UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
Commission file number 1-12297
United Auto Group, Inc.
Registrant’s telephone number, including area code:
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined Rule 12b-2 of the Exchange Act) Yes þ No o
As of October 31, 2003, there were 41,470,038 shares of voting common stock outstanding.
TABLE OF CONTENTS
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UNITED AUTO GROUP, INC.
See Notes to Consolidated Condensed Financial Statements
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CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW
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1. Interim Financial Statements
The information presented as of September 30, 2003 and for the three and nine month periods then ended is unaudited, but includes all adjustments (consisting only of normal and recurring adjustments) which the management of United Auto Group, Inc. (the “Company”) believes to be necessary for the fair presentation of results for the periods presented. The results for the interim periods are not necessarily indicative of results to be expected for the year. These consolidated condensed financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2002, which were included as part of the Company’s Annual Report on Form 10-K. In order to maintain consistency and comparability of financial information between periods presented, certain reclassifications have been made to the Company’s prior year consolidated condensed financial statements to conform to the current year presentation.
During 2003 and 2002, the Company sold 4 and 5 dealerships, respectively, which qualified for treatment as discontinued operations in accordance with Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.” Consequently, such dealerships have been reported as discontinued operations in the consolidated condensed financial statements. Combined financial information of these dealerships is as follows:
In March 2003, the Financial Accounting Standards Board’s (“FASB”) Emerging Issues Task Force (“EITF”) finalized Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Cash Consideration Received from a Vendor” (“EITF 02-16”), which addresses the accounting treatment for vendor allowances. EITF 02-16 provides that cash consideration received from a vendor should be presumed to be a reduction of the prices of the vendor’s product and should therefore be shown as a reduction in the purchase price of the merchandise. To the extent that the cash consideration represents a reimbursement of a specific, incremental and identifiable cost, then those vendor allowances should be used to offset such costs. Historically, the Company recorded non-refundable floor plan credits and certain other non-refundable credits
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
when received. As a result of EITF 02-16, these credits are now presumed to be reductions in the cost of purchased inventory and are deferred until the related vehicle is sold. In accordance with EITF 02-16, the Company recorded a cumulative effect of accounting change as of January 1, 2003, the date of adoption, that decreased net income by $3.1 million, or $0.07 per diluted share.
Statement of Financial Accounting Standards (“SFAS”) No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS 149”), was issued in April 2003. SFAS 149 clarifies the circumstances under which a contract with an initial net investment meets the characteristics of a derivative and clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS 149 amends certain other existing pronouncements. SFAS 149 is generally effective for contracts entered into or modified after June 30, 2003 and should be applied prospectively. The adoption of SFAS 149 is not expected to have an impact on the Company’s consolidated financial position, result of operations or cash flow.
SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” was issued in May 2003. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003. This statement establishes standards for an issuer’s classification and measurement of certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a freestanding financial instrument as a liability (or an asset in some circumstances). The adoption of SFAS 150 is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flow.
FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of APB No. 50 (“FIN 46”), was issued in January 2003. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. In October 2003, the effective date of FIN 46 was deferred to the first interim or annual period beginning after December 15, 2003. During the deferral period, the FASB will expose for comment an amendment to FIN 46. Due to the uncertainty relating to the final rules, the Company is not yet able to determine the effect, if any, the adoption of the final rules may have on the Company’s consolidated financial position, results of operations or cash flow.
The EITF is currently discussing Issue No. 03-01, “The Meaning of Other-than-Temporary Impairment and Its Application to Certain Investments.” The issue addresses how to determine the meaning of other-than-temporary for impairments and how that concept should be applied to investments accounted for under the cost or equity method, or investments classified as either available-for-sale or held-to-maturity under SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities.” Due to the preliminary nature of these discussions, the Company is not yet able to determine the effect, if any, the adoption of the final rules may have on the Company’s consolidated financial position, results of operations or cash flow.
The EITF is also currently discussing Issue No. 03-09, “Evaluating the Criteria in Sub-Paragraph 11(d) of SFAS 142, Goodwill and Other Intangible Assets, Regarding Renewal or Extension When Determining the Useful Life of an Intangible Asset.” The issue addresses the evaluation of certain criteria in determining whether an intangible asset has an indefinite useful life or, the appropriate useful life if it is determined to have a finite useful life. Due to the preliminary nature of these discussions, the Company is not yet able to determine the effect, if any, the adoption of the final rules may have on the Company’s consolidated financial position, results of operations or cash flow.
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The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the amounts of revenues and expenses recognized during the reporting period. Actual results could differ from those estimates. The accounts requiring the use of significant estimates include accounts receivable, inventories, income taxes, intangible assets and certain reserves.
Franchise value represents the estimated value of franchises acquired in business combinations. Goodwill represents the excess of cost over the fair value of tangible and identified intangible assets acquired in business combinations. Goodwill and franchise value are deemed to have indefinite lives and are not amortized, but are subject to, at a minimum, an annual impairment test. If the carrying value of any of the Company’s intangible assets exceeds its fair market value, an impairment loss would be recorded. The Company uses a discounted cash flow model to determine the fair market value of its reporting units.
Following is a summary of the changes in the carrying amount of goodwill and franchise value for the nine months ended September 30, 2003:
2. Inventories
Inventories consisted of the following:
3. Business Combinations
During the nine months ended September 30, 2003 and 2002, the Company acquired 23 and 69 automobile dealership franchises, respectively. The Company’s financial statements include the results of operations of the acquired dealerships only from the date of acquisition.
4. Stock-Based Compensation
Full-time employees of the Company and its subsidiaries and affiliates are eligible to receive stock based compensation pursuant to the terms of the Company’s 2002 Equity Compensation Plan (the “Plan”). The Plan includes 2,100 shares available for future issuance of awards including; stock options, stock appreciation
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rights, restricted stock, restricted stock units, performance shares and other awards to key employees, outside directors, consultants and advisors of the Company. As of September 30, 2003, 1,774 shares of common stock were available for grant under the Plan. In addition, 150 shares of common stock are available for the grant of options pursuant to the Company’s prior equity compensation plan.
During 2003, the Company granted 326 shares of restricted common stock at no cost to certain employees. Shares are issued to the participants at the date of grant, entitling the participants to the right to vote their respective shares and receive dividends. However, the shares are subject to forfeiture and are non-transferable, which restrictions lapse ratably over a three-year period from the grant date. The fair value of these restricted shares at the date of grant is amortized to expense over the restriction period. During the nine months ended September 30, 2003, the Company has recorded deferred compensation expense related to restricted stock of $4,111, of which $3,327 remained unamortized at September 30, 2003.
