactions 54.5% 51.2% 56.8% 50.8%
Total 54.8% 55.7% 55.7% 56.0%
-33-
Our consolidated parts and service gross margin decreased to 54.8% in
2004, from 55.7% in 2003 and 56.0% in 2002, as a result of an increase in
contribution from the lower margin parts and collision service businesses in
relation to our higher margin customer pay and warranty service business, as
well as a slight decline attributable to the impact from acquisitions and
recently opened operations.
Our Same Store parts and service revenues have increased, primarily, as a
result of our expanding wholesale parts business. This business has increased
from 18.8% of our Same Store parts and service sales in 2002, to 23% of our
sales in 2003 and 24.3% in 2004. Although this business has contributed to a
large part of our overall parts and service revenue growth, our margins in this
line of business are significantly lower than those in our retail parts and
service operations.
FINANCE AND INSURANCE DATA
(dollars in thousands,
except per unit amounts)
FOR THE YEAR ENDED FOR THE YEAR ENDED
------------------------------- ------------------------------
2004 % CHANGE 2003 2003 % CHANGE 2002
--------- -------- --------- --------- -------- ---------
Retail New and Used
Unit Sales
Same Stores 159,220 (1.4)% 161,427 144,167 (9.0)% 158,382
Transactions 25,087 1,265 18,525 2,321
--------- --------- --------- ---------
Total 184,307 13.3% 162,692 162,692 1.2% 160,703
Retail Finance Fees
Same Stores $ 60,053 (4.3)% $ 62,738 $ 56,179 (3.0)% $ 57,916
Transactions 8,484 472 7,031 953
--------- --------- --------- ---------
Total $ 68,537 8.4% $ 63,210 $ 63,210 7.4% $ 58,869
Vehicle Service Contract Fees
Same Stores $ 58,827 (3.7)% $ 61,064 $ 54,498 5.1% $ 51,842
Transactions 6,911 251 6,817 504
--------- --------- --------- ---------
Total $ 65,738 7.2% $ 61,315 $ 61,315 17.1% $ 52,346
Insurance and Other
Same Stores $ 35,006 (9.1)% $ 38,526 $ 32,849 9.5% $ 30,003
Transactions 3,620 199 5,876 242
--------- --------- --------- ---------
Total $ 38,626 (0.3)% $ 38,725 $ 38,725 28.0% $ 30,245
Total
Same Stores $ 153,886 (5.2)% $ 162,328 $ 143,526 2.7% $ 139,761
Transactions 19,015 922 19,724 1,699
--------- --------- --------- ---------
Total $ 172,901 5.9% $ 163,250 $ 163,250 15.4% $ 141,460
========= ========= ========= =========
Finance and Insurance
Revenues per Unit Sold
Same Stores $ 966 (4.0)% $ 1,006 $ 996 12.9% $ 882
Transactions $ 758 $ 729 $ 1,065 $ 732
Total $ 938 (6.5)% $ 1,003 $ 1,003 14.0% $ 880
Our finance and insurance revenues per retail unit sold decreased 6.5% in
2004, as compared to 2003, as a result of lower Same Store penetration of
products on both new and used vehicles and the impact from current year
acquisitions, which generally had lower penetration of finance and insurance
products on sales of new and used vehicles than our existing stores. Our finance
and insurance revenues per retail unit increased 14% in 2003, as compared to
2002, as a result of increases in vehicle service contracts and other finance
and insurance revenues, discussed in more detail below.
Our 2004 Same Store retail finance fees decreased 4.3%, as compared to
2003, due to a 1.4% decrease in unit sales and a 2.5% decline in penetration
on total unit sales. This decline in penetration was primarily attributable to a
decrease in penetration on unit sales of used vehicles as a result of an overall
challenging credit market for these vehicles. Our 2003 Same Store retail finance
fees decreased 3.0%, when compared to 2002, primarily due to our decrease in
unit sales.
-34-
Our 2004 Same Store vehicle service contract fees decreased 3.7%, as
compared to 2003, primarily as a result of the decrease in used vehicles sold,
as well as a decline in the amount of previously deferred revenue recognized on
contracts sold in prior years. The 5.1% increase in Same Store vehicle service
contract fees during 2003, as compared to 2002, was primarily a result of the
increase in deferred revenue recognized on contracts sold in prior years
partially offset by a decrease in Same Store insurance revenues attributable to
the decline in retail unit sales. This increase was partially offset by the
impact of the decline in retail unit sales.
The decline in our Same Store other finance and insurance revenues from
$38.5 million in 2003, to $35.0 million in 2004, was primarily the result of
higher chargebacks and a reduction of revenue from ancillary service products.
The increase in our Same Store other finance and insurance revenues from $30.0
million in 2002, to $32.8 million in 2003, was primarily attributable to certain
products sold in two of our platforms in prior years, partially offset by a
decrease in Same Store insurance revenues attributable to the decline in retail
unit sales. In December 2002, we increased our revenue and cost deferrals
related to these products to properly reflect our future obligations not
previously accounted for, thereby reducing our net revenues for the period by
$4.3 million.
We have not sold a significant number of contracts requiring revenue and
cost deferral since 2002, thus, we expect the majority of the remaining deferred
revenues, and associated deferred costs, to be recognized over the next three
years.
SELLING, GENERAL AND ADMINISTRATIVE DATA
(dollars in thousands)
FOR THE YEAR ENDED FOR THE YEAR ENDED
------------------------------- --------------------------------
2004 % CHANGE 2003 2003 % CHANGE 2002
--------- -------- --------- --------- -------- ---------
Personnel
Same Stores $ 339,625 (0.4)% $ 340,843 $ 305,922 (0.8)% $ 308,495
Transactions 59,089 2,220 37,141 5,103
--------- --------- --------- ---------
Total $ 398,714 16.2% $ 343,063 $ 343,063 9.4% $ 313,598
Advertising
Same Stores $ 57,582 (4.1)% $ 60,046 $ 52,388 8.4% $ 48,350
Transactions 9,990 489 8,147 1,245
--------- --------- --------- ---------
Total $ 67,572 11.6% $ 60,535 $ 60,535 22.1% $ 49,595
Rent and Facility Costs
Same Stores $ 67,523 4.9% $ 64,380 $ 56,798 4.2% $ 54,490
Transactions 12,598 439 8,021 1,141
--------- --------- --------- ---------
Total $ 80,121 23.6% $ 64,819 $ 64,819 16.5% $ 55,631
Other SG&A
Same Stores $ 108,480 17.5% $ 92,320 $ 82,767 0.7% $ 82,196
Transactions 17,181 961 10,514 2,046
--------- --------- --------- ---------
Total $ 125,661 34.7% $ 93,281 $ 93,281 10.7% $ 84,242
Total SG&A
Same Stores $ 573,210 2.8% $ 557,589 $ 497,875 0.9% $ 493,531
Transactions 98,858 4,109 63,823 9,535
--------- --------- --------- ---------
Total $ 672,068 19.6% $ 561,698 $ 561,698 11.7% $ 503,066
========= ========= ========= =========
Total Gross Profit
Same Stores $ 710,704 (1.1)% $ 718,779 $ 645,466 0.7% $ 640,727
Transactions 121,062 4,632 77,945 11,568
--------- --------- --------- ---------
Total $ 831,766 15.0% $ 723,411 $ 723,411 10.9% $ 652,295
========= ========= ========= =========
SG&A as % of Gross Profit
Same Stores 80.7% 77.6% 77.1% 77.0%
Transactions 81.7% 88.7% 81.9% 82.4%
Total 80.8% 77.6% 77.6% 77.1%
Our selling, general and administrative expenses consist primarily of
salaries, commissions and incentive-based compensation, as well as rent,
advertising, insurance, benefits, utilities and other fixed expenses. We believe
that our personnel and advertising expenses are variable and can be adjusted in
response to changing business conditions. In such a case, however, it may take
us several months to adjust our cost structure, or we may elect not to fully
adjust a variable component, such as advertising expenses.
-35-
The decreases in Same Store personnel related costs from 2002 to 2003, and
also from 2003 to 2004, are consistent with the changes noted in Same Store
gross profit, as our commissioned salespeople and platform management
compensation is closely tied to dealership gross profit.
Advertising expense is managed locally and will vary period to period
based upon current trends, market factors and other circumstances in each
individual market.
The 4.9% increase in Same Store rent and facility costs when comparing
2004 to 2003 is primarily due to rent increases associated with new facilities
and scheduled rent increases, tied to changes in the consumer price or similar
index, on existing facilities. The 4.2% increase in Same Store rent and facility
costs when comparing 2003 to 2002 was primarily due to increased utilities and
real estate taxes.
Other SG&A consists primarily of insurance, freight, supplies,
professional fees, loaner car expenses, vehicle delivery expenses, software
licenses and other data processing costs, and miscellaneous other operating
costs not related to personnel, advertising or facilities. During 2004, as
compared to 2003, our Same Store items increased $16.2 million primarily as a
result of the following:
- We incurred $3.5 million of higher losses from our property and
casualty retained risk program, primarily from two significant
events: (1) a hailstorm that damaged or destroyed more than 1,000
vehicles, or about 95% of the inventory, at our Amarillo, Texas,
dealerships during the second quarter of 2004, and (2) the damage
sustained at our Florida dealerships from hurricanes during the
third quarter of 2004;
- We had a $2.9 million increase in professional fees, primarily
related to the assessment and testing of our internal control
environment in accordance with Section 404 of the Sarbanes-Oxley
Act;
- During 2003, as a result of favorable collection activity on a
portfolio of customer loans we guaranteed in prior years, we
realized a $2.9 million benefit related to the reduction of a
previously established required guarantee liability. During 2004, we
further reduced this guarantee liability by $0.3 million;
- We had a $1.8 million increase in vehicle delivery expenses,
primarily due to higher fuel costs; and
- We accrued an estimated $1.5 million for our expected settlement
costs based on the progression of settlement discussions in the
class action lawsuit regarding vehicle inventory tax charges to
which we are a party in Texas.
The remainder is attributable to numerous less significant items which in total
increased by approximately $3.9 million on a net basis, or an increase of 4.2%
as compared to Same Store other SG&A for 2003. This increase is, on a percentage
basis, approximately the same as our other less variable rent and facility
costs.
DEPRECIATION AND AMORTIZATION DATA
(dollars in thousands)
FOR THE YEAR ENDED FOR THE YEAR ENDED
---------------------------- ----------------------------
2004 % CHANGE 2003 2003 % CHANGE 2002
-------- -------- -------- -------- -------- --------
Same Stores $ 13,987 12.4% $ 12,441 $ 11,601 17.5% $ 9,876
Transactions 1,849 69 909 261
-------- -------- -------- --------
Total $ 15,836 26.6% $ 12,510 $ 12,510 23.3% $ 10,137
======== ======== ======== ========
Our Same Store depreciation and amortization expense increased between
each period presented primarily as a result of a number of facility additions,
including service bay expansions, facility upgrades and manufacturer required
image renovations.
IMPAIRMENT OF ASSETS
In accordance with SFAS No. 142, we assess goodwill and other
indefinite-lived intangibles for impairment on an annual basis, or more
frequently when events or circumstances indicate that an impairment may have
occurred. We also assess, when events or circumstances indicate that an
impairment may have occurred, the carrying value of our other long-lived assets,
primarily our property and equipment, in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." Based on the
organization and management of our business, we have determined that each of our
platforms currently qualify as reporting units for the purpose of assessing
-36-
goodwill for impairment. However, we are required to evaluate the carrying value
of our indefinite-lived intangible franchise rights at a dealership level.
During October 2004, in connection with the preparation and review of our
third-quarter interim financial statements, we determined that recent events and
circumstances at our Atlanta platform, including further deterioration of the
platform's financial results and recent changes in platform management,
indicated that an impairment of goodwill may have occurred in the three months
ended September 30, 2004. As a result, we performed an interim impairment
assessment of the Atlanta platform's goodwill in accordance with SFAS No. 142.
After analyzing the long-term potential of the Atlanta market and the expected
pretax income of its dealership franchises in Atlanta, we estimated the fair
value of the reporting unit as of September 30, 2004. As a result of the
required comparison, we determined that the carrying amount of the reporting
unit exceeded its fair value as of September 30, 2004, and recorded a pretax
goodwill impairment charge of $40.3 million.
In accordance with SFAS No. 144, we review long-lived assets for
impairment whenever there is evidence that the carrying amount of such assets
may not be recoverable. As a result of the factors noted above, we evaluated the
long-lived assets of the dealerships within our Atlanta platform for impairment
under the provisions of SFAS No. 144 and recorded a pretax impairment charge for
certain leasehold improvements of $1.1 million at September 30, 2004.
During our annual assessment of the carrying value of our goodwill and
indefinite-lived intangible assets as part of our year-end financial statement
preparation process, we determined that the carrying value of one of our
dealership's intangible franchise rights was in excess of its fair market value
and recorded a pretax impairment charge of $3.3 million at December 31, 2004.
FLOORPLAN INTEREST EXPENSE
(dollars in thousands)
FOR THE YEAR ENDED FOR THE YEAR ENDED
------------------ ------------------
2004 % CHANGE 2003 2003 % CHANGE 2002
-------- -------- ------------ ----------- ---------- -----------
Same Stores $ 21,832 2.0% $ 21,414 $ 19,503 (1.5)% $ 19,799
Transactions 3,517 157 2,068 388
-------- ------------ ----------- -----------
Total $ 25,349 17.5% $ 21,571 $ 21,571 6.9% $ 20,187
======== ============ =========== ===========
Our floorplan interest expense fluctuates based on changes in borrowings
outstanding and interest rates, which are based on LIBOR (or Prime in some
cases) plus a spread. Our Same Store floorplan interest expense increased during
the twelve months ended December 31, 2004, compared to 2003, as a result of an
approximate $58.6 million increase in weighted average borrowings outstanding
between the periods and an approximate 15 basis point increase in weighted
average interest rates. The increase in weighted average borrowings was
primarily a result of the use of the proceeds from our 8-1/4% senior
subordinated notes offering in August 2003 to temporarily pay down our floorplan
notes payable. These funds were partially redrawn in March 2004 to fund the
redemption of our 10 7/8% senior subordinated notes and in June 2004 to fund our
acquisition of the Peterson Automotive Group.
Our Same Store floorplan interest expense decreased during the twelve
months ended December 31, 2003, compared to 2002, as a result of an approximate
22 basis point decrease in weighted average interest rates, partially offset by
the impact of an approximate $27.9 million increase in weighted average
borrowings outstanding between the periods. The increase in weighted average
borrowings between 2003 and 2002 resulted primarily from an increase in our Same
Store average new vehicle inventory supply to 79 days during 2003 from 66 days
during 2002.
Also impacting Same Store floorplan expense between each of the periods
were changes attributable to our outstanding interest rate swaps. During 2002,
we had two interest rate swaps outstanding the entire year, each with notional
amounts of $100.0 million and converting 30-day LIBOR to a fixed rate. One of
the swaps expired in July 2003 (and therefore was outstanding for only seven
months of 2003) and the second expired in October 2004 (and therefore was
outstanding for only 10 months of 2004). As a result of their staggered
expiration dates, and the impact on the expense attributable to the swaps
resulting from changes in interest rates, our swap expense decreased from $4.6
million for the twelve months ended December 31, 2002, to $4.3 million and $2.1
million for the twelve months ended December 31, 2003 and 2004, respectively.
-37-
OTHER INTEREST EXPENSE, NET
Other net interest expense, which consists of interest charges on our
long-term debt and our acquisition line partially offset by interest income,
increased $4.1 million, or 27.0%, to $19.3 million for the year ended December
31, 2004, from $15.2 million for the year ended December 31, 2003. This increase
was due to an approximate $78.3 million increase in weighted average borrowings
outstanding between the periods, partially offset by an approximate 183 basis
point decrease in weighted average interest rates. During 2004, our average debt
outstanding increased, as compared to the average for the twelve months ended
December 31, 2003, as a result of borrowings under our acquisition line in 2004
and the issuance, in August 2003, of $150.0 million of 8-1/4% senior
subordinated notes.
For the twelve months ended December 31, 2003, compared to 2002, other net
interest expense increased $4.6 million, or 43.4%, to $15.2 million for the year
ended December 31, 2003, from $10.6 million for the year ended December 31,
2002. This increase was due to an approximate $54.1 million increase in weighted
average borrowings outstanding between the periods, partially offset by an
approximate 116 basis point decrease in weighted average interest rates. The
increase in weighted average debt outstanding was attributable to the August
2003 issuance of our 8-1/4% senior subordinated notes
LOSS ON REDEMPTION OF SENIOR SUBORDINATED NOTES
On March 1, 2004, we completed the redemption of all of our 10 7/8% senior
subordinated notes. We incurred a $6.4 million pretax charge in completing the
redemption, consisting of a $4.1 million redemption premium and a $2.3 million
non-cash write-off of unamortized bond discount and deferred cost.
During 2002, we realized a $1.2 million loss on the repurchase and
retirement of a portion of our 10 7/8% senior subordinated notes.
PROVISION FOR INCOME TAXES
Our provision for income taxes decreased $16.7 million to $20.2 million
for the year ended December 31, 2004, from $36.9 million for the year ended
December 31, 2003. For the twelve months ended December 31, 2004, our effective
tax rate increased to 42.1%, from 32.7% for the year ended December 31, 2003.
Our 2004 effective tax rate was negatively impacted as a result of the
non-deductibility for tax purposes of certain portions of the goodwill
impairment charge we recorded in September 2004 related to our Atlanta platform,
and was positively impacted by adjustments to reconcile differences between the
tax and book basis of our assets. Excluding these items, our 2004 effective tax
would have been approximately 37.3%. Our 2003 effective tax rate benefited from
a $5.4 million reduction in our estimated tax liabilities as a result of the
favorable resolution of tax contingencies during 2003 when various state and
federal tax audits were concluded, providing certainty and resolution on various
formation, financing, acquisition and structural matters. In addition, various
other tax exposures of acquired companies had been favorably resolved. Excluding
this benefit, our 2003 effective tax rate would have been 37.5%.
