UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1
ý |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended June 30, 2005 |
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OR |
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o |
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: 001-31262
ASBURY AUTOMOTIVE GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware |
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01-0609375 |
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622 Third Avenue, 37th
Floor |
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10017 |
(Address of principal executive offices) |
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(Zip Code) |
(212) 885-2500
(Registrants 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 ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ý No o
Indicate the number of shares outstanding of each of the registrants classes of common stock, as of the latest practicable date: The number of shares of common stock outstanding as of August 3, 2005, was 32,745,053 (net of 1,586,587 treasury shares).
EXPLANATORY NOTE
We are filing Amendment No. 1 to the Asbury Automotive Group, Inc. Quarterly Report on Form 10-Q for the three and six months ended June 30, 2005 to change the presentation of certain floor plan notes payable information. We finance substantially all of our new and at times a portion of our used vehicle inventories under revolving floor plan notes payable with various lenders. Consistent with industry practice, the Company previously reported all floor plan notes payable as a single line on our Consolidated Balance Sheets and all cash flow activity relating to floor plan notes payable in the operating activities section of our Consolidated Statement of Cash flows. In addition, we historically considered all borrowings and repayments of floor plan notes payable associated with inventory acquired through a dealership acquisition and inventory sold through a dealership divestiture, non-cash activities. Floor plan notes payable to a party unaffiliated with the manufacturer of a particular new vehicle, and all floor plan notes payable relating to pre-owned vehicles, have been restated as floor plan notes payable non-manufacturer affiliated on the Consolidated Balance Sheets, and the related non-manufacturer affiliated cash flows have been restated from operating activities to financing activities on the Consolidated Statements of Cash Flows with borrowings reflected separately from repayments. In addition, we have included floor plan notes payable activity associated with dealership acquisitions and divestitures in the Consolidated Statements of Cash Flows.
The changes in presentation have no effect on net income, earnings per share, stockholders equity or our conclusion that our disclosure controls and procedures were effective as of June 30, 2005. However, because we are restating the financial statements included in our Form 10-Q, our financial statements include the effects of entities which became discontinued operations during the nine months ended September 30, 2005. In addition, we have made certain other immaterial reclassifications to conform to current presentation. All other information in this amendment is as of the date of the original filing and does not reflect any subsequent information or events occurring after the date of the original filing. Forward looking statements made reflect our expectations as of the date of our original filing and have not been adjusted to reflect subsequent information.
ASBURY AUTOMOTIVE GROUP, INC.
INDEX
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Consolidated Balance Sheets as of June 30, 2005 (Unaudited) and December 31, 2004, restated |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
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ASBURY AUTOMOTIVE GROUP, INC.
CONSOLIDATED
BALANCE SHEETS
(In thousands, except share and per share data)
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June 30, |
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December 31, |
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2005 |
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2004 |
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(Unaudited) |
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(Restated) |
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(Restated)* |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
11,049 |
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$ |
28,093 |
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Contracts-in-transit |
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112,432 |
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105,360 |
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Restricted investments |
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1,813 |
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1,645 |
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Accounts receivable (net of allowance of $2,224 and $2,073, respectively) |
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150,183 |
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148,196 |
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Inventories |
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722,160 |
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761,557 |
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Deferred income taxes |
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15,576 |
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15,576 |
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Prepaid and other current assets |
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58,512 |
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56,831 |
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Assets held for sale |
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43,424 |
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25,748 |
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Total current assets |
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1,115,149 |
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1,143,006 |
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PROPERTY AND EQUIPMENT, net |
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205,982 |
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195,788 |
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GOODWILL |
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464,947 |
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461,650 |
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RESTRICTED INVESTMENTS, net of current portion |
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3,282 |
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2,478 |
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OTHER LONG-TERM ASSETS |
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99,139 |
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95,037 |
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Total assets |
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$ |
1,888,499 |
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$ |
1,897,959 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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CURRENT LIABILITIES: |
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Floor plan notes payable manufacturer affiliated |
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$ |
181,414 |
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$ |
336,369 |
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Floor plan notes payable non-manufacturer affiliated |
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431,723 |
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314,579 |
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Current maturities of long-term debt |
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32,936 |
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33,880 |
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Accounts payable |
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66,649 |
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53,078 |
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Accrued liabilities |
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88,992 |
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89,066 |
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Liabilities associated with assets held for sale |
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27,619 |
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20,538 |
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Total current liabilities |
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829,333 |
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847,510 |
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LONG-TERM DEBT |
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476,408 |
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492,536 |
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DEFERRED INCOME TAXES |
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38,375 |
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40,360 |
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OTHER LONG-TERM LIABILITIES |
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39,927 |
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35,821 |
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COMMITMENTS AND CONTINGENCIES (Note 13) |
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SHAREHOLDERS EQUITY: |
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Preferred stock, $.01 par value per share, 10,000,000 shares authorized |
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Common stock, $.01 par value per share, 90,000,000 shares authorized 34,195,206 and 34,163,759 shares issued, including shares held in treasury, respectively |
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342 |
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342 |
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Additional paid-in capital |
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413,490 |
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413,094 |
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Retained earnings |
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113,532 |
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87,905 |
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Treasury stock, at cost; 1,586,587 shares held |
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(15,032 |
) |
(15,032 |
) |
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Accumulated other comprehensive loss |
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(7,876 |
) |
(4,577 |
) |
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Total shareholders equity |
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504,456 |
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481,732 |
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Total liabilities and shareholders equity |
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$ |
1,888,499 |
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$ |
1,897,959 |
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* See Note 2 Restatement
See Notes to Consolidated Financial Statements.
