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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 or any amendment to this
Form 10-K. [ ]
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.
TABLE OF CONTENTS
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 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 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-
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.
-7-
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.
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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