SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _________ to ___________
COMMISSION FILE NUMBER: 1-13107
AUTONATION, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 73-1105145
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
110 S.E. 6TH STREET
FT. LAUDERDALE, FLORIDA 33301
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (954) 769-6000
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No[ ]
On April 30, 2002 the registrant had 321,525,332 outstanding shares of
common stock, par value $.01 per share.
AUTONATION, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page
----
ITEM 1. FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Balance Sheets as
of March 31, 2002 and December 31, 2001..................... 3
Unaudited Condensed Consolidated Income Statements
for the Three Months Ended March 31, 2002 and 2001.......... 4
Unaudited Condensed Consolidated Statement of Shareholders'
Equity for the Three Months Ended March 31, 2002............ 5
Unaudited Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2002 and 2001.......... 6
Notes to Unaudited Condensed Consolidated Financial Statements. 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..... 31
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.............................................. 32
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................... 33
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AUTONATION, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
March 31, December 31,
2002 2001
---------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................. $ 105.5 $ 128.1
Receivables, net ...................................... 808.3 802.2
Inventory ............................................. 2,363.1 2,178.5
Other current assets .................................. 44.3 43.7
---------- ----------
Total Current Assets ............................. 3,321.2 3,152.5
RESTRICTED ASSETS ........................................ 209.2 199.9
PROPERTY AND EQUIPMENT, NET .............................. 1,606.3 1,583.3
INTANGIBLE ASSETS, NET ................................... 2,949.8 2,865.2
OTHER ASSETS.............................................. 259.1 264.5
---------- ----------
Total Assets ..................................... $ 8,345.6 $ 8,065.4
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Floorplan notes payable ............................... $ 2,031.0 $ 1,900.7
Accounts payable ...................................... 162.4 149.7
Notes payable and current maturities of
long-term debt ................................... 9.2 7.9
Other current liabilities ............................. 579.3 519.8
---------- ----------
Total Current Liabilities ........................ 2,781.9 2,578.1
LONG-TERM DEBT, NET OF CURRENT MATURITIES ................ 644.3 647.3
DEFERRED INCOME TAXES .................................... 855.6 853.8
OTHER LIABILITIES ........................................ 160.8 158.3
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, par value $.01 per share;
5,000,000 shares authorized; none issued ........... -- --
Common stock, par value $.01 per share;
1,500,000,000 shares authorized;
478,357,691 and 476,472,730 shares
issued including shares held in
treasury, respectively ............................... 4.8 4.8
Additional paid-in capital ............................ 4,694.2 4,674.0
Retained earnings ..................................... 973.3 881.6
Accumulated other comprehensive income ................ .7 1.6
Treasury stock, at cost; 157,552,709 and
154,759,709 shares held, respectively ................ (1,770.0) (1,734.1)
---------- ----------
Total Shareholders' Equity ....................... 3,903.0 3,827.9
---------- ----------
Total Liabilities and Shareholders' Equity ....... $ 8,345.6 $ 8,065.4
========== ==========
The accompanying notes are an integral part of these statements.
3
AUTONATION, INC.
UNAUDITED CONDENSED CONSOLIDATED INCOME STATEMENTS
(In millions, except per share data)
Three Months Ended
March 31,
-------------------------------
2002 2001
----------- -----------
REVENUE ........................................ $ 4,750.7 $ 4,887.6
Cost of operations ............................. 4,029.0 4,195.1
----------- -----------
GROSS MARGIN ................................... 721.7 692.5
Selling, general and administrative expenses ... 548.1 550.1
Depreciation ................................... 15.7 15.6
Amortization ................................... .6 20.0
Loan and lease underwriting losses (income),net (.2) .6
Restructuring and impairment recoveries, net ... -- (.8)
Other losses ................................... .4 --
----------- -----------
OPERATING INCOME ............................... 157.1 107.0
Other interest expense ......................... (11.7) (11.0)
Interest income ................................ 3.3 1.4
Other expense, net ............................. (.2) (.1)
----------- -----------
INCOME BEFORE INCOME TAXES ..................... 148.5 97.3
Provision for income taxes ..................... 56.8 37.4
----------- -----------
NET INCOME ..................................... $ 91.7 $ 59.9
=========== ===========
BASIC EARNINGS PER SHARE:
Net income ............................... $ .29 $ .17
=========== ===========
Weighted average common shares outstanding 321.4 343.8
=========== ===========
DILUTED EARNINGS PER SHARE:
Net income ............................... $ .28 $ .17
=========== ===========
Weighted average common shares outstanding 325.9 344.3
=========== ===========
The accompanying notes are an integral part of these statements.
4
AUTONATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In millions)
Accumulated
Additional Other
Common Paid-in Retained Comprehensive Treasury
Stock Capital Earnings Income Stock Total
------- ----------- -------- ------------- ----------- ---------
BALANCE AT DECEMBER 31, 2001....... $ 4.8 $4,674.0 $ 881.6 $ 1.6 $(1,734.1) $3,827.9
Purchases of treasury stock.... -- -- -- -- (35.9) (35.9)
Exercise of stock options..... -- 20.2 -- -- -- 20.2
Other comprehensive loss....... -- -- -- (.9) -- (.9)
Net income..................... -- -- 91.7 -- -- 91.7
------ ------- ------- ------- --------- --------
BALANCE AT MARCH 31, 2002.......... $ 4.8 $4,694.2 $ 973.3 $ .7 $(1,770.0) $3,903.0
====== ======== ======= ======= ========= ========
The accompanying notes are an integral part of these statements.
5
AUTONATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Three Months Ended
March 31,
-------------------------
2002 2001
-------- --------
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income ......................................... $ 91.7 $ 59.9
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation .................................... 15.7 15.6
Amortization .................................... .6 20.0
Amortization of debt issue costs and discounts .. 1.2 .4
Deferred income tax provision ................... 2.8 11.2
Restructuring and impairment recoveries, net .... -- (.8)
Other losses .................................... .4 --
Gain on sale of marketable securities, net ...... -- (.2)
Other ........................................... .2 .3
Changes in assets and liabilities, net of effects
from business combinations and divestitures:
Receivables ............................... (12.2) 9.9
Inventory ................................. (134.6) 171.6
Other assets .............................. .3 (20.3)
Floorplan notes payable ................... 99.9 (162.7)
Accounts payable .......................... 12.5 (2.4)
Other liabilities ......................... 57.0 32.1
-------- --------
135.5 134.6
-------- --------
CASH USED IN INVESTING ACTIVITIES:
Purchases of property and equipment ................ (28.7) (24.0)
Proceeds from sale of property and equipment ....... .3 5.6
Proceeds from assets held for sale ................. .9 26.7
Cash used in business acquisitions, net of
cash acquired ................................... (127.7) (22.0)
Cash received from business divestitures ........... .9 .2
Collections of installment loan receivables
and other related items ......................... 27.2 35.8
Funding of installment loan receivables ............ -- (202.5)
Proceeds from securitizations of installment loan
receivables ..................................... -- 173.2
Net changes in restricted cash ..................... 1.9 (11.6)
Purchases of restricted investments ................ (22.3) --
Sales of restricted investments .................... 9.9 --
Sales of other investments ......................... -- .5
Other .............................................. (.5) 4.4
-------- --------
(138.1) (13.7)
-------- --------
CASH USED IN FINANCING ACTIVITIES:
Net payments under revolving credit facilities ..... -- (14.0)
Purchases of treasury stock ........................ (35.9) (98.2)
Payments of notes payable and long-term debt ....... (3.0) (7.9)
Exercise of stock options, including income tax
benefit of $1.3.................................. 20.2 --
Other .............................................. (.1) --
-------- --------
(18.8) (120.1)
-------- --------
CASH PROVIDED BY (USED IN) CONTINUING OPERATIONS ...... (21.4) .8
CASH USED IN DISCONTINUED OPERATIONS .................. (1.2) --
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...... (22.6) .8
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ...... 128.1 84.6
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............ $ 105.5 $ 85.4
======== ========
The accompanying notes are an integral part of these statements.
6
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data)
1. INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements
include the accounts of AutoNation, Inc. and its subsidiaries (the "Company")
and have been prepared by the Company pursuant to the rules and regulations of
the Securities and Exchange Commission. All significant intercompany accounts
and transactions have been eliminated. Certain information related to the
Company's organization, significant accounting policies and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted. These unaudited condensed consolidated financial statements reflect, in
the opinion of management, all material adjustments (which include only normal
recurring adjustments) necessary to fairly state, in all material respects, the
financial position and the results of operations for the periods presented and
the disclosures herein are adequate to make the information presented not
misleading in any material respect.
Operating results for interim periods are not necessarily indicative of
the results that can be expected for a full year. These interim financial
statements should be read in conjunction with the Company's audited consolidated
financial statements and notes thereto included in the Company's most recent
Annual Report on Form 10-K.
In order to maintain consistency and comparability between periods
presented, certain amounts have been reclassified from the previously reported
financial statements to conform with the financial statement presentation of the
current period.