Pursuant to Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, the Company accounts for option grants using the intrinsic value method. Accordingly, no compensation expense has been recorded in the consolidated condensed financial statements with respect to option grants. The Company has adopted the disclosure only provisions of SFAS 123, “Accounting for Stock Based Compensation”, as amended by SFAS 148, “Accounting for Stock Based Compensation — Transition and Disclosure, an Amendment of FASB Statement No. 123”. Had the Company elected to recognize compensation expense for option grants using the fair value method, pro forma income available to common stockholders, basic earnings per common share and diluted earnings per common share would have been as follows:
During 2003, the Company granted options to acquire 8 shares of common stock. The weighted average fair value of the option grants was calculated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: no dividend yield; expected volatility of 61%; risk free interest rate of 4% and expected lives of five years. The resulting weighted average fair value of the options granted during the nine months ended September 30, 2003 was $6.24.
5. Earnings Per Share
Basic earnings per common share is computed using the weighted average number of common shares outstanding. Diluted earnings per common share is based on the weighted average number of common shares outstanding, adjusted for the dilutive effect of stock options, restricted stock, preferred stock and warrants. For the three and nine months ended September 30, 2003, 505 and 853 shares, respectively, issuable upon the exercise of outstanding options were excluded from the calculation of diluted earnings per common share
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because the effect of such securities was antidilutive. A reconciliation of the number of shares used in the calculation of basic and diluted earnings per common share is as follows:
6. Supplemental Cash Flow Information
The following table presents certain supplementary information to the consolidated condensed statements of cash flow:
7. Long-Term Debt
Long-term debt consisted of the following:
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Available borrowing capacity under the Company’s credit facilities amounted to approximately $300,000 as of September 30, 2003.
The Company is party to a credit agreement with DaimlerChrysler Services North America LLC and Toyota Motor Credit Corporation, dated December 22, 2000, as amended (the “U.S. Credit Agreement”), which provides for up to $700,000 in revolving loans to be used for acquisitions, working capital, letters of credit, the repurchase of common stock and general corporate purposes. The Company is also party to an additional $50,000 standby letter of credit facility provided by DaimlerChrysler Services North America LLC (the “Additional Facility”). Revolving loans mature on August 3, 2005. Loans under the U.S. Credit Agreement bear interest between U.S. LIBOR plus 2.00% and U.S. LIBOR plus 3.00%. The U.S. Credit Agreement is fully and unconditionally guaranteed on a joint and several basis by the Company’s domestic automotive dealership subsidiaries and contains a number of significant covenants that, among other things, restrict the ability of the Company to dispose of assets, incur additional indebtedness, repay other indebtedness, create liens on assets, make investments or acquisitions and engage in mergers or consolidations. The Company is also required to comply with specified ratios and tests defined in the U.S. Credit Agreement. The U.S. Credit Agreement also contains typical events of default, including change of control and non-payment of obligations. Availability under the revolving portion of the U.S. Credit Agreement is subject to a collateral-based borrowing limitation, which is determined based on certain of the Company’s allowable domestic tangible assets. Substantially all of the Company’s domestic assets are subject to security interests granted to lenders under the U.S. Credit Agreement. The U.S. Credit Agreement, the subordinated notes discussed below and borrowings under floor plan financing arrangements have cross-default provisions that trigger a default in the event of an uncured default under other material indebtedness. As of September 30, 2003, outstanding letters of credit under the U.S. Credit Agreement amounted to $10,300 and outstanding letters of credit under the Additional Facility amounted to $50,000. As of September 30, 2003, the Company was in compliance with all financial covenants under the U.S. Credit Agreement.
The Company is party to a credit facility with the Royal Bank of Scotland dated February 28, 2003 (the “U.K. Credit Facility”), which provides for up to £45,000 (approximately $75,000 as of September 30, 2003) in revolving loans to be used for acquisitions, working capital, and general corporate purposes. The U.K. Credit facility also provides for an additional seasonally adjusted overdraft line of credit up to a maximum of £10,000 (approximately $17,000 as of September 30, 2003). Loans under the U.K. Credit Facility bear interest between U.K. LIBOR plus 0.85% and U.K. LIBOR plus 1.25%. Borrowing capacity under the U.K. Credit Facility will be reduced by £2,000 every six months, with the first reduction occurring on January 1, 2004. The remaining £35,000 of revolving loans mature on January 31, 2006. The U.K. Credit Facility is fully and unconditionally guaranteed on a joint and several basis by the Company’s subsidiaries in the U.K. (the “U.K. Subsidiaries”), and contains a number of significant covenants that, among other things, restrict the ability of the U.K. Subsidiaries to pay dividends, dispose of assets, incur additional indebtedness, repay other indebtedness, create liens on assets, make investments or acquisitions and engage in mergers or consolidations. In addition, the U.K. Subsidiaries are required to comply with specified ratios and tests defined in the U.K. Credit Facility. The U.K. Credit Facility also contains typical events of default, including change of control and non-payment of obligations. Substantially all of the U.K. Subsidiaries’ assets are subject to security interests granted to lenders under the U.K. Credit Facility and the U.K. Credit Facility has cross-default provisions that trigger a default in the event of an uncured default under other material indebtedness of the U.K. Subsidiaries. As of September 30, 2003, outstanding borrowings under the U.K. Credit Facility amounted to approximately £34,000. As of September 30, 2003, the Company was in compliance with all financial covenants under the U.K. Credit Facility.
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In March 2002, the Company issued $300,000 aggregate principal amount of 9.625% Senior Subordinated Notes due 2012 (the “Notes”). Net proceeds from the offering were approximately $291,900, which was used to repay indebtedness outstanding under the U.S. Credit Agreement. The Notes are unsecured senior subordinated notes and rank behind all existing and future senior debt, including debt under the Company’s credit agreements and floor plan indebtedness. The Notes are guaranteed by substantially all of the Company’s domestic subsidiaries on a senior subordinated basis. The Company can redeem all or some of the Notes at its option beginning in 2007 at specified redemption prices. In addition, until 2005 the Company is allowed to redeem up to 35% of the Notes with the net cash proceeds from specified public equity offerings. Upon a change of control, each holder of Notes will be able to require the Company to repurchase all or some of the Notes at a redemption price of 101% of the principal amount of the Notes. The Notes also contain customary negative covenants and events of default.