Our 2003 provision for income taxes decreased $3.3 million to $36.9
million from $40.2 million for the year ended December 31, 2002. This decrease
was due to the aforementioned $5.4 million reduction in our estimated tax
liabilities as a result of the favorable resolution of certain tax
contingencies, partially offset by higher taxable income. The impact of the
change in our reserve was to reduce our effective tax rate for 2003 to 32.7%, as
compared to 37.5% for 2002.
We expect our effective tax rate in 2005 to be approximately 37.5%.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity and capital resources are primarily derived from cash on
hand, cash from operations, borrowings under our credit facilities, which
provide floorplan, working capital and acquisition financing, and proceeds from
debt and equity offerings. While we cannot guarantee it, based on current facts
and circumstances, including our recently obtained additional commitments under
our revolving credit agreement discussed below, we believe we have adequate cash
flow, coupled with available borrowing capacity, to fund our current operations,
capital expenditures and acquisition program for 2005. If our capital
expenditures or acquisition plans for 2005 change, we may need to access the
private or public capital markets to obtain additional funding.
-38-
SOURCES OF LIQUIDITY AND CAPITAL RESOURCES
CASH ON HAND. As of December 31, 2004, our total cash on hand was $37.8
million.
CASH FLOWS. The following table sets forth selected information from our
statement of cash flows:
Year Ended December 31,
-----------------------
2004 2003 2002
--------- -------------- ----------
(in thousands)
Net cash provided by (used in) operating activities $ 27,253 $ 313,009 $ (62,645)
Net cash used in investing activities (250,389) (54,165) (123,756)
Net cash provided by (used in) financing activities 234,403 (257,446) 194,625
--------- -------------- ----------
Net increase in cash and cash equivalents $ 11,267 $ 1,398 $ 8,224
========= ============== ==========
With respect to all new vehicle floorplan borrowings, the manufacturers
of the vehicles draft our credit facilities directly with no cash flow to or
from the Company. With respect to borrowings for used vehicle financing, we
choose which vehicles to finance and the funds flow directly to us from the
lender. All borrowings from, and repayments to, lenders affiliated with the
vehicle manufacturers (excluding the cash flows from or to affiliated lenders
participating in our syndicated lending group) are presented within cash flows
from operating activities on the Consolidated Statements of Cash Flows and all
borrowings from, and repayments to, the syndicated lending group under our
revolving credit facility (including the cash flows from or to affiliated
lenders participating in the facility) are presented within cash flows from
financing activities.
Operating activities. For the year ended December 31, 2004, we generated
$27.3 million in net cash from operating activities, primarily driven by net
income. Non-cash charges, including depreciation and amortization and the $44.7
million of asset impairments, along with the $6.4 million pretax loss on the
redemption of our 10 7/8% senior subordinated notes in March 2004, were offset
by changes in operating assets and liabilities, primarily a $64.3 million
increase in inventories.
For the year ended December 31, 2003, we generated $313.0 million of cash
flow from operations, primarily driven by net income, after adding back
depreciation and amortization, and a $183.4 million increase in floorplan
borrowings from manufacturer-affiliated lenders. During 2003, we entered into a
floorplan financing arrangement with Ford Motor Credit Company, which we refer
to as the FMCC Facility, to provide financing for our entire Ford, Lincoln and
Mercury new vehicle inventory. In accordance with SFAS No. 95, "Statement of
Cash Flows," the change in these borrowings is reflected as an item of cash
flows from operating activities, whereas historically, when these model vehicles
were financed under our revolving credit facility, such changes were shown as an
item of cash flows from financing activities (after taking into account the
change in historical presentation set forth in this Amendment). Upon entering
into the FMCC Facility, we repaid approximately $218.5 million of floorplan
borrowings under the revolving credit facility with funds provided by FMCC. This
repayment is reflected as a repayment on the credit facility in cash flows from
financing activities and a borrowing in the floorplan notes payable -
manufacturer affiliates in cash flows from operating activities.
For the year ended December 31, 2002, we used $62.6 million of cash flow
from operations, primarily driven by a $107.5 million increase in vehicle
inventory, partially offset by net income, after adding depreciation and
amortization.
Investing activities. During 2004, we used approximately $250.4 million in
investing activities, of which $221.7 million was for acquisitions, net of cash
received, and $47.4 million was for purchases of property and equipment.
Approximately $22.3 million of the property and equipment purchases was for the
purchase of land and construction of new or expanded facilities. We also
received approximately $12.3 million in proceeds from sales of property and
equipment, primarily of dealership facilities which we then leased back.
During 2003, the $54.2 million of cash used for investing activities
included $35.4 million of cash used in acquisitions, net of cash received, and
$34.6 million for purchases of property and equipment. Approximately $22.9
million of the property and equipment purchases were for the purchase of land
and construction of new or expanded facilities. Offsetting these uses was $11.6
million received from sales of property and equipment, including dealership
facilities which we then leased back, and $7.4 million received from the sale of
one dealership franchise during 2003.
During 2002, the $123.8 million of cash used for investing activities
included $81.4 million of cash used in acquisitions, net of cash received, and
$43.5 million for purchases of property and equipment. Approximately $32.4
million of the property and equipment purchases were for the purchase of land
and construction of new or expanded facilities. Offsetting these uses was $7.4
million received from the sales of three dealership franchises during 2002.
Financing activities. We obtained approximately $234.4 million from
financing activities during 2004, primarily from net borrowings under our
revolving credit facility to fund vehicle inventory purchases and acquisitions.
These proceeds were also used to complete the redemption of all of our 10 7/8%
senior subordinated notes in March 2004. Additionally, we spent $7.0 million
repurchasing our common stock.
We used approximately $257.4 million in financing activities during
2003, primarily to repay borrowings under our revolving credit facility
associated with the proceeds from the aforementioned FMCC facility. We also paid
down other floorplan borrowings under our revolving credit facility with the
proceeds from our issuance of 8 1/4% senior subordinated notes in August 2003.
We spent an additional $14.4 million repurchasing our common stock.
During 2002, we obtained approximately $194.6 million from financing
activities, primarily from net borrowings under our revolving credit facility
to fund vehicle inventory purchases. Additionally, we spent $11.6 million
repurchasing a portion of our senior subordinated notes and $23.8 million for
repurchases of common stock.
WORKING CAPITAL. At December 31, 2004, we had working capital of $155.5
million, approximating the amount we believe is necessary to operate our
existing business.
-39-
Changes in our working capital are driven primarily by changes in
floorplan notes payable outstanding. Borrowings on our new vehicle floorplan
notes payable, subject to agreed upon pay off terms, are equal to 100% of the
factory invoice of the vehicles. Borrowings on our used vehicle floorplan notes
payable, subject to agreed upon pay off terms, are limited to 55% of the
aggregate book value of our used vehicle inventory. At times, we have made
payments on our floorplan notes payable using excess cash flow from operations
and the proceeds of debt and equity offerings. As needed, we reborrow the
amounts later, up to the limits on the floorplan notes payable discussed below,
for working capital, acquisitions, capital expenditures or general corporate
purposes.
CREDIT FACILITIES. Our various credit facilities are used to finance the
purchase of inventory, provide acquisition funding and provide working capital
for general corporate purposes. Our two facilities currently provide us with a
total of $1.2 billion of borrowing capacity.
Revolving Credit Facility. This facility matures in June 2006 and now
provides a total of $937.0 million of financing, after we exercised our option
to expand the facility by $162.0 million in July 2004. We can further expand the
facility to its maximum commitment of $1.0 billion, subject to participating
lender approval. This facility consists of two tranches: $769.2 million for
floorplan financing, (the "Floorplan Line"), and $162.8 million for
acquisitions, capital expenditures and general corporate purposes, including the
issuance of letters of credit (the "Acquisition Line"). The Acquisition Line
bears interest at LIBOR plus a margin that ranges from 175 to 325 basis points,
depending on our leverage ratio. The Floorplan Line bears interest at rates
equal to LIBOR plus 112.5 basis points for new vehicle inventory and LIBOR plus
125 basis points for used vehicle inventory.
Our revolving credit facility contains various covenants including
financial ratios, such as fixed-charge coverage and interest coverage, and a
minimum net worth requirement, among others, as well as additional maintenance
requirements.
Our group of lenders is comprised of 13 major financial institutions,
including two manufacturer captive finance companies. As of February 28, 2005,
$65.8 million was available, after deducting $8.0 million for outstanding
letters of credit, to be drawn under the Acquisition Line, and $158.5 million
was available to be drawn under the Floorplan Line for inventory purchases.
Ford Motor Credit Facility. The FMCC Facility, which matures on June 2,
2006, provides for up to $300.0 million of financing for inventory at an
interest rate equal to Prime plus 100 basis points minus certain incentives. As
of February 28, 2005, $85.0 million was available for inventory purchases. We
expect the net cost of our borrowings under the FMCC Facility, after all
incentives, to be slightly higher than the cost of borrowing under the Floorplan
Line.
-40-
The following table summarizes the current position of our credit
facilities as of December 31, 2004:
TOTAL
CREDIT FACILITY COMMITMENT OUTSTANDING AVAILABLE
------------------------- ---------- ------------ ---------
(in thousands)
Floorplan Line $ 769,247 $ 632,593 $ 136,654
Acquisition Line (1)(2) 162,753 90,519 $ 72,234
---------- ------------ ---------
Total Revolving
Credit Facility 932,000 723,112 208,888
FMCC Facility 300,000 195,498 $ 104,502
---------- ------------ ---------
Total Credit Facilities $1,232,000 $ 918,610 313,390
========== ============ =========
----------
(1) The outstanding balance at December 31, 2004 includes $6.5 million of
letters of credit.
(2) The total commitment reflects the aggregate commitment of $167.8 million
less $5.0 million of reserves as required by the lenders.
For a more detailed discussion of our credit facilities please see Note 7
to our consolidated financial statements.
SENIOR SUBORDINATED NOTES. During August 2003, we completed a private
offering of $150.0 million of 8 1/4% senior subordinated notes due 2013. The net
proceeds from the offering of $144.1 million were used to temporarily pay down
borrowings under the floorplan tranche of our revolving credit facility. During
2004, we reborrowed these amounts to fund acquisitions and to redeem all of our
outstanding 10 7/8% senior subordinated notes. The 8 1/4% senior subordinated
notes are fully and unconditionally guaranteed by our dealership subsidiaries
and contain various provisions that permit us to redeem the notes at our option
and a requirement that we repurchase all of the notes upon a change of control.
Additionally, the notes contain various financial and other covenants, such as
limitations on the incurrence of debt, the payment of dividends, the repurchase
of stock, and the disposition of assets, among others. As of December 31, 2004,
we were in compliance with these covenants. For a more detailed discussion of
our notes please see Note 8 to our consolidated financial statements.
USES OF LIQUIDITY AND CAPITAL RESOURCES
SENIOR SUBORDINATED NOTES REDEMPTION. On March 1, 2004, we completed the
redemption of all of our 10 7/8% senior subordinated notes. Total cash used in
completing the redemption, excluding accrued interest of $4.1 million, was $79.5
million.
CAPITAL EXPENDITURES. Our capital expenditures include expenditures to
extend the useful life of current facilities and expenditures to start or expand
operations. Historically, our annual capital expenditures, exclusive of new or
expanded operations, have approximately equaled our annual depreciation charge.
In general, expenditures relating to the construction or expansion of dealership
facilities are driven by new franchises being granted to us by a manufacturer,
significant growth in sales at an existing facility, or manufacturer imaging
programs. During 2005, we plan to invest approximately $55.2 million to expand
or relocate 11 existing facilities, prepare six new facilities for operations,
perform manufacturer required imaging projects at four locations and purchase
equipment for new and expanded facilities. We have agreed to sell and leaseback
four of the projects scheduled for completion during 2005. Expected total
proceeds from the sales of these construction projects is estimated at
approximately $15.7 million, resulting in net capital expenditures for new and
expanded operations of $39.5 million. Upon sale we will begin leasing the
facilities from the buyers resulting in an estimated incremental annual rent
expense of $1.5 million per year.
ACQUISITIONS. From January 1, 2004, through December 31, 2004, we
completed acquisitions of 23 franchises with expected annual revenues of
approximately $1.2 billion. These acquisitions included a platform in New Jersey
with three franchises, a platform in California with nine franchises and one
collision center, and a platform in New York with four franchises and one
collision center. The remaining franchises were acquired in tuck-in acquisitions
that complement existing platform operations in California, Massachusetts, and
Texas. The aggregate consideration paid in completing these acquisitions was
approximately $221.7 million in cash, net of cash received, 394,313 shares of
common stock and the assumption of $109.7 million of inventory financing.
Our acquisition target for 2005 is to complete acquisitions that have
approximately $300.0 million in expected annual revenues. We expect the cash
needed to complete our acquisitions will come from excess working capital,
operating cash flows of our dealerships, and borrowings under our credit
facility. Depending on the market value of our common stock, we may issue common
stock to fund a portion of the purchase price of acquisitions. We purchase
businesses based on expected return on investment. Generally, the purchase price
is approximately 15% to 20% of the annual revenue. Thus, our targeted
acquisition budget of $300.0 million is expected to cost us between $45.0 and
$60.0 million.
-41-
Since December 31, 2004, we have completed tuck-in acquisitions of two
franchises, with expected annual revenues of $46.0 million, in Tulsa, Oklahoma
under our Bob Howard Auto Group platform, for approximately $7.5 million in
cash, net of cash received, and the assumption of $9.6 million of inventory
financing.
STOCK REPURCHASES. In March 2004, our board of directors authorized us to
repurchase up to $25.0 million of our stock, subject to management's judgment
and the restrictions of our various debt agreements. During 2004, we repurchased
approximately 195,000 shares of our common stock for approximately $7.0 million,
a portion of which was purchased under a previous board of directors'
authorization established in February 2003, with the remainder purchased under
the March 2004 authorization. As of December 31, 2004, $18.9 million remained
under the board of directors' March 2004 authorization. This amount is less than
the amount permitted under the indenture governing our 8 1/4% senior
subordinated notes, our most restrictive agreement with respect to stock
repurchases. The amount we are able to repurchase under this indenture adjusts
based on future net income and issuances of common stock.
CONTRACTUAL OBLIGATIONS
The following is a summary of our contractual obligations as of December
31, 2004 (Restated):
PAYMENTS DUE BY PERIOD
CONTRACTUAL OBLIGATIONS TOTAL < 1 YEAR 1-3 YEARS 3-5 YEARS THEREAFTER
----------------------- ---------- -------- --------- --------- ----------
(in thousands)
Floorplan notes payable $ 848,260 $848,260 $ - $ - $ -
Long-term debt obligations (1) 248,301 1,054 92,102 1,743 153,402
Estimated interest payments on
Floorplan notes payable(2) 4,811 4,811 - - -
Estimated interest payments on
long-term debt obligations(3) 117,997 16,802 26,945 24,750 49,500
Operating leases 562,283 61,508 121,141 100,938 278,696
Purchase commitments(4) 52,347 47,973 4,374 - -
---------- -------- --------- --------- ---------
Total $1,833,999 $980,407 $244,562 $127,431 $481,598
========== ======== ========= ========= =========
----------
(1) Includes borrowings on the Acquisition Line and outstanding letters of
credit.
(2) Estimated interest payments were calculated using the floorplan balance
and weighted average interest rate at December 31, 2004, and the
assumption that these liabilities would be settled within 60 days which
approximates our inventory days supply.
(3) Estimated interest payments on long-term debt obligations includes fixed
rate interest on our 8 1/4% Senior Subordinated Notes due 2013 plus
variable rate interest on our Acquisition Line. The future variable rate
interest was calculated using the Acquisition Line balance and current
interest rate at December 31, 2004, and the assumption that this balance
was held to contractual maturity of June 30, 2006.
(4) Includes capital expenditures, acquisition commitment and other.
We lease various real estate, facilities and equipment under long-term
operating lease agreements. Generally, our real estate and facility leases have
30-year total terms with initial terms of 15 years and three additional
five-year terms, at our option. We generally do not have an option to purchase
the real estate and facilities at the end of the lease term, but generally have
a right of first refusal that gives us the opportunity to purchase the real
estate and facilities if the owner reaches an agreement to sell them to a third
party.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following information about our market-sensitive financial instruments
constitutes a "forward-looking statement." Our major market-risk exposure is
changing interest rates. Our policy is to manage interest rate exposure through
the use of a combination of fixed and floating rate debt.
At December 31, 2004, fixed rate debt, primarily consisting of our senior
subordinated notes outstanding, totaled $157.8 million and had a fair value of
$172.5 million.
At December 31, 2004, we had $848.3 million of variable-rate floorplan
borrowings and $84.0 million of variable-rate Acquisition Line borrowings
outstanding. Based on these amounts, a 100 basis point change in interest rates
would result in an approximate $9.3 million change to our interest expense. Our
exposure to changes in interest rates with respect to vehicle floorplan
borrowings is partially mitigated by manufacturers' floorplan assistance, which
in some cases is based on variable interest rates. This assistance, which has
ranged from approximately 105% to 160% of our floorplan interest expense over
the past three years, totaled $33.2 million in 2004, $27.4 million in 2003, and
$26.7 million in 2002. We treat this interest assistance as a vehicle purchase
price discount, and reflect it as a reduction of new vehicle cost of sales as
new vehicles are sold. A 100 basis point change in interest rates would result
in an approximate $3.6 million change in floorplan assistance.
Interest rate swaps may be used to adjust our exposure to interest rate
movements when appropriate based upon market conditions. These swaps are entered
into with financial institutions with investment grade credit ratings, thereby
minimizing the risk of credit loss.
-42-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See our Consolidated Financial Statements beginning on page F-1 for the
information required by this Item.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer performed an
evaluation of our disclosure controls and procedures, which have been designed
to permit us to effectively identify and timely disclose important information.