1
ASBURY
AUTOMOTIVE GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
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For the Three Months |
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For the Six Months |
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2005 |
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2004 |
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2005 |
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2004 |
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REVENUES: |
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New vehicle |
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$ |
880,684 |
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$ |
786,669 |
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$ |
1,659,191 |
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$ |
1,450,818 |
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Used vehicle |
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350,740 |
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300,639 |
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673,312 |
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583,993 |
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Parts, service and collision repair |
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160,635 |
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142,237 |
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315,012 |
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276,501 |
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Finance and insurance, net |
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39,386 |
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34,917 |
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75,134 |
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63,329 |
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Total revenues |
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1,431,445 |
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1,264,462 |
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2,722,649 |
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2,374,641 |
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COST OF SALES: |
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New vehicle |
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820,187 |
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730,750 |
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1,545,450 |
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1,346,046 |
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Used vehicle |
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320,654 |
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275,400 |
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614,325 |
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533,927 |
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Parts, service and collision repair |
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77,588 |
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66,666 |
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151,868 |
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131,234 |
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Total cost of sales |
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1,218,429 |
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1,072,816 |
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2,311,643 |
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2,011,207 |
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GROSS PROFIT |
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213,016 |
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191,646 |
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411,006 |
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363,434 |
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OPERATING EXPENSES: |
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Selling, general and administrative |
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162,706 |
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147,801 |
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323,600 |
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284,721 |
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Depreciation and amortization |
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4,782 |
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4,753 |
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9,489 |
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9,325 |
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Income from operations |
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45,528 |
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39,092 |
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77,917 |
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69,388 |
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OTHER INCOME (EXPENSE): |
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Floor plan interest expense |
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(7,541 |
) |
(4,724 |
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(14,147 |
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(8,831 |
) |
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Other interest expense |
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(10,270 |
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(10,132 |
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(19,871 |
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(20,396 |
) |
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Interest income |
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171 |
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106 |
|
436 |
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373 |
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Other income, net |
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337 |
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84 |
|
452 |
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208 |
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Total other expense, net |
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(17,303 |
) |
(14,666 |
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(33,130 |
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(28,646 |
) |
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Income before income taxes |
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28,225 |
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24,426 |
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44,787 |
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40,742 |
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INCOME TAX EXPENSE |
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10,584 |
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8,982 |
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16,795 |
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15,100 |
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INCOME FROM CONTINUING OPERATIONS |
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17,641 |
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15,444 |
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27,992 |
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25,642 |
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DISCONTINUED OPERATIONS, net of tax |
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(1,655 |
) |
(696 |
) |
(2,365 |
) |
(530 |
) |
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NET INCOME |
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$ |
15,986 |
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$ |
14,748 |
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$ |
25,627 |
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$ |
25,112 |
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EARNINGS PER COMMON SHARE: |
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Basic |
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Continuing operations |
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$ |
0.54 |
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$ |
0.48 |
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$ |
0.86 |
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$ |
0.79 |
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Discontinued operations |
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(0.05 |
) |
(0.03 |
) |
(0.07 |
) |
(0.02 |
) |
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Net income |
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$ |
0.49 |
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$ |
0.45 |
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$ |
0.79 |
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$ |
0.77 |
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Diluted |
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Continuing operations |
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$ |
0.54 |
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$ |
0.47 |
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$ |
0.85 |
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$ |
0.78 |
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Discontinued operations |
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(0.05 |
) |
(0.02 |
) |
(0.07 |
) |
(0.01 |
) |
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Net income |
|
$ |
0.49 |
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$ |
0.45 |
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$ |
0.78 |
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$ |
0.77 |
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WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: |
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Basic |
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32,604 |
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32,470 |
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32,596 |
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32,452 |
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Diluted |
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32,725 |
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32,656 |
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32,753 |
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32,688 |
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See Notes to Consolidated Financial Statements.
2
ASBURY AUTOMOTIVE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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For
the Six Months |
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2005 |
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2004 |
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(Restated)* |
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(Restated)* |
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CASH FLOW FROM OPERATING ACTIVITIES: |
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Net income |
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$ |
25,627 |
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$ |
25,112 |
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Adjustments to reconcile net income to net cash used in operating activities- |
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Depreciation and amortization |
|
9,489 |
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9,325 |
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Depreciation and amortization from discontinued operations |
|
1,100 |
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1,341 |
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Amortization of deferred financing fees |
|
1,013 |
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1,170 |
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Change in allowance for doubtful accounts |
|
151 |
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(327 |
) |
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(Gain) loss on sale of discontinued operations |
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(10 |
) |
474 |
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Other adjustments |
|
2,993 |
|
3,543 |
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Changes in operating assets and liabilities, net of acquisitions and divestitures- |
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Contracts-in-transit |
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(7,072 |
) |
(2,482 |
) |
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Accounts receivable |
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(10,375 |
) |
(35,511 |
) |
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Proceeds from the sale of accounts receivable |
|
8,126 |
|
9,976 |
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Inventories |
|
31,705 |
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(63,735 |
) |
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Prepaid and other current assets |
|
(13,190 |
) |
(6,454 |
) |
||
Floor plan notes payable manufacturer affiliated |
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(141,120 |
) |
25,078 |
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||
Accounts payable and accrued liabilities |
|
13,097 |
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16,578 |
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Other long-term assets and liabilities |
|
770 |
|
(7,202 |
) |
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Net cash used in operating activities |
|
(77,696 |
) |
(23,114 |
) |
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CASH FLOW FROM INVESTING ACTIVITIES: |
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Capital expenditures non-financed |
|
(16,942 |
) |
(18,391 |
) |
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Capital expenditures financeable |
|
(18,236 |
) |
(16,130 |
) |
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Construction reimbursements associated with sale-leaseback agreements |
|
2,595 |
|
9,493 |
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Acquisitions |
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(11,562 |
) |
(100,403 |
) |
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Proceeds from the sale of assets |
|
7,989 |
|
3,522 |
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Other investing activities |
|
(878 |
) |
913 |
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Net cash used in investing activities |
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(37,034 |
) |
(120,996 |
) |
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CASH FLOW FROM FINANCING ACTIVITIES: |
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|
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Floor plan borrowings non-manufacturer affiliated |
|
1,753,115 |
|
1,185,266 |
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Floor plan repayments non-manufacturer affiliated |
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(1,629,643 |
) |
(1,130,882 |
) |
||
Proceeds from borrowings |
|
20,734 |
|
3,850 |
|
||
Repayments of debt |
|
(41,989 |
) |
(6,813 |
) |
||
Payments of debt issuance costs |
|
(4,927 |
) |
|
|
||
Proceeds from the exercise of stock options |
|
396 |
|
857 |
|
||
Net cash provided by financing activities |
|
97,686 |
|
52,278 |
|
||
Net decrease in cash and cash equivalents |
|
(17,044 |
) |
(91,832 |
) |
||
|
|
|
|
|
|
||
CASH AND CASH EQUIVALENTS, beginning of period |
|
28,093 |
|
106,711 |
|
||
CASH AND CASH EQUIVALENTS, end of period |
|
$ |
11,049 |
|
$ |
14,879 |
|
See Note 12 for supplemental cash flow information
* See Note 2 Restatement
See Notes to Consolidated Financial Statements
3
ASBURY
AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF BUSINESS
Asbury Automotive Group, Inc. is a national automotive retailer, operating 94 dealership locations (129 franchises) as of June 30, 2005. We offer an extensive range of automotive products and services, including new and used vehicles, financing and insurance, vehicle maintenance and collision repair services, replacement parts and service contracts. We offer 33 domestic and foreign brands of new vehicles, including four heavy truck brands. We also operate 23 collision repair centers that serve our markets. Our retail network is organized into regional dealership groups, formerly called platforms, in 23 metropolitan markets, which are marketed under different local brands.