8. Interest Rate Swaps
During January 2000, the Company entered into a swap agreement of five years duration pursuant to which a notional $200,000 of U.S. floating rate debt was exchanged for fixed rate debt. The fixed rate interest was 7.15%. In October 2002, the terms of this swap were amended pursuant to which the interest rate was reduced to 5.86% and the term of the agreement was extended for an additional three years. During March 2003, the Company entered into a swap agreement of five years duration pursuant to which a notional $350,000 of U.S. floating rate debt was exchanged for fixed rate debt. The fixed rate interest is 3.15%. These swaps have been designated as cash flow hedges of future interest payments of the Company’s LIBOR based U.S. floor plan borrowings.
9. Subsequent Event
On October 21, 2003, the Company announced that it would initiate a quarterly dividend of 10 cents per share. The dividend will be paid December 1, 2003 to shareholders of record on November 10, 2003.
10. Condensed Consolidating Financial Information
The following tables include condensed consolidating financial information as of September 30, 2003 and December 31, 2002 and for the three and nine month periods ended September 30, 2003 and 2002 for United Auto Group, Inc. (as the issuer), wholly-owned subsidiary guarantors, non-wholly owned guarantors, and non-guarantor subsidiaries (primarily representing foreign entities). The condensed consolidating financial information includes certain allocations of balance sheet, income statement and cash flow items, which are not necessarily indicative of the financial position, results of operations and cash flows of these entities on a stand-alone basis.
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UNITED AUTO GROUP, INC
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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
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CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
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This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors.
General
We are the second largest publicly-held automotive retailer in the United States as measured by total revenues. As of September 30, 2003, we owned and operated 134 franchises in the United States and 79 franchises internationally, primarily in the United Kingdom. As an integral part of our dealership operations, we retail new and used automobiles and light trucks, operate service and parts departments, operate collision repair centers and sell various third-party aftermarket products, including finance, extended service and other insurance contracts.
New vehicle revenues include sales to retail customers and to leasing companies providing consumer automobile leasing. Used vehicle revenues include amounts received for used vehicles sold to retail customers, leasing companies providing consumer leasing and other dealers. We generate finance and insurance revenues from sales of third-party extended service contracts, other third-party insurance policies, and accessories, as well as from fees for placing third-party finance and lease contracts. Service and parts revenues include fees paid for repair and maintenance service, the sale of replacement parts and body shop repairs.
Our gross profit tends to vary with the mix of revenues we derive from the sale of new vehicles, used vehicles, finance and insurance products, and service and parts sales. Our gross profit generally varies across product lines, with new vehicle sales usually resulting in lower gross profit margins and our other products resulting in higher gross profit margins. Factors such as seasonality, weather, cyclicality and manufacturers’ advertising and incentives may impact the mix of our revenues, and therefore influence our gross profit margin.
Our selling expenses consist of advertising and compensation for sales department personnel, including commissions and related bonuses. General and administrative expenses include compensation for administration, finance, legal and general management personnel, rent, insurance, utilities and other outside services. A significant portion of our selling expenses are variable, and a significant portion of our general and administrative expenses are subject to our control, allowing us to adjust them over time to reflect economic trends.
Floor plan interest expense relates to floor plan financing. Floor plan financing represents indebtedness incurred in connection with the acquisition of new and used vehicle inventories. Other interest expense consists of interest charges on all of our interest-bearing debt, other than interest relating to floor plan financing.
We have made a number of dealership acquisitions in each year since our inception. Each of these acquisitions has been accounted for using the purchase method of accounting. As a result, our financial statements include the results of operations of the acquired dealerships from the date of acquisition.
In March 2003, the Financial Accounting Standards Board’s (“FASB”) Emerging Issues Task Force (“EITF”) finalized Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Cash Consideration Received from a Vendor” (“EITF 02-16”), which addresses the accounting treatment for vendor allowances. EITF 02-16 provides that cash consideration received from a vendor should be presumed to be a reduction of the prices of the vendors’ product and should therefore be shown as a reduction in the purchase price of the merchandise. To the extent that the cash consideration represents a reimbursement of a specific, incremental and identifiable cost, then those vendor allowances should be used to offset such costs. Historically, the Company recorded non-refundable floor plan credits and certain other non-refundable credits when received. As a result of the EITF, these credits are now presumed to be reductions in the cost of purchased inventory and are deferred until the related vehicle is sold. In accordance with EITF 02-16, the Company recorded a cumulative effect of accounting change as of January 1, 2003, the date of adoption, that decreased net income by $3.1 million, or $0.07 per diluted share.
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Results of Operations
Retail revenues, which exclude revenues relating to fleet and wholesale transactions, increased by $357.3 million, or 19.4%, from $1,838.3 million to $2,195.6 million. The overall increase in retail revenues is due primarily to: (1) a $176.5 million, or 9.9%, increase in retail revenues at dealerships owned prior to July 1, 2002, and (2) dealership acquisitions made subsequent to July 1, 2002. The overall increase in retail revenues at dealerships owned prior to July 1, 2002 reflects 8.8%, 12.3%, 16.2% and 10.6% increases in new retail vehicle, used retail vehicle, finance and insurance and service and parts revenues, respectively. Aggregate retail unit sales increased by 13.5%, due principally to: (1) the net increase at dealerships owned prior to July 1, 2002, and (2) acquisitions made subsequent to July 1, 2002. We retailed 71,408 vehicles during the three months ended September 30, 2003, compared with 62,912 vehicles during the three months ended September 30, 2002.
Retail sales of new vehicles increased by $209.1 million, or 17.6%, from $1,191.5 million to $1,400.6 million. The increase is due primarily to: (1) a $102.0 million, or 8.8%, increase at dealerships owned prior to July 1, 2002, and (2) acquisitions made subsequent to July 1, 2002. The increase at dealerships owned prior to July 1, 2002 is due primarily to a 4.6% increase in new retail unit sales, coupled with a 4.0% increase in comparative average selling prices per vehicle. Aggregate retail unit sales of new vehicles increased by 11.4%, due principally to: (1) the net increase at dealerships owned prior to July 1, 2002 and (2) acquisitions made subsequent to July 1, 2002. We retailed 47,934 new vehicles (67% of total retail vehicle sales) during the three months ended September 30, 2003, compared with 43,026 new vehicles (68% of total retail vehicle sales) during the three months ended September 30, 2002.