They concluded that the controls and procedures were effective as of December
31, 2004, to ensure that material information was accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.
During the three months ended December 31, 2004, we have made no change in our
internal controls over financial reporting that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting. In addition, we have considered the restatement of our Consolidated
Balance Sheets and Consolidated Statements of Cash Flows to comply with the
guidance under the Securities and Exchange Commission's rules and regulations
and SFAS No. 95, "Statement of Cash Flows," and have concluded that such
restatement does not represent a material weakness in our internal control over
financial reporting.
-43-
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rules 13a - 15(f) and
15d - 15(f) under the Securities Exchange Act of 1934. The Company's internal
control over financial reporting was designed by management, under the
supervision of the Chief Executive Officer and Chief Financial Officer, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States, and includes
those policies and procedures that:
(i) pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the
assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
accounting principles generally accepted in the United States, and that
receipts and expenditures of the Company are being made only in accordance
with authorizations of management and directors of the Company; and
(iii)provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the Company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies and procedures may deteriorate.
Management assessed the effectiveness of the Company's internal control
over financial reporting as of December 31, 2004. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework.
In making its assessment of internal controls, the Company relied on the
relief provided by the Securities and Exchange Commission with respect to two
new platforms acquired during June and August of 2004. For the year ending
December 31, 2004, these operations represented, in the aggregate, 9.1% of total
assets, 11.3% of consolidated pretax income, and 4.7% of consolidated revenue.
Based on our evaluation under the framework in Internal Control-Integrated
Framework, management believes that the Company maintained effective internal
control over financial reporting as of December 31, 2004. Ernst & Young, the
Company's independent auditors, has issued a report on our assessment of the
Company's internal control over financial reporting. This report, dated March
10, 2005, appears on page 45.
/s/ B.B. Hollingsworth, Jr.
----------------------------------------
B.B. Hollingsworth, Jr.
Chairman and Chief Executive Officer
/s/ Robert T. Ray
----------------------------------------
Robert T. Ray
Chief Financial Officer
-44-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Group 1 Automotive, Inc.:
We have audited management's assessment, included in the accompanying
Management Report on Internal Controls over Financial Reporting, that Group 1
Automotive, Inc. maintained effective internal control over financial reporting
as of December 31, 2004, based on criteria established in Internal Control --
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). Group 1 Automotive, Inc.'s management
is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management Report on Internal Controls
over Financial Reporting, management's assessment of and conclusion on the
effectiveness of internal control over financial reporting did not include the
internal controls of two new platforms acquired during June and August of 2004,
which are included in the 2004 consolidated financial statements of Group 1
Automotive, Inc. and constituted 9.1% of total assets, 11.3% of consolidated
pretax income, and 4.7% of consolidated revenue for the year then ended. Our
audit of internal control over financial reporting of Group 1 Automotive, Inc.
also did not include an evaluation of the internal control over financial
reporting of these two new platforms acquired during June and August of
2004.
In our opinion, management's assessment that Group 1 Automotive, Inc.
maintained effective internal control over financial reporting as of December
31, 2004, is fairly stated, in all material respects, based on the COSO
criteria. Also, in our opinion, Group 1 Automotive, Inc. maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2004, based on the COSO criteria.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheets of Group 1 Automotive, Inc. as of December 31, 2004 and 2003, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2004, of
Group 1 Automotive, Inc. and our report dated March 10, 2005, except for Note 2,
as to which the date is January 27, 2006, expressed an unqualified opinion
thereon.
/s/ Ernst & Young LLP
Houston, Texas
March 10, 2005
-45-
PART III
Please see the definitive Proxy Statement of Group 1 Automotive, Inc. for
the Annual Meeting of Stockholders to be held on May 18, 2005, which will be
filed with the Securities and Exchange Commission and is incorporated herein by
reference for the information concerning:
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements
The financial statements listed in the accompanying Index to
Financial Statements are filed as part of this amended Annual Report
on Form 10-K/A.
(b) Other Information
None.
(c) Exhibits
-46-
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 -- Restated Certificate of Incorporation of the Company
(Incorporated by reference to Exhibit 3.1 of the Company's
Registration Statement on Form S-1 Registration No. 333-29893).
3.2 -- Certificate of Designation of Series A Junior Participating
Preferred Stock (Incorporated by reference to Exhibit 3.2 of the
Company's Registration Statement on Form S-1 Registration No.
333-29893).
3.3 -- Bylaws of the Company (Incorporated by reference to Exhibit 3.3
of the Company's Registration Statement on Form S-1 Registration
No. 333-29893).
4.1 -- Specimen Common Stock Certificate (Incorporated by reference to
Exhibit 4.1 of the Company's Registration Statement on Form S-1
Registration No. 333-29893).
4.2 -- Subordinated Indenture dated as of August 13, 2003 among Group 1
Automotive, Inc., the Subsidiary Guarantors named therein and
Wells Fargo Bank, N.A., as Trustee (Incorporated by reference to
Exhibit 4.6 of the Company's Registration Statement on Form S-4
Registration No. 333-109080).
4.3 -- First Supplemental Indenture dated as of August 13, 2003 among
Group 1 Automotive, Inc., the Subsidiary Guarantors named
therein and Wells Fargo Bank, N.A., as Trustee (Incorporated by
reference to Exhibit 4.7 of the Company's Registration Statement
on Form S-4 Registration No. 333-109080).
4.4 -- Form of Subordinated Debt Securities (included in Exhibit 4.3).
10.1* -- Employment Agreement between the Company and B.B. Hollingsworth,
Jr., effective March 1, 2002 (Incorporated by reference to
Exhibit 10.1 of the Company's Annual Report on Form 10-K for the
year ended December 31, 2001).
10.2* -- First Amendment to Employment Agreement between the Company
and B.B. Hollingsworth, Jr., effective March 1, 2002
(Incorporated by reference to Exhibit 10.40 of the Company's
Annual Report on Form 10-K for the year ended December 31,
2003).
10.3* -- Employment Agreement between the Company and John T. Turner
dated November 3, 1997 (Incorporated by reference to Exhibit
10.5 of the Company's Annual Report on Form 10-K for the year
ended December 31, 1997).
10.4 -- Rights Agreement between Group 1 Automotive, Inc. and
ChaseMellon Shareholder Services, L.L.C., as rights agent, dated
October 3, 1997 (Incorporated by reference to Exhibit 10.10 of
the Company's Registration Statement on Form S-1 Registration
No. 333-29893).
10.5* -- Split Dollar Life Insurance Agreement, dated as of January 23,
2002, between Group 1 Automotive, Inc., and Leslie Hollingsworth
and Leigh Hollingsworth Copeland, as Trustees of the
Hollingsworth 2000 Children's Trust (Incorporated by reference
to Exhibit 10.36 of the Company's Annual Report on Form 10-K for
the year ended December 31, 2002).
10.6* -- Group 1 Automotive, Inc. Deferred Compensation Plan, as Amended
and Restated (Incorporated by reference to Exhibit 4.1 of the
Company's Registration Statement on Form S-8 Registration No.
333-83260).
10.7* -- First Amendment to Group 1 Automotive, Inc. Deferred
Compensation Plan, as Amended and Restated (Incorporated by
reference to Exhibit 4.1 of the Company's Registration Statement
on Form S-8 Registration No. 333-115962).
10.8* -- 1996 Stock Incentive Plan (Incorporated by reference to Exhibit
10.7 of the Company's Registration Statement on Form S-1
Registration No. 333-29893).
10.9* -- First Amendment to 1996 Stock Incentive Plan (Incorporated by
reference to Exhibit 10.8 of the Company's Registration
Statement on Form S-1 Registration No. 333-29893).
10.10* -- Second Amendment to 1996 Stock Incentive Plan (Incorporated by
reference to Exhibit 10.1 of the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999).
10.11* -- Third Amendment to 1996 Stock Incentive Plan (Incorporated by
reference to Exhibit 4.1 of the Company's Registration Statement
on Form S-8 Registration No. 333-75784).
10.12* -- Fourth Amendment to 1996 Stock Incentive Plan (Incorporated by
reference to Exhibit 4.1 of the Company's Registration Statement
on Form S-8 Registration No. 333-115961).
10.13* -- Fifth Amendment to 1996 Stock Incentive Plan (Incorporated by
reference to Exhibit 10.1 of the Company's Current Report on
Form 8-K dated March 9, 2005).
-47-
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.14* -- Form of Restricted Stock Agreement for Employees (Incorporated
by reference to Exhibit 10.2 of the Company's Current Report on
Form 8-K dated March 9, 2005).
10.15* -- Form of Phantom Stock Agreement for Employees (Incorporated by
reference to Exhibit 10.3 of the Company's Current Report on
Form 8-K Company's Current Report on Form 8-K dated March 9,
2005).
10.16* -- Form of Restricted Stock Agreement for Non-Employee Directors
(Incorporated by reference to Exhibit 10.4 of the Company's
Current Report on Form 8-K dated March 9, 2005).
10.17* -- Form of Phantom Stock Agreement for Non-Employee Directors
(Incorporated by reference to Exhibit 10.5 of the Company's
Current Report on Form 8-K dated March 9, 2005).
10.18* -- Annual Incentive Plan for Executive Officers of Group 1
Automotive, Inc. (Incorporated by reference to the section
titled "Executive Officer Compensation - Adoption of Bonus
Plan" in Item 1.01 of the Company's Current Report on Form 8-K
dated March 9, 2005).
10.19* -- Group 1 Automotive, Inc. Director Compensation Plan
(Incorporated by reference to the Company's Current Report on
Form 8-K dated November 17, 2004, and to the section titled
"Director Compensation - Change in Director Compensation" in
Item 1.01 of the Company's Current Report on Form 8-K dated
March 9, 2005).
10.20* -- Group 1 Automotive, Inc. 1998 Employee Stock Purchase Plan
(Incorporated by reference to Exhibit 10.11 of the Company's
Registration Statement on Form S-1 Registration No. 333-29893).
10.21* -- First Amendment to Group 1 Automotive, Inc. 1998 Employee
Stock Purchase Plan (Incorporated by reference to Exhibit 10.35
of the Company's Annual Report on Form 10-K for the year ended
December 31, 1998).
10.22* -- Second Amendment to Group 1 Automotive, Inc. 1998 Employee
Stock Purchase Plan (Incorporated by reference to Exhibit 4.1 of
the Company's Registration Statement on Form S-8 Registration
No. 333-75754).
10.23* -- Third Amendment to Group 1 Automotive, Inc. 1998 Employee
Stock Purchase Plan (Incorporated by reference to Exhibit 4.1 of
the Company's Registration Statement on Form S-8 Registration
No. 333-106486).
10.24* -- Fourth Amendment to Group 1 Automotive, Inc. 1998 Employee
Stock Purchase Plan (Incorporated by reference to Exhibit 4.2 of
the Company's Registration Statement on Form S-8 Registration
No. 333-106486).
10.25* -- Fifth Amendment to Group 1 Automotive, Inc. 1998 Employee
Stock Purchase Plan (Incorporated by reference to Exhibit 4.3 of
the Company's Registration Statement on Form S-8 Registration
No. 333-106486).
10.26 -- Fifth Amended and Restated Revolving Credit Agreement, dated as
of June 2, 2003 (Incorporated by reference to Exhibit 10.1 of
the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2003).
10.27 -- First Amendment to Fifth Amended and Restated Revolving Credit
Agreement, dated as of July 25, 2003 (Incorporated by reference
to Exhibit 10.37 of the Company's Registration Statement on Form
S-4 Registration No. 333-109080).
10.28 -- Form of Ford Motor Credit Company Automotive Wholesale Plan
Application for Wholesale Financing and Security Agreement
(Incorporated by reference to Exhibit 10.2 of the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2003).
10.29 -- Form of Agreement between Toyota Motor Sales, U.S.A., and
Group 1 Automotive, Inc. (Incorporated by reference to Exhibit
10.12 of the Company's Registration Statement on Form S-1
Registration No. 333-29893).
10.30 -- Form of Supplemental Agreement to General Motors Corporation
Dealer Sales and Service Agreement (Incorporated by reference to
Exhibit 10.13 of the Company's Registration Statement on Form
S-1 Registration No. 333-29893).
10.31 -- Supplemental Terms and Conditions between Ford Motor Company and
Group 1 Automotive, Inc. dated September 4, 1997 (Incorporated
by reference to Exhibit 10.16 of the Company's Registration
Statement on Form S-1 Registration No. 333-29893).
-48-
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.32 -- Toyota Dealer Agreement between Gulf States Toyota, Inc. and
Southwest Toyota, Inc. dated April 5, 1993 (Incorporated by
reference to Exhibit 10.17 of the Company's Registration
Statement on Form S-1 Registration No. 333-29893).
10.33 -- Lexus Dealer Agreement between Toyota Motor Sales, U.S.A., Inc.
and SMC Luxury Cars, Inc. dated August 21, 1995 (Incorporated by
reference to Exhibit 10.18 of the Company's Registration
Statement on Form S-1 Registration No. 333-29893).
10.34 -- Form of General Motors Corporation U.S.A. Sales and Service
Agreement (Incorporated by reference to Exhibit 10.25 of the
Company's Registration Statement on Form S-1 Registration No.
333-29893).
10.35 -- Form of Ford Motor Company Sales and Service Agreement
(Incorporated by reference to Exhibit 10.38 of the Company's
Annual Report on Form 10-K for the year ended December 31,
1998).
10.36 -- Form of Chrysler Corporation Sales and Service Agreement
(Incorporated by reference to Exhibit 10.39 of the Company's
Annual Report on Form 10-K for the year ended December 31,
1998).
10.37 -- Form of Nissan Division Dealer Sales and Service Agreement
(Incorporated by reference to Exhibit 10.25 of the Company's
Annual Report on Form 10-K for the year ended December 31,
2003).
10.38 -- Form of Infiniti Division Dealer Sales and Service
Agreement (Incorporated by reference to Exhibit 10.26 of the
Company's Annual Report on Form 10-K for the year ended December
31, 2003).
10.39 -- Lease Agreement between Howard Pontiac GMC, Inc. and Robert E.
Howard II (Incorporated by reference to Exhibit 10.9 of the
Company's Registration Statement on Form S-1 Registration No.
333-29893).
10.40 -- Lease Agreement between Bob Howard Motors, Inc. and Robert E.
Howard II (Incorporated by reference to Exhibit 10.9 of the
Company's Registration Statement on Form S-1 Registration No.
333-29893).
10.41 -- Lease Agreement between Bob Howard Chevrolet, Inc. and Robert E.
Howard II (Incorporated by reference to Exhibit 10.9 of the
Company's Registration Statement on Form S-1 Registration No.
333-29893).
10.42 -- Lease Agreement between Bob Howard Automotive-East, Inc. and
REHCO East, L.L.C. (Incorporated by reference to Exhibit 10.37
of the Company's Annual Report on Form 10-K for the year ended
December 31, 2002).
10.43 -- Lease Agreement between Howard-H, Inc. and REHCO, L.L.C.
(Incorporated by reference to Exhibit 10.38 of the Company's
Annual Report on Form 10-K for the year ended December 31,
2002).
10.44 -- Lease Agreement between Howard Pontiac-GMC, Inc. and North
Broadway Real Estate Limited Liability Company (Incorporated by
reference to Exhibit 10.10 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2002).
10.45 -- Lease Agreement between Howard-Ford, Inc. and REHCO EAST, L.L.C.
(Incorporated by reference to Exhibit 10.38 of the Company's
Annual Report on Form 10-K for the year ended December 31,
2003).
10.46 -- Amendment and Assignment of Lease between Howard Ford, Inc.,
Howard-FLM, Inc. and REHCO EAST, L.L.C. (Incorporated by
reference to Exhibit 10.39 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2003).
10.47 -- Second Amendment to Fifth Amended and Restated Revolving Credit
Agreement, dated as of March 8, 2005 (Incorporated by reference
to Exhibit 10.47 to the Company's Annual Report on Form 10-K for
the year ended December 31, 2004).
10.48* -- Sixth Amendment to Group 1 Automotive, Inc. 1998 Employee Stock
Purchase Plan (Incorporated by reference to Exhibit 10.48 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 2004).
10.49* -- Form of Incentive Stock Option Agreement for Employees
(Incorporated by reference to Exhibit 10.49 to the Company's
Annual Report on Form 10-K for the year ended December 31,
2004).
10.50* -- Form of Nonstatutory Stock Option Agreement for Employees
(Incorporated by reference to Exhibit 10.50 to the Company's
Annual Report on Form 10-K for the year ended December 31,
2004).
11.1 -- Statement re: computation of earnings per share is included
under Note 2 to the financial statements.
14.1 -- Code of Ethics for Specified Officers of Group 1 Automotive,
Inc., dated as of May 16, 2004 (Incorporated by reference
to Exhibit 14.1 to the Company's Annual Report on Form 10-K for
the year ended December 31, 2004).
21.1 -- Group 1 Automotive, Inc. Subsidiary List (Incorporated by
reference to Exhibit 21.1 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2004).
23.1 -- Consent of Ernst & Young LLP.
31.1 -- Certification of Chief Executive Officer Under Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 -- Certification of Chief Financial Officer Under Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 -- Certification of Chief Executive Officer Under Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 -- Certification of Chief Financial Officer Under Section 906 of
the Sarbanes-Oxley Act of 2002.
--------------
* Management contract or compensatory plan or arrangement
-49-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amended report to be
signed on its behalf by the undersigned, thereunto duly authorized in the city
of Houston, Texas, on the 30th day of January, 2006.
Group 1 Automotive, Inc.
By: /s/ Earl J. Hesterberg
--------------------------------------
Earl J. Hesterberg
President and chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
amended report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on the 30th day of January, 2006.