2. INVENTORY AND FLOORPLAN NOTES PAYABLE
Inventory consists of the following:
March 31, December 31,
2002 2001
--------- ------------
New vehicles...................................... $1,860.9 $1,757.5
Used vehicles..................................... 352.7 273.5
Parts, accessories and other...................... 149.5 147.5
-------- --------
$2,363.1 $2,178.5
======== ========
At March 31, 2002 and December 31, 2001, floorplan notes payable
totaled $2.0 billion and $1.9 billion, respectively. The Company finances
vehicle inventory through secured floorplan facilities at a LIBOR-based rate of
interest primarily with manufacturers' captive finance subsidiaries, as well as
independent financial institutions. As of March 31, 2002, capacity under the
floorplan credit facilities was approximately $3.5 billion.
A summary of the Company's floorplan interest expense and floorplan
assistance from manufacturers, both components of Cost of Operations in the
accompanying Unaudited Condensed Consolidated Income Statements, related to new
vehicles is as follows:
Three Months Ended
March 31,
-------------------------
2002 2001
--------- ---------
Floorplan interest expense.................... $ (18.2) $ (45.6)
Floorplan assistance.......................... $ 29.4 $ 37.9
7
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. RESTRICTED ASSETS AND REINSURANCE
The Company has restricted cash and investments primarily held in trust
accounts in accordance with the terms and conditions of certain reinsurance
agreements to secure the payments of outstanding losses and loss adjustment
expenses relating to its captive insurance subsidiaries. Restricted investments
consist primarily of marketable corporate and government debt securities that
are classified as available-for-sale.
A summary of restricted assets is as follows:
March 31, December 31,
2002 2001
------- ------------
Restricted cash......................... $ 43.2 $ 43.7
Restricted investments.................. 166.0 156.2
------- -------
$ 209.2 $ 199.9
======= =======
At March 31, 2002 and December 31, 2001, current unearned premiums and
loss reserves related to the Company's reinsurance programs were included in
Other Current Liabilities and long term unearned premiums and loss reserves were
included in Other Liabilities in the Unaudited Condensed Consolidated Balance
Sheets as follows:
March 31, December 31,
2002 2001
----------- ------------
REINSURANCE RESERVES
--------------------
Unearned premiums - current portion.............. $ 78.4 $ 76.4
Unearned premiums - long-term portion............ 93.8 91.2
----------- ------------
Total unearned premiums.................... $ 172.2 $ 167.6
=========== ============
Loss reserves - current portion.................. $ 11.3 $ 13.0
Loss reserves - long-term portion................ 2.0 3.1
----------- -----------
Total loss reserves........................ $ 13.3 $ 16.1
=========== ============
4. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consist of the following:
March 31, December 31,
2002 2001
----------- ------------
Revolving credit facilities................................... $ -- $ --
Senior unsecured notes, net of unamortized
discount of $5.3 million and $5.5 million, respectively... 444.7 444.5
Other debt.................................................... 208.8 210.7
----------- ------------
653.5 655.2
Less: current portion........................................ (9.2) (7.9)
----------- ------------
Long-term debt, net of current maturities........... $ 644.3 $ 647.3
=========== ============
The Company has two revolving credit facilities with an aggregate
borrowing capacity of $500.0 million. The 364-day revolving credit facility
provides borrowings up to $200.0 million at a LIBOR-based interest rate. The
five-year facility provides borrowings up to $300.0 million at a LIBOR-based
interest rate. These facilities are secured by a pledge of the capital stock of
certain subsidiaries of the Company, which directly or indirectly own
substantially all of the Company's dealerships, and are guaranteed by
substantially all of the Company's subsidiaries. As of March 31, 2002, no
amounts were drawn on these revolving credit facilities.
8
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company also has $450.0 million of 9.0% senior unsecured notes due
August 1, 2008. The senior unsecured notes are guaranteed by substantially all
of the Company's subsidiaries.
Within the meaning of Regulation S-X, Rule 3-10, AutoNation, Inc. (the
parent company) has no independent assets or operations, the guarantees of its
subsidiaries are full and unconditional and joint and several, and any
subsidiaries other than the guarantor subsidiaries are minor.
At March 31, 2002, the Company had $151.4 million outstanding under two
mortgage facilities with automotive manufacturers' captive finance subsidiaries.
Each facility has an aggregate capacity of $150.0 million, bears interest at a
LIBOR-based interest rate and is secured by mortgages on certain of the
Company's dealerships' real property.
The Company's revolving credit facilities, the indenture for the
Company's senior unsecured notes and the Company's mortgage facilities contain
numerous customary financial and operating covenants that place significant
restrictions on the Company, including the Company's ability to incur additional
indebtedness, to create liens or other encumbrances, to make certain payments
(including dividends and share repurchases) and investments, and to sell or
otherwise dispose of assets and merge or consolidate with other entities. The
revolving credit facilities and the indenture for the Company's senior unsecured
notes also require the Company to meet certain customary financial ratios and
tests. At March 31, 2002, the Company was in compliance in all material respects
with the requirements of the revolving credit facilities and the indenture for
the Company's senior unsecured notes.
5. SHAREHOLDERS' EQUITY
During the three months ended March 31, 2002, the Company repurchased
2.8 million shares of its common stock for an aggregate purchase price of $35.9
million. From 1998 through March 31, 2002, an aggregate of 157.7 million shares
of common stock have been acquired under the Company's share repurchase programs
for an aggregate purchase price of $1.8 billion, leaving approximately $224.3
million available for share repurchases under the current program authorized by
the Company's Board of Directors.
6. INCOME TAXES
Income taxes have been provided based upon the Company's anticipated
annual effective income tax rate.
In 1997 and 1999, the Company engaged in certain transactions that are
of a type that the Internal Revenue Service has indicated it intends to
challenge. Approximately $680 million of the Company's net deferred tax
liabilities totaling $855.6 million at March 31, 2002 relates to these
transactions, including a significant portion that relates to a transaction that
generally had the effect of accelerating certain future projected tax
deductions. These transactions are currently under review by the Internal
Revenue Service. The Company believes that its tax returns appropriately reflect
such transactions, and that it has established adequate reserves with respect to
any tax liabilities relating to these transactions. However, an unfavorable
settlement or adverse resolution of these matters could have a material adverse
effect on the Company's financial condition, results of operations and cash
flows.
7. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the
weighted-average number of common shares outstanding during the period. Diluted
earnings per share is based on the combined weighted-average number of common
shares and common share equivalents outstanding which include, where
appropriate, the assumed exercise or conversion of options and warrants.
9
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The computation of weighted-average common and common equivalent shares
used in the calculation of basic and diluted earnings per share is shown below:
Three Months Ended
March 31,
--------------------------
2002 2001
----- -----
Weighted-average common shares outstanding used to
calculate basic earnings per share......................... 321.4 343.8
Effect of dilutive options and warrants...................... 4.5 .5
----- -----
Weighted-average common and common equivalent shares used to
calculate diluted earnings per share....................... 325.9 344.3
===== =====
At March 31, 2002 and 2001, the Company had approximately 55.2 million
stock options outstanding of which 18.2 million and 45.0 million, respectively,
have been excluded from the computation of diluted earnings per share since they
are anti-dilutive.
8. COMPREHENSIVE INCOME
Comprehensive income (loss) is as follows:
Three Months Ended
March 31,
-------------------------
2002 2001
------ ------
Net income.................................................. $ 91.7 $ 59.9
Other comprehensive loss.................................... (.9) (.6)
------ ------
Comprehensive income........................................ $ 90.8 $ 59.3
====== ======
9. BUSINESS ACQUISITIONS AND DIVESTITURES
Businesses acquired through March 31, 2002 were accounted for under the
purchase method of accounting and are included in the unaudited condensed
consolidated financial statements from the date of acquisition.
During the three months ended March 31, 2002, the Company acquired eight
automotive retail franchises. During the three months ended March 31, 2001, the
Company acquired one automotive franchise. The Company paid approximately $122.1
million and $20.2 million, respectively, in cash for these acquisitions. During
the three months ended March 31, 2002 and 2001, the Company also paid
approximately $5.6 million and $1.8 million, respectively, in deferred purchase
price for certain prior year automotive retail acquisitions.
Purchase price allocations for 2002 are subject to final adjustment due
to their recent closing date. Preliminary purchase price allocations for
business combinations for the three months ended March 31, were as follows:
2002 2001
------- -------
Property and equipment....................................... $ 29.0 $ 20.7
Goodwill and other intangibles not subject to amortization... 82.2 3.4
Other intangibles subject to amortization.................... .5 -
Working capital.............................................. 11.3 (7.8)
Debt assumed................................................. (1.1) 3.2
Other assets................................................. .2 .7
------- -------
Cash used in acquisitions, net of cash acquired.............. $ 122.1 $ 20.2
======= =======
10
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company's unaudited pro forma consolidated results of operations
assuming acquisitions accounted for under the purchase method of accounting had
occurred at January 1, 2001 are as follows for the three months ended March 31:
2002 2001
--------- ---------
Revenue...................................... $ 4,829.7 $ 5,021.5
Net income................................... $ 94.1 $ 62.6
Diluted earnings per share................... $ .29 $ .18
The unaudited pro forma results of operations are presented for
informational purposes only and may not necessarily reflect the future results
of operations of the Company or what the results of operations would have been
had the Company owned and operated these businesses as of the beginning of each
period presented.