Retail sales of used vehicles increased by $98.0 million, or 24.7%, from $396.2 million to $494.2 million. The increase is due primarily to: (1) a $47.0 million, or 12.3%, increase at dealerships owned prior to July 1, 2002 and (2) acquisitions made subsequent to July 1, 2002. The increase at dealerships owned prior to July 1, 2002 is due primarily to an 8.3% increase in used retail unit sales, coupled with a 3.7% increase in comparative
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Finance and insurance revenues increased by $10.1 million, or 21.0%, from $48.0 million to $58.1 million. The increase is due primarily to: (1) a $6.6 million, or 16.2% increase at dealerships owned prior to July 1, 2002 and (2) acquisitions made subsequent to July 1, 2002. The increase at dealerships owned prior to July 1, 2002 is primarily due to a $66 increase in finance and insurance revenue per retail vehicle sold, which increased revenue by approximately $4.0 million, and a 5.8% increase in retail vehicles sold, which increased revenue by approximately $2.6 million.
Service and parts revenues increased by $40.2 million, or 19.9%, from $202.6 million to $242.8 million. The increase is due primarily to: (1) a $20.9 million, or 10.6%, increase at dealerships owned prior to July 1, 2002 and (2) acquisitions made subsequent to July 1, 2002. The Company believes that its service and parts business is being positively impacted by the complexity of today’s vehicles, increases in retail unit sales at our dealerships and capacity increases in our service and parts operations resulting from our facility improvement and expansion programs.
Fleet revenues decreased $4.3 million, or 13.7%, from $31.6 million to $27.3 million. The decrease in fleet revenues is due entirely to a decrease in fleet sales revenues at dealerships owned prior to July 1, 2002. We have generally elected to de-emphasize low margin fleet business, however, opportunities to obtain such business are considered on a case by case basis. We may elect to selectively pursue fleet opportunities in circumstances where we believe we will be able to generate higher margin service and parts revenues throughout the life cycle of the fleet vehicle.
Wholesale revenues increased $12.2 million, or 9.5%, from $127.8 million to $140.0 million. The increase in wholesale revenues is due primarily to acquisitions made subsequent to July 1, 2002, partially offset by a $4.3 million, or 3.5%, decrease at dealerships owned prior to July 1, 2002.
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Retail gross profit, which excludes gross profit on fleet and wholesale transactions, increased $55.0 million, or 19.7%, from $279.5 million to $334.5 million. The increase in retail gross profit is due to: (1) a $25.8 million, or 9.8%, increase in retail gross profit at stores owned prior to July 1, 2002, and (2) acquisitions made subsequent to July 1, 2002. The increase in gross profit at stores owned prior to July 1, 2002 is principally due to (1) the increase in retail unit sales, (2) the $66 per unit increase in finance and insurance revenues, (3) the 10.6% increase in same store service and parts revenues and, (4) a 20 basis point increase in same store service and parts gross margin. These factors were offset slightly by decreased gross profit margins on the sale of new and used vehicles.
Retail gross profit as a percentage of revenues on retail transactions of 15.2% remained consistent with the prior year. Gross profit as a percentage of revenues for new vehicle retail, used vehicle retail, finance and insurance and service and parts revenues was 8.1%, 9.3%, 100%, and 48.0%, respectively, compared with 8.2%, 9.5%, 100% and 47.4% in the comparable prior year period.
Fleet gross profit decreased $0.1 million, or 13.4%, from $0.7 million to $0.6 million. The decrease in gross profit is primarily due to a decrease of 492 units sold, offset by an increase of $85 per unit of average gross profit.
Wholesale gross profit increased $2.6 million, or 151.0%, from a loss of $1.7 million to a profit of $0.9 million. The increase in wholesale gross profit is primarily due to an increase in the average gross profit per unit sold due in large part to (1) closed bid auctions implemented in several areas, which management believes has enhanced the value received for units sold through wholesale channels and (2) enhanced inventory management which reduces the number of units which need to be sold through wholesale channels.
Selling, general and administrative expenses increased by $46.2 million, or 21.4%, from $216.5 million to $262.7 million. Such expenses increased as a percentage of total revenue from 10.8% to 11.1%, and increased as a percentage of gross profit from 77.8% to 78.2%. The aggregate increase in selling, general and administrative expenses is due principally to: (1) a $26.2 million, or 13.0%, increase at dealerships owned prior to July 1, 2002, and (2) acquisitions made subsequent to July 1, 2002. The increase in selling, general and administrative expenses at stores owned prior to July 1, 2002 is due in large part to (1) increased variable selling expenses, including increases in variable compensation as a result of the 9.8% increase in retail gross profit over the prior year, (2) a $4.2 million, or 27.5%, increase in advertising and promotion over the prior year caused by the overall competitiveness of the retail vehicle market and the promotion of expanded manufacturer incentive programs, and (3) increased rent and related costs of approximately $3.2, due in part to our facility improvement and expansion program.
Depreciation and amortization increased by $2.9 million, or 56.1%, from $5.3 million to $8.2 million. The increase in depreciation and amortization is due principally to: (1) a $1.9 million, or 36.3%, increase at dealerships owned prior to July 1, 2002, which is due in large part to our facility improvement and expansion program and (2) acquisitions made subsequent to July 1, 2002.
Floor plan interest expense increased by $2.3 million, or 25.9%, from $8.9 million to $11.2 million. The increase in floor plan interest expense is due to (1) a $2.1 million, or 24.8%, increase at stores owned prior to July 1, 2002, primarily due to $1.8 million of incremental interest resulting from our March 2003 $350 million floorplan interest rate swap and (2) acquisitions made subsequent to July 1, 2002.
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Other interest expense increased by $1.2 million, or 12.0%, from $9.9 million to $11.1 million. The increase is due primarily to increased working capital advances and acquisition related indebtedness, including borrowings in connection with the April 2003 acquisition of the Inskip Autocenter dealerships located in Warwick, Rhode Island, offset in part by a decrease in our weighted average borrowing rate.
Income taxes increased by $1.6 million from $15.3 million to $16.9 million. The net increase is due to an increase in pre-tax income compared with 2002, offset by a reduction in our effective rate resulting from an increase in the relative proportion of taxable income from our U.K. operations, which are taxed at a lower rate.
Retail revenues, which exclude revenues relating to fleet and wholesale transactions, increased by $1,082.6 million, or 21.9%, from $4,948.9 million to $6,031.5 million. The overall increase in retail revenues is due primarily to: (1) a $308.8 million, or 7.5%, increase in retail revenues at dealerships owned prior to January 1, 2002, and (2) dealership acquisitions made subsequent to January 1, 2002. The overall increase in retail revenues at dealerships owned prior to January 1, 2002 reflects 6.5%, 9.9%, 14.9% and 7.6% increases in new retail vehicle, used retail vehicle, finance and insurance and service and parts revenues, respectively. Aggregate retail unit sales increased by 15.7%, due principally to: (1) the net increase at dealerships owned prior to January 1, 2002 and (2) acquisitions made subsequent to January 1, 2002. We retailed 198,222 vehicles during the nine months ended September 30, 2003, compared with 171,338 vehicles during the nine months ended September 30, 2002.