Signature Title
--------- -----
/s/ Earl J. Hesterberg President and Chief Executive
----------------------- Officer and Director (Principal
Earl J. Hesterberg Executive Officer)
/s/ John C. Rickel Senior Vice President and Chief
----------------------- Financial Officer (Chief Financial
John C. Rickel and Accounting Officer)
/s/ John L. Adams Chairman and Director
-----------------------
John L. Adams
/s/ Robert E. Howard II Director
-----------------------
Robert E. Howard II
/sl Louis E. Lataif Director
-----------------------
Louis E. Lataif
/s/ Stephen D. Quinn Director
-----------------------
Stephen D. Quinn
/s/ J. Terry Strange Director
-----------------------
J. Terry Strange
/s/ Max P. Watson. Jr. Director
-----------------------
Max P. Watson, Jr.
-52-
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Group 1 Automotive, Inc. and Subsidiaries -- Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm....................... F-2
Consolidated Balance Sheets................................................... F-3
Consolidated Statements of Operations......................................... F-4
Consolidated Statements of Stockholders' Equity............................... F-5
Consolidated Statements of Cash Flows......................................... F-6
Notes to Consolidated Financial Statements.................................... F-7
F-1
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Group 1 Automotive, Inc.
We have audited the accompanying consolidated balance sheets of Group 1
Automotive, Inc. as of December 31, 2004 and 2003, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2004. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Group 1
Automotive, Inc. at December 31, 2004 and 2003, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2004, in conformity with U.S. generally accepted accounting
principles.
As discussed in Note 2 to the consolidated financial statements, the
consolidated financial statements have been restated.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Group 1
Automotive, Inc.'s internal control over financial reporting as of December 31,
2004, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 10, 2005 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Houston, Texas
March 10, 2005, except for Note 2, as to which the date is January 27, 2006
F-2
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Restated)
DECEMBER 31,
----------------------------------------
2004 2003
---------------- ------------------
(dollars in thousands, except share data)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................ $ 37,750 $ 26,483
Contracts-in-transit and vehicle receivables, net.................... 172,402 143,260
Accounts and notes receivable, net................................... 76,687 63,669
Inventories.......................................................... 877,575 671,279
Deferred income taxes................................................ 14,755 11,163
Prepaid expenses and other current assets............................ 26,046 16,176
---------------- ------------------
Total current assets............................................... 1,205,215 932,030
---------------- ------------------
PROPERTY AND EQUIPMENT, net............................................. 160,297 131,647
GOODWILL................................................................ 366,673 328,491
INTANGIBLE FRANCHISE RIGHTS............................................. 187,135 76,656
DEFERRED COSTS RELATED TO INSURANCE POLICY AND VEHICLE SERVICE
CONTRACT SALES.......................................................... 7,996 12,238
OTHER ASSETS............................................................ 19,904 21,383
---------------- ------------------
Total assets....................................................... $ 1,947,220 $ 1,502,445
================ ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Floorplan notes payable - credit facility............................ $ 632,593 $ 297,848
Floorplan notes payable - manufacturer affiliates.................... 215,667 195,720
Current maturities of long-term debt................................. 1,054 910
Accounts payable..................................................... 108,920 87,675
Accrued expenses..................................................... 91,528 74,295
---------------- ------------------
Total current liabilities.......................................... 1,049,762 656,448
---------------- ------------------
LONG-TERM DEBT, net of current maturities............................... 156,747 230,178
ACQUISITION LINE - credit facility...................................... 84,000 -
DEFERRED INCOME TAXES................................................... 33,197 33,786
OTHER LIABILITIES....................................................... 24,288 23,169
---------------- ------------------
Total liabilities before deferred revenues......................... 1,347,994 943,581
---------------- ------------------
DEFERRED REVENUES....................................................... 32,052 40,755
STOCKHOLDERS' EQUITY:
Preferred stock, 1,000,000 shares authorized, none issued or
outstanding.......................................................... - -
Common stock, $.01 par value, 50,000,000 shares authorized;
23,916,393 and 23,454,046 issued, respectively....................... 239 235
Additional paid-in capital........................................... 265,645 255,356
Retained earnings.................................................... 318,931 291,150
Accumulated other comprehensive loss................................. (173) (1,285)
Treasury stock, at cost; 606,588 and 1,002,506 shares, respectively.. (17,468) (27,347)
---------------- ------------------
Total stockholders' equity......................................... 567,174 518,109
---------------- ------------------
Total liabilities and stockholders' equity......................... $ 1,947,220 $ 1,502,445
================ ==================
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
2004 2003 2002
------------- ------------- -------------
(dollars in thousands, except per share amounts)
REVENUES:
New vehicle retail sales....................... $ 3,348,875 $ 2,739,315 $ 2,526,847
Used vehicle retail sales...................... 988,797 884,819 921,359
Used vehicle wholesale sales................... 359,247 265,187 222,529
Parts and service sales........................ 565,213 465,989 402,169
Retail finance fees............................ 68,537 63,210 58,869
Vehicle service contract fees.................. 65,738 61,315 52,346
Other finance and insurance revenues, net...... 38,626 38,725 30,245
------------- ------------- -------------
Total revenues.............................. 5,435,033 4,518,560 4,214,364
COST OF SALES:
New vehicle retail sales....................... 3,112,140 2,539,319 2,337,223
Used vehicle retail sales...................... 868,351 778,266 817,385
Used vehicle wholesale sales................... 367,513 271,328 230,424
Parts and service sales........................ 255,263 206,236 177,037
------------- ------------- -------------
Total cost of sales......................... 4,603,267 3,795,149 3,562,069
------------- ------------- -------------
GROSS PROFIT..................................... 831,766 723,411 652,295
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES..... 672,068 561,698 503,066
DEPRECIATION AND AMORTIZATION EXPENSE............ 15,836 12,510 10,137
ASSET IMPAIRMENTS................................ 44,711 -- --
------------- ------------- -------------
INCOME FROM OPERATIONS........................... 99,151 149,203 139,092
OTHER INCOME AND (EXPENSES):
Floorplan interest expense, excludes
manufacturer interest assistance............ (25,349) (21,571) (20,187)
Other interest expense, net.................... (19,299) (15,191) (10,578)
Loss on redemption of senior subordinated
notes....................................... (6,381) -- (1,173)
Other income (expense), net.................... (170) 631 128
------------- ------------- -------------
INCOME BEFORE INCOME TAXES....................... 47,952 113,072 107,282
PROVISION FOR INCOME TAXES....................... 20,171 36,946 40,217
------------- ------------- -------------
NET INCOME....................................... $ 27,781 $ 76,126 $ 67,065
============= ============= =============
EARNINGS PER SHARE:
Basic.......................................... $ 1.22 $ 3.38 $ 2.93
Diluted........................................ $ 1.18 $ 3.26 $ 2.80
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic.......................................... 22,807,922 22,523,825 22,874,918
Diluted........................................ 23,493,899 23,346,221 23,968,072
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED OTHER
COMPREHENSIVE LOSS
----------------------
UNREALIZED UNREALIZED
COMMON STOCK ADDITIONAL LOSSES ON LOSSES ON
---------------------- PAID-IN RETAINED INTEREST MARKETABLE TREASURY
SHARES AMOUNT CAPITAL EARNINGS RATE SWAPS SECURITIES STOCK TOTAL
----------- --------- ---------- ---------- ----------- ---------- ---------- ----------
(dollars in thousands, except share data)
BALANCE, December 31, 2001......... 23,029,853 $ 230 $ 251,145 $ 147,959 $ (807) - $ (6,284) $ 392,243
Comprehensive income:
Net income..................... - - - 67,065 - - - 67,065
Interest rate swap adjustment,
net of tax benefit of
$1,563...................... - - - - (2,552) - - (2,552)
----------
Total comprehensive
income.................... 64,513
Proceeds from sales of common
stock under employee benefit
plans....................... 547,306 6 8,030 - - - - 8,036
Issuance of treasury stock to
employee benefit plans...... (393,933) (4) (7,427) - - - 7,431 -
Non-cash stock compensation..... - - 193 - - - - 193
Purchase of treasury stock...... - - - - - - (23,772) (23,772)
Tax benefit from options
exercised................... - - 2,204 - - - - 2,204
----------- --------- ---------- ---------- --------- ---------- ---------- ----------
BALANCE, December 31, 2002......... 23,183,226 232 254,145 215,024 (3,359) - (22,625) 443,417
Comprehensive income:
Net income..................... - - - 76,126 - - - 76,126
Interest rate swap adjustment,
net of taxes of $1,288.... - - - - 2,074 - - 2,074
----------
Total comprehensive
income.................... 78,200
Proceeds from sales of common
stock under employee benefit
plans......................... 673,572 7 8,984 - - - - 8,991
Issuance of treasury stock to
employee benefit plans........ (402,752) (4) (9,678) - - - 9,682 -
Purchase of treasury stock...... - - - - - - (14,404) (14,404)
Tax benefit from options
exercised................... - - 1,905 - - - - 1,905
----------- --------- ---------- ---------- --------- ---------- ---------- ----------
BALANCE, December 31, 2003......... 23,454,046 235 255,356 291,150 (1,285) - (27,347) 518,109
Comprehensive income:
Net income..................... - - - 27,781 - - - 27,781
Interest rate swap adjustment,
net of taxes of $771.... - - - - 1,285 - - 1,285
Unrealized losses on
investments, net of income tax
benefit of $104............... - - - - - $ (173) - (173)
----------
Total comprehensive
income................... 28,893
Proceeds from sales of common
stock under employee benefit
plans......................... 659,013 6 11,788 - - - - 11,794
Issuance of treasury stock to
employee benefit plans........ (590,979) (6) (16,892) - - - 16,898 -
Issuance of common stock in
connection with
acquisitions.................. 394,313 4 12,892 - - - - 12,896
Purchase of treasury stock...... - - - - - - (7,019) (7,019)
Tax benefit from options
exercised................... - - 2,501 - - - - 2,501
----------- --------- ---------- ---------- --------- ---------- ---------- ----------
BALANCE, December 31, 2004......... 23,916,393 $ 239 $ 265,645 $ 318,931 - $ (173) $ (17,468) $ 567,174
=========== ========= ========== ========== ========= ========== ========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Restated)
YEAR ENDED DECEMBER 31,
----------------------------------------
2004 2003 2002
---------- ---------- ----------
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................... $ 27,781 $ 76,126 $ 67,065
Adjustments to reconcile net income to net
cash provided by operating activities:
Impairment of assets............................................ 44,711 - -
Depreciation and amortization................................... 15,836 12,510 10,137
Amortization of debt discount and issue costs................... 1,834 1,871 1,469
Deferred income taxes........................................... (4,701) 11,951 6,883
Tax benefit from options exercised.............................. 2,501 1,905 2,204
Provision for doubtful accounts and uncollectible notes......... 1,529 (631) 1,078
(Gain) loss on sale of assets................................... 142 (622) 483
Gain on sales of franchises..................................... - - (414)
Losses on repurchases of senior subordinated notes.............. 6,381 - 1,173
Changes in operating assets and liabilities, net of effects of
acquisitions and dispositions:
Contracts-in-transit and vehicle receivables.................. (28,902) 36,704 (37,750)
Accounts receivable........................................... (14,204) (2,799) (3,055)
Inventories................................................... (64,294) 4,709 (107,487)
Prepaid expenses and other assets............................. (2,015) (2,565) (6,063)
Floorplan notes payable - manufacturer affiliates............. 18,421 183,400 1,826
Accounts payable and accrued expenses ........................ 30,936 1,115 (6,768)
Deferred revenues ............................................ (8,703) (10,665) 6,574
----------- ----------- ----------
Net cash provided by (used in) operating activities......... 27,253 313,009 (62,645)
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable..................................... - (2,958) (8,083)
Collections on notes receivable.................................. 5,367 1,388 1,303
Purchases of property and equipment.............................. (47,412) (34,627) (43,498)
Proceeds from sales of property and equipment.................... 12,329 11,598 1,975
Proceeds from sales of franchises................................ - 7,414 7,430
Purchases of restricted investments.............................. (2,074) (5,520) (3,424)
Maturities of restricted investments............................. 1,027 1,991 2,307
(Increase) decrease in restricted cash........................... 2,095 1,967 (344)
Cash paid in acquisitions, net of cash received.................. (221,721) (35,418) (81,422)
----------- ----------- ----------
Net cash used in investing activities....................... (250,389) (54,165) (123,756)
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on credit facility.................................... 3,619,426 2,482,830 3,193,654
Repayments on credit facility.................................... (3,308,891) (2,872,838) (2,969,731)
Principal payments of long-term debt............................. (1,219) (1,253) (1,950)
Borrowings of long-term debt..................................... - - 17
Proceeds from issuance of senior subordinated notes.............. - 144,131 -
Debt issue costs................................................. (209) (4,903) -
Repurchase of senior subordinated notes.......................... (79,479) - (11,629)
Proceeds from issuance of common stock to benefit plans.......... 11,794 8,991 8,036
Repurchase of common stock, amounts based on settlement
date............................................................ (7,019) (14,404) (23,772)
----------- ----------- ----------
Net cash provided by (used in) financing activities......... 234,403 (257,446) 194,625
----------- ----------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS............................ 11,267 1,398 8,224
CASH AND CASH EQUIVALENTS, beginning of period....................... 26,483 25,085 16,861
----------- ----------- ----------
CASH AND CASH EQUIVALENTS, end of period............................. $ 37,750 $ 26,483 $ 25,085
=========== =========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for -
Interest........................................................ $ 43,521 $ 38,863 $ 31,075
Income taxes.................................................... $ 23,949 $ 31,971 $ 36,632
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Restated)
1. BUSINESS AND ORGANIZATION:
Group 1 Automotive, Inc., a Delaware corporation, is a leading operator in
the automotive retailing industry. Group 1 Automotive, Inc. is a holding company
with no independent assets or operations other than its investments in its
subsidiaries, which are located in California, Colorado, Florida, Georgia,
Louisiana, Massachusetts, New Jersey, New Mexico, New York, Oklahoma, and Texas.
These subsidiaries sell new and used cars and light trucks through their
dealerships and Internet sites; arrange related financing, vehicle service and
insurance contracts; provide maintenance and repair services; and sell
replacement parts. Group 1 Automotive, Inc. and its subsidiaries are herein
collectively referred to as the "Company" or "Group 1."
2. RESTATEMENT AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Restatement
Subsequent to the issuance of the Company's December 31, 2004,
consolidated financial statements, the Company's management determined that
certain information in the Consolidated Balance Sheets and Consolidated
Statements of Cash Flows should be restated and reclassified for all periods
presented to comply with the guidance set forth by the rules and regulations of
the Securities and Exchange Commission and Statement of Financial Accounting
Standards ("SFAS") No. 95, "Statement of Cash Flows." Floorplan notes payable to
a party other than the manufacturer of a particular new vehicle, and all
floorplan notes payable relating to used vehicles, have been reclassified as
floorplan notes payable - credit facility on the Consolidated Balance Sheets,
and related cash flows have been reclassified from operating activities to
financing activities on the Consolidated Statements of Cash Flows. Consistent
with industry practice, the Company previously reported all cash flow
information relating to floorplan notes payable as operating cash flows.
A summary of the significant effects of the restatement are as follows:
AT DECEMBER 31,
--------------------------------------------------
2004 2003
---------------------- ---------------------
CONSOLIDATED BALANCE SHEETS REPORTED RESTATED REPORTED RESTATED
--------------------------- -------- -------- -------- --------
(IN THOUSANDS)
Floorplan notes payable $848,260 $ - $493,568 $ -
Floorplan notes payable - credit facility - 632,593 - 297,848
Floorplan notes payable - manufacturer affiliates - 215,667 - 195,720
FOR THE YEAR ENDED,
--------------------------------------------------------------------------
DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
--------------------- --------------------- ---------------------
CONSOLIDATED STATEMENT OF CASH FLOWS REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
------------------------------------ -------- -------- -------- -------- -------- --------
(in thousands)
Floorplan notes payable $ 73,509 $ - $(41,438) $ - $143,727 $ -
Floorplan notes payable - manufacturer affiliates - 18,421 - 183,400 - 1,826
Net cash provided by (used in) operating activities 82,341 27,253 88,171 313,009 79,256 (62,645)
Net borrowings (payments) on revolving credit facility 255,447 - (165,170) - 82,022 -
Borrowings on credit facility - 3,619,426 - 2,482,830 - 3,193,654
Repayments on credit facility - (3,308,891) - (2,872,838) - (2,969,731)
Net cash provided by (used in) financing activities 179,315 234,403 (32,608) (257,446) 52,724 194,625
Basis of Presentation
All acquisitions of dealerships completed during the periods presented
have been accounted for using the purchase method of accounting and their
results of operations are included from the effective dates of the closings of
the acquisitions. The allocations of purchase price to the assets acquired and
liabilities assumed are assigned and recorded based on estimates of fair value.
All intercompany balances and transactions have been eliminated in
consolidation.
Revenue Recognition
Revenues from vehicle sales, parts sales and vehicle service are
recognized upon completion of the sale and delivery to the customer. Conditions
to completing a sale include having an agreement with the customer, including
pricing, and the sales price must be reasonably expected to be collected.
In accordance with Emerging Issues Task Force ("EITF") No. 00-21, "Revenue
Arrangements with Multiple Deliverables," the Company defers revenues received
for products and services to be delivered at a later date. This relates
primarily to the sale of various maintenance services, to be provided in the
future, at the time of the sale of a vehicle. The amount of revenues deferred is
based on the then current retail price of the service to be provided. The
revenues are recognized over the period during which the services are to be
delivered. The remaining residual purchase price is attributed to the vehicle
and recognized as revenue at the time of the sale.
In accordance with EITF No. 99-19, "Reporting Revenue Gross as a Principal
versus Net as an Agent," the Company records the profit it receives for
arranging vehicle fleet transactions net in other finance and insurance
revenues, net. Since all sales of new vehicles must occur through franchised new
vehicle dealerships, the dealerships effectively act as agents for the
automobile manufacturers in completing sales of vehicles to fleet customers. As
these customers typically order the vehicles, the Company has no significant
general inventory risk. Additionally, fleet customers generally receive special
purchase incentives from the automobile manufacturers and the Company receives
only a nominal fee for facilitating the transactions.