10. FINANCE UNDERWRITING AND ASSET SECURITIZATIONS
In December 2001, the Company decided to exit the business of
underwriting retail automobile loans for customers at its dealerships, which it
determined was not a part of the Company's core automotive retail business. The
Company continues to provide automotive loans for its customers through
unrelated third party finance sources, which historically had provided more than
95% of the auto loans made to its customers.
Through 2001, the Company sold installment loan finance receivables in
securitization transactions through unrelated financial institutions. When the
Company sold receivables in these securitization transactions, it retained
interest-only strips, one or more subordinated tranches, servicing rights, and
cash reserve accounts, all of which were classified as investments in
securitizations. The remaining finance leases, installment loans and investments
in securitizations are expected to be substantially collected over the next
three years. Finance receivables due within one year totaling $53.6 million and
$67.2 million at March 31, 2002 and December 31, 2001, respectively, are
classified as Receivables, Net in the accompanying Unaudited Condensed
Consolidated Balance Sheets. Finance receivables due after one year totaling
$91.9 million and $108.5 million at March 31, 2002 and December 31, 2001,
respectively, are classified as Other Assets, Net in the accompanying Unaudited
Condensed Consolidated Balance Sheets.
Finance receivables consist of the following:
March 31, December 31,
2002 2001
--------- ------------
Finance leases..................................... $ 20.4 $ 34.2
Installment loans.................................. 58.7 67.7
Investments in securitizations..................... 66.4 73.8
--------- -------
Total finance receivables...................... $ 145.5 $ 175.7
========= =======
Interest-only strips, which represent the present value of the estimated
future residual cash flows from securitized receivables, are carried at fair
value. Certain of the Company's interest-only strips are marked to fair value
with unrealized gains or losses recorded directly to income. Other of the
Company's interest-only strips are marked to fair value with unrealized gains
and losses recorded through other comprehensive income unless an other than
temporary impairment occurs in the valuation of the interest-only strip in which
case the impairment is recorded directly to income. The Company estimates fair
value utilizing valuation models based on the present value of future expected
cash flows which use the Company's best estimate and historical experience of
key assumptions, including credit losses, voluntary prepayment speeds, and
discount rates commensurate with the risks involved. The Company follows the
provisions of EITF Issue No. 99-20, "Recognition of Interest Income and
Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets".
11
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Until December 2001, the Company securitized installment loan receivables
through the issuance of asset-backed notes through non-consolidated qualified
special purpose entities under a shelf registration statement. The Company
provides credit enhancements related to these notes in the form of a 1%
over-collateralization, a reserve fund and a third party surety bond. The
Company retains responsibility for servicing the loans for which it is paid a
servicing fee. The Company in turn has a sub-servicing arrangement with a third
party. Included in Other Current Liabilities and Other Liabilities at March 31,
2002, is the current portion of the net servicing liability of $3.7 million and
the long-term portion of the net servicing liability of $11.0 million,
respectively, relating to these arrangements. The servicing liability relates to
loans that have been sold and continue to be serviced by the Company. The
servicing liability is the present value, discounted at 7.4%, of the estimated
excess of future sub-servicing costs over the future estimated servicing income.
Substantially all of the beneficial interests in the debt of the qualified
special purpose entities are held by unrelated third parties. The investors and
the securitization trusts have no recourse to the Company's assets for failure
of debtors to pay when due, except to the extent of the Company's remaining
investments in securitizations.
During the three months ended March 31, 2001, the Company recognized a
pre-tax gain on the securitization of installment loan receivables of $3.2
million, which has been included in Loan and Lease Underwriting Losses (Income),
Net in the Unaudited Condensed Consolidated Income Statements.
At March 31, 2002, included in investments in securitizations are
interest-only strips valued at $45.4 million and cash reserve accounts valued at
$21.0 million, which have an aggregate weighted-average life of 1.17 years. The
sensitivity of the current fair value of the investments in securitizations at
March 31, 2002 to immediate 10 percent and 20 percent unfavorable changes in
assumptions are presented in the table below. These sensitivities are
hypothetical and should not be considered to be predictive of future
performance. As the figures indicate, the change in fair value based on a 10
percent variation in assumptions cannot necessarily be extrapolated because the
relationship of the change in assumption to the change in the indicated fair
value may not be linear. Also, in this table, the effect of a variation in a
particular assumption on the fair value of the investments in securitizations is
calculated independently from any change in the other assumptions. In reality,
changes in one factor may contribute to changes in another (for example,
increases in market interest rates may result in lower prepayments and increased
credit losses), which might magnify or counteract the sensitivities.
Furthermore, the disclosed estimated fair values should not be considered
indicative of future earnings on these assets. The current rate assumptions
below reflect the expected performance of the total loans securitized as of
March 31, 2002.
$ Effect On Investments in
Securitizations of
-------------------------------
Current 10% Change 20% Change
Description Rate Assumption in Assumption in Assumption
----------- --------------- ------------- -------------
Voluntary prepayment speed (ABS)....................... 1.50% $ 3.2 $ 5.8
Expected credit losses (annual rate, excluding
accrued interest).................................. 2.92% $ 4.4 $ 8.7
Discount rate on residual cash flows (annual rate)..... 9.15% $ 1.0 $ 1.9
As of March 31, 2002 and 2001, the Company had expected static pool credit
losses on its total serviced installment loan portfolio of 3.86% and 2.58%,
respectively, (3.55% and 2.27%, respectively, excluding accrued interest).
Static pool credit losses represent estimated lifetime losses as a percentage of
total amounts underwritten.
12
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following summarizes information about total serviced installment
loans and delinquencies and net credit losses:
March 31, 2002 December 31, 2001
-------------------------------------- -----------------------------------
Total Principal Total Principal
Principal Amount of Loans Principal Amount of Loans
Amount 60 Days or More Amount 60 Days or More
of Loans Past Due of Loans Past Due
----------- --------------- --------- ----------------
Loans securitized........................ $ 1,090.4 $ 9.1 $ 1,275.9 $ 12.3
Loans retained on balance sheet.......... 58.7 3.6 67.7 5.5
---------- -------- --------- -------
Total loans serviced..................... $ 1,149.1 $ 12.7 $ 1,343.6 $ 17.8
========== ======== ========= =======
Net credit losses are charge-offs less recoveries and are based on total
installment loans serviced. Net credit losses, including accrued interest,
during the three months ended March 31, 2002 and 2001 totaled $8.9 million and
$8.8 million, respectively.
11. RESTRUCTURING ACTIVITIES AND IMPAIRMENT CHARGES
During the fourth quarter of 1999, the Company approved a plan to
restructure certain of its operations. The restructuring plan was comprised of
the following major components: (1) exiting the used vehicle megastore business;
and (2) reducing the corporate workforce. The restructuring plan also included
divesting of certain non-core franchised dealerships. Approximately 2,000
positions were eliminated as a result of the restructuring plan of which 1,800
were megastore positions and 200 were corporate positions. These restructuring
activities resulted in pre-tax charges of $443.7 million in 1999, of which
$416.4 million appears as Restructuring and Impairment Charges (Recoveries), Net
in the Company's 1999 Consolidated Income Statement. These pre-tax charges
include $286.9 million of asset impairment charges; $103.3 million of reserves
for residual value guarantees for closed lease properties; $26.2 million of
severance and other exit costs; and $27.3 million of inventory related costs.
The $286.9 million asset impairment charge consists of: $244.9 million of
megastore and other property impairments; $26.6 million of goodwill impairment
reserves for the divestiture of certain non-core franchised automotive
dealerships; and $15.4 million of information systems impairments. Of the $443.7
million restructuring reserve recorded, $10.8 million of severance was paid in
1999 and $53.7 million of asset impairments and write-offs were recorded during
the fourth quarter of 1999.
The Company continues to dispose of its closed megastores and other
properties, including closed lease properties, through sales to third parties.
At March 31, 2002, properties held for sale total $86.4 million of which
properties with total asset value of $68.5 million remain to be sold of the
total $285.3 million identified as part of the restructure plan. These
properties continue to be aggressively marketed. The majority of these
properties will be disposed of by the end of 2002.
The following summarizes the activity in the Company's restructuring
and impairment reserves for the three months ended March 31, 2002:
Deductions
Balance Amounts Charged ---------------------- Balance
December 31, 2001 (Credited) to Income Cash Non-cash March 31, 2002
----------------- -------------------- ---- --------- --------------
Asset reserves:
Asset impairment....... $ 68.4 $ -- $ -- $ (.9) $ 67.5
Accrued liabilities:
Severance and other
exit cost.............. .2 -- -- -- .2
----------- ------- ----- -------- -------
$ 68.6 $ -- $ -- $ (.9) $ 67.7
=========== ======= ===== ======== =======
13
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following summarizes the activity in the Company's restructuring
and impairment reserves for the three months ended March 31, 2001:
Deductions
Balance Amounts Charged ---------------------- Balance
December 31, 2000 (Credited) to Income Cash Non-cash March 31, 2001
----------------- -------------------- ---- --------- --------------
Asset reserves:
Asset impairment....... $ 161.4 $ (1.2) $ -- $ (42.9) $ 117.3
Accrued liabilities:
Severance and other
exit cost........... 1.2 .4 (.4) -- 1.2
----------- ------- ----- -------- -------
$ 162.6 $ (.8) $ (.4) $ (42.9) $ 118.5
=========== ======= ===== ========= =======
The net amount credited to income in 2001, primarily consists of net
gains on sold properties.