During the first quarter of 2005, we reorganized our platforms into principally four regions: (i) Florida (comprising our Coggin dealerships, operating primarily in Jacksonville and Orlando, and our Courtesy dealerships operating in Tampa), (ii) West (comprising our McDavid dealerships operating throughout Texas, our Thomason dealerships operating in Portland, Oregon, our Spirit dealerships operating primarily in Los Angeles, California and our Northern California Dealerships operating in Sacramento and Fresno, California), (iii) Mid-Atlantic (comprising our Crown dealerships operating in North Carolina, South Carolina and Southern Virginia) and (iv) South (comprising our Nalley dealerships operating in Atlanta, Georgia, and our North Point dealerships operating in Little Rock, Arkansas.) Our Plaza dealerships operating in St. Louis, Missouri and our Gray Daniels dealerships operating in Jackson, Mississippi remain standalone operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited interim consolidated financial statements reflect the consolidated accounts of Asbury Automotive Group, Inc. and our wholly owned subsidiaries. All intercompany transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the current period presentation.
In the opinion of management, all adjustments (consisting only of normal, recurring adjustments) considered necessary for a fair presentation of the unaudited interim consolidated financial statements as of June 30, 2005, and for the three and six months ended June 30, 2005 and 2004 have been included. The results of operations for the three and six months ended June 30, 2005 are not necessarily indicative of the results that may be expected for the full year. Our interim unaudited consolidated financial statements should be read together with our consolidated financial statements and the notes thereto contained in our Annual Report on Form 10-K/A for the year ended December 31, 2004.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results could differ from these estimates. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary.
Restatement
Subsequent to the issuance of the Companys December 31, 2004 financial statements, we determined that certain information in the Consolidated Balance Sheets and Consolidated Statements of Cash Flows should be restated for all periods presented to comply with the guidance under Statement of Financial Accounting Standards (SFAS) No. 95, Statement of Cash Flows, and Rule 5-02(19)(a) of Regulation S-X. Historically, we reported all cash flows arising in connection with changes in floor plan notes payable as an operating activity and considered all borrowings and repayments of floor plan notes payable associated with inventory acquired through a dealership acquisition and inventory sold through a dealership divestiture, non-cash activities. Therefore, the changes in floor plan notes payable associated with dealership acquisitions and divestitures were not included in the Consolidated Statements of Cash Flows. As a result, we have (i) restated floor plan notes payable to a party other than the manufacturer of a particular new vehicle, and all floor plan notes payable relating to pre-owned vehicles, as floor plan notes payable non-manufacturer affiliated on our Consolidated Balance Sheets (ii) restated the related non-manufacturer affiliated cash flows as a financing activity on our Consolidated Statements of Cash flows with borrowings reflected separately from repayments and (iii) included floor plan notes payable activity associated with dealership acquisitions and divestitures in the Consolidated Statements of Cash Flows. A summary of the significant effects of the restatement are as follows:
4
|
|
As of |
|
|
Floor plan notes payable previously reported |
|
$ |
613,137 |
|
|
|
|
|
|
Floor plan notes payable manufacturer affiliated - previously reported |
|
$ |
|
|
Floor plan notes payable manufacturer affiliated |
|
181,414 |
|
|
Floor plan notes payable manufacturer affiliated restated |
|
$ |
181,414 |
|
|
|
|
|
|
Floor plan notes payable non-manufacturer affiliated - previously reported |
|
$ |
|
|
Floor plan notes payable non-manufacturer affiliated |
|
431,723 |
|
|
Floor plan notes payable non-manufacturer affiliated restated |
|
$ |
431,723 |
|
|
|
For the Six Months Ended |
|
||||
(In thousands) |
|
2005 |
|
2004 |
|
||
Cash provided by operating activities previously reported |
|
$ |
43,394 |
|
$ |
4,651 |
|
Floor plan notes payable manufacturer affiliated |
|
(121,343 |
) |
(27,393 |
) |
||
Other |
|
253 |
|
(372 |
) |
||
Cash used in operating activities restated |
|
$ |
(77,696 |
) |
$ |
(23,114 |
) |
|
|
|
|
|
|
||
Cash used in investing activities previously reported |
|
$ |
(34,652 |
) |
$ |
(94,377 |
) |
Acquisitions |
|
(6,870 |
) |
(28,809 |
) |
||
Proceeds from the sale of assets |
|
4,741 |
|
1,818 |
|
||
Other |
|
(253 |
) |
372 |
|
||
Cash used in investing activities restated |
|
$ |
(37,034 |
) |
$ |
(120,996 |
) |
|
|
|
|
|
|
||
Cash used in financing activities previously reported |
|
$ |
(25,786 |
) |
$ |
(2,106 |
) |
Floor plan borrowings non-manufacturer affiliated |
|
1,753,115 |
|
1,185,266 |
|
||
Floor plan repayments non-manufacturer affiliated |
|
(1,629,643 |
) |
(1,130,882 |
) |
||
Cash provided by financing activities restated |
|
$ |
97,686 |
|
$ |
52,278 |
|
Revenue Recognition
Revenue from the sale of new and used vehicles is recognized upon delivery, passage of title, signing of the sales contract and approval of financing. Revenue from the sale of parts, service and collision repair is recognized upon delivery of parts to the customer or at the time vehicle service or repair work is completed. Manufacturer vehicle incentives and rebates, including holdbacks, are recognized as a component of new vehicle cost of sales when earned, generally at the time the related vehicles are sold.
We receive commissions from the sale of vehicle service contracts, credit life insurance and disability insurance to customers. In addition, we receive commissions from financing institutions for arranging customer financing. We may be charged back (chargebacks) for finance, insurance or vehicle service contract commissions in the event a contract is terminated. The revenues from financing fees and commissions are recorded at the time the vehicles are sold and a reserve for future chargebacks is established based on historical operating results and the termination provisions of the applicable contracts. Finance, insurance and vehicle service contract commissions, net of estimated chargebacks, are included in Finance and insurance, net in the accompanying Consolidated Statements of Income.
Goodwill and Other Intangible Assets
Upon adoption of Statement of Financial Accounting Standards (SFAS) No. 142 Goodwill and Other Intangible Assets, on January 1, 2002, we determined that each of our platforms qualified as a reporting unit since we operate in one segment, our platforms are one level below our corporate level, discrete financial information existed for each platform and the management of each platform directly reviewed the platforms performance. In late 2004, we began the process of reorganizing our platforms into four regions. Within this more streamlined structure, we will evaluate our operations and financial results by dealership in the aggregate,
5
rather than by platform. The general managers, with direction from a centralized management team, including corporate and regional management, will continue to have the independence and flexibility to respond effectively to local market conditions. Based on the changes in our management, operational and reporting structure during the first quarter of 2005, we evaluate goodwill at the operating segment level.