The Company arranges financing for customers through various institutions
and receives financing fees based on the difference between the loan rates
charged to customers and predetermined financing rates set by the financing
institution. In addition, the Company receives fees from the sale of vehicle
service contracts to customers. The Company may be charged back a portion of the
financing, insurance contract and vehicle service contract fees in the event of
early termination of the contracts by customers. Revenues from these fees are
recorded at the time of the sale of the vehicles and a reserve for future
chargebacks is established based on the Company's historical operating results
and the termination provisions of the applicable contracts.
The Company consolidates the operations of its reinsurance companies. The
Company reinsures the credit life and accident and health insurance policies
sold by its dealerships. All of the revenues and related direct costs from the
sales of these policies are deferred and recognized over the life of the
policies, in accordance with SFAS No. 60, "Accounting and Reporting by Insurance
Enterprises." Investment of the net assets of these companies are regulated by
state insurance commissions and consist of permitted investments, in general,
government-backed securities and obligations of government agencies. These
investments are classified as available-for-sale and are carried at market
value. These investments, along with restricted cash that is not invested, are
classified as other long-term assets in the accompanying consolidated balance
sheets.
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits and various other
short-term investments with original maturities of three months or less at the
date of purchase.
F-7
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Restated)
Contracts-in-Transit and Vehicle Receivables
Contracts-in-transit and vehicle receivables consist primarily of amounts
due from financing institutions on retail finance contracts from vehicle sales.
Also included are amounts receivable from vehicle wholesale sales.
Inventories
New, used and demonstrator vehicles are stated at the lower of specific
cost or market. Vehicle inventory cost consists of the amount paid to acquire
the inventory, plus reconditioning cost, cost of equipment added and
transportation cost. Additionally, the Company receives interest assistance from
some of the automobile manufacturers. The assistance is accounted for as a
vehicle purchase price discount and is reflected as a reduction to the inventory
cost on the balance sheet and as a reduction to cost of sales in the income
statement as the vehicles are sold. At December 31, 2004 and 2003, inventory
cost had been reduced by $7.2 million and $5.6 million, respectively, for
interest assistance received from manufacturers. New vehicle cost of sales has
been reduced by $33.2 million, $27.4 million and $26.7 million for interest
assistance received related to vehicles sold for the years ended December 31,
2004, 2003 and 2002, respectively.
Parts and accessories are stated at the lower of cost (determined on a
first-in, first-out basis) or market.
Market adjustments are provided against the inventory balances based on
the historical loss experience and management's considerations of current market
trends.
Property and Equipment
Property and equipment are recorded at cost and depreciation is provided
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for major additions or improvements, which extend the useful
lives of assets, are capitalized. Minor replacements, maintenance and repairs,
which do not improve or extend the lives of the assets, are charged to
operations as incurred. Disposals are removed at cost less accumulated
depreciation, and any resulting gain or loss is reflected in current operations.
Goodwill
Goodwill represents the excess of the purchase price of businesses
acquired over the fair value of the net tangible and intangible assets acquired
at the date of acquisition. In June 2001, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 141, "Business Combinations." Prior to the
adoption of SFAS No. 141 on January 1, 2002, the Company did not separately
record intangible assets apart from goodwill as all were amortized over similar
lives. In 2001, the FASB also issued SFAS No. 142, "Goodwill and Other
Intangible Assets," which changed the treatment of goodwill, no longer
permitting the amortization of goodwill, but instead requiring, at least
annually, an assessment for impairment of goodwill by reporting unit, defined by
the Company as each of its platforms, using a fair-value based two-step test.
The Company performs the annual impairment assessment at the end of each
calendar year, and performs an impairment assessment more frequently if events
or circumstances occur at a reporting unit between annual assessments that would
more likely than not reduce the fair value of the reporting unit below its
carrying value. See Note 4.
In evaluating goodwill for impairment, the Company compares the carrying
value of the net assets of each reporting unit, its platforms, to each
platform's respective fair value. This represents the first step of the
impairment test. If the fair value of a platform is less than the carrying value
of the net assets of the platform, the Company is then required to proceed to
step two of the impairment test. The second step involves allocating the
calculated fair value to all of the tangible and identifiable intangible assets
of the respective platform as if the calculated fair value was the purchase
price of the business combination. This allocation could result in assigning
value to intangible assets not previously recorded separately from goodwill
prior to the adoption of SFAS No. 141, which could result in less implied
residual value assigned to goodwill (see discussion regarding franchise rights
acquired prior to July 1, 2001, in "Intangible Franchise Rights" below). The
Company then compares the value of the implied goodwill resulting from this
second step to the carrying value of the goodwill in the respective platform. To
the extent the carrying value of the goodwill exceeds the implied fair value, an
impairment charge is recorded for such difference.
The Company uses a discounted cash flow approach in estimating the fair
value of each platform in completing step one of the impairment analysis.
Included in this analysis are assumptions regarding revenue growth rates,
F-8
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Restated)
future gross margin estimates, future selling, general and administrative
expense rates and the Company's weighted average cost of capital. The Company
also estimates residual values at the end of the forecast period and future
capital expenditure requirements. At December 31, 2004, 2003 and 2002, the fair
value of each of the Company's platforms exceeded the carrying value of its net
assets (step one of the impairment test). As a result, the Company was not
required to conduct the second step of the impairment test described above.
However, if in future periods, the Company determines the carrying amount of its
net assets exceed the respective fair value as a result of step one, the Company
believes that the application of the second step of the impairment test could
result in a material impairment charge to the goodwill associated with the
applicable platform(s), especially with respect to those platforms acquired
prior to July 1, 2001.
Intangible Franchise Rights
The Company's only significant identified intangible assets, other than
goodwill, are rights under franchise agreements with manufacturers, which are
recorded at an individual dealership level. The Company expects these franchise
agreements to continue for an indefinite period and, when these agreements do
not have indefinite terms, the Company believes that renewal of these agreements
can be obtained without substantial cost. As such, the Company believes that its
franchise agreements will contribute to cash flows for an indefinite period,
and, therefore, the carrying amount of franchise rights are not amortized.
Franchise rights acquired in acquisitions prior to July 1, 2001, were recorded
and amortized as part of goodwill and remain as part of goodwill at December 31,
2004 and 2003 in the accompanying consolidated balance sheets. Like goodwill,
and in accordance with SFAS No. 142, the Company evaluates these franchise
rights for impairment annually, or more frequently if events or circumstances
indicate possible impairment, using a fair value method. Unlike the goodwill
impairment analysis, however, the impairment analysis for the Company's
franchise rights is a single step approach comparing the fair value of each
franchise right with its recorded carrying value. To the extent the carrying
value of the respective intangible franchise right exceeds its fair value, an
impairment charge is recorded for such difference. See Note 4.
The Company uses a discounted cash flow based approach to test the
carrying value of each individual franchise right for impairment. Included in
this analysis are assumptions, at a dealership level, regarding revenue growth
rates, future gross margin estimates and future selling, general and
administrative expense rates. Using the Company's weighted average cost of
capital, estimated residual values at the end of the forecast period and future
capital expenditure requirements, the Company calculates the fair value of each
dealership's franchise rights after considering estimated values for tangible
assets, working capital and workforce.
Long-Lived Assets
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," requires that long-lived assets be reviewed for impairment whenever
there is evidence that the carrying amount of such assets may not be
recoverable. This consists of comparing the carrying amount of the asset with
its expected future undiscounted cash flows without interest costs. If the asset
carrying amount is less than such cash flow estimate, then it is required to be
written down to its fair value. Estimates of expected future cash flows
represent management's best estimate based on currently available information
and reasonable and supportable assumptions.
Income Taxes
The Company follows the liability method of accounting for income taxes in
accordance with SFAS No. 109, "Accounting for Income Taxes." Under this method,
deferred income taxes are recorded based upon differences between the financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the underlying assets are
realized or liabilities are settled. A valuation allowance reduces deferred tax
assets when it is more likely than not that some or all of the deferred tax
assets will not be realized.
Self-Insured Medical and Property / Casualty Plans
The Company is self-insured for a portion of the claims related to its
employee medical benefits and property/casualty insurance programs. Claims,
not subject to stop-loss insurance, are accrued based upon the Company's
estimates of the aggregate liability for claims incurred using the Company's
historical claims experience.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash equivalents,
contracts-in-transit, accounts receivable, investments in debt and equity
securities, accounts payable, floorplan notes payable and long-term debt.
F-9
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Restated)
The fair values of cash equivalents, contracts-in-transit, accounts receivable,
accounts payable, floorplan notes payable and the acquisition line of credit
approximate their carrying values due to the short-term nature of these
instruments or the existence of variable interest rates. The Company's
investments in debt and equity securities are classified as available-for-sale
securities and thus are carried at fair market value. As of December 31, 2004,
the 8 1/4% Senior Subordinated Notes due 2013 had a carrying value, net of
applicable discount, of $144.7 million and a fair value, based on quoted market
prices, of $159.4 million.
Factory Incentives
In addition to the interest assistance discussed above, the Company
receives various incentive payments from certain of the automobile
manufacturers. These incentive payments are typically received on parts
purchases from the automobile manufacturers and on new vehicle retail sales.
These incentives are reflected as reductions of cost of sales in the statement
of operations.
Advertising
The Company expenses production and other costs of advertising as
incurred. Advertising expense for the years ended December 31, 2004, 2003, and
2002, totaled $67.6 million, $60.5 million and $49.6 million, respectively.
Additionally, the Company receives advertising assistance from some of the
automobile manufacturers. The assistance is accounted for as an advertising
expense reimbursement and is reflected as a reduction of advertising expense in
the income statement as the vehicles are sold, and in other accruals on the
balance sheet for amounts related to vehicles still in inventory on that date.
Advertising expense has been reduced by $16.8 million, $13.9 million and $13.2
million for advertising assistance received related to vehicles sold for the
years ended December 31, 2004, 2003, and 2002, respectively. At December 31,
2004 and 2003, accrued expenses included $4.0 million and $2.9 million,
respectively, related to deferrals of advertising assistance received from the
manufacturers.
Business Concentrations
The Company owns and operates franchised automotive dealerships in the
United States. Automotive dealerships operate pursuant to franchise agreements
with vehicle manufacturers. Franchise agreements generally provide the
manufacturers or distributors with considerable influence over the operations of
the dealership and generally provide for termination of the franchise agreement
for a variety of causes. The success of any franchised automotive dealership is
dependent, to a large extent, on the financial condition, management, marketing,
production and distribution capabilities of the vehicle manufacturers or
distributors of which the Company holds franchises. The Company purchases
substantially all of its new vehicles from various manufacturers or distributors
at the prevailing prices to all franchised dealers. The Company's sales volume
could be adversely impacted by the manufacturers or distributors' inability to
supply the dealerships with an adequate supply of vehicles.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions in determining the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. The significant estimates made by management in the
accompanying consolidated financial statements relate to inventory market
adjustments, reserves for future chargebacks on finance and vehicle service
contract fees, self-insured property/casualty insurance exposure, the fair value
of assets acquired and liabilities assumed in business combinations and the
valuation of goodwill and intangible franchise rights. Actual results could
differ from those estimates.
Statements of Cash Flows
With respect to all new vehicle floorplan borrowings, the manufacturers of
the vehicles draft the Company's credit facilities directly with no cash flow to
or from the Company. With respect to borrowings for used vehicle financing, the
Company chooses which vehicles to finance and the funds flow directly to the
Company from the lender. All borrowings from, and repayments to, lenders
affiliated with the vehicle manufacturers (excluding the cash flows from or to
affiliated lenders participating in our syndicated lending group) are presented
within cash flows from operating activities on the Consolidated Statements of
Cash Flows and all borrowings from, and repayments to, the syndicated lending
group under the revolving credit facility (including the cash flows from or to
affiliated lenders participating in the facility) are presented within cash
flows from financing activities.
Upon entering into a new financing arrangement with Ford Motor Credit
Company in June 2003, the Company repaid approximately $218.5 million of
floorplan borrowings under the revolving credit facility with funds provided by
this new facility. This repayment is reflected as a source of cash within cash
flows from operating activities and a use of cash within cash flows from
financing activities.
Related-Party Transactions
From time to time, the company has entered into transactions with related
parties. Related parties include officers, directors, five percent or greater
stockholders and other management personnel of the company.
At times, the Company has purchased its stock from related parties. These
transactions were completed at then current market prices. See Note 12 for a
summary of related party lease commitments. See Note 3 for
F-10
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Restated)
information regarding certain transactions that occurred during the year ended
December 31, 2003. There are no other significant related party transactions.
Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic
value method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"). Accordingly, compensation expense for stock options
is measured as the excess, if any, of the quoted market price of the Company's
common stock at the date of grant over the amount an employee must pay to
acquire the common stock. The Company grants options at prices equal to the
market price of its common stock on the date of grant and therefore do not
record compensation expense related to these grants. Additionally, no
compensation expense is recorded for shares issued pursuant to the employee
stock purchase plan as it is a "noncompensatory" plan, as that term is defined
in APB No. 25.
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure, an Amendment of FASB Statement No. 123," requires companies that
continue to account for stock-based compensation in accordance with APB No. 25
to disclose certain information using a tabular presentation. The table
presented below illustrates the effect on net income and earnings per share as
if the fair value recognition provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation" had been applied to the Company's stock-based employee
compensation plans. Under the provisions of SFAS No. 123, compensation cost for
stock-based compensation is determined based on fair values as of the dates of
grant estimated using an option-pricing model such as the Black-Scholes
option-pricing model, and compensation cost is amortized over the applicable
option-vesting period.
YEAR ENDED DECEMBER 31,
----------------------------------
2004 2003 2002
-------- ------- -------
(in thousands, except per share amounts)
Net income, as reported......................... $ 27,781 $76,126 $67,065
Add: Stock-based employee compensation expense
included in reported net income, net of
related tax effects........................... -- -- 120
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects....................................... 4,015 3,576 5,333
-------- ------- -------
Pro forma net income............................ $ 23,766 $72,550 $61,852
======== ======= =======
Earnings per share:
Basic - as reported........................... $ 1.22 $ 3.38 $ 2.93
Basic - pro forma............................. $ 1.04 $ 3.22 $ 2.70
Diluted - as reported......................... $ 1.18 $ 3.26 $ 2.80
Diluted - pro forma........................... $ 1.01 $ 3.11 $ 2.58
The fair value of options granted is estimated on the date of grant using
the Black-Scholes option-pricing model. The Black-Scholes option-pricing model
is not designed to measure not-for-sale options, but is the most widely used
method for option valuation. The following table summarizes the weighted average
assumptions used in determining the fair value of the Company's stock-based
compensation during the years ended December 31, 2004, 2003 and 2002 and the
resulting weighted average fair values:
F-11
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Restated)
2004 2003 2002
---- ---- ----
Risk-free interest rate................... 4.2% 3.8% 4.6%
Expected life of options.................. 7.1 years 8.0 years 8.0 years
Expected volatility....................... 47.7% 51.9% 52.5%
Expected dividend yield................... - - -
Fair value................................ $ 16.14 $ 18.02 $ 21.73
Business Segment Information
The Company, through its operating companies, operates in the automotive
retailing industry. All of the operating companies sell new and used vehicles,
arrange financing, vehicle service, and insurance contracts, provide
maintenance and repair services and sell replacement parts. The operating
companies are similar in that they deliver the same products and services to a
common customer group, their customers are generally individuals, they follow
the same procedures and methods in managing their operations, and they operate
in similar regulatory environments. Additionally, the Company's management
evaluates performance and allocates resources based on the operating results of
the individual operating companies. For the reasons discussed above, all of the
operating companies represent one reportable segment under SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
Accordingly, the accompanying consolidated financial statements reflect the
operating results of the Company's reportable segment.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment."
SFAS No. 123(R) requires that companies recognize compensation expense equal to
the fair value of stock options and other share-based payments. The standard is
effective beginning in the third quarter of 2005. The impact on the Company's
net income will include the remaining amortization of the fair value of existing
options currently disclosed as pro-forma expense above, and is contingent upon
the number of future options granted and the determination of the appropriate
valuation model. The Company is evaluating the requirements of SFAS No. 123(R),
has not yet determined the method of adoption or the effect of adopting SFAS No.
123(R), and has not determined whether the adoption will result in amounts that
are similar to the current pro forma disclosures required under SFAS No. 123
presented above.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29." SFAS No. 153 requires that
nonmonetary asset exchanges should be recorded and measured at the fair value of
the asset exchanged, with certain exceptions. This statement amends APB Opinion
29 to eliminate the exception for certain nonmonetary exchanges of similar
productive assets, although commercially substantive, to be recorded at
carryover basis and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. The provisions of SFAS
No. 153 are effective for nonmonetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. The adoption of SFAS No. 153 is not
expected to have a material impact on the Company's consolidated financial
position or results of operations.
In November 2004, the Emerging Issues Task Force provided additional
guidance regarding the application of SFAS No. 144 in Issue 03-13, "Applying the
Conditions in Paragraph 42 of FASB Statement No. 144, `Accounting for the
Impairment or Disposal of Long-Lived Assets', in Determining Whether to Report
Discontinued Operations." EITF 03-13 provides additional guidance regarding the
approach for evaluating whether the criteria in paragraph 42 of SFAS No. 144
have been met for purposes of classifying the results of operations of a
component of an entity that either has been disposed of or is classified as held
for sale as discontinued operations. The consensus is effective for components
classified as held for sale or disposed of in fiscal periods beginning after
December 15, 2004.
In September 2004, the Securities and Exchange Commission staff issued
Staff Announcement No. D-108. This announcement states that the "residual
method" should no longer be used to value intangible assets other than goodwill.