12. COMMITMENTS AND CONTINGENCIES
The Company is involved, and will continue to be involved, in numerous
legal proceedings arising out of the conduct of its business, including
litigation with customers, employment related lawsuits, class actions, purported
class actions and actions brought by governmental authorities.
In an action filed in Florida state court in 1999, one of the Company's
subsidiaries was accused of violating, among other things, the Florida Motor
Vehicle Retail Sales Finance Act and the Florida Deceptive and Unfair Trade
Practices Act by allegedly failing to deliver executed copies of retail
installment contracts to customers of the Company's former used vehicle
megastores. On October 31, 2000, the court certified the class of customers on
whose behalf the action would proceed. In July 2001, Florida's Fourth District
Court of Appeals upheld the certification of the class.
In October 2000, the California Department of Motor Vehicles
("California DMV") brought an action against one of the Company's subsidiaries'
dealerships for alleged customer fraud as well as several other claims. In April
2001, the Company settled the California DMV action and a related action by the
State of California. In April 2002, the Company reached a final settlement of
three civil class action lawsuits (which have been consolidated) relating to
this matter. The estimated payment under the settlement of the three civil class
actions is expected to be approximately $2.0 million, for which the Company is
adequately reserved. Other lawsuits and claims have also been filed or made
against the dealership based on the allegations underlying the California DMV
case.
Many of the Company's Texas dealership subsidiaries have been named in
three class action lawsuits brought against the Texas Automobile Dealers
Association ("TADA") and new vehicle dealerships in Texas that are members of
the TADA. The three actions allege that since January 1994 Texas dealers have
deceived customers with respect to a vehicle inventory tax and violated federal
antitrust and other laws as well. In April 2002, in two of the actions (which
have been consolidated) the state court certified two classes of consumers on
whose behalf the action would proceed. The Company intends to appeal this
decision.
14
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company intends to vigorously defend itself and assert available
defenses with respect to each of the foregoing matters. Further, the Company may
have certain insurance coverage and rights of indemnification with respect to
certain aspects of the foregoing matters. However, a settlement or an adverse
resolution of one or more of these matters may result in the payment of
significant costs and damages, which could have a material adverse effect on the
Company's business, financial condition, results of operations, cash flows and
prospects.
In addition to the foregoing cases, the Company is also a party to
numerous other legal proceedings that arose in the conduct of its business. The
Company does not believe that the ultimate resolution of these matters will have
a material adverse effect on its business, results of operations, financial
condition or cash flows. However, the results of these matters cannot be
predicted with certainty, and an unfavorable resolution of one or more of these
matters could have a material adverse effect on its business, financial
condition, results of operations, cash flows and prospects.
13. DISCONTINUED OPERATIONS
On June 30, 2000, the Company completed the tax-free spin-off of ANC
Rental Corporation ("ANC Rental"). In connection with the spin-off of ANC
Rental, the Company agreed to provide certain guarantees and credit enhancements
with respect to financial and other performance obligations of ANC Rental,
including acting as a guarantor under certain motor vehicle and real property
leases between ANC Rental and Mitsubishi Motor Sales of America, Inc.
("Mitsubishi") and acting as an indemnitor with respect to certain surety bonds
issued on ANC Rental's behalf. The Company is also a party to certain agreements
with ANC Rental (the "ANC Rental Agreements"), including a separation and
distribution agreement, a reimbursement agreement and a tax sharing agreement,
pursuant to which both ANC Rental and the Company have certain obligations. On
November 13, 2001, ANC Rental filed voluntary petitions for reorganization under
Chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court in
Wilmington, Delaware. In connection with ANC Rental's bankruptcy, the Company
was called on to perform under nine of the twelve real property leases between
ANC Rental and Mitsubishi for which it provided guarantees. As a result, the
Company agreed to assume these real property leases, which expire in 2017, in
order to control and attempt to mitigate its exposure relating thereto. In the
fourth quarter of 2001, the Company incurred a pre-tax charge of $20.0 million
to reflect its assumption of the nine leases with Mitsubishi and certain other
costs that it expects to incur as a result of ANC Rental's bankruptcy. The
Company continues to guarantee the remaining three leases with Mitsubishi until
their expiration in 2017, and the Company remains subject to various other ANC
Rental obligations. ANC Rental has been accounted for as a discontinued
operation and, accordingly, the Company expects that additional charges recorded
by it pursuant to the foregoing credit enhancements and guarantees or with
respect to claims under the ANC Rental Agreements, if any, would not impact its
reported results from continuing operations.
15
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company has reached an agreement with Mitsubishi pursuant to which
its aggregate financial exposure relating to motor vehicles leased by ANC Rental
from Mitsubishi is capped at $10.0 million. Although the Company believes its
financial exposure under the agreement will likely decrease significantly in
2002, it could have potential exposure under the agreement for up to five to ten
years. The Company's indemnification obligations with respect to the surety
bonds issued on behalf of ANC Rental are capped at $29.5 million in the
aggregate. The Company could have potential exposure under the indemnification
obligations for approximately five years. Due to the bankruptcy of ANC Rental,
obligations of ANC Rental to the Company under the terms of the ANC Rental
Agreements may be extinguished or its claims against ANC Rental under such
agreements may be unenforceable. These claims could include reimbursement
obligations that ANC Rental may have to the Company in connection with payments
made by the Company with respect to the foregoing credit enhancements and
guarantees, as well as indemnification rights with respect to any payments that
the Company makes to the Internal Revenue Service as a result of audit
adjustments in its consolidated federal income tax returns relating to ANC
Rental's automotive rental businesses prior to the spin-off. Such audit
adjustments, if any, would likely be resolved in the next three to five years.
The Company estimates that, based on its assessment of the risks involved in
each matter and excluding the liabilities associated with the $20.0 million
charge it incurred in the fourth quarter of 2001, its remaining potential
pre-tax financial exposure related to ANC Rental may be in the range of $25.0
million to $60.0 million. However, the exposure is difficult to estimate and the
Company cannot assure that its aggregate obligations under these credit
enhancements, guarantees and ANC Rental Agreements will not be materially above
the range indicated above or that it will not be subject to additional claims as
a result of ANC Rental's bankruptcy filing, which could have a material adverse
effect on the Company's business, financial condition, cash flows and prospects.
14. NEW ACCOUNTING PRONOUNCEMENTS
On June 30, 2001 the Financial Accounting Standards Board (FASB)
finalized and issued Statements of Financial Accounting Standards No. 141,
"Business Combinations" ("SFAS 141") and No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142").
The Company has adopted the provisions of SFAS 141, which requires all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method, eliminating the pooling of interests method. Additionally,
acquired intangible assets should be separately recognized if the benefit of the
intangible asset is obtained through contractual or other legal rights, or if
the intangible asset can be sold, transferred, licensed, rented, or exchanged,
regardless of the acquirer's intent to do so.
The provisions of SFAS 142 applied immediately to all acquisitions
completed after June 30, 2001. Goodwill and intangible assets with indefinite
lives existing at June 30, 2001 were amortized until December 31, 2001.
Effective January 1, 2002 such amortization ceased, as companies were required
to adopt the new rules on that date, resulting in a $19.4 million decrease in
amortization for the three months ended March 31, 2002 compared to the same
period in 2001. Net income for the three months ended March 31, 2001, adjusted
for the impact of amortization, would have been $79.3 million or $.21 per share.
As of the first quarter of calendar year 2002, the Company has, as required,
begun to perform an impairment analysis of intangible assets. SFAS 142 requires
the Company upon adoption and at least annually to reassess the intangible
assets, including goodwill, previously recorded in connection with earlier
purchase acquisitions, as well as their useful lives. Furthermore, the Company
will, as required, complete the first step of the goodwill transition impairment
test by June 30, 2002, which requires determining the fair value of the
reporting unit, as defined by SFAS 142, and comparing it to the carrying value
of the net assets allocated to the reporting unit. If this fair value exceeds
the carrying value, no further analysis is required. If the fair value of the
reporting unit is less than the carrying value of the net assets, the Company
must perform step two of the SFAS 142 impairment test, which requires the
Company to allocate the implied fair value of the reporting unit to all
underlying assets and liabilities, including both recognized and unrecognized
tangible and intangible assets, based on their fair value. Any impairment noted
must be recorded at the date of adoption restating first quarter results, if
necessary. Impairment charges, if any, that result from the
16
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
application of the above test would be recorded as the cumulative effect of a
change in accounting principle in the first quarter of the year ending December
31, 2002.
The Company will not be able to determine the ultimate impact of SFAS
142 on its Consolidated Financial Statements until such time as the Company
applies its provisions and there can be no assurance that the application of
SFAS 142 will not result in a material impairment charge.