Retail sales of new vehicles increased by $579.4 million, or 18.1%, from $3,207.4 million to $3,786.8 million. The increase is due primarily to: (1) a $180.6 million, or 6.5%, increase at dealerships owned prior to January 1, 2002 and (2) acquisitions made subsequent to January 1, 2002. The increase at dealerships owned prior to January 1, 2002 is due primarily to a 3.5% increase in new retail unit sales, coupled with a 2.9% increase in comparative average selling prices per vehicle. Aggregate retail unit sales of new vehicles increased by 12.3%, due principally to: (1) the net increase at dealerships owned prior to January 1, 2002 and (2) acquisitions made subsequent to January 1, 2002. We retailed 130,328 new vehicles (66% of total retail
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Retail sales of used vehicles increased by $343.5 million, or 32.3%, from $1,062.0 million to $1,405.5 million. The increase is due primarily to: (1) a $78.2 million, or 9.9%, increase at dealerships owned prior to January 1, 2002 and (2) acquisitions made subsequent to January 1, 2002. The increase at dealerships owned prior to January 1, 2002 is due primarily to a 10.8% increase in used retail unit sales, offset slightly by a 0.9% decrease in comparative average selling prices per vehicle. Aggregate retail unit sales of used vehicles increased by 22.8%, due principally to: (1) the net increase at dealerships owned prior to January 1, 2002, and (2) acquisitions made subsequent to January 1, 2002. We retailed 67,894 used vehicles (34% of total retail vehicle sales) during the nine months ended September 30, 2003, compared with 55,306 used vehicles (32% of total retail vehicle sales) during the nine months ended September 30, 2002.
Finance and insurance revenues increased by $31.1 million, or 24.3%, from $127.9 million to $159.0 million. The increase is due primarily to: (1) a $14.9 million, or 14.9%, increase at dealerships owned prior to January 1, 2002 and (2) acquisitions made subsequent to January 1, 2002. The increase at dealerships owned prior to January 1, 2002 is primarily due to a $57 increase in finance and insurance revenue per retail vehicle sold, which increased revenue by approximately $8.6 million, and a 5.8% increase in retail vehicles sold, which increased revenue by approximately $6.3 million.
Service and parts revenues increased by $128.7 million, or 23.3%, from $551.5 million to $680.2 million. The increase is due primarily to: (1) a $35.1 million, or 7.6%, increase at dealerships owned prior to January 1, 2002 and (2) acquisitions made subsequent to January 1, 2002. The Company believes that its service and parts business is being positively impacted by the complexity of today’s vehicles, increases in retail unit sales at our dealerships and capacity increases in our service and parts operations resulting from our facility improvement and expansion programs.
Fleet revenues increased $2.5 million, or 2.8%, from $90.7 million to $93.2 million. The increase in fleet revenues is due entirely to an increase in fleet sales revenues at dealerships owned prior to January 1, 2002. We have generally elected to de-emphasize low margin fleet business, however, opportunities to obtain such business are considered on a case by case basis. We may elect to selectively pursue fleet opportunities in
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Wholesale revenues increased $40.7 million, or 11.8%, from $343.8 million to $384.5 million. The increase in wholesale revenues is due primarily to acquisitions made subsequent to January 1, 2002, offset in part by a $19.5 million, or 7.3%, decrease at dealerships owned prior to January 1, 2002.
Retail gross profit, which excludes gross profit on fleet and wholesale transactions, increased $166.3 million, or 21.8%, from $763.9 million to $930.2 million. The increase in retail gross profit is due to: (1) a $50.3 million, or 8.1%, increase in retail gross profit at stores owned prior to January 1, 2002, and (2) acquisitions made subsequent to January 1, 2002. The increase in gross profit at stores owned prior to January 1, 2002 is due principally to (1) the increase in retail unit sales, (2) the $57 per unit increase in finance and insurance revenues, (3) the 7.6% increase in same store service and parts revenues and, (4) a 60 basis point increase in same store service and parts gross margin. These factors were offset by slightly decreased gross profit margins on the sale of new vehicles.
Retail gross profit as a percentage of revenues on retail transactions of 15.4% remained consistent with the prior year. Gross profit as a percentage of revenues for new vehicle retail, used vehicle retail, finance and insurance and service and parts revenues was 8.3%, 9.3%, 100%, and 48.0%, respectively, compared with 8.4%, 10.0%, 100% and 46.9% in the comparable prior year period.
Fleet gross profit decreased $0.5 million, or 20.4%, from $2.5 million to $2.0 million. The decrease in gross profit is primarily due to a decrease of $96 per unit of average gross profit, coupled with a decrease of 100 units sold.
Wholesale losses decreased $2.5 million, or 89.0%, from a loss of $2.8 million to a loss of $0.3 million. The decrease in wholesale losses is primarily due to a decrease in the average loss per unit sold due in large part to (1) closed bid auctions implemented in several areas, which management believes has enhanced the value received for units sold through wholesale channels and (2) enhanced inventory management which reduces the number of units which need to be sold through wholesale channels.
Selling, general and administrative expenses increased by $140.4 million, or 23.6%, from $593.5 million to $733.9 million. Such expenses increased as a percentage of total revenue from 11.0% to 11.3%, and increased as a percentage of gross profit from 77.7% to 78.8%. The aggregate increase in selling, general and administrative expenses is due principally to: (1) a $51.6 million, or 10.8%, increase at dealerships owned prior to January 1, 2002, and (2) acquisitions made subsequent to January 1, 2002. The increase in selling, general and administrative expenses at stores owned prior to January 1, 2002 is due in large part to (1) increased variable selling expenses, including increases in variable compensation as a result of the 8.1% increase in retail gross profit over the prior year, (2) a $4.2 million, or 9.7% increase in advertising and promotion over the prior year caused by the overall competitiveness of the retail vehicle market and the promotion of expanded
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Depreciation and amortization increased by $7.8 million, or 51.0%, from $15.2 million to $23.0 million. The increase in depreciation and amortization is due principally to: (1) a $5.4 million, or 46.7%, increase at dealerships owned prior to January 1, 2002, which is due in large part to our facility improvement and expansion program and (2) acquisitions made subsequent to January 1, 2002.