Stock-Based Compensation
We account for stock-based compensation issued to employees in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. APB Opinion No. 25 requires the use of the intrinsic value method, which measures compensation cost as the excess, if any, of the quoted market price of the stock at the measurement date over the amount an employee must pay to acquire the stock. We have adopted the disclosure provisions of SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure-An amendment of FASB Statement No. 123.
The following table illustrates the effect on net income and net income per share had stock-based employee compensation been recorded based on the fair value method under SFAS No. 123 Accounting for Stock-Based Compensation:
|
|
For the Three Months Ended June 30, |
|
For the Six Months Ended June 30, |
|
||||||||
(In thousands, except per share data) |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net income |
|
$ |
15,986 |
|
$ |
14,748 |
|
$ |
25,627 |
|
$ |
25,112 |
|
Adjustments to net income: |
|
|
|
|
|
|
|
|
|
||||
Stock-based compensation expense included in net income, net of tax |
|
|
|
62 |
|
1 |
|
83 |
|
||||
Pro forma stock-based compensation expense, net of tax |
|
(674 |
) |
(1,406 |
) |
(1,340 |
) |
(2,595 |
) |
||||
Pro forma net income |
|
$ |
15,312 |
|
$ |
13,404 |
|
$ |
24,288 |
|
$ |
22,600 |
|
|
|
|
|
|
|
|
|
|
|
||||
Net income per common sharebasic (as reported) |
|
$ |
0.49 |
|
$ |
0.45 |
|
$ |
0.79 |
|
$ |
0.77 |
|
|
|
|
|
|
|
|
|
|
|
||||
Net income per common sharediluted (as reported) |
|
$ |
0.49 |
|
$ |
0.45 |
|
$ |
0.78 |
|
$ |
0.77 |
|
|
|
|
|
|
|
|
|
|
|
||||
Pro forma net income per common sharebasic |
|
$ |
0.47 |
|
$ |
0.41 |
|
$ |
0.75 |
|
$ |
0.70 |
|
|
|
|
|
|
|
|
|
|
|
||||
Pro forma net income per common sharediluted |
|
$ |
0.47 |
|
$ |
0.41 |
|
$ |
0.74 |
|
$ |
0.69 |
|
We use the Black-Scholes option valuation model (Black-Scholes), which is the measure of fair value most often utilized under SFAS No. 123. Traded options, unlike our stock-based awards, are not subject to vesting restrictions, are fully transferable and may use lower expected stock price volatility measures than those assumed below. We estimated the fair value of stock-based compensation issued to employees during each respective period using Black-Scholes with the following weighted average assumptions:
|
|
For the Three Months |
|
For the Six Months |
|
||||
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
Risk free interest rate |
|
3.7 |
% |
3.6 |
% |
3.8 |
% |
3.3 |
% |
Expected life of options |
|
4 years |
|
4 years |
|
4 years |
|
4 years |
|
Expected stock price volatility |
|
45 |
% |
51 |
% |
45 |
% |
51 |
% |
Expected dividend yield |
|
N/A |
|
N/A |
|
N/A |
|
N/A |
|
Derivative Instruments and Hedging Activities
We utilize derivative financial instruments to manage our capital structure. The types of risks hedged are those relating to the variability of cash flows and changes in the fair value of our financial instruments caused by movements in interest rates. We document our risk management strategy and assess hedge effectiveness at the inception and during the term of each hedge. Derivatives are reported at fair value on the accompanying Consolidated Balance Sheets.
The changes in fair value of the effective portion of cash flow hedges are reported as a component of accumulated other comprehensive income (loss). Amounts in accumulated other comprehensive income (loss) are reclassified to interest expense to the
6
extent the hedge becomes ineffective. The change in fair value of fair value hedges are recorded as a component of interest expense. Changes in the fair value of the associated hedged exposures (senior subordinated notes) are also recorded as a component of interest expense.
Measurements of hedge effectiveness are based on comparisons between the gains or losses of the actual interest rate swaps and the gains or losses of hypothetical interest rate swaps which are designed to reflect the critical terms of the defined hedged exposures. Ineffective portions of these interest rate swaps are reported as a component of interest expense in the accompanying Consolidated Statements of Income. We recognized minor ineffectiveness during the three and six months ended June 30, 2005 and no ineffectiveness during the three and six months ended June 30, 2004.
Discontinued Operations
Statements of Cash Flows
Borrowings and repayments of floor plan notes payable to a party unaffiliated with the manufacturer of a particular new vehicle, and all floor plan notes payable relating to pre-owned vehicles, are classified as financing activities on the accompanying Consolidated Statements of Cash Flows with borrowings reflected separately from repayments. The net change in floor plan notes payable to a party affiliated with the manufacturer of a particular new vehicle is classified as an operating activity on the Consolidated Statements of Cash Flows.
The net change in service loaner vehicle financing is reflected as an operating activity in the accompanying Consolidated Statements of Cash Flows, as these borrowings and repayments are with lenders affiliated with the vehicle manufacturer from which we purchase the related vehicles.
Construction reimbursements from third parties in connection with sale-leaseback agreements for the construction of new dealership facilities or leasehold improvements on our dealership facilities are included in investing activities in the accompanying Consolidated Statements of Cash Flows.
Financeable capital expenditures include all expenditures that we have financed during the reporting period or intend to finance in future reporting periods through sale-leaseback transactions or mortgage financing. In addition, in connection with the sale of one of our dealerships, we purchased the real estate on which the dealership is located for approximately $5.4 million and the buyer of our dealership has agreed to purchase the real estate from us for $5.4 million. We have classified this transaction as a financeable capital expenditure in the accompanying Consolidated Statement of Cash Flows. Non-financed capital expenditures include all capital expenditures that are not included in financeable capital expenditures.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), Share-based Payment. This statement requires compensation costs related to share-based payment transactions to be recognized in the financial statements. With limited exceptions, the amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. Compensation cost will be recognized over the period that an employee provides service in exchange for the award. SFAS No. 123 (revised 2004) replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. In April 2005, the Securities and Exchange Commission adopted a new rule that amends the compliance dates for SFAS No. 123 (revised 2004). Registrants would have been required to implement the standard as of the beginning of the first interim or annual period that begins after September 15, 2005. The Commissions new rule allows companies to implement SFAS No. 123 (Revised 2004) at the beginning of their next fiscal year, instead of the next reporting period, that begins after September 15, 2005. We are currently evaluating the effect of this statement on our consolidated financial statements and related disclosures.
7
3. INVENTORIES
Inventories consist of the following:
|
|
As of |
|
||||
(In thousands) |
|
June
30, |
|
December
31, |
|
||
|
|
|
|
|
|
||
New vehicles |
|
$ |
563,414 |
|
$ |
619,098 |
|
Used vehicles |
|
114,429 |
|
98,071 |
|
||
Parts and accessories |
|
44,317 |
|
44,388 |
|
||
Total inventories |
|
$ |
722,160 |
|
$ |
761,557 |
|
The lower of cost or market reserves for inventory totaled $4.4 million and $4.9 million as of June 30, 2005 and December 31, 2004, respectively.