Effective January 1, 2002, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supercedes
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed of", and
Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations
- Reporting the Effect of the Disposal of a Segment of a Business and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions"
("APB30"). SFAS 144 establishes a single accounting model for assets to be
disposed of by sale whether previously held and used or newly acquired. SFAS 144
retains the provisions of APB 30 for the presentation of discontinued operations
in the income statement but broadens the presentation to include a component of
an entity. The adoption of SFAS 144 did not have a material impact on the
Company's consolidated financial position, results of operations or cash flows.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
unaudited condensed consolidated financial statements and notes thereto included
under Item 1. In addition, reference should be made to the Company's audited
consolidated financial statements and notes thereto and related Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in the Company's most recent Annual Report on Form 10-K.
CONSOLIDATED RESULTS OF OPERATIONS
For the three months ended March 31, 2002 and 2001, the Company had net
income of $91.7 million and $59.9 million, respectively, and diluted earnings
per share of $.28 and $.17, respectively.
18
REPORTED OPERATING DATA
Historical operating results include the results of acquired businesses
from the date of acquisition for acquisitions accounted for under the purchase
method of accounting. The following table sets forth: (1)the components of total
revenue; (2)the components of gross margin; (3) selling, general and
administrative expenses; (4) store performance; (5) retail vehicle unit sales;
and (6) gross margin per vehicle retailed:
Three Months Ended March 31,
--------------------------------------------------------------------
($ in millions, except per vehicle data) 2002 2001 $ Variance % Variance
---------- --------- ---------- ----------
Revenue:
New vehicle....................... $ 2,813.1 $ 2,867.7 $ (54.6) (1.9)
Used vehicle...................... 947.0 977.1 (30.1) (3.1)
Parts and service................. 611.9 601.5 10.4 1.7
Finance and insurance............. 121.1 111.5 9.6 8.6
Other............................. 257.6 329.8 (72.2) (21.9)
--------- --------- ---------
$ 4,750.7 $ 4,887.6 $ (136.9) (2.8)
========= ========= =========
Gross margin:
New vehicle....................... $ 203.7 $ 193.5 $ 10.2 5.3
Used vehicle...................... 108.5 107.0 1.5 1.4
Parts and service................. 264.8 257.8 7.0 2.7
Finance and insurance............. 121.1 111.5 9.6 8.6
Other............................. 23.6 22.7 0.9 4.0
--------- --------- ---------
721.7 692.5 29.2 4.2
S,G&A - Store........................ 513.0 509.4 (3.6) (0.7)
--------- --------- ---------
Store performance.................... 208.7 183.1 25.6 14.0
S,G&A - Corporate.................... 35.1 40.7 5.6 13.8
Depreciation......................... 15.7 15.6 (0.1)
Amortization......................... 0.6 20.0 19.4
Loan and lease underwriting
losses(income), net.............. (0.2) 0.6 0.8
Restructuring and impairment
recoveries, net................... -- (0.8) (0.8)
Other losses......................... 0.4 -- (0.4)
--------- --------- ---------
Operating income..................... $ 157.1 $ 107.0 $ 50.1 46.8
========= ========= =========
Retail vehicle sales:
New vehicle....................... 104,000 109,000 (5,000) (4.6)
Used vehicle...................... 63,000 65,000 (2,000) (3.1)
--------- --------- ---------
167,000 174,000 (7,000) (4.0)
========= ========= =========
Gross margin per vehicle retailed:
New............................... $ 1,959 $ 1,775 $ 184 10.4
Used.............................. $ 1,722 $ 1,646 $ 76 4.6
Finance and insurance............. $ 725 $ 641 $ 84 13.1
19
The following table sets forth: (1) revenue mix percentages; (2)
operating items as a percentage of revenue; and (3) other operating items as a
percentage of total gross margin.
Three Months Ended March 31,
----------------------------------------
% 2002 % 2001
-------- -------
Revenue mix percentages:
New vehicle........................ 59.2 58.7
Used vehicle....................... 19.9 20.0
Parts and service.................. 12.9 12.3
Finance and insurance.............. 2.6 2.3
Other.............................. 5.4 6.7
-------- -------
100.0 100.0
======== =======
Operating items as a percentage of revenue:
Gross margin:
New vehicle........................ 7.2 6.7
Used vehicle....................... 11.5 11.0
Parts and service.................. 43.3 42.9
Finance and insurance.............. 100.0 100.0
Other.............................. 9.2 6.9
Total......................... 15.2 14.2
S,G&A - Store...................... 10.8 10.4
Store performance.................. 4.4 3.7
S,G&A - Corporate.................. 0.7 0.8
Operating income................... 3.3 2.2
Net income......................... 1.9 1.2
Other operating items as a percentage of total gross margin:
S,G&A - Store...................... 71.1 73.6
Store performance.................. 28.9 26.4
S,G&A - Corporate.................. 4.9 5.9
Total S,G&A........................ 75.9 79.4
Operating income................... 21.8 15.5
Three Months Ended March 31,
-----------------------------------------------------------------
Floorplan Assistance and Expense 2002 % 2001 %
-------------------------------- ---------- ---- --------- -----
New vehicle gross margin, before floorplan. $ 192.5 6.8 $ 201.2 7.0
Floorplan assistance....................... 29.4 1.0 37.9 1.3
Floorplan interest expense................. (18.2) (0.6) (45.6) (1.6)
--------- ---------
New vehicle gross margin, as presented.. $ 203.7 7.2 $ 193.5 6.7
========= =========
New vehicle revenue decreased 1.9% to $2.8 billion for the three months
ended March 31, 2002 due to a decrease in volume of 4.6% partially offset by an
increase in average revenue per unit of 2.7%. On a same store basis, new vehicle
revenue decreased 2.0%.
New vehicle gross margin reflects the net results of the sales price
from the sale of a vehicle less the cost of acquisition, including vehicle net
inventory carrying cost (floorplan interest expense net of floorplan assistance
from manufacturers). Despite a decrease in volume in 2002, new vehicle gross
margin increased 5.3% to $203.7 million for the three months ended March 31,
2002. The increase was primarily the result of lower inventory carrying costs
for the three months ended March 31, 2002 compared to the same period in 2001
due to lower interest rates and reduced inventory levels. Interest rates
declined significantly in the latter part of 2001 and may increase in the latter
part of 2002. As a result, the Company does not expect to realize the same level
of benefit from lower inventory carrying costs through the remainder of 2002. On
a same store basis, new vehicle gross margin increased 4.2%.
20
Used vehicle revenue decreased 3.1% to $947.0 million during the three
months ended March 31, 2002 driven by a decrease in volume. On a same store
basis, used vehicle revenue decreased by 2.9% attributable to a decrease in
volume of 1.6% and lower average revenue per unit of 1.3% reflecting a shift in
mix to lower cost units. Despite a softer used vehicle market, used vehicle
gross margin as a percentage of revenue improved 50 basis points to 11.5% for
the three months ended March 31, 2002. On a same store basis, gross margin as a
percent of revenue increased 30 basis points to 11.4%.
Parts and service revenue increased 1.7% to $611.9 million during the
three months ended March 31, 2002. On a same store basis, parts and service
revenue increased 2.1%. Parts and service gross margin increased 2.7% to $264.8
million for the three months ended March 31, 2002. On a same store basis, parts
and service gross margin increased 3.0%. As a percentage of revenue, parts and
service gross margin increased 40 basis points for the three months ended March
31, 2002 as a result of the Company's continuing focus on initiatives to
implement a pricing strategy, a team-based process and a comprehensive parts and
service marketing plan.
Finance and insurance revenue and gross margin increased 8.6% to $121.1
million for the three months ended March 31, 2002. On a same store basis,
finance and insurance revenue and gross margin increased 10.1%. Finance and
insurance gross margin per vehicle retailed increased 13.1% to $725 for the
three months ended March 31, 2002 as compared to the same period in 2001.
Increases were primarily due to increased penetration as a result of the
continued implementation of a customer-friendly "full disclosure" finance and
insurance menu and standardized closing process, and product pricing.
Other revenue decreased 21.9% to $257.6 million during the three months
ended March 31, 2002, primarily due to decreased used car wholesale activity
resulting from decreased new and used vehicle volume and the impact of
improvement in used inventory management in the three months ended March 31,
2001.
Store level selling, general and administrative expenses were $513.0
million or 71.1% of total gross margin for the three months ended March 31,
2002, compared to 73.6% for the three months ended March 31, 2001 as the Company
continued to focus on cost-cutting initiatives and operational improvements.
Store performance margin was $208.7 million or as a percentage of total
revenue 4.4% for the three months ended March 31, 2002 compared to 3.7% for the
three months ended March 31, 2001.
Corporate selling, general and administrative expenses decreased by
$5.6 million or 13.8% during the three months ended March 31, 2002. The decrease
is primarily the result of the continued disposal of excess properties.
Amortization was $.6 million for the three months ended March 31, 2002
as compared to $20.0 million for the three months ended March 31, 2001. The
decrease is due to the elimination of goodwill amortization as a result of the
adoption of new goodwill accounting rules effective January 1, 2002.