Rather, a "direct value method" should be used to determine the fair value of
all intangible assets required to be recognized under SFAS No. 141 for purposes
of impairment testing under SFAS No. 142, including those assets previously
valued using the residual method. Registrants who have applied the residual
method to the valuation of intangible assets for purposes of impairment testing
will be required to perform an impairment test using a direct value method on
all intangible assets that were previously valued using the residual method at
the
F-12
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Restated)
beginning of the first fiscal year beginning after December 15, 2004. The
Company believes its method of valuing its intangible franchise rights does not
differ materially from a direct value method. The Company is evaluating the
requirements of this announcement and has yet to determine its impact, if any,
on the Company's financial position or results of operations. Any impairment
resulting from application of a different valuation method will be reported as a
cumulative effect of a change in accounting principle during the first quarter
of 2005.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities." FIN No. 46 clarifies the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," to variable interest
entities ("VIEs"). VIEs are certain entities in which equity investors do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated support from other parties. FIN No. 46 is intended to
achieve more consistent application of consolidation policies to VIEs and thus,
to improve comparability between enterprises engaged in similar activities even
if some of those activities are conducted through VIEs. In December 2003, the
FASB issued a revision to FIN No. 46, FIN No. 46R, to clarify some of the
provisions of FIN No. 46 and to exempt certain entities from its requirements.
The Company adopted the provisions of the interpretation as of March 31,
2004. The implementation of the interpretation did not require the Company to
change its historical presentation for the entities determined to be VIEs.
Certain wholly owned subsidiaries were determined to be VIEs due to their
capital structures. As the Company was determined to be the primary beneficiary,
the Company continues to consolidate the operations of these subsidiaries.
Additionally, the Company determined that certain arrangements that allow the
Company to participate in the residual profits on certain products sold are also
VIEs. However, with respect to these arrangements, the Company determined that
it was not the primary beneficiary and it believes the Company has no exposure
to loss under these arrangements.
Reclassifications
Certain reclassifications have been made in the 2003 and 2002 financial
statements to conform to the current year presentation.
3. BUSINESS COMBINATIONS:
During 2004, the Company acquired 23 automobile dealership franchises in
California, Massachusetts, New Jersey, New York and Texas. The accompanying
consolidated balance sheet as of December 31, 2004, includes preliminary
allocations of the purchase price for all of the acquired assets and liabilities
assumed based on their estimated fair market values at the dates of acquisition
and are subject to final adjustment. As a result of these allocations, the
Company has recorded the following (dollars in thousands):
Inventories..................................... $ 140,896
Property and equipment.......................... 11,085
Goodwill........................................ 79,172
Intangible franchise rights..................... 113,817
Other assets.................................... 6,328
Floorplan notes payable......................... (109,736)
Other liabilities............................... (6,945)
----------
Net assets acquired........................ 234,617
Less:
Fair value of 394,313 common shares issued.... 12,896
----------
Cash paid.................................. $ 221,721
==========
Approximately $75.2 million of the acquired goodwill is expected to be
deductible for tax purposes.
During 2003, the Company acquired eight automobile dealership franchises
in Louisiana, Oklahoma, and Texas, and completed a market consolidation project
in conjunction with DaimlerChrysler's Alpha Initiative in Dallas, Texas. The
acquisitions were accounted for as purchases. The aggregate consideration paid
in completing the acquisitions included approximately $35.4 million in cash, net
of cash received, and the assumption of $52.7 million of inventory financing and
$4.8 million of notes payable. The purchase price
F-13
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Restated)
allocations resulted in recording approximately $15.8 million of franchise value
intangible assets, and $9.7 million of goodwill, of which $8.8 million is
deductible for tax purposes.
Additionally, during 2003, the Company disposed of the net assets,
including $3.6 million of goodwill, of three dealership franchises and received
$7.4 million in cash. No gain or loss was recognized on these transactions.
Included in the acquisitions and dispositions discussed above, the Company
purchased three automobile dealership franchises from Robert E. Howard II, a
director of the Company, and sold one automobile dealership franchise to a
company owned by Mr. Howard. The Company acquired Ford, Lincoln, and Mercury
franchises, with $131.2 million in annual revenues, and sold a Mercedes-Benz
franchise, with $47.4 million in annual revenues. In completing the
acquisitions, the aggregate consideration paid by the Company consisted of $12.7
million of cash, net of cash received and the assumption of approximately $22.9
million of inventory financing. The Company received $7.4 million in cash from
the sale of the Mercedes-Benz dealership franchise and related assets, including
goodwill of approximately $3.6 million. The Company believes the sale of the
Mercedes-Benz dealership was at fair market value. The proceeds received
exceeded the Company's basis in the dealership by approximately $1.3 million.
This excess sales price over cost was recorded as a reduction of the cost basis
in the newly acquired Ford, Lincoln, and Mercury dealerships. Additionally, the
outstanding inventory financing, for the Mercedes-Benz dealership, was assumed
by a company owned by Mr. Howard. As a result of the two transactions described
above, the Company's goodwill was reduced by $3.2 million and its intangible
franchise rights increased $0.5 million.
During 2002, the Company acquired 15 automobile dealership franchises. The
acquisitions were accounted for as purchases. The aggregate consideration paid
in completing the acquisitions included approximately $81.4 million in cash, net
of cash and cash equivalents received, and the assumption of an estimated $59.0
million of inventory financing. The purchase price allocations resulted in
recording approximately $56.3 million of intangible franchise rights and
$52.2 million of goodwill, of which $16.6 million is deductible for tax
purposes.
Additionally, during 2002, the Company disposed of the net assets,
including $4.2 million of goodwill, of five dealership franchises and received
$7.4 million in cash. A gain of $0.4 million was recognized on these sales and
is recorded in other income (expense), net in the statement of operations.
Six of the franchises acquired during 2002 were part of Miller Automotive
Group, a platform acquisition completed in August of 2002 in Southern California
and their results of operations have been included in the consolidated financial
statements since that time. The acquisition expanded the Company's geographic
and brand diversity, and represented its first operations in California. All of
the businesses acquired are now 100% wholly-owned subsidiaries of the Company.
The Company paid $55.8 million in cash, net of cash and cash equivalents
received, and assumed $40.5 million of floorplan notes payable in completing
this acquisition. The purchase price was arrived at based on a calculation
including the tangible net worth of the companies acquired, plus an amount equal
to the estimated income before taxes multiplied by an agreed upon multiple. The
total purchase price paid in excess of the net amounts assigned to the assets
acquired, including intangible franchise rights, and liabilities assumed was
recognized as goodwill.
4. ASSET IMPAIRMENTS:
During 2004, the Company recorded three impairment charges, all reflected
in asset impairments in the accompanying statement of operations.
During October 2004, in connection with the preparation and review of the
third-quarter interim financial statements, the Company determined that recent
events and circumstances at its Atlanta platform, including further
deterioration of the platform's financial results and recent changes in platform
management, indicated that an impairment of goodwill may have occurred in the
three months ended September 30, 2004. As a result, the Company performed an
interim impairment assessment of the Atlanta platform's goodwill in accordance
with SFAS No. 142. After analyzing the long-term potential of the Atlanta market
and the expected future operating results of its dealership franchises in
Atlanta, the Company estimated the fair value of the reporting unit as of
September 30, 2004. As a result of the required evaluation, the Company
determined that the carrying amount of the reporting unit's goodwill exceeded
its implied fair value as of September 30, 2004, and recorded a goodwill
impairment charge of $40.3 million. In connection with this evaluation, the
Company determined that impairment of certain long-lived assets of the Atlanta
platform may have occurred requiring an impairment assessment of these
F-14
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Restated)
assets in accordance with SFAS No. 144. As a result of this assessment, the
Company recorded a $1.1 million pretax impairment charge during the third
quarter of 2004.
As required by SFAS No. 142, the Company performed an annual review of the
fair value of its goodwill and indefinite-lived intangible assets at December
31, 2004. As a result of this assessment, the Company determined that the fair
value of indefinite-lived intangible franchise rights related to one of its
dealerships in the Miller Automotive Group platform did not exceed its carrying
value and an impairment charge was required. Accordingly, the Company recorded a
$3.3 million pretax impairment charge during the fourth quarter of 2004.
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts and notes receivable consist of the following:
DECEMBER 31,
---------------------
2004 2003
-------- --------
(in thousands)
Amounts due from manufacturers............... $ 49,285 $ 36,458
Parts and service receivables................ 16,483 12,856
Finance and insurance receivables............ 8,808 7,439
Other........................................ 4,286 9,186
-------- --------
Total accounts and notes receivable....... 78,862 65,939
Less - Allowance for doubtful accounts....... 2,175 2,270
-------- --------
Accounts and notes receivable, net........ $ 76,687 $ 63,669
======== ========
Inventories consist of the following:
DECEMBER 31,
---------------------
2004 2003
-------- --------
(in thousands)
New vehicles................................. $699,238 $536,289
Used vehicles................................ 108,506 86,108
Rental vehicles.............................. 24,085 10,744
Parts, accessories and other................. 45,746 38,138
-------- --------
Inventories......................... $877,575 $671,279
======== ========
Property and equipment consist of the following:
ESTIMATED DECEMBER 31,
USEFUL LIVES ---------------------------
IN YEARS 2004 2003
------------ ----------- ----------
(in thousands)
Land.................................. - $ 28,417 $ 22,282
Buildings............................. 30 to 40 35,297 29,672
Leasehold improvements................ 7 to 15 49,303 33,559
Machinery and equipment............... 7 to 20 38,220 32,450
Furniture and fixtures................ 3 to 10 49,524 42,328
Company vehicles...................... 3 to 5 7,318 5,879
Construction in progress.............. 9,505 9,579
----------- ----------
Total............................... 217,584 175,749
Less - Accumulated depreciation and
amortization........................ 57,287 44,102
----------- ----------
Property and equipment, net......... $ 160,297 $ 131,647
=========== ==========
Depreciation and amortization expense totaled approximately $15.8 million,
$12.5 million, and $10.1 million for the years ended December 31, 2004, 2003 and
2002, respectively.
F-15
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Restated)
6. INTANGIBLE FRANCHISE RIGHTS AND GOODWILL:
The following is a roll-forward of the Company's intangible franchise
rights and goodwill accounts:
INTANGIBLE
FRANCHISE RIGHTS GOODWILL
---------------- ------------
(in thousands)
Balance, December 31, 2002 ................. $ 60,879 $ 323,104
Additions through acquisitions .......... 15,777 9,701
Reductions from sales of dealerships .... - (3,615)
Realization of tax benefits ............. - (699)
--------------- ------------
Balance, December 31, 2003 ................. 76,656 328,491
Additions through acquisitions .......... 113,817 79,172
Impairments ............................. (3,338) (40,255)
Realization of tax benefits ............. - (735)
--------------- ------------
Balance, December 31, 2004 ................. $ 187,135 $ 366,673
=============== ============
The reduction in goodwill related to the realization of certain tax
benefits is due to differences between the book and tax bases of the goodwill.
7. CREDIT FACILITIES:
The Company obtains its floorplan and acquisition financing through a
$937.0 million revolving credit arrangement (the "Credit Facility") with a
lending group comprised of 13 major financial institutions, including two
manufacturer captive finance companies. The Company also has a $300.0 million
floorplan financing arrangement with Ford Motor Credit Company (the "FMCC
Facility"), as well as arrangements with several other automobile manufacturers
for financing of a portion of its rental vehicle inventory. Floorplan notes
payable - credit facility reflects amounts payable for the purchase of specific
new and used vehicle inventory (with the exception of new vehicle purchases
financed through lenders affiliated with the respective manufacturer) whereby
financing is provided by the Credit Facility. Floorplan notes payable -
manufacturer affiliates reflects amounts payable for the purchase of specific
new vehicles whereby financing is provided by the FMCC Facility and the
financing of its rental vehicle inventory with several other automobile
manufacturers. Payments on the floorplan notes payable are generally due as the
vehicles are sold. As a result, these obligations are reflected on the
accompanying balance sheets as current liabilities.
The Credit Facility currently provides $769.2 million of floorplan
financing capacity (the "Floorplan Line") for new and used vehicles. After
considering the above outstanding balances, the Company had $136.7 million of
available floorplan capacity under the Floorplan Line as of December 31, 2004.
The Company pays a commitment fee of 0.25% per annum on the unused portion of
its floorplan capacity. Floorplan borrowings under the Floorplan Line bear
interest at the London Interbank Offer Rate ("LIBOR") plus 112.5 basis points
for new vehicle inventory and LIBOR plus 125 basis points for used vehicle
inventory. As of December 31, 2004 and 2003, the weighted average interest rate
on the outstanding floorplan notes payable was 3.45% and 2.31%, respectively.
The Credit Facility also currently provides $162.8 million of acquisition
financing capacity (the "Acquisition Line"), which may be used to fund
acquisitions, capital expenditures and/or other general corporate purposes.
After considering the above outstanding balances, as well as $6.5 million of
outstanding letters of credit, there was $72.3 million available under the
Acquisition Line as of December 31, 2004. The Company pays a commitment fee of
0.425% per annum on the unused portion of the Acquisition Line. Borrowings under
the Acquisition Line bear interest based on LIBOR plus a margin that ranges from
175 to 325 basis points depending on the Company's leverage ratio. As of
December 31, 2004, the weighted average interest rate on borrowings under the
Acquisition Line was 5.27%. No amounts were outstanding at December 31, 2003.
The Credit Facility contains various financial covenants that, among other
things, require the Company to maintain certain financial ratios, including
fixed-charge coverage, interest coverage and minimum equity, as well as place
limitations on the Company's ability to make capital expenditures, incur capital
lease and other debt obligations, pay cash dividends, and repurchase shares of
its common stock. As of December 31, 2004, the Company was in compliance with
these covenants. The Company's obligations under the Credit Facility are
F-16
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Restated)
collateralized by its entire inventory of new and used vehicles (other than its
Ford, Lincoln and Mercury new vehicle inventory), plus substantially all of its
land, buildings and other assets. The Credit Facility matures on June 30, 2006.
During 2003, the Company entered into the FMCC Facility for the financing
of its entire Ford, Lincoln and Mercury new vehicle inventory. This arrangement
provides for $300.0 million of floorplan financing and matures on June 2, 2006.
After considering the above outstanding balance, the Company had $104.5 million
of available floorplan capacity under the FMCC Facility as of December 31, 2004.
This facility bears interest at a rate of Prime plus 100 basis points minus
certain incentives. As of December 31, 2004 and 2003, the interest rate on the
FMCC Facility was 4.15% and 2.9%, respectively, before considering non-interest
related incentives. After considering all incentives received during 2004, the
effective interest rate under the FMCC Facility approximates the interest rate
under the floorplan portion of the Credit Facility. The Company's obligations
under the FMCC Facility are collateralized by substantially all of the Company's
Ford, Lincoln and Mercury new vehicle inventories. Additionally, under the FMCC
Facility, the Company is required to maintain a $1.5 million balance in a Ford
Money Market Account as additional collateral. This balance is reflected in
other long-term assets on the accompanying balance sheets.
Taken together, the Credit Facility and FMCC Facility permit the Company
to borrow up to $1.2 billion for inventory purchases, acquisitions, capital
expenditures and/or other general corporate purposes. As of December 31, 2004,
total available capacity under these arrangements was approximately $313.4
million.
Excluding rental vehicles financed through the Credit Facility, financing
for rental vehicles is typically obtained directly from the automobile
manufacturers. These financing arrangements generally require small monthly
payments and mature in varying amounts between 2004 and 2006. The weighted
average interest rate charged as of December 31, 2004 and 2003, was 4.1% and
3.9%, respectively. Rental vehicles are typically moved to used vehicle
inventory when they are removed from rental service and repayment of the
borrowing is required at that time.
As discussed more fully in Note 2, the Company receives interest
assistance from certain automobile manufacturers. The assistance has ranged from
approximately 105% to 160% of the Company's floorplan interest expense over the
past three years.
F-17
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Restated)
8. LONG-TERM DEBT:
Long-term debt consists of the following:
DECEMBER 31,
-------------------------
2004 2003
--------- ---------
(in thousands)
8 1/4% Senior Subordinated Notes due 2013 ............. $ 144,704 $ 144,318
10 7/8% Senior Subordinated Notes due 2009 ............ -- 73,157
Various notes payable, maturing in varying amounts
through August 2018 with a weighted average interest
rate of 10.5% and 10.4%, respectively ............... 13,097 13,613
--------- ---------
157,801 231,088
Less - Current maturities ........................... 1,054 910
--------- ---------
$ 156,747 $ 230,178
========= =========
During August 2003, the Company issued 8 1/4% Senior Subordinated Notes
due 2013 (the "8 1/4% Notes") with a face amount of $150.0 million. The 8 1/4%
Notes pay interest semi-annually on February 15 and August 15 each year
beginning February 15, 2004. Including the effects of discount and issue cost
amortization, the effective interest rate is approximately 8.9%. The 8 1/4%
Notes have the following redemption provisions:
- The Company may, prior to August 15, 2006, redeem up to $52.5
million of the 8 1/4% Notes with the proceeds of certain public
offerings of common stock at a redemption price of 108.250% of the
principal amount plus accrued interest.
- The Company may, prior to August 15, 2008, redeem all or a portion
of the 8 1/4% Notes at a redemption price equal to the principal
amount plus a make-whole premium to be determined, plus accrued
interest.
- The Company may, during the twelve-month periods beginning August
15, 2008, 2009, 2010 and 2011 and thereafter, redeem all or a
portion of the 8 1/4% Notes at redemption prices of 104.125%,
102.750%, 101.375% and 100.000%, respectively, of the principal
amount plus accrued interest.
The 8 1/4% Notes are jointly, severally, fully, and unconditionally
guaranteed, on an unsecured senior subordinated basis, by all subsidiaries of
the Company, other than certain minor subsidiaries (the "Subsidiary
Guarantors"). All of the Subsidiary Guarantors are wholly-owned subsidiaries of
the Company. Additionally, the 8 1/4% Notes are subject to various financial
and other covenants that must be maintained by the Company.