4. ACQUISITIONS
During the six months ended June 30, 2005, we acquired one dealership location (one franchise) for an aggregate purchase price of $12.0 million, of which $4.7 million was paid in cash through the use of available funds, $6.8 million was borrowed from our floor plan facilities, with the remaining $0.5 million representing the fair value of future payments. During the six months ended June 30, 2004, we acquired six dealership locations (six franchises) for an aggregate purchase price of $102.6 million, of which $71.6 million was paid in cash through the use of available funds, $28.8 million was borrowed from our floor plan facilities, with the remaining $2.2 million representing the fair value of future payments associated with one of our acquisitions.
The allocation of purchase price for acquisitions is as follows:
|
|
For the Six Months |
|
||||
(In thousands) |
|
2005 |
|
2004 |
|
||
|
|
|
|
|
|
||
Inventories |
|
$ |
6,878 |
|
$ |
32,540 |
|
Fixed assets |
|
278 |
|
3,774 |
|
||
Other assets |
|
|
|
1,681 |
|
||
Goodwill |
|
3,541 |
|
53,101 |
|
||
Franchise rights |
|
1,350 |
|
11,500 |
|
||
Total purchase price |
|
$ |
12,047 |
|
$ |
102,596 |
|
The allocation of purchase price to assets acquired and liabilities assumed for certain current and prior year acquisitions was based on preliminary estimates of fair value and may be revised as additional information concerning valuation of such assets and liabilities becomes available.
5. GOODWILL AND MANUFACTURER FRANCHISE RIGHTS
The changes in the carrying amount of goodwill for the six months ended June 30, 2005 are as follows:
(In thousands) |
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004 |
|
$ |
461,650 |
|
Current year acquisitions |
|
3,541 |
|
|
Adjustments associated with prior year acquisitions |
|
519 |
|
|
Current year divestitures |
|
(763 |
) |
|
Balance, June 30, 2005 |
|
$ |
464,947 |
|
8
The changes in the carrying amount of manufacturer franchise rights, which are included in Other Long-Term Assets on the accompanying Consolidated Balance Sheets, are as follows:
(In thousands) |
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004 |
|
$ |
42,013 |
|
Current year acquisitions |
|
1,350 |
|
|
Current year divestitures |
|
(500 |
) |
|
Other |
|
(294 |
) |
|
Balance, June 30, 2005 |
|
$ |
42,569 |
|
During the six months ended June 30, 2005, we sold two dealership locations (four franchises) resulting in the removal of $0.8 million of goodwill from our Consolidated Balance Sheets. Two of the franchises sold had been allocated a total of $0.5 million of manufacturer franchise rights, which were also removed from our Consolidated Balance Sheets.
During the six months ended June 30, 2005, we acquired one dealership location (one franchise) and allocated $1.4 million of the purchase price to manufacturer franchise rights.
6. ASSETS AND LIABILITIES HELD FOR SALE
Assets and liabilities classified as held for sale include (i) assets and liabilities associated with discontinued operations held for sale at each balance sheet date, (ii) costs of completed construction projects included in pending sale-leaseback transactions where an unaffiliated third party has reimbursed us or will reimburse us funds for the cost of construction and (iii) costs of completed construction projects included in pending sale-leaseback transactions where an unaffiliated third party has agreed to purchase the assets from us upon completion of the construction.
Assets and liabilities associated with discontinued operations include three dealership locations (five franchises) as of June 30, 2005, and two dealership locations (four franchises) as of December 31, 2004. During the three months ended June 30, 2005, we sold real estate associated with one former dealership location with a book value of $0.8 million for $0.9 million. Assets associated with discontinued operations totaled $43.4 million and $11.2 million, and liabilities associated with discontinued operations totaled $27.6 million and $7.4 million as of June 30, 2005 and December 31, 2004, respectively.
Included in Assets Held for Sale as of December 31, 2004 was $14.5 million of costs associated with one completed project included in a pending sale-leaseback transaction. As of December 31, 2004, Liabilities Associated with Assets Held for Sale included $13.1 million of funds reimbursed by an unaffiliated third party associated with the completed construction project. During the six months ended June 30, 2005, we received $1.4 million of funds from the unaffiliated third party and completed this pending sale-leaseback transaction, which resulted in the removal of $14.5 million of Assets Held for Sale and Liabilities Associated with Assets Held for Sale from our Consolidated Balance Sheets.
A summary of assets and liabilities held for sale is as follows:
|
|
As of |
|
||||
(In thousands) |
|
June 30, |
|
December 31, |
|
||
|
|
|
|
|
|
||
Assets: |
|
|
|
|
|
||
Inventories |
|
$ |
30,722 |
|
$ |
7,846 |
|
Property and equipment, net |
|
12,702 |
|
17,902 |
|
||
Total assets |
|
43,424 |
|
25,748 |
|
||
Liabilities: |
|
|
|
|
|
||
Floor plan notes payable |
|
27,619 |
|
7,456 |
|
||
Other liabilities |
|
|
|
13,082 |
|
||
Total liabilities |
|
27,619 |
|
20,538 |
|
||
Net assets held for sale |
|
$ |
15,805 |
|
$ |
5,210 |
|
Included in Prepaid and Other Current Assets on the accompanying Consolidated Balance Sheets are costs associated with construction projects, which we intend to sell through sale-leaseback transactions but have not been completed and therefore are not available for sale. In connection with these construction projects, we have entered into sale-leaseback agreements whereby an unaffiliated third party purchased the land and is either reimbursing us for the cost of construction of dealership facilities being constructed on the land or has agreed to purchase the assets from us upon completion of the project. We capitalize the cost of the construction and lease payments during the construction period and record a corresponding liability equal to the amount reimbursed.
9
Upon completion of the construction, we will execute the sale-leaseback transaction, remove the cost of construction and the related liability from our Consolidated Balance Sheets and amortize the capitalized lease payments on a straight-line basis over the lease term. During the six months ended June 30, 2005, we completed one sale-leaseback transaction associated with a construction project that was completed subsequent to December 31, 2004, which resulted in the removal of $1.2 million of Assets Held for Sale and Liabilities Associated with Assets Held for Sale from our Consolidated Balance Sheets. The book value of assets associated with construction projects that have not been completed as of June 30, 2005 and December 31, 2004 totaled $10.2 million and $7.1 million, respectively. As of June 30, 2005 and December 31, 2004, the book value of liabilities associated with these construction projects totaled $1.6 million.