21
SAME STORE OPERATING DATA
The following table sets forth: (1) the components of same store
revenue; (2) the components of same store gross margin; (3) same store selling,
general and administrative expenses; (4) same store performance; (5) retail
vehicle same store unit sales; and (6) gross margin per vehicle retailed:
Three Months Ended March 31,
--------------------------------------------------------------------
($ in millions, except per vehicle data) 2002 2001 $ Variance % Variance
---------- --------- ---------- -----------
Revenue:
New vehicle......................... $ 2,751.6 $ 2,808.8 $ (57.2) (2.0)
Used vehicle........................ 929.4 956.9 (27.5) (2.9)
Parts and service................... 600.9 588.6 12.3 2.1
Finance and insurance............... 120.6 109.5 11.1 10.1
Other............................... 298.9 314.7 (15.8) (5.0)
--------- --------- --------
$ 4,701.4 $ 4,778.5 $ (77.1) (1.6)
========= ========= ========
Gross margin:
New vehicle......................... $ 197.7 $ 189.8 $ 7.9 4.2
Used vehicle........................ 105.6 106.6 (1.0) (0.9)
Parts and service................... 259.6 252.0 7.6 3.0
Finance and insurance............... 120.6 109.5 11.1 10.1
Other............................... 19.6 18.9 0.7 3.7
--------- --------- --------
703.1 676.8 26.3 3.9
S,G&A - Store.......................... 499.2 495.7 (3.5) (0.7)
--------- --------- --------
Store performance...................... $ 203.9 $ 181.1 $ 22.8 12.6
========= ========= ========
Retail vehicle sales:
New vehicle......................... 102,000 107,000 (5,000) (4.7)
Used vehicle........................ 62,000 63,000 (1,000) (1.6)
--------- --------- --------
164,000 170,000 (6,000) (3.5)
========= ========= ========
Gross margin per vehicle retailed:
New................................. $ 1,938 $ 1,774 $ 164 9.2
Used................................ $ 1,703 $ 1,692 $ 11 0.7
Finance and insurance............... $ 735 $ 644 $ 91 14.1
22
The following table sets forth: (1) same store revenue mix percentages;
(2) same store operating items as a percentage of revenue; and (3) same store
other operating items as a percentage of total gross margin:
Three Months Ended March 31,
--------------------------------------
% 2002 % 2001
------ ------
Revenue mix percentages:
New vehicle......................... 58.5 58.8
Used vehicle........................ 19.8 20.0
Parts and service................... 12.8 12.3
Finance and insurance............... 2.6 2.3
Other............................... 6.3 6.6
----- -----
100.0 100.0
===== =====
Operating items as a percentage of revenue:
Gross margin:
New vehicle......................... 7.2 6.8
Used vehicle........................ 11.4 11.1
Parts and service................... 43.2 42.8
Finance and insurance............... 100.0 100.0
Other............................... 6.6 6.0
Total........................... 15.0 14.2
S,G&A - Store....................... 10.6 10.4
Store performance................... 4.3 3.8
Other operating items as a percentage of total gross margin:
S,G&A - Store....................... 71.0 73.2
Store performance................... 29.0 26.8
BUSINESS ACQUISITIONS AND DIVESTITURES
From 1996 through 1999, the Company aggressively expanded its
automotive retail operations through the acquisition of franchised automotive
dealerships. Since 1999, the Company has not completed and does not expect to
complete acquisitions at the same pace as in the past. Future acquisitions will
primarily target single dealerships or dealership groups focused in key existing
markets.
During the three months ended March 31, 2002, the Company acquired
eight automotive retail dealerships. The Company paid approximately $122.1
million in cash for these acquisitions. During the three months ended March 31,
2002, the Company also paid approximately $5.6 million in deferred purchase
price for certain prior year automotive retail acquisitions.
In the normal course of business, the Company will periodically divest
of dealerships that do not meet certain operational, financial, and strategic
criteria. Revenue for the operations disposed and to be disposed, including the
Flemington dealership group until its disposition in March 2001, was $55.7
million and $152.0 million during the three months ended March 31, 2002 and
2001, respectively. Operating income for the operations disposed or to be
disposed was $.6 million and $.3 million for the three months ended March 31,
2002 and 2001, respectively.
23
RESTRUCTURING ACTIVITIES AND IMPAIRMENT CHARGES
During the fourth quarter of 1999, the Company approved a plan to
restructure certain of its operations. The restructuring plan was comprised of
the following major components: (1) exiting the used vehicle megastore business;
and (2) reducing the corporate workforce. The restructuring plan also included
divesting of certain non-core franchised dealerships. Approximately 2,000
positions were eliminated as a result of the restructuring plan of which 1,800
were megastore positions and 200 were corporate positions. These restructuring
activities resulted in pre-tax charges of $443.7 million in 1999, of which
$416.4 million appears as Restructuring and Impairment Charges (Recoveries), Net
in the Company's 1999 Consolidated Income Statement. These pre-tax charges
include $286.9 million of asset impairment charges; $103.3 million of reserves
for residual value guarantees for closed lease properties; $26.2 million of
severance and other exit costs; and $27.3 million of inventory related costs.
The $286.9 million asset impairment charge consists of: $244.9 million of
megastore and other property impairments; $26.6 million of goodwill impairment
reserves for the divestiture of certain non-core franchised automotive
dealerships; and $15.4 million of information systems impairments. Of the $443.7
million restructuring reserve recorded, $10.8 million of severance was paid in
1999 and $53.7 million of asset impairments and write-offs were recorded during
the fourth quarter of 1999.
The Company continues to dispose of its closed megastores and other
properties, including closed lease properties, through sales to third parties.
At March 31, 2002, properties held for sale total $86.4 million of which
properties with total asset value of $68.5 million remain to be sold of the
total $285.3 million identified as part of the restructure plan. These
properties continue to be aggressively marketed. The majority of these
properties will be disposed of by the end of 2002.
The following summarizes the activity in the Company's restructuring
and impairment reserves for the three months ended March 31, 2002:
Deductions
Balance Amounts Charged --------------------- Balance
December 31, 2001 (Credited) to Income Cash Non-cash March 31, 2002
----------------- -------------------- -------- -------- --------------
Asset reserves:
Asset impairment....... $ 68.4 $ -- $ -- $ (.9) $ 67.5
Accrued liabilities:
Severance and other
exit cost........... .2 -- -- -- .2
----------- -------- -------- -------- -------
$ 68.6 $ -- $ -- $ (.9) $ 67.7
=========== ======== ======== ======== =======
The following summarizes the activity in the Company's restructuring
and impairment reserves for the three months ended March 31, 2001:
Deductions
Balance Amounts Charged --------------------- Balance
December 31, 2000 (Credited) to Income Cash Non-cash March 31, 2001
----------------- -------------------- -------- -------- --------------
Asset reserves:
Asset impairment....... $ 161.4 $ (1.2) $ -- $ (42.9) $ 117.3
Accrued liabilities:
Severance and other
exit cost........... 1.2 .4 (.4) -- 1.2
----------- -------- -------- -------- -------
$ 162.6 $ (.8) $ (.4) $ (42.9) $ 118.5
=========== ======== ======== ======== =======
The net amount credited to income in 2001, primarily consists of net
gains on sold properties.
24
NON-OPERATING INCOME (EXPENSE)
OTHER INTEREST EXPENSE
Other interest expense for the three months ended March 31, 2002 was
incurred primarily on borrowings under mortgage facilities and outstanding
senior unsecured notes sold in August 2001. Other interest expense was $11.7
million and $11.0 million for the three months ended March 31, 2002 and 2001,
respectively.
INTEREST INCOME
Interest income was $3.3 million and $1.4 million for the three months
ended March 31, 2002 and 2001, respectively. The increase is primarily due to
the result of higher average cash and investment balances in 2002, partially
offset by lower interest rates.
INCOME TAXES
The provision for income taxes from continuing operations was $56.8
million and $37.4 million for the three months ended March 31, 2002 and 2001,
respectively. Income taxes have been provided based upon the Company's
anticipated annual effective income tax rate. The decrease in the effective tax
rate in 2002 primarily reflects the impact of the elimination of goodwill
amortization, partially offset by anticipated increases to the Company's state
tax rates.
FINANCIAL CONDITION
At March 31, 2002, the Company had $105.5 million of unrestricted cash
and cash equivalents. The Company has two revolving credit facilities with an
aggregate borrowing capacity of $500.0 million. The 364-day revolving credit
facility provides borrowings up to $200.0 million at a LIBOR-based interest rate
and expires in August 2002 at which time the Company expects to renew the
revolving credit facility. The five-year facility provides borrowings up to
$300.0 million at a LIBOR-based interest rate. These facilities are secured by a
pledge of the capital stock of certain subsidiaries of the Company, which
directly or indirectly own substantially all of the Company's dealerships, and
are guaranteed by substantially all of the Company's subsidiaries. As of March
31, 2002, no amounts were drawn on these revolving credit facilities.
The Company also has $450.0 million of 9.0% senior unsecured notes due
August 1, 2008. The senior unsecured notes are guaranteed by substantially all
of the Company's subsidiaries.
In conjunction with the revolving credit facilities and senior unsecured
notes offering, the Company received corporate credit ratings from rating
agencies. The revolving credit facilities and the senior unsecured notes have
provisions linked to credit ratings. The interest rates for the revolving credit
facilities are impacted by changes in credit ratings, and certain covenants
related to the senior unsecured notes would be eliminated with certain upgrades
in ratings. In the event of a downgrade in the Company's credit rating, the
Company would continue to have access to the revolving credit facilities, but at
higher rates of interest.