Floor plan interest expense increased by $6.1 million, or 23.8%, from $25.5 million to $31.6 million. The increase in floor plan interest expense is due to (1) a $3.8 million, or 17.3%, increase at stores owned prior to January 1, 2002, primarily due to $3.7 million of incremental interest resulting from our March 2003 $350 million floorplan interest rate swap and (2) acquisitions made subsequent to January 1, 2002.
Other interest expense increased by $4.5 million, or 16.4%, from $27.7 million to $32.2 million. The increase is due primarily to (1) increased working capital advances and acquisition related indebtedness, including borrowings in connection with the April 2003 acquisition of the Inskip Autocenter dealerships located in Warwick, Rhode Island and (2) a full nine months of interest expense related to our $300 million senior subordinated notes offered in March 2002, offset in part by a decrease in our weighted average borrowing rate.
Income taxes increased by $3.0 million from $41.0 million to $44.0 million. The net increase is due to an increase in pre-tax income compared with 2002, offset by a reduction in our effective rate due to an increase in the relative proportion of taxable income from our U.K. operations, which are taxed at a lower rate.
Liquidity and Capital Resources
Our cash requirements are primarily for working capital, the acquisition of new dealerships, the improvement and expansion of existing facilities and the construction of new facilities. Historically, these cash requirements have been met through borrowings under our credit agreements, the issuance of debt securities, floor plan notes payable, sale-leaseback transactions, the issuance of equity securities and cash flow from operations. At September 30, 2003, we had working capital of $138.2 million.
We finance the majority of our new and a portion of our used vehicle inventory under revolving floor plan financing arrangements between our subsidiaries and various lenders. In the U.S., we make monthly interest payments on the amount financed, but are generally not required to make loan principal repayments prior to the sale of the new and used vehicles we have financed. In the U.K., we pay interest only for 60 days, after which we repay the floor plan indebtedness with cash flow from operations or borrowings under available credit facilities. The floor plan agreements grant a security interest in substantially all of the assets of our automotive dealership subsidiaries. Interest rates on the floor plan arrangements are variable and increase or decrease based on movements in the prime rate or LIBOR. Outstanding borrowings under floor plan arrangements amounted to $879.6 million as of September 30, 2003, of which $200.1 million relates to inventory held by our U.K. subsidiaries.
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We are party to a credit agreement with DaimlerChrysler Services North America LLC and Toyota Motor Credit Corporation, dated December 22, 2002, as amended (the “U.S. Credit Agreement”), which provides for up to $700.0 million in revolving loans to be used for acquisitions, working capital, letters of credit, the repurchase of common stock and general corporate purposes. We are also party to an additional $50.0 million standby letter of credit facility provided by DaimlerChrysler Services North America LLC (the “Additional Facility”). Revolving loans mature on August 3, 2005. Loans under the U.S. Credit Agreement bear interest between U.S. LIBOR plus 2.00% and U.S. LIBOR plus 3.00%. The U.S. Credit Agreement is fully and unconditionally guaranteed on a joint and several basis by our domestic automotive dealership subsidiaries and contains a number of significant covenants that, among other things, restrict our ability to dispose of assets, incur additional indebtedness, repay other indebtedness, create liens on assets, make investments or acquisitions and engage in mergers or consolidations. We are also required to comply with specified ratios and tests defined in the U.S. Credit Agreement. The U.S. Credit Agreement also contains typical events of default, including change of control and non-payment of obligations. Availability under the revolving portion of the U.S. Credit Agreement is subject to a collateral-based borrowing limitation, which is determined based on certain of our allowable domestic tangible assets. Substantially all of our domestic assets are subject to security interests granted to lenders under the U.S. Credit Agreement. Our U.S. Credit Agreement, the subordinated notes discussed below and borrowings under floor plan financing arrangements have cross-default provisions that trigger a default in the event of an uncured default under other material indebtedness. As of September 30, 2003, outstanding borrowings and letters of credit under the U.S. Credit Agreement amounted to $425.5 million and $10.3 million, respectively. As of September 30, 2003 outstanding letters of credit under the Additional Facility amounted to $50.0 million. As of September 30, 2003 we were in compliance with all financial covenants under the U.S. Credit Agreement.
We are party to a credit facility with the Royal Bank of Scotland dated February 28, 2003 (the “U.K. Credit Facility”), which provides for up to £45.0 million (approximately $75 million as of September 30, 2003) in revolving loans to be used for acquisitions, working capital, and general corporate purposes. The U.K. credit facility also provides for an additional seasonally adjusted overdraft line of credit up to a maximum of £10.0 million (approximately $17 million as of September 30, 2003). Loans under the U.K. Credit Facility bear interest between U.K. LIBOR plus 0.85% and U.K. LIBOR plus 1.25%. Our borrowing capacity under the U.K. Credit Facility will be reduced by £2.0 million every six months, with the first reduction occurring on January 1, 2004. The remaining £35.0 million of revolving loans mature on January 31, 2006. The U.K. Credit Facility is fully and unconditionally guaranteed on a joint and several basis by our subsidiaries in the U.K. (the “U.K. Subsidiaries”), and contains a number of significant covenants that, among other things, restrict the ability of the U.K. Subsidiaries to pay dividends, dispose of assets, incur additional indebtedness, repay other indebtedness, create liens on assets, make investments or acquisitions and engage in mergers or consolidations. In addition, the U.K. Subsidiaries are required to comply with specified ratios and tests defined in the U.K. Credit facility. The U.K. Credit Facility also contains typical events of default, including change of control and non-payment of obligations. Substantially all of the U.K. Subsidiaries’ assets are subject to security interests granted to lenders under the U.K. Credit Facility and the U.K. Credit Facility has cross-default provisions that trigger a default in the event of an uncured default under other material indebtedness of the U.K. Subsidiaries. As of September 30, 2003, outstanding borrowings under the U.K. Credit Facility amounted to approximately £34.0 million. As of September 30, 2003, we were in compliance with all financial covenants under the U.K. Credit Facility.