7. LONG-TERM DEBT
Long-term debt consists of the following:
|
|
As of |
|
||||
(In thousands) |
|
June
30, |
|
December
31, |
|
||
|
|
|
|
|
|
||
9% Senior Subordinated Notes due 2012 |
|
$ |
250,000 |
|
$ |
250,000 |
|
8% Senior Subordinated Notes due 2014 ($200.0 million face value, net of hedging activity of $446 and $2,736, respectively) |
|
199,554 |
|
197,264 |
|
||
Mortgage notes payable |
|
24,727 |
|
49,732 |
|
||
Notes payable collateralized by loaner vehicles |
|
22,810 |
|
21,627 |
|
||
Committed Credit Facility |
|
5,000 |
|
|
|
||
Capital lease obligations |
|
4,370 |
|
4,421 |
|
||
Other notes payable |
|
2,883 |
|
3,372 |
|
||
|
|
509,344 |
|
526,416 |
|
||
Lesscurrent portion |
|
(32,936 |
) |
(33,880 |
) |
||
Long-term debt |
|
$ |
476,408 |
|
$ |
492,536 |
|
During the three months ended June 30, 2005, we borrowed $15.0 million from our committed credit facility, of which $8.2 million was used for the purchase of real estate on which two of our dealerships are located. The remainder of the borrowings was used for general corporate purposes. During the three months ended June 30, 2005, we repaid $10.0 million of the amounts borrowed from our committed credit facility and subsequent to the end of the quarter we repaid the remaining $5.0 million.
8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITY
We have entered into two forward interest rate swaps with a combined notional principal amount of $170.0 million, to provide a hedge against changes in the interest rates of our variable rate floor plan notes payable for a period of eight years beginning in March 2006. The swap agreements were designated and qualify as cash flow hedges of our variable rate floor plan notes payable and will contain minor ineffectiveness. The swaps are scheduled to expire in March 2006. As of June 30, 2005 and December 31, 2004, the swaps had a fair value of $12.3 million and $7.1 million and are included in Accrued Liabilities and Other Long-term Liabilities, respectively, on the accompanying Consolidated Balance Sheets.
We have entered into an interest rate swap agreement with a notional principal amount of $200.0 million as a hedge against changes in the fair value of our 8% Senior Subordinated Notes due 2014. Under the terms of the swap agreement, we are required to make variable rate payments based on six-month LIBOR and receive a fixed rate of 8.0%. This swap agreement was designated and qualifies as a fair value hedge of our 8% Senior Subordinated Notes due 2014 and did not contain any ineffectiveness. As a result our 8% Senior Subordinated Notes due 2014 have been adjusted by the fair market value of the related swap. The swap is scheduled to expire in March 2006. As of June 30, 2005 and December 31, 2004, the swap agreement had a fair value of $0.4 million and $2.7 million and is included in Accrued Liabilities and Other Long-Term Liabilities, respectively, on the accompanying Consolidated Balance Sheets.
We have entered into an interest rate swap agreement with a notional principal amount of $15.2 million as a hedge against future changes in the interest rate of our variable rate mortgage notes payable. Under the terms of the swap agreement, we are required to make payments at a fixed rate of 6.08% and receive a variable rate based on LIBOR. This swap agreement was designated and qualifies as a cash flow hedge of changes in the interest rate of our variable rate mortgage notes payable and will contain minor ineffectiveness. As of June 30, 2005 and December 31, 2004, the swap agreement had a fair value of $0.2 million, which was included in Other Long-Term Liabilities on the accompanying Consolidated Balance Sheets.
10
9. COMPREHENSIVE INCOME
The following table provides a reconciliation of net income to comprehensive income:
|
|
For the Three Months |
|
For the Six Months |
|
||||||||
(In thousands) |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net income |
|
$ |
15,986 |
|
$ |
14,748 |
|
$ |
25,627 |
|
$ |
25,112 |
|
|
|
|
|
|
|
|
|
|
|
||||
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
||||
Change in fair value of cash flow hedges |
|
(8,368 |
) |
8,751 |
|
(5,279 |
) |
1,001 |
|
||||
Income tax benefit (expense) associated with cash flow hedges |
|
3,138 |
|
(3,282 |
) |
1,980 |
|
(404 |
) |
||||
Comprehensive income |
|
$ |
10,756 |
|
$ |
20,217 |
|
$ |
22,328 |
|
$ |
25,709 |
|
10. DISCONTINUED OPERATIONS
During the six months ended June 30, 2005, we sold two dealership locations (four franchises) and real estate associated with one former dealership location and placed three dealership locations (five franchises) into discontinued operations. As of June 30, 2005, three dealership locations (five franchises) and real estate associated with one former dealership location were pending disposition. In addition, during the period between June 30, 2005 and September 30, 2005 we sold two franchises. As of September 30, 2005, eight dealership locations (eight franchises) were pending disposition. The accompanying Consolidated Statements of Income for the three and six months ended June 30, 2005 and 2004, have been reclassified to reflect the status of our discontinued operations as of September 30, 2005.