At March 31, 2002, the Company had $151.4 million outstanding under two
mortgage facilities with automotive manufacturers' captive finance subsidiaries.
Each facility has an aggregate capacity of $150.0 million, bears interest at a
LIBOR-based interest rate and is secured by mortgages on certain of the
Company's dealerships' real property.
The Company finances its vehicle inventories through secured
financings, primarily floorplan facilities, with automotive manufacturers'
captive finance subsidiaries as well as independent financial institutions. As
of March 31, 2002, capacity of the facilities was approximately $3.5 billion.
The Company finances its used vehicle inventory primarily through cash flow from
operations and revolving credit facilities.
25
The Company offers its customers various vehicle protection products,
such as extended service contracts, vehicle protection and maintenance programs,
and insurance products. The products it offers include products that are sold
and administered by independent third parties, including the vehicle
manufacturers' captive finance subsidiaries. Pursuant to its arrangements with
these third-party finance and insurance product providers, the Company either
sells the products on a straight commission basis or it sells the product,
recognizes commission and assumes some or all of the underwriting risk through
reinsurance agreements with its captive insurance subsidiaries. The Company
maintains restricted cash and investments in trust accounts in accordance with
the terms and conditions of certain reinsurance agreements to secure the
payments of outstanding losses and loss adjustment expenses related to its
captive insurance subsidiaries.
During the three months ended March 31, 2002 the Company repurchased
2.8 million shares of its common stock for an aggregate purchase price of $35.9
million. Since 1998 through March 31, 2002, an aggregate of 157.7 million shares
of common stock have been acquired under the Company's share repurchase programs
for an aggregate purchase price of $1.8 billion, leaving approximately $224.3
million available for share repurchases under the current program authorized by
the Company's Board of Directors. While the Company expects to continue
repurchasing shares under these programs, the decision to make additional share
repurchases will be based on such factors as the market price of its common
stock, the potential impact on its capital structure and the expected return on
competing uses of capital such as strategic dealership acquisitions and capital
investments in the Company's current businesses. Future share repurchases are
also subject to limitations contained in the indenture relating to the Company's
senior unsecured notes and credit agreements for its two revolving credit
facilities.
On June 30, 2000, the Company completed the tax-free spin-off of ANC
Rental. In connection with the spin-off of ANC Rental, the Company agreed to
provide certain guarantees and credit enhancements with respect to financial and
other performance obligations of ANC Rental, including acting as a guarantor
under certain motor vehicle and real property leases between ANC Rental and
Mitsubishi Motor Sales of America, Inc. ("Mitsubishi") and acting as an
indemnitor with respect to certain surety bonds issued on ANC Rental's behalf.
The Company is also a party to certain agreements with ANC Rental (the "ANC
Rental Agreements"), including a separation and distribution agreement, a
reimbursement agreement and a tax sharing agreement, pursuant to which both ANC
Rental and the Company have certain obligations. On November 13, 2001, ANC
Rental filed voluntary petitions for reorganization under Chapter 11 of the U.S.
Bankruptcy Code with the U.S. Bankruptcy Court in Wilmington, Delaware. In
connection with ANC Rental's bankruptcy, the Company was called on to perform
under nine of the twelve real property leases between ANC Rental and Mitsubishi
for which it provided guarantees. As a result, the Company agreed to assume
these real property leases, which expire in 2017, in order to control and
attempt to mitigate its exposure relating thereto. In the fourth quarter of
2001, the Company incurred a pre-tax charge of $20.0 million to reflect its
assumption of the nine leases with Mitsubishi and certain other costs that it
expects to incur as a result of ANC Rental's bankruptcy. The Company continues
to guarantee the remaining three leases with Mitsubishi until their expiration
in 2017, and the Company remains subject to various other ANC Rental
obligations. ANC Rental has been accounted for as a discontinued operation and,
accordingly, the Company expects that additional charges recorded by it pursuant
to the foregoing credit enhancements and guarantees or with respect to claims
under the ANC Rental Agreements, if any, would not impact its reported results
from continuing operations.
The Company has reached an agreement with Mitsubishi pursuant to which
its aggregate financial exposure relating to motor vehicles leased by ANC Rental
from Mitsubishi is capped at $10.0 million. Although the Company believes its
financial exposure under the agreement will likely decrease significantly in
2002, it could have potential exposure under the agreement for up to five to ten
years. The Company's indemnification obligations with respect to the surety
bonds issued on behalf of ANC Rental are capped at $29.5 million in the
aggregate. The Company could have potential exposure under the indemnification
obligations for approximately five years. Due to the bankruptcy of ANC Rental,
obligations of ANC Rental to the Company under the terms of the ANC Rental
Agreements may be extinguished or its claims against ANC Rental under such
agreements may be unenforceable. These claims could include reimbursement
obligations that ANC Rental may have to the Company in connection with payments
made by the Company with respect to the foregoing credit enhancements and
guarantees, as well as indemnification rights with respect to any payments that
the Company makes to the Internal Revenue Service as a result of audit
26
adjustments in its consolidated federal income tax returns relating to ANC
Rental's automotive rental businesses prior to the spin-off. Such audit
adjustments, if any, would likely be resolved in the next three to five years.
The Company estimates that, based on its assessment of the risks involved in
each matter and excluding the liabilities associated with the $20.0 million
charge it incurred in the fourth quarter of 2001, its remaining potential
pre-tax financial exposure related to ANC Rental may be in the range of $25.0
million to $60.0 million. However, the exposure is difficult to estimate and the
Company cannot assure that its aggregate obligations under these credit
enhancements, guarantees and ANC Rental Agreements will not be materially above
the range indicated above or that it will not be subject to additional claims as
a result of ANC Rental's bankruptcy filing, which could have a material adverse
effect on the Company's business, financial condition, cash flows and prospects.
At March 31, 2002 and December 31, 2001, the Company had $855.6 million
and $853.8 million, respectively, of net deferred tax liabilities. The Company
provides for deferred income taxes in its unaudited condensed consolidated
financial statements to show the effect of temporary differences between the
recognition of revenue and expenses for financial and income tax reporting
purposes and between the tax basis of assets and liabilities and their reported
amounts in the financial statements. In 1997 and 1999, the Company engaged in
certain transactions that are of a type that the Internal Revenue Service has
indicated it intends to challenge. Approximately $680 million of the Company's
net deferred tax liabilities relates to these transactions, including a
significant portion that relates to a transaction that generally had the effect
of accelerating certain future projected tax deductions. These transactions are
currently under review by the Internal Revenue Service. The Company believes
that its tax returns appropriately reflect such transactions, and that it has
established adequate reserves with respect to any tax liabilities relating to
these transactions. However, an unfavorable settlement or adverse resolution of
these matters could have a material adverse effect on the Company's financial
condition, results of operations and cash flows.
LOAN AND LEASE UNDERWRITING ACTIVITIES
In December 2001, the Company decided to exit the business of
underwriting retail automobile loans for customers at its dealerships, which it
determined was not a part of the Company's core automotive retail business. The
Company continues to provide automotive loans for its customers through
unrelated third party finance sources, which historically had provided more than
95% of the auto loans made to its customers. At March 31, 2002 and December 31,
2001, the Company had finance receivables totaling $145.5 million and $175.7
million, respectively, including investments in securitizations of $66.4 million
and $73.8 million, respectively. The remaining finance leases, installment loans
and investments in securitizations are expected to be substantially collected
over the next three years. See discussion in Note 10, Finance Underwriting and
Asset Securitizations, of the Notes to Unaudited Condensed Consolidated
Financial Statements.
CASH FLOWS
Cash and cash equivalents increased (decreased) by $(22.6) million and
$.8 million during the three months ended March 31, 2002 and 2001, respectively.
The major components of these changes are discussed below.
CASH FLOWS FROM OPERATING ACTIVITIES
Cash provided by operating activities was $135.5 million and $134.6
million during the three months ended March 31, 2002 and 2001, respectively.
Cash flows from operating activities include net income adjusted for
non-cash items and the effects of changes in working capital including changes
in floorplan notes payable, which directly relate to vehicle inventory.
27
CASH FLOWS FROM INVESTING ACTIVITIES
Cash flows from investing activities consist primarily of cash used in
capital additions, activity from acquisitions and divestitures, activity of
installment loan receivables, purchases and sales of investments and other
transactions as further described below.
Capital expenditures were $28.7 million and $24.0 million during the
three months ended March 31, 2002 and 2001, respectively.
Collection of installment loan receivables and other related items
totaled $27.2 million and $35.8 million for the three months ended March 31,
2002 and 2001, respectively. Funding from the securitizations of installment
loan receivables and proceeds from the securitizations of installment loan
receivables totaled $202.5 million and $173.2 million, respectively, for the
three months ended March 31, 2001. There was no funding from the securitizations
of installment loan receivables or proceeds from the securitizations of
installment loans receivables for the three months ended March 31, 2002, as a
result of the Company's decision to exit the business of underwriting retail
automobile loans in December 2001.