In March 2002, the Company issued $300.0 million aggregate principal amount of 9.625% Senior Subordinated Notes due 2012 (the “Notes”). Net proceeds from the offering were approximately $291.9 million, which was used to repay indebtedness outstanding under the U.S. Credit Agreement. The Notes are unsecured senior subordinated notes and rank behind all existing and future senior debt, including debt under
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During January 2000, we entered into a swap agreement of five years duration pursuant to which a notional $200.0 million of our U.S. floating rate debt was exchanged for fixed rate debt. The fixed rate interest was 7.15%. In October 2002, the terms of this swap were amended pursuant to which the interest rate was reduced to 5.86% and the term of the agreement was extended for an additional three years. During March 2003, we entered into a swap agreement of five years duration pursuant to which a notional $350.0 million of our U.S. floating rate debt was exchanged for fixed rate debt. The fixed rate interest is 3.15%. These swaps have been designated as cash flow hedges of future interest payments of our LIBOR based U.S. floor plan borrowings.
As of September 30, 2003, we had approximately $10.8 million of cash available to fund operations and future acquisitions. In addition, as of September 30, 2003, approximately $300.0 million was available for borrowing under our credit agreements. Availability under the U.S. Credit Agreement is not currently limited by the credit agreement’s borrowing base collateral limitation (in general, the borrowing base equals certain of our allowable domestic tangible assets plus $300.0 million). Borrowings used to finance the cost of domestic acquisitions and domestic capital construction projects will typically increase tangible assets, allowing us to access borrowing capacity that may not otherwise be available due to the base collateral limitation in the U.S. Credit Agreement.
In March 2002, we acquired Sytner Group plc, a publicly traded automotive retailer operating in excess of 60 franchises in the United Kingdom, pursuant to an all cash tender offer. Total consideration for Sytner amounted to approximately $140.0 million. In addition, we assumed approximately $22.4 million of Sytner’s debt. As an alternative to receiving all or any part of the cash consideration receivable under the offer, Sytner shareholders could elect to receive loan notes. Approximately $40.0 million of such loan notes were issued pursuant to this election. The loan notes matured in July 2003. The funds used to repay these notes were held in escrow by the Royal Bank of Scotland for the benefit of the note holders. The loan notes were offset against the escrow funds in our consolidated balance sheets.
During the nine months ended September 30, 2003, net cash provided by operations amounted to $84.0 million. Net cash used in investing activities during the nine months ended September 30, 2003 totaled $223.8 million, including $124.3 million related to net capital expenditures. Net cash provided by financing activities during the nine months ended September 30, 2003 totaled $117.6 million.
We have a number of capital projects planned or underway relating to the expansion and renovation of our retail automotive operations. Historically, we have financed such capital expenditures with cash flow from operations and borrowings under our credit agreements. In the past, we have also entered into sale-leaseback transactions, including sale-leaseback transactions with Automotive Group Realty, LLC (“AGR”), a wholly owned subsidiary of Penske Corporation. We made lease payments to AGR totaling $1.1 and $3.6 million
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In connection with an acquisition of dealerships completed in October 2000, we agreed to make a contingent payment in cash to the extent 841,476 shares of common stock issued as consideration for the acquisition are sold subsequent to the fifth anniversary of the transaction and have a market value of less than $12.00 per share at the time of sale. We will be forever released from this guarantee in the event the average daily closing price of our common stock for any 90 day period subsequent to the fifth anniversary of the transaction exceeds $12.00 per share. In the event we are required to make a payment relating to this guarantee, such payment would result in the revaluation of the common stock issued in the transaction, resulting in a reduction of additional paid-in-capital. We have further granted the seller a put option pursuant to which we may be required to repurchase no more than 108,333 shares for $12.00 per share on each of the first five anniversary dates of the transaction. To date, no payments have been made by us relating to the put option. As of November 1, 2003, the maximum of future cumulative cash payments we may be required to make in connection with the put option amounted to $2.6 million. We also have obligations with respect to past acquisitions totaling approximately $24.5 million over the next three years.
In connection with an acquisition of dealerships completed in October 1997, we agreed that if the acquired companies achieved aggregate specified base earnings levels in any of the five years beginning with the year ending December 31, 1999, we would pay to the sellers for each year in which the acquired companies exceeded base earnings an amount equal to $0.7 million plus defined percentages of the amounts earned in excess of such base earnings for any such year. The total amount of payments to be made pursuant to this agreement is limited to $7.0 million. To date we have paid $3.0 million relating to this agreement. The amount of additional payments, if any, will be determined based upon the financial performance of the acquired business in 2003. Payments relating to this earnings contingency are recorded as additional cost of the acquired dealerships, resulting in an increase in goodwill.
In January 1998, we entered into an agreement with a third party to jointly acquire and manage dealerships in Illinois, Ohio, North Carolina and South Carolina. With respect to any joint venture established pursuant to this agreement, we are required to repurchase our partner’s interest at the end of the five-year period following the date of the acquisition. Pursuant to this arrangement, we have entered into joint venture agreements with respect to the Citrus Chrysler and Honda of Mentor dealerships. We are required to repurchase our partner’s interest in these joint ventures in November 2003 and July 2008, respectively. We expect the November 2003 payment to be approximately $3.6 million.
We are a holding company whose assets consist primarily of the direct or indirect ownership of the capital stock of our operating subsidiaries. Consequently, our ability to pay dividends is dependent upon the earnings of our subsidiaries and their ability to distribute earnings and other advances and payments to us. The minimum working capital requirement under our franchise agreements could in some cases restrict the ability of our subsidiaries to make distributions, although to date we have not faced any such restrictions.
Our principal source of growth has come from acquisitions of automotive dealerships. We believe that our existing cash flow provided by operating activities and our capital resources, including the liquidity provided by our credit agreements and floor plan financing, will be sufficient to fund our current operations and commitments for the next twelve months. To the extent we pursue additional significant acquisitions, we may need to raise additional capital either through the public or private issuance of equity or debt securities or through additional bank borrowings. We may not have sufficient availability under our credit agreements to finance significant additional acquisitions. In certain circumstances, a public equity offering could require the
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Joint Ventures
From time to time we enter into joint venture arrangements in the ordinary course of business, pursuant to which we acquire dealerships together with a minority investor.
In April 2003, an entity controlled by one of our directors, Lucio A. Noto (the “Investor”), paid approximately $1.8 million (including approximately $0.8 million credited from prior earnings retroactive to March 1, 2001) for a 6.5% interest in one of the Company’s subsidiaries, UAG Connecticut I, LLC, which entitles the Investor to 20% of the operating profits of UAG Connecticut I. In addition, the Investor has an option to purchase up to a 20% interest in UAG Connecticut I for specified amounts. The Investor has also guaranteed 20% of UAG Connecticut I’s lease obligation to AGR, our landlord of the facility at which the dealership operates. In exchange for that guarantee, the Investor will be entitled to 20% of any appreciation of the property, which appreciation would otherwise accrue to AGR at the time of sale, and the Investor is responsible to AGR for any corresponding depreciation of the property at the time of sale, which obligation shall be secured solely by the Investor’s ownership interest in UAG Connecticut I, LLC.