The following table provides further information regarding our discontinued operations as of September 30, 2005, and includes the results of businesses sold prior to September 30, 2005, and businesses pending disposition as of September 30, 2005:
|
|
For the Three Months |
|
For the Three Months |
|
||||||||||||||
(Dollars in thousands) |
|
Sold(a) |
|
Pending Disposition(b) |
|
Total |
|
Sold(c) |
|
Pending Disposition(b) |
|
Total |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Franchises |
|
4 |
|
8 |
|
12 |
|
19 |
|
8 |
|
27 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Revenues |
|
$ |
9,087 |
|
$ |
85,329 |
|
$ |
94,416 |
|
$ |
57,764 |
|
$ |
87,129 |
|
$ |
144,893 |
|
Cost of sales |
|
8,036 |
|
72,635 |
|
80,671 |
|
48,954 |
|
73,778 |
|
122,732 |
|
||||||
Gross profit |
|
1,051 |
|
12,694 |
|
13,745 |
|
8,810 |
|
13,351 |
|
22,161 |
|
||||||
Operating expenses |
|
1,304 |
|
13,591 |
|
14,895 |
|
8,779 |
|
13,339 |
|
22,118 |
|
||||||
Income (loss) from operations |
|
(253 |
) |
(897 |
) |
(1,150 |
) |
31 |
|
12 |
|
43 |
|
||||||
Other expense, net |
|
(407 |
) |
(715 |
) |
(1,122 |
) |
(641 |
) |
(210 |
) |
(851 |
) |
||||||
Loss on disposition of discontinued operations |
|
(376 |
) |
|
|
(376 |
) |
(306 |
) |
|
|
(306 |
) |
||||||
Loss before income taxes |
|
(1,036 |
) |
(1,612 |
) |
(2,648 |
) |
(916 |
) |
(198 |
) |
(1,114 |
) |
||||||
Income tax benefit |
|
383 |
|
610 |
|
993 |
|
338 |
|
80 |
|
418 |
|
||||||
Discontinued operations, net of tax |
|
$ |
(653 |
) |
$ |
(1,002 |
) |
$ |
(1,655 |
) |
$ |
(578 |
) |
$ |
(118 |
) |
$ |
(696 |
) |
11
|
|
For the Six Months Ended |
|
For the Six Months Ended |
|
||||||||||||||
(Dollars in thousands) |
|
Sold |
|
Pending Disposition(b) |
|
Total |
|
Sold(d) |
|
Pending Disposition(b) |
|
Total |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Franchises |
|
6 |
|
8 |
|
14 |
|
20 |
|
8 |
|
28 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Revenues |
|
$ |
18,962 |
|
$ |
165,965 |
|
$ |
184,927 |
|
$ |
117,824 |
|
$ |
162,856 |
|
$ |
280,680 |
|
Cost of sales |
|
16,351 |
|
140,863 |
|
157,214 |
|
99,623 |
|
137,267 |
|
236,890 |
|
||||||
Gross profit |
|
2,611 |
|
25,102 |
|
27,713 |
|
18,201 |
|
25,589 |
|
43,790 |
|
||||||
Operating expenses |
|
3,113 |
|
26,468 |
|
29,581 |
|
18,007 |
|
24,477 |
|
42,484 |
|
||||||
Income (loss) from operations |
|
(502 |
) |
(1,366 |
) |
(1,868 |
) |
194 |
|
1,112 |
|
1,306 |
|
||||||
Other expense, net |
|
(851 |
) |
(1,076 |
) |
(1,927 |
) |
(1,292 |
) |
(388 |
) |
(1,680 |
) |
||||||
Gain (loss) on disposition of discontinued operations |
|
10 |
|
|
|
10 |
|
(474 |
) |
|
|
(474 |
) |
||||||
Income (loss) before income taxes |
|
(1,343 |
) |
(2,442 |
) |
(3,785 |
) |
(1,572 |
) |
724 |
|
(848 |
) |
||||||
Income tax (expense) benefit |
|
496 |
|
924 |
|
1,420 |
|
593 |
|
(275 |
) |
318 |
|
||||||
Discontinued operations, net of tax |
|
$ |
(847 |
) |
$ |
(1,518 |
) |
$ |
(2,365 |
) |
$ |
(979 |
) |
$ |
449 |
|
$ |
(530 |
) |
(a) Businesses were sold between April 1, 2005 and September 30, 2005
(b) Businesses pending disposition as of September 30, 2005
(c) Businesses were sold between April 1, 2004 and September 30, 2005
(d) Businesses were sold between January 1, 2004 and September 30, 2005
11. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted average common shares outstanding during the periods presented. Diluted earnings per share is computed by dividing net income by the weighted average common shares and common share equivalents outstanding during the periods presented.
The following table sets forth the computation of basic and diluted earnings per share:
|
|
For the Three Months Ended |
|
For the Six Months Ended |
|
||||||||
(In thousands, except per share data) |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net income: |
|
|
|
|
|
|
|
|
|
||||
Continuing operations |
|
$ |
17,641 |
|
$ |
15,444 |
|
$ |
27,992 |
|
$ |
25,642 |
|
Discontinued operations |
|
(1,655 |
) |
(696 |
) |
(2,365 |
) |
(530 |
) |
||||
Net income |
|
$ |
15,986 |
|
$ |
14,748 |
|
$ |
25,627 |
|
$ |
25,112 |
|
|
|
|
|
|
|
|
|
|
|
||||
Earnings per share basic and diluted: |
|
|
|
|
|
|
|
|
|
||||
Continuing operations basic |
|
$ |
0.54 |
|
$ |
0.48 |
|
$ |
0.86 |
|
$ |
0.79 |
|
Discontinued operations - basic |
|
(0.05 |
) |
(0.03 |
) |
(0.07 |
) |
(0.02 |
) |
||||
Net income |
|
$ |
0.49 |
|
$ |
0.45 |
|
$ |
0.79 |
|
$ |
0.77 |
|
|
|
|
|
|
|
|
|
|
|
||||
Continuing operations diluted |
|
$ |
0.54 |
|
$ |
0.47 |
|
$ |
0.85 |
|
$ |
0.78 |
|
Discontinued operations - diluted |
|
(0.05 |
) |
(0.02 |
) |
(0.07 |
) |
(0.01 |
) |
||||
Net income |
|
$ |
0.49 |
|
$ |
0.45 |
|
$ |
0.78 |
|
$ |
0.77 |
|
|
|
|
|
|
|
|
|
|
|
||||
Common shares and common share equivalents: |
|
|
|
|
|
|
|
|
|
||||
Weighted average common shares outstanding basic |
|
32,604 |
|
32,470 |
|
32,596 |
|
32,452 |
|
||||
Common share equivalents (stock options) |
|
121 |
|
186 |
|
157 |
|
236 |
|
||||
Weighted average common shares outstanding diluted |
|
32,725 |
|
32,656 |
|
32,753 |
|
32,688 |
|
12
12. SUPPLEMENTAL CASH FLOW INFORMATION
During the six months ended June 30, 2005 and 2004, we made interest payments, net of amounts capitalized, totaling $36.3 million and $29.8 million, respectively. During the six months ended June 30, 2005 and 2004, we received $2.5 million and $1.5 million, respectively, of proceeds associated with our interest rate swap agreement that was entered into in December 2003 in connection with the issuance of our 8% Senior Subordinated Notes due 2014.
During the six months ended June 30, 2005 and 2004, we made income tax payments totaling $8.2 million and $9.3 million, respectively.
During the six months ended June 30, 2005, we completed two sale-leaseback transactions, which resulted in the sale of approximately $15.7 million of Assets Held for Sale and the removal of $15.7 million of Liabilities Associated with Assets Held for Sale from our Consolidated Balance Sheets.
13. COMMITMENTS AND CONTINGENCIES
A significant portion of our vehicle business involves the sale of vehicles, parts or vehicles composed of parts that are manufactured outside the United States of America. As a result, our operations are subject to customary risks of importing merchandise, including fluctuations in the relative values of currencies, import duties, exchange controls, trade restrictions, work stoppages and general political and socio-economic conditions in foreign countries. The United States of America or the countries from which our products are imported may, from time to time, impose new quotas, duties, tariffs or other restrictions, or adjust presently prevailing quotas, duties or tariffs, which may affect our operations and our ability to purchase imported vehicles and/or parts at reasonable prices.
Manufacturers may direct us to implement costly capital improvements to dealerships as a condition upon entering into franchise agreements with them. Manufacturers also typically require that their franchises meet specific standards of appearance. These factors, either alone or in combination, could cause us to divert our financial resources to capital projects from uses that management believes may be of higher long-term value, such as acquisitions.