Cash used in business acquisitions was $127.7 million and $22.0 million
for the three months ended March 31, 2002 and 2001, respectively. The increase
in cash used in business acquisitions was due to acquisitions of the
Chicago-based Laurel dealership group and Hudiburg Chevrolet in Fort Worth,
Texas.
CASH FLOWS FROM FINANCING ACTIVITIES
Cash flows from financing activities consisted primarily of treasury
stock purchases and proceeds from stock option exercises.
During the three months ended March 31, 2002 and 2001, the Company
spent approximately $35.9 million and $98.2 million, respectively, to repurchase
shares of common stock under the Company's Board approved share repurchase
programs.
During the three months ended March 31, 2002 and 2001 proceeds from the
exercise of stock options were $20.2 million and $0, respectively. Increased
activity in 2002 was due to higher market prices for the Company's common stock
which resulted in more exercises of stock options outstanding.
LIQUIDITY
The Company requires cash to fund working capital needs, finance
acquisitions of new dealerships and fund capital expenditures. These
requirements are met principally from cash flows from operations, borrowings
under floorplan financings, mortgage notes and credit facilities.
The Company believes that its funds generated through future operations
and availability of borrowings under its floorplan facilities, its revolving
credit facilities and mortgage facilities will be sufficient to fund its debt
service and working capital requirements, commitments and contingencies and any
seasonal operating requirements for the foreseeable future. The Company intends
to finance capital expenditures, business acquisitions, and share repurchases
through cash flow from operations, its revolving credit facilities, and other
financings.
SEASONALITY
The Company's operations generally experience higher volumes of vehicle
sales in the second and third quarters of each year in part due to consumer
buying trends and the introduction of new vehicle models. Also, demand for cars
and light trucks is generally lower during the winter months than in other
seasons, particularly in regions of the United States where dealerships may be
subject to harsh winters. Accordingly, the Company expects its revenue and
operating results to be generally lower in the first and fourth quarters as
compared to the second and third quarters. However, revenue may be impacted
significantly from quarter to quarter by other factors unrelated to season, such
as automotive
28
manufacturer incentives programs. Comparisons of the Company's sales and
operating results between different quarters within a single year are,
therefore, not necessarily indicators of future performance.
FORWARD-LOOKING STATEMENTS
The Company's business, financial condition, results of operations,
cash flows and prospects, and the prevailing market price and performance of its
common stock, may be adversely affected by a number of factors, including the
matters discussed below. Certain statements and information set forth herein in
this Form 10-Q, as well as other written or oral statements made from time to
time by the Company or by its authorized executive officers on the Company's
behalf, constitute "forward-looking statements" within the meaning of the
Federal Private Securities Litigation Reform Act of 1995. The Company intends
for its forward-looking statements to be covered by the safe harbor provisions
for forward-looking statements contained in the Private Securities Litigation
Reform Act of 1995, and it sets forth this statement and these risk factors in
order to comply with such safe harbor provisions. It should be noted that the
Company's forward-looking statements speak only as of the date of this Form 10-Q
or when made and the Company undertakes no duty or obligation to update or
revise its forward-looking statements, whether as a result of new information,
future events or otherwise. Although the Company believes that the expectations,
plans, intentions and projections reflected in its forward-looking statements
are reasonable, such statements are subject to known and unknown risks,
uncertainties and other factors that may cause actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by the forward-looking statements. The risks,
uncertainties and other factors that the Company's shareholders and prospective
investors should consider include, but are not limited to, the following:
o The automotive retailing industry is cyclical and is sensitive to
changing economic conditions and manufacturer incentive programs;
retail sales of new vehicles in the United States during 2002 are
expected to decrease as compared to 2001 on a unit basis; significantly
lower actual sales levels could materially adversely impact the
Company's business.
o ANC Rental Corporation filed for Chapter 11 bankruptcy protection in
November 2001. Accordingly, the Company has been called on to perform
under certain guarantees with respect to ANC Rental, it may be called
on to perform under additional credit enhancements and guarantees in
the future, and it may have claims against ANC Rental that may be
discharged in bankruptcy, any of which could have a material adverse
effect on its business, financial condition, cash flows and prospects.
o The Company has engaged in certain transactions that are under review
by the IRS and may have a material adverse effect on its financial
condition and cash flows.
o The Company is subject to residual value risk and consumer credit risk
in connection with its lease portfolio, consumer credit risk in
connection with its finance receivables and related assets and
underwriting risk in connection with its reinsurance of warranty and
protection products.
o The Company's revolving credit facilities and the indenture relating to
its senior unsecured notes contain certain restrictions on the
Company's ability to conduct its business.
o The Company's dealerships are dependent on the programs and operations
of vehicle manufacturers and, therefore, any changes to such programs
and operations may adversely affect its dealership operations and, in
turn, affect its business, results of operations, financial condition,
cash flows and prospects.
o The Company is subject to restrictions imposed by vehicle manufacturers
that may adversely impact its business, financial condition, results of
operations, cash flows and prospects, including its ability to acquire
new dealerships.
o The Company is subject to numerous legal and administrative
proceedings, which, if the outcomes are adverse to the Company, could
adversely affect its business, operating results and prospects.
29
o The Company is subject to extensive governmental regulation and if it
is found to be in violation of any of these regulations, its business,
operating results and prospects could suffer.
o The Company may encounter limitations on its ability to acquire
automotive dealerships in key markets on favorable terms or at all,
which may materially adversely affect its ability to execute its
acquisition strategy.
o New accounting pronouncements on business combinations and goodwill
will affect the Company's future earnings.
Please refer to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2001, and to the Company's subsequent filings
with the SEC for additional discussion of the foregoing risk factors.
30
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's major market risk exposure is changing interest rates.
The Company's policy is to manage interest rate risk through the use of a
combination of fixed and floating rate debt. Interest rate derivatives may be
used to adjust interest rate exposures when appropriate, based upon market
conditions. At March 31, 2002 and December 31, 2001, the Company did not have
any derivative instruments outstanding.
Reference is made to the Company's quantitative disclosures about
market risk as of December 31, 2001 included in the Company's Annual Report on
Form 10-K.
31
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In October 2000, the California Department of Motor Vehicles
("California DMV") brought an action against one of the Company's subsidiaries'
dealerships for alleged customer fraud as well as several other claims. (This
matter was previously discussed in the Legal Proceedings section of the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2001.) In April 2001, the Company settled the California DMV action and a
related action by the State of California. In April 2002, the Company reached a
final settlement of three civil class action lawsuits (which have been
consolidated) relating to this matter. The estimated payment under the
settlement of the three civil class actions is expected to be approximately $2.0
million, for which the Company is adequately reserved. Other lawsuits and claims
have also been filed or made against the dealership based on the allegations
underlying the California DMV case.
Many of the Company's Texas dealership subsidiaries have been named in
three class action lawsuits brought against the Texas Automobile Dealers
Association ("TADA") and new vehicle dealerships in Texas that are members of
the TADA. The actions (JETT JONES, ET AL. V. ALFORD CHEVROLET-GEO, ET AL., Case
No. 30-96 in the District Court of Marion County, Texas, 115th Judicial
District, filed January 25, 1996; PAT MURPHY V. ALFORD CHEVROLET-GEO, ET AL.,
Case No. 168-96, in the District Court of Marion County, Texas, 115th Judicial
District, filed August 23, 1996; and BERT A. ROBINSON, ET AL. V. TEXAS
AUTOMOBILE DEALERS ASSOCIATION, ET AL., Civil Action No. 5:97 CV 273 (E.D.
Tex.), filed October 3, 1997) allege that since January 1994 Texas dealers have
deceived customers with respect to a vehicle inventory tax and violated federal
antitrust and other laws as well. (This matter was previously discussed in the
Legal Proceedings section of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2001). In April 2002, in the JETT JONES and PAT
MURPHY cases (which have been consolidated) the state court certified two
classes of consumers on whose behalf the action would proceed. The Company
intends to appeal this decision.
The Company intends to vigorously defend itself and assert available
defenses with respect to each of the foregoing matters. Further, the Company may
have certain insurance coverage and rights of indemnification with respect to
certain aspects of the foregoing matters. However, a settlement or an adverse
resolution of one or more of these matters may result in the payment of
significant costs and damages, which could have a material adverse effect on its
business, financial condition, results of operations, cash flows and prospects.
In addition to the foregoing cases, the Company is also a party to
numerous other legal proceedings that arose in the conduct of its business. The
Company does not believe that the ultimate resolution of these matters will have
a material adverse effect on its business, results of operations, financial
condition or cash flows. However, the results of these matters cannot be
predicted with certainty, and an unfavorable resolution of one or more of these
matters could have a material adverse effect on its business, financial
condition, results of operations, cash flows and prospects.
32
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.16 AutoNation, Inc. Senior Executive Incentive Bonus Plan
(b) Reports on Form 8-K:
Form 8-K, dated January 29, 2002, reporting that the Board of
Directors of AutoNation, Inc. has appointed Edward S. Lampert
and William C. Crowley to the Board.
33
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant, AutoNation, Inc., has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AUTONATION, INC.
By: /s/ Patricia A. McKay
-------------------------------------
Patricia A. McKay
Senior Vice President-Finance
(PRINCIPAL ACCOUNTING OFFICER)
Date: May 3, 2002
34