On March 1, 2004, the Company completed the redemption of all its 10 7/8%
Notes at a redemption price of 105.438% of the principal amount of the notes.
The Company incurred a $6.4 million pretax charge in completing the redemption,
consisting of a $4.1 million redemption premium and a $2.3 million non-cash
write-off of unamortized bond discount and deferred costs. Total cash used in
completing the redemption, excluding accrued interest of $4.1 million, was $79.5
million.
During 2002, the Company repurchased a portion of its 10 7/8% Notes. The
Company recorded a $1.2 million loss during 2002 related to the repurchases,
which is included in loss on redemption of senior subordinated notes on the
accompanying statement of operations.
At the time of the issuances of the 10 7/8% Notes and the 8 1/4% Notes,
the Company incurred certain costs, which were included as deferred financing
costs in long-term other assets on the accompanying balance sheets. Unamortized
deferred financing costs at December 31, 2004 and 2003, totaled $0.8 million and
$0.9 million, respectively. The Notes are recorded net of unamortized discount
of $5.3 million and $7.9 million as of December 31, 2004 and 2003, respectively.
Total interest expense on the senior subordinated notes for the years
ended December 31, 2004, 2003 and 2002, was approximately $14.4 million, $13.5
million and $9.2 million, respectively.
F-18
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Restated)
Total interest incurred on various other notes payable, which were included
in long-term debt on the accompanying balance sheets, was approximately $1.4
million, $1.7 million and $2.4 million for the years ended December 31, 2004,
2003 and 2002, respectively.
The Company capitalized approximately $0.6 million, $1.0 million, and $1.3
million of interest on construction projects in 2004, 2003 and 2002,
respectively.
The aggregate annual maturities of long-term debt for the next five years
are as follows (in thousands):
2005.................... $ 1,054
2006(1)................. 84,819
2007.................... 783
2008.................... 875
2009.................... 868
(1) Includes contractual maturity of Acquisition Line discussed in Note 7.
9. STOCK-BASED COMPENSATION PLANS:
In 1996, Group 1 adopted the 1996 Stock Incentive Plan, as amended, (the
"Plan"), which provides for the granting or awarding of stock options, stock
appreciation rights and restricted stock to employees and directors. The number
of shares authorized and reserved for issuance under the Plan is 5,500,000
shares, of which 1,336,448 are available for future issuance as of December 31,
2004. The terms of the option awards (including vesting schedules) are
established by the Compensation Committee of the Company's Board of Directors.
All outstanding options are exercisable over a period not to exceed 10 years and
vest over periods ranging from three to eight years.
The following table summarizes the Company's outstanding stock options:
WEIGHTED
AVERAGE
NUMBER EXERCISE PRICE
--------- --------------
Options outstanding, December 31, 2001 ................ 3,585,309 $ 15.04
Grants (exercise prices between $19.47 and $44.96
per share)......................................... 505,950 34.61
Exercised ........................................... (383,245) 11.16
Forfeited ........................................... (189,665) 20.26
--------- --------------
Options outstanding, December 31, 2002 ................ 3,518,349 18.00
Grants (exercise prices between $22.93 and $34.85
per share)......................................... 176,000 29.78
Exercised ........................................... (482,509) 10.60
Forfeited ........................................... (374,205) 23.28
--------- --------------
Options outstanding, December 31, 2003 ................ 2,837,635 19.29
Grants (exercise prices between $28.20 and $29.94
per share) ........................................ 218,400 29.35
Exercised ........................................... (478,258) 14.52
Forfeited ........................................... (140,700) 26.52
--------- --------------
Options outstanding, December 31, 2004 ................ 2,437,077 $ 20.71
========= ==============
At December 31, 2004, 2003 and 2002, 1,707,950, 1,767,339 and 1,771,538
options, respectively, were exercisable at weighted average exercise prices of
$17.77, $15.44 and $13.49, respectively.
F-19
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Restated)
The following table summarizes information regarding stock options
outstanding as of December 31, 2004:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- -----------------------------
NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 12/31/04 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/04 EXERCISE PRICE
---------------- ----------- ---------------- -------------- ----------- --------------
$ 2.90 26,000 2.23 years $ 2.90 26,000 $ 2.90
$ 9.00 to $13.99 743,343 4.52 11.20 643,433 11.20
$14.00 to $19.99 710,955 4.71 17.43 648,455 17.32
$20.00 to $24.99 291,479 6.46 24.47 162,843 24.59
$25.00 to $44.99 665,300 8.08 33.90 227,219 34.45
--------- ---------- -------------- --------- --------------
Total 2,437,077 5.76 years $ 20.71 1,707,950 $ 17.77
========= ========== ============== ========= ==============
In September 1997, Group 1 adopted the Group 1 Automotive, Inc. 1998
Employee Stock Purchase Plan, as amended (the "Purchase Plan"). The Purchase
Plan authorizes the issuance of up to 2.0 million shares of common stock and
provides that no options to purchase shares may be granted under the Purchase
Plan after June 30, 2007. As of December 31, 2004, there were 447,517 shares
remaining in reserve for future issuance under the Purchase Plan. The Purchase
Plan is available to all employees of the Company and its participating
subsidiaries and is a qualified plan as defined by Section 423 of the Internal
Revenue Code. At the end of each fiscal quarter (the "Option Period") during the
term of the Purchase Plan, the employee contributions are used to acquire shares
of common stock at 85% of the fair market value of the common stock on the first
or the last day of the Option Period, whichever is lower. During 2004, 2003 and
2002, the Company issued 153,791, 173,114 and 166,922 shares, respectively, of
common stock to employees participating in the Purchase Plan.
10. EMPLOYEE SAVINGS PLANS:
The Company has a deferred compensation plan to provide select employees
and members of the Company's Board of Directors with the opportunity to
accumulate additional savings for retirement on a tax-deferred basis.
Participants in the plan are allowed to defer receipt of a portion of their
salary and/or bonus compensation, or in the case of the Company's directors,
annual retainer and meeting fees, earned. The participants can choose from
various defined investment options to determine their earnings crediting rate;
however, the Company has complete discretion over how the funds are utilized.
Participants in the plan are unsecured creditors of the Company. The balances
due to participants of the deferred compensation plan as of December 31, 2004
and 2003 were $15.4 million and $12.3 million, respectively, and are included in
other liabilities in the accompanying balance sheets.
The Company offers a 401(k) plan to all of its employees and provides a
matching contribution to those employees that participate. The matching
contributions paid by the Company totaled $3.7 million, $3.2 million and $2.7
million for the years ended December 31, 2004, 2003 and 2002, respectively.
F-20
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Restated)
11. EARNINGS PER SHARE:
Basic earnings per share is computed based on weighted average shares
outstanding and excludes dilutive securities. Diluted earnings per share is
computed including the impact of all potentially dilutive securities. The
following table sets forth the calculation of earnings per share for the years
ended December 31, 2004, 2003 and 2002:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2004 2003 2002
------------- ------------- -------------
(dollars in thousands)
Net income ...................................................... $ 27,781 $ 76,126 $ 67,065
Weighted average basic shares outstanding ....................... 22,807,922 22,523,825 22,874,918
Dilutive effect of stock options, net of assumed repurchase
of treasury stock ......................................... 685,977 822,396 1,093,154
------------- ------------- -------------
Weighted average diluted shares outstanding ..................... 23,493,899 23,346,221 23,968,072
============= ============= =============
Earnings per share:
Basic ..................................................... $ 1.22 $ 3.38 $ 2.93
Diluted ................................................... $ 1.18 $ 3.26 $ 2.80
Any options with an exercise price in excess of the average market price
of the Company's common stock, during the periods presented, are not considered
when calculating the dilutive effect of stock options for diluted earnings per
share calculations. The weighted average number of options not included in the
calculation of the dilutive effect of stock options was 0.4 million for each of
the years ended December 31, 2004, 2003 and 2002, respectively.
12. OPERATING LEASES:
The Company leases various facilities and equipment under long-term
operating lease agreements. The facility leases typically have a minimum term of
fifteen years with options that extend the term up to an additional fifteen
years.
Future minimum lease payments for operating leases as of December 31,
2004, are as follows (in thousands):
RELATED THIRD
YEAR ENDED DECEMBER 31, PARTIES PARTIES TOTAL
------------------------------- --------- --------- ---------
2005........................... $ 14,547 $ 46,961 $ 61,508
2006........................... 14,385 46,545 60,930
2007........................... 14,266 45,945 60,211
2008........................... 11,495 42,488 53,983
2009........................... 11,495 35,460 46,955
Thereafter..................... 84,915 193,781 278,696
--------- --------- ---------
Total.......................... $ 151,103 $ 411,180 $ 562,283
========= ========= =========
Total rent expense under all operating leases was approximately $57.3
million, $46.5 million and $36.8 million for the years ended December 31, 2004,
2003 and 2002, respectively. Rent expense on related party leases, which is
included in the above total rent expense amounts, totaled approximately $12.4
million, $9.5 million and $8.4 million for the years ended December 31, 2004,
2003 and 2002, respectively.
During 2004, the Company completed construction of three new facilities
and subsequently sold and leased these facilities back under long-term operating
lease agreements. These transactions were accounted for as sale-leasebacks. Two
of the transactions were conducted with third parties, with an aggregate sales
price of approximately $8.1 million. The resulting leases expire in 2019 and the
minimum lease payments total approximately $20.0 million, which is included in
the table above. The third property was sold to and leased back from one of the
Company's platform presidents. The total sales price was approximately $3.9
million, the lease expires in 2019 and the future minimum lease payments under
this lease are approximately $11.1 million, which is included in the table above
under the heading Related Parties. The Company believes that the terms of this
lease are at fair market value and are comparable to terms in leases executed
with third parties during the same time frame.
F-21
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Restated)
In addition to the transactions discussed in Note 3, effective February
18, 2003, the Company sold certain dealership buildings in Oklahoma City to Mr.
Howard for $4.5 million and leased them back on a 15-year lease. The lease has
two renewal options, each five years, solely at the Company's discretion. The
sales price represents the Company's cost basis in recently constructed
buildings and no gain or loss was recognized. The Company will pay Mr. Howard a
market rental rate of $44,376 per month, under standard lease terms, for land
owned by Mr. Howard and the buildings sold and leased back. The Company believes
that the terms of the lease are at fair market value.
13. INCOME TAXES:
Federal and state income taxes are as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------
2004 2003 2002
-------- -------- --------
(in thousands)
Federal -
Current .................... $ 22,967 $ 22,837 $ 31,026
Deferred ................... (3,850) 11,091 6,336
State -
Current .................... 1,904 2,158 2,308
Deferred ................... (850) 860 547
-------- -------- --------
Provision for income taxes ... $ 20,171 $ 36,946 $ 40,217
======== ======== ========
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 35% in 2004, 2003 and
2002 to income before income taxes as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------
2004 2003 2002
--------- --------- ---------
(in thousands)
Provision at the statutory rate .......... $ 16,783 $ 39,575 $ 37,549
Increase (decrease) resulting
from -
State income tax, net of benefit for
federal deduction ................... 647 2,058 1,856
Non-deductible portion of goodwill
impairment .......................... 3,253 - -
Resolution of tax contingencies ....... - (5,423) -
Other .................................. (512) 736 812
--------- --------- ---------
Provision for income taxes ............... $ 20,171 $ 36,946 $ 40,217
========= ========= =========
During 2004, certain portions of the goodwill impairment charge recorded
in September 2004 related to the Atlanta platform were non-deductible for tax
purposes. In addition, certain other adjustments were made to reconcile
differences between the tax and book basis of the Company's assets and
liabilities. As a result of these items, the effective tax rate for 2004
increased to 42.1%, as compared to 32.7% for 2003.
During 2003, the Company resolved certain tax contingencies as various
state and federal tax audits were concluded providing certainty and resolution
on various formation, financing, acquisition, and structural matters. In
addition, various other tax exposures of acquired companies have been favorably
resolved. As a result, the Company recorded a reduction in its tax contingency
accrual, which reduced the effective tax rate for 2003 to 32.7% as compared to
37.5% for 2002.
F-22
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Restated)
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets (liabilities) result principally from the following:
DECEMBER 31,
------------------------
2004 2003
---------- ----------
(in thousands)
Loss reserves and accruals ................... $ 25,158 $ 24,911
Goodwill and intangible franchise rights...... (31,690) (35,410)
Depreciation expense.......................... (9,870) (9,025)
State net operating loss (NOL) carryforwards.. 4,514 3,170
Reinsurance operations........................ (1,180) (2,258)
Interest rate swaps........................... - 771
Other......................................... (1,027) (1,612)
--------- ---------
Deferred tax liability..................... (14,095) (19,453)
Valuation allowance on state NOL's............ (4,347) (3,170)
--------- ---------
Net deferred tax liability................. $ (18,442) $ (22,623)
========= =========
As of December 31, 2004, the Company had state net operating loss
carryforwards of $70.0 million that will expire between 2005 and 2024;
however, in certain state jurisdictions net income is not expected to be
sufficient to realize these net operating losses and as a result a valuation
allowance has been established.
The net deferred tax assets (liabilities) are comprised of the following:
DECEMBER 31,
-------------------------
2004 2003
---------- ----------
(in thousands)
Deferred tax assets -
Current.............................. $ 16,679 $ 13,584
Long-term............................ 11,464 19,302
Deferred tax liabilities -
Current.............................. (1,924) (2,421)
Long-term............................ (44,661) (53,088)
--------- ---------
Net deferred tax liability............. $ (18,442) $ (22,623)
========= =========
The Company believes it is more likely than not, that the net deferred tax
assets will be realized, based primarily on the assumption of future taxable
income.
14. COMMITMENTS AND CONTINGENCIES:
Legal Proceedings
From time to time, the Company's dealerships are named in claims involving
the manufacture of automobiles, contractual disputes and other matters arising
in the ordinary course of business.
The Texas Automobile Dealers Association ("TADA") and certain new vehicle
dealerships in Texas that are members of the TADA, including a number of the
Company's Texas dealership subsidiaries, have been named in two state court
class action lawsuits and one federal court class action lawsuit. The three
actions allege that since January 1994, Texas dealers have deceived customers
with respect to a vehicle inventory tax and violated federal antitrust and other
laws. In April 2002, the state court in which two of the actions are pending
certified classes of consumers on whose behalf the action would proceed. In
October 2002, the Texas Court of Appeals affirmed the trial court's order of
class certification in the state action. The defendants requested that the Texas
Supreme Court review that decision, and the Court declined that request on March
26, 2004. The defendants petitioned the Texas Supreme Court to reconsider its
denial, and that petition was denied on September 10, 2004. In the federal
antitrust action, in March 2003, the federal district court also certified a
class of consumers. Defendants appealed the district court's certification to
the Fifth Circuit Court of Appeals, which on October 5, 2004, reversed the class
certification order and remanded the case back to the federal district court for
further proceedings. In February 2005, the plaintiffs in the federal action
sought a writ of certiorari to the United States Supreme Court in order to
obtain review of the Fifth Circuit's order. The defendants notified the U.S.
Supreme Court that they would not respond to the writ unless requested to do so
by the Court. Also in February 2005, settlement discussions with the plaintiffs
in the three cases culminated in formal settlement offers pursuant to which the
Company could settle the state and
F-23
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Restated)
federal cases. The Company has not entered into the settlements at this time,
and, if it does, the settlements will be contingent upon court approval. The
estimated expense of the proposed settlements includes the Company's dealerships
issuing certificates for discounts off future vehicle purchases, refunding cash
in some circumstances, and paying attorneys' fees and certain costs. Dealers
participating in the settlements would agree to certain disclosures regarding
inventory tax charges when itemizing such charges on customer invoices. The
estimated expense of the proposed settlements of $1.5 million has been included
in accrued expenses in the accompanying consolidated financial statements. If
the Company does not enter into the settlements, or if the settlements are not
approved, it will continue to vigorously assert available defenses in connection
with these lawsuits. While the Company does not believe this litigation will
have a material adverse effect on its financial condition or results of
operations, no assurance can be given as to its ultimate outcome. A settlement
on different terms or an adverse resolution of this matter in litigation could
result in the payment of significant costs and damages.
In addition to the foregoing cases, there are currently no legal
proceedings pending against or involving the Company that, in management's
opinion, based on current known facts and circumstances, are expected to have a
material adverse effect on the Company's financial position or results of
operations.
Insurance
Because of their vehicle inventory and nature of business, automobile
dealerships generally require significant levels of insurance covering a broad
variety of risks. The Company's insurance coverage includes umbrella policies,
as well as insurance on its real property, comprehensive coverage for its
vehicle inventory, general liability insurance, employee dishonesty coverage,
employment practices liability insurance, pollution coverage and errors and
omissions insurance in connection with its vehicle sales and financing
activities. Additionally, the Company retains some risk of loss under its
self-insured medical and property/casualty plans. See further discussion under
Note 2. As of December 31, 2004, the Company has two letters of credit
outstanding totaling $6.4 million, supporting its obligations with respect to
its property/casualty insurance program.
Split Dollar Life Insurance
On January 23, 2002, the Company, with the approval of the Compensation
Committee of the Board of Directors, entered into an agreement with a trust
established by B.B. Hollingsworth, Jr., the Company's Chairman, President and
Chief Executive Officer, and his wife (the "Split-Dollar Agreement"). Under the
Split-Dollar Agreement, the Company committed to make advances of a portion of
the insurance premiums on a life insurance policy purchased by the trust on the
joint lives of Mr. and Mrs. Hollingsworth. Under the terms of the Split-Dollar
Agreement, the Company committed to pay the portion of the premium on the
policies not related to term insurance each year for a minimum of seven years.
The obligations of the Company under the Split-Dollar Agreement to pay premiums
on the split-dollar insurance are not conditional, contingent or terminable
under the express terms of the contract. Premiums to be paid by the Company are
approximately $300,000 per year. The face amount of the policy is $7.8 million.
The Company is entitled to reimbursement of the amounts paid, without interest,
upon the first to occur of (a) the death of the survivor of Mr. and Mrs.