In April 2003, we formed a joint venture to own and operate three BMW dealerships in and around Munich, Germany. Our joint venture partner in Germany is Peter Reisacher. We contributed approximately $5.0 million for a 50% interest and Mr. Reisacher contributed approximately $5.0 million for a 50% interest in the joint venture.
Cyclicality
Unit sales of motor vehicles, particularly new vehicles, historically have been cyclical, fluctuating with general economic cycles. During economic downturns, the automotive retailing industry tends to experience similar periods of decline and recession as the general economy. We believe that the industry is influenced by general economic conditions and particularly by consumer confidence, the level of personal discretionary spending, fuel prices, interest rates and credit availability.
Seasonality
Our business is modestly seasonal overall. Our operations generally experience higher volumes of vehicle sales in the second and third quarters of each year, due in part to consumer buying trends and the introduction of new vehicle models. Also, demand for cars and light trucks is generally lower during the winter months than in other seasons, particularly in regions of the United States where dealerships may be subject to harsh winters. Accordingly, we expect our revenues and profitability to be generally lower in our first and fourth quarters as compared to our second and third quarters. The greatest seasonalities exist with the dealerships in the northeastern United States, for which the second and third quarters are the strongest with respect to vehicle-related sales. The service and parts business at all dealerships experiences relatively modest seasonal fluctuations.
New Accounting Pronouncements
See Note 1, Interim Financial Statements of the Notes to Consolidated Condensed Financial Statements.
Effects of Inflation
We believe that the relatively moderate rates of inflation over the last few years have not had a significant impact on revenues or profitability. We do not expect inflation to have any near-term material effects on the sale of our products and services. However, there can be no assurance that there will be no such effect in the future.
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We finance substantially all of our inventory through various revolving floor plan arrangements and we are party to the U.S. and U.K. credit agreements. Such arrangements contain interest rates that vary based on the prime rate or U.S. or U.K. LIBOR. Such rates have historically increased during periods of increasing inflation. We do not believe that we would be placed at a competitive disadvantage should interest rates increase due to increased inflation since most other automotive dealerships have similar floating rate borrowing arrangements and we have fixed interest rates on $550.0 million of floor plan debt through the first quarter of 2008 by entering into interest rate swaps.
Forward Looking Statements
This quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements generally can be identified by the use of terms such as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “intend,” “plan,” “estimate,” “predict,” “potential,” “forecast,” “continue” or variations of such terms, or the use of these terms in the negative. Forward-looking statements include statements regarding our current plans, forecasts, estimates, beliefs or expectations, including, without limitation, statements with respect to:
Forward-looking statements involve known and unknown risks and uncertainties and are not assurances of future performance. Actual results may differ materially from anticipated results due to a variety of factors, including the factors identified in the reports and our other periodic filings with the SEC. Important factors that could cause actual results to differ materially from our expectations include the following:
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Furthermore,
We urge you to carefully consider these risk factors in evaluating all forward-looking statements regarding our business. Readers of this report are cautioned not to place undue reliance on the forward-looking statements contained in this report. All forward-looking statements attributable to us are qualified in their entirety by this cautionary statement. Except to the extent required by the federal securities laws and Securities and Exchange Commission rules and regulations, we have no intention or obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rates. We are exposed to market risk from changes in the interest rates on a significant portion of our outstanding indebtedness. Outstanding balances under our U.S. and U.K. credit agreements bear interest at a variable rate based on a margin over LIBOR, as defined. Based on the amount outstanding as of September 30, 2003, a 100 basis point change in interest rates would result in an approximate $4.8 million change to our annual interest expense. Similarly, amounts outstanding under floor plan financing arrangements bear interest at a variable rate based on a margin over defined LIBOR or Prime rates. We continually evaluate our exposure to interest rate fluctuations and follow established policies and procedures to implement strategies designed to manage the amount of variable rate indebtedness outstanding at any point in time in an effort to reduce the effect of interest rate fluctuations on our earnings and cash flows. We are currently party to swap agreements pursuant to which a notional $200.0 million of our floating rate floor plan debt was exchanged for 5.86% fixed rate debt through January 2008 and a notional $350.0 million of our floating rate floor plan debt was exchanged for 3.15% fixed rate debt through March 2008. Based on an average of the aggregate amounts outstanding under our floor plan financing arrangements, a 100 basis point change in interest rates would result in an approximate $4.2 million change to our annual floor plan interest expense.
Interest rate fluctuations affect the fair market value of our fixed rate debt, including the Notes and certain seller financed promissory notes, but do not impact our earnings or cash flows.
Foreign Currency Exchange Rates.We currently have operations in the U.K. and Brazil and have investments in Germany and Mexico. In each of these markets, the local currency is the functional currency. Due to our intent to remain permanently invested in these foreign markets, we do not hedge against foreign currency fluctuations. Other than the U.K., our foreign operations are not significant. In the event we change our intent with respect to the investment in any of our international operations, we would expect to implement strategies designed to manage those risks in an effort to reduce the effect of foreign currency fluctuations on our earnings and cash flows.
In common with other automotive retailers, we purchase certain of our new vehicle and parts inventories from foreign manufacturers. Although we purchase the majority of our inventories in the local functional currency, including the U.S. Dollar, our business is subject to certain risks, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions and foreign exchange rate volatility which may influence such manufacturers’ ability to provide their products at competitive prices in the local jurisdictions. Our future results could be materially and adversely impacted by changes in these or other factors.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that both non-financial and financial information required to be disclosed in our periodic reports is recorded, processed, summarized and reported in a timely fashion. Based on the most recent evaluation, the principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective. In addition, we maintain internal controls designed to provide the Company with the information it requires for accounting and financial reporting purposes. In the third quarter we enhanced our internal controls by (1) documenting an internal policy that generally requires review and approval of all original accounting entries, and (2) adding certain procedures to our internal audits. Other than these additions, there were no changes in our internal controls over financial reporting that occurred during our last fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Item 1 — Legal Proceedings
The Company and its subsidiaries are involved in litigation that has arisen in the ordinary course of business. None of these matters, either individually or in the aggregate, are expected to have a material adverse effect on the Company’s results of operations or financial condition.
Item 6 — Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Exhibits
(b) Reports on Form 8-K.
The Company filed the following Current Report on Form 8-K during the quarter ended September 30, 2003:
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 13, 2003
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