Hollingsworth or (b) the termination of the Split-Dollar Agreement. In no event
will the Company's reimbursement exceed the accumulated cash value of the
insurance policy, which will be less than the premiums paid in the early years.
The Split-Dollar Agreement terminates upon the later to occur of the following:
(a) the date that Mr. Hollingsworth ceases to be an officer, director,
consultant or employee of the Company for any reason other than total and
permanent disability or (b) January 23, 2017. The insurance policy has been
assigned to the Company as security for repayment of the amounts which the
Company contributes toward payments due on such policy.
In accordance with the terms of the Split-Dollar Agreement, the Company
paid the 2002 premium in the amount of $299,697 in January and April 2002.
However, due to the uncertainty surrounding the applicability of the
Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act") to split-dollar life insurance
arrangements, the Company, Mr. and Mrs. Hollingsworth and the trustees of the
trust agreed to the deferral of the Company's then-current obligations to pay
premiums in 2003 and 2004 on the split-dollar life insurance policies until
January 2005 or such earlier time as the parties mutually determined that such
payments were not prohibited by the Sarbanes-Oxley Act. In November 2004, after
consultation with, and receipt of an opinion from, legal counsel, the
Compensation Committee of the Company's Board of Directors authorized the
Company to resume the payment of premiums, including deferred premiums, as
contractually required under the terms of the Split-Dollar Agreement. In
November 2004, the Company paid deferred premiums totaling $600,000. The Company
has recorded the cash surrender value of the policy as a long-term other asset
in the accompanying balance sheets.
F-24
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Restated)
Vehicle Service Contract Obligations
In November 2002, FASB Interpretation ("FIN") No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" was issued. FIN No. 45 enhances the
disclosures to be made by a guarantor about its obligations under certain
guarantees that it has issued. It also requires, on a prospective basis,
beginning after January 1, 2003, that guarantors recognize, at the inception of
a guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee.
While the Company is not an obligor under the vehicle service contracts it
currently sells, it is an obligor under vehicle service contracts previously
sold in two states. The contracts were sold to retail vehicle customers with
terms, typically, ranging from two to seven years. The purchase price paid by
the customer, net of the fee the Company received, was remitted to an
administrator. The administrator set the pricing at a level adequate to fund
expected future claims and their profit. Additionally, the administrator
purchased insurance to further secure its ability to pay the claims under the
contracts. The Company can become liable if the administrator and the insurance
company are unable to fund future claims. Though the Company has never had to
fund any claims related to these contracts, and reviews the credit worthiness of
the administrator and the insurance company, it is unable to estimate the
maximum potential claim exposure, but believes there will not be any future
obligation to fund claims on the contracts. The Company's revenues related to
these contracts were deferred at the time of sale and are being recognized over
the life of the contracts. The amounts deferred are presented on the face of the
balance sheets as deferred revenues.
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
QUARTER
--------------------------------------------------------- FULL
YEAR ENDED DECEMBER 31, FIRST SECOND THIRD FOURTH YEAR
----------- ----------- ------------- ----------- -----------
(in thousands, except per share data)
2004
Total revenues...................... $ 1,147,027 $ 1,314,901 $ 1,532,407 $ 1,440,698 $ 5,435,033
Gross profit........................ 183,428 198,510 229,884 219,944 831,766
Net income (loss)................... 10,487 15,714 (9,615) 11,195 27,781
Basic earnings (loss) per share..... 0.47 0.70 (0.42) 0.48 1.22
Diluted earnings (loss) per share... 0.45 0.67 (0.42) 0.47 1.18
2003
Total revenues...................... $ 1,029,791 $ 1,147,880 $ 1,239,490 $ 1,101,399 $ 4,518,560
Gross profit........................ 169,448 184,216 194,447 175,300 723,411
Net income.......................... 14,816 19,980 21,694 19,636 76,126
Basic earnings per share............ 0.66 0.89 0.96 0.87 3.38
Diluted earnings per share.......... 0.64 0.86 0.92 0.84 3.26
During the first quarter of 2004, the Company incurred a $6.4 million loss
on the redemption of its outstanding 10 7/8% senior subordinated notes. See Note
8.
During the third quarter of 2004, the Company incurred goodwill and
long-lived asset impairment charges totaling $41.4 million. See Note 4.
During the fourth quarter of 2004, the Company incurred an intangible
franchise right impairment charge of $3.3 million. See Note 4.
During the fourth quarter of 2003, the Company realized a tax benefit from
the resolution of tax contingencies, resulting in a $4.8 million decrease in tax
expense. See Note 13.
F-25
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 -- Restated Certificate of Incorporation of the Company
(Incorporated by reference to Exhibit 3.1 of the Company's
Registration Statement on Form S-1 Registration No. 333-29893).
3.2 -- Certificate of Designation of Series A Junior Participating
Preferred Stock (Incorporated by reference to Exhibit 3.2 of the
Company's Registration Statement on Form S-1 Registration No.
333-29893).
3.3 -- Bylaws of the Company (Incorporated by reference to Exhibit 3.3
of the Company's Registration Statement on Form S-1 Registration
No. 333-29893).
4.1 -- Specimen Common Stock Certificate (Incorporated by reference to
Exhibit 4.1 of the Company's Registration Statement on Form S-1
Registration No. 333-29893).
4.2 -- Subordinated Indenture dated as of August 13, 2003 among Group 1
Automotive, Inc., the Subsidiary Guarantors named therein and
Wells Fargo Bank, N.A., as Trustee (Incorporated by reference to
Exhibit 4.6 of the Company's Registration Statement on Form S-4
Registration No. 333-109080).
4.3 -- First Supplemental Indenture dated as of August 13, 2003 among
Group 1 Automotive, Inc., the Subsidiary Guarantors named
therein and Wells Fargo Bank, N.A., as Trustee (Incorporated by
reference to Exhibit 4.7 of the Company's Registration Statement
on Form S-4 Registration No. 333-109080).
4.4 -- Form of Subordinated Debt Securities (included in Exhibit 4.3).
10.1* -- Employment Agreement between the Company and B.B. Hollingsworth,
Jr., effective March 1, 2002 (Incorporated by reference to
Exhibit 10.1 of the Company's Annual Report on Form 10-K for the
year ended December 31, 2001).
10.2* -- First Amendment to Employment Agreement between the Company
and B.B. Hollingsworth, Jr., effective March 1, 2002
(Incorporated by reference to Exhibit 10.40 of the Company's
Annual Report on Form 10-K for the year ended December 31,
2003).
10.3* -- Employment Agreement between the Company and John T. Turner
dated November 3, 1997 (Incorporated by reference to Exhibit
10.5 of the Company's Annual Report on Form 10-K for the year
ended December 31, 1997).
10.4 -- Rights Agreement between Group 1 Automotive, Inc. and
ChaseMellon Shareholder Services, L.L.C., as rights agent, dated
October 3, 1997 (Incorporated by reference to Exhibit 10.10 of
the Company's Registration Statement on Form S-1 Registration
No. 333-29893).
10.5* -- Split Dollar Life Insurance Agreement, dated as of January 23,
2002, between Group 1 Automotive, Inc., and Leslie Hollingsworth
and Leigh Hollingsworth Copeland, as Trustees of the
Hollingsworth 2000 Children's Trust (Incorporated by reference
to Exhibit 10.36 of the Company's Annual Report on Form 10-K for
the year ended December 31, 2002).
10.6* -- Group 1 Automotive, Inc. Deferred Compensation Plan, as Amended
and Restated (Incorporated by reference to Exhibit 4.1 of the
Company's Registration Statement on Form S-8 Registration No.
333-83260).
10.7* -- First Amendment to Group 1 Automotive, Inc. Deferred
Compensation Plan, as Amended and Restated (Incorporated by
reference to Exhibit 4.1 of the Company's Registration Statement
on Form S-8 Registration No. 333-115962).
10.8* -- 1996 Stock Incentive Plan (Incorporated by reference to Exhibit
10.7 of the Company's Registration Statement on Form S-1
Registration No. 333-29893).
10.9* -- First Amendment to 1996 Stock Incentive Plan (Incorporated by
reference to Exhibit 10.8 of the Company's Registration
Statement on Form S-1 Registration No. 333-29893).
10.10* -- Second Amendment to 1996 Stock Incentive Plan (Incorporated by
reference to Exhibit 10.1 of the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999).
10.11* -- Third Amendment to 1996 Stock Incentive Plan (Incorporated by
reference to Exhibit 4.1 of the Company's Registration Statement
on Form S-8 Registration No. 333-75784).
10.12* -- Fourth Amendment to 1996 Stock Incentive Plan (Incorporated by
reference to Exhibit 4.1 of the Company's Registration Statement
on Form S-8 Registration No. 333-115961).
10.13* -- Fifth Amendment to 1996 Stock Incentive Plan (Incorporated by
reference to Exhibit 10.1 of the Company's Current Report on
Form 8-K dated March 9, 2005).
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.14* -- Form of Restricted Stock Agreement for Employees (Incorporated
by reference to Exhibit 10.2 of the Company's Current Report on
Form 8-K dated March 9, 2005).
10.15* -- Form of Phantom Stock Agreement for Employees (Incorporated by
reference to Exhibit 10.3 of the Company's Current Report on
Form 8-K Company's Current Report on Form 8-K dated March 9,
2005).
10.16* -- Form of Restricted Stock Agreement for Non-Employee Directors
(Incorporated by reference to Exhibit 10.4 of the Company's
Current Report on Form 8-K dated March 9, 2005).
10.17* -- Form of Phantom Stock Agreement for Non-Employee Directors
(Incorporated by reference to Exhibit 10.5 of the Company's
Current Report on Form 8-K dated March 9, 2005).
10.18* -- Annual Incentive Plan for Executive Officers of Group 1
Automotive, Inc. (Incorporated by reference to the section
titled "Executive Officer Compensation - Adoption of Bonus
Plan" in Item 1.01 of the Company's Current Report on Form 8-K
dated March 9, 2005).
10.19* -- Group 1 Automotive, Inc. Director Compensation Plan
(Incorporated by reference to the Company's Current Report on
Form 8-K dated November 17, 2004, and to the section titled
"Director Compensation - Change in Director Compensation" in
Item 1.01 of the Company's Current Report on Form 8-K dated
March 9, 2005).
10.20* -- Group 1 Automotive, Inc. 1998 Employee Stock Purchase Plan
(Incorporated by reference to Exhibit 10.11 of the Company's
Registration Statement on Form S-1 Registration No. 333-29893).
10.21* -- First Amendment to Group 1 Automotive, Inc. 1998 Employee
Stock Purchase Plan (Incorporated by reference to Exhibit 10.35
of the Company's Annual Report on Form 10-K for the year ended
December 31, 1998).
10.22* -- Second Amendment to Group 1 Automotive, Inc. 1998 Employee
Stock Purchase Plan (Incorporated by reference to Exhibit 4.1 of
the Company's Registration Statement on Form S-8 Registration
No. 333-75754).
10.23* -- Third Amendment to Group 1 Automotive, Inc. 1998 Employee
Stock Purchase Plan (Incorporated by reference to Exhibit 4.1 of
the Company's Registration Statement on Form S-8 Registration
No. 333-106486).
10.24* -- Fourth Amendment to Group 1 Automotive, Inc. 1998 Employee
Stock Purchase Plan (Incorporated by reference to Exhibit 4.2 of
the Company's Registration Statement on Form S-8 Registration
No. 333-106486).
10.25* -- Fifth Amendment to Group 1 Automotive, Inc. 1998 Employee
Stock Purchase Plan (Incorporated by reference to Exhibit 4.3 of
the Company's Registration Statement on Form S-8 Registration
No. 333-106486).
10.26 -- Fifth Amended and Restated Revolving Credit Agreement, dated as
of June 2, 2003 (Incorporated by reference to Exhibit 10.1 of
the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2003).
10.27 -- First Amendment to Fifth Amended and Restated Revolving Credit
Agreement, dated as of July 25, 2003 (Incorporated by reference
to Exhibit 10.37 of the Company's Registration Statement on Form
S-4 Registration No. 333-109080).
10.28 -- Form of Ford Motor Credit Company Automotive Wholesale Plan
Application for Wholesale Financing and Security Agreement
(Incorporated by reference to Exhibit 10.2 of the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2003).
10.29 -- Form of Agreement between Toyota Motor Sales, U.S.A., and
Group 1 Automotive, Inc. (Incorporated by reference to Exhibit
10.12 of the Company's Registration Statement on Form S-1
Registration No. 333-29893).
10.30 -- Form of Supplemental Agreement to General Motors Corporation
Dealer Sales and Service Agreement (Incorporated by reference to
Exhibit 10.13 of the Company's Registration Statement on Form
S-1 Registration No. 333-29893).
10.31 -- Supplemental Terms and Conditions between Ford Motor Company and
Group 1 Automotive, Inc. dated September 4, 1997 (Incorporated
by reference to Exhibit 10.16 of the Company's Registration
Statement on Form S-1 Registration No. 333-29893).
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.32 -- Toyota Dealer Agreement between Gulf States Toyota, Inc. and
Southwest Toyota, Inc. dated April 5, 1993 (Incorporated by
reference to Exhibit 10.17 of the Company's Registration
Statement on Form S-1 Registration No. 333-29893).
10.33 -- Lexus Dealer Agreement between Toyota Motor Sales, U.S.A., Inc.
and SMC Luxury Cars, Inc. dated August 21, 1995 (Incorporated by
reference to Exhibit 10.18 of the Company's Registration
Statement on Form S-1 Registration No. 333-29893).
10.34 -- Form of General Motors Corporation U.S.A. Sales and Service
Agreement (Incorporated by reference to Exhibit 10.25 of the
Company's Registration Statement on Form S-1 Registration No.
333-29893).
10.35 -- Form of Ford Motor Company Sales and Service Agreement
(Incorporated by reference to Exhibit 10.38 of the Company's
Annual Report on Form 10-K for the year ended December 31,
1998).
10.36 -- Form of Chrysler Corporation Sales and Service Agreement
(Incorporated by reference to Exhibit 10.39 of the Company's
Annual Report on Form 10-K for the year ended December 31,
1998).
10.37 -- Form of Nissan Division Dealer Sales and Service Agreement
(Incorporated by reference to Exhibit 10.25 of the Company's
Annual Report on Form 10-K for the year ended December 31,
2003).
10.38 -- Form of Infiniti Division Dealer Sales and Service
Agreement (Incorporated by reference to Exhibit 10.26 of the
Company's Annual Report on Form 10-K for the year ended December
31, 2003).
10.39 -- Lease Agreement between Howard Pontiac GMC, Inc. and Robert E.
Howard II (Incorporated by reference to Exhibit 10.9 of the
Company's Registration Statement on Form S-1 Registration No.
333-29893).
10.40 -- Lease Agreement between Bob Howard Motors, Inc. and Robert E.
Howard II (Incorporated by reference to Exhibit 10.9 of the
Company's Registration Statement on Form S-1 Registration No.
333-29893).
10.41 -- Lease Agreement between Bob Howard Chevrolet, Inc. and Robert E.
Howard II (Incorporated by reference to Exhibit 10.9 of the
Company's Registration Statement on Form S-1 Registration No.
333-29893).
10.42 -- Lease Agreement between Bob Howard Automotive-East, Inc. and
REHCO East, L.L.C. (Incorporated by reference to Exhibit 10.37
of the Company's Annual Report on Form 10-K for the year ended
December 31, 2002).
10.43 -- Lease Agreement between Howard-H, Inc. and REHCO, L.L.C.
(Incorporated by reference to Exhibit 10.38 of the Company's
Annual Report on Form 10-K for the year ended December 31,
2002).
10.44 -- Lease Agreement between Howard Pontiac-GMC, Inc. and North
Broadway Real Estate Limited Liability Company (Incorporated by
reference to Exhibit 10.10 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2002).
10.45 -- Lease Agreement between Howard-Ford, Inc. and REHCO EAST, L.L.C.
(Incorporated by reference to Exhibit 10.38 of the Company's
Annual Report on Form 10-K for the year ended December 31,
2003).
10.46 -- Amendment and Assignment of Lease between Howard Ford, Inc.,
Howard-FLM, Inc. and REHCO EAST, L.L.C. (Incorporated by
reference to Exhibit 10.39 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2003).
10.47 -- Second Amendment to Fifth Amended and Restated Revolving Credit
Agreement, dated as of March 8, 2005 (Incorporated by reference
to Exhibit 10.47 to the Company's Annual Report on Form 10-K for
the year ended December 31, 2004).
10.48* -- Sixth Amendment to Group 1 Automotive, Inc. 1998 Employee Stock
Purchase Plan (Incorporated by reference to Exhibit 10.48 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 2004).
10.49* -- Form of Incentive Stock Option Agreement for Employees
(Incorporated by reference to Exhibit 10.49 to the Company's
Annual Report on Form 10-K for the year ended December 31,
2004).
10.50* -- Form of Nonstatutory Stock Option Agreement for Employees
(Incorporated by reference to Exhibit 10.50 to the Company's
Annual Report on Form 10-K for the year ended December 31,
2004).
11.1 -- Statement re: computation of earnings per share is included
under Note 2 to the financial statements.
14.1 -- Code of Ethics for Specified Officers of Group 1 Automotive,
Inc., dated as of May 16, 2004 (Incorporated by reference
to Exhibit 14.1 to the Company's Annual Report on Form 10-K for
the year ended December 31, 2004).
21.1 -- Group 1 Automotive, Inc. Subsidiary List (Incorporated by
reference to Exhibit 21.1 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2004).
23.1 -- Consent of Ernst & Young LLP.
31.1 -- Certification of Chief Executive Officer Under Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 -- Certification of Chief Financial Officer Under Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 -- Certification of Chief Executive Officer Under Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 -- Certification of Chief Financial Officer Under Section 906 of
the Sarbanes-Oxley Act of 2002.
--------------
* Management contract or compensatory plan or arrangement