Substantially all of our facilities are subject to federal, state and local provisions regarding the discharge of materials into the environment. Compliance with these provisions has not had, nor do we expect such compliance to have, any material effect upon our capital expenditures, net earnings, financial condition, liquidity or competitive position. We believe that our current practices and procedures for the control and disposition of such materials comply with applicable federal, state and local requirements.
From time to time, we and our dealerships are named in claims involving the manufacture and sale or lease of motor vehicles, including but not limited to the charging of administrative fees, the operation of dealerships, contractual disputes and other matters arising in the ordinary course of our business. With respect to certain of these claims, the sellers of our acquired dealerships have indemnified us. We do not expect that any potential liability from these claims will materially affect our financial condition, liquidity, results of operations or financial statement disclosures.
Our dealerships hold dealer agreements with a number of vehicle manufacturers. In accordance with the individual dealer agreements, each dealership is subject to certain rights and restrictions typical of the industry. The ability of the manufacturers to influence the operations of the dealerships or the loss of a dealer agreement could have a negative impact on our operating results.
We have guaranteed a loan made by a financial institution directly to a non-consolidated entity controlled by a former executive, which totaled approximately $2.1 million as of June 30, 2005. This loan was made by a corporation we acquired in October 1998, and guarantees an industrial revenue bond, which we are legally required to guarantee. The primary obligor of the note is a non-dealership business entity and that entitys partners as individuals.
14. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Our 8% Senior Subordinated Notes due 2014 are guaranteed by all of our current subsidiaries, other than our current Toyota and Lexus dealership subsidiaries, and all of our future domestic restricted subsidiaries, other than our future Toyota and Lexus dealership facilities. The following tables set forth, on a condensed consolidating basis, our balance sheets, statements of income and statements of cash flows, for our guarantor and non-guarantor subsidiaries for all financial statement periods presented in our interim consolidated financial statements.
13
Condensed Consolidating Balance Sheet
As of June 30, 2005
(In thousands)
(Restated)
|
|
Parent |
|
Guarantor |
|
Non-guarantor |
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|||||
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Cash and cash equivalents |
|
$ |
|
|
$ |
11,049 |
|
$ |
|
|
$ |
|
|
$ |
11,049 |
|
Inventories |
|
|
|
668,522 |
|
53,638 |
|
|
|
722,160 |
|
|||||
Other current assets |
|
|
|
282,270 |
|
56,246 |
|
|
|
338,516 |
|
|||||
Assets held for sale |
|
|
|
43,424 |
|
|
|
|
|
43,424 |
|
|||||
Total current assets |
|
|
|
1,005,265 |
|
109,884 |
|
|
|
1,115,149 |
|
|||||
Property and equipment, net |
|
|
|
200,708 |
|
5,274 |
|
|
|
205,982 |
|
|||||
Goodwill |
|
|
|
403,635 |
|
61,312 |
|
|
|
464,947 |
|
|||||
Other assets |
|
|
|
99,376 |
|
3,045 |
|
|
|
102,421 |
|
|||||
Investment in subsidiaries |
|
504,456 |
|
132,159 |
|
|
|
(636,615 |
) |
|
|
|||||
Total assets |
|
$ |
504,456 |
|
$ |
1,841,143 |
|
$ |
179,515 |
|
$ |
(636,615 |
) |
$ |
1,888,499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|||||
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Floor plan notes payable Manufacturer affiliated |
|
$ |
|
|
$ |
181,414 |
|
$ |
|
|
$ |
|
|
$ |
181,414 |
|
Floor plan notes payable Non Manufacturer affiliated |
|
|
|
389,379 |
|
42,344 |
|
|
|
431,723 |
|
|||||
Other current liabilities |
|
|
|
184,539 |
|
4,038 |
|
|
|
188,577 |
|
|||||
Liabilities associated with assets held for sale |
|
|
|
27,619 |
|
|
|
|
|
27,619 |
|
|||||
Total current liabilities |
|
|
|
782,951 |
|
46,382 |
|
|
|
829,333 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Long-term debt |
|
|
|
476,377 |
|
31 |
|
|
|
476,408 |
|
|||||
Other liabilities |
|
|
|
77,359 |
|
943 |
|
|
|
78,302 |
|
|||||
Shareholders equity |
|
504,456 |
|
504,456 |
|
132,159 |
|
(636,615 |
) |
504,456 |
|
|||||
Total liabilities and shareholders equity |
|
$ |
504,456 |
|
$ |
1,841,143 |
|
$ |
179,515 |
|
$ |
(636,615 |
) |
$ |
1,888,499 |
|
14
Condensed Consolidating Balance Sheet
As of December 31, 2004
(In thousands)
(Restated)
|
|
Parent |
|
Guarantor |
|
Non-guarantor |
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|||||
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Cash and cash equivalents |
|
$ |
|
|
$ |
28,093 |
|
$ |
|
|
$ |
|
|
$ |
28,093 |
|
Inventories |
|
|
|
713,205 |
|
48,352 |
|
|
|
761,557 |
|
|||||
Other current assets |
|
|
|
286,675 |
|
40,933 |
|
|
|
327,608 |
|
|||||
Assets held for sale |
|
|
|
25,748 |
|
|
|
|
|
25,748 |
|
|||||
Total current assets |
|
|
|
1,053,721 |
|
89,285 |
|
|
|
1,143,006 |
|
|||||
Property and equipment, net |
|
|
|
190,706 |
|
5,082 |
|
|
|
195,788 |
|
|||||
Goodwill |
|
|
|
400,338 |
|
61,312 |
|
|
|
461,650 |
|
|||||
Other assets |
|
|
|
79,435 |
|
18,080 |
|
|
|
97,515 |
|
|||||
Investment in subsidiaries |
|
481,732 |
|
130,098 |
|
|
|
(611,830 |
) |
|
|
|||||
Total assets |
|
$ |
481,732 |
|
$ |
1,854,298 |
|
$ |
173,759 |
|
$ |
(611,830 |
) |
$ |
1,897,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|||||
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Floor plan notes payable Manufacturer affiliated |
|
$ |
|
|
$ |
336,369 |
|
$ |
|
|
$ |
|
|
$ |
336,369 |
|
Floor plan notes payable Non Manufacturer affiliated |
|
|
|
277,170 |
|
37,409 |
|
|
|
314,579 |
|
|||||
Other current liabilities |
|
|
|
170,227 |
|
5,797 |
|
|
|
176,024 |
|
|||||
Liabilities associated with assets held for sale |
|
|
|
20,538 |
|
|
|
|
|
20,538 |
|
|||||
Total current liabilities |
|
|
|
804,304 |
|
43,206 |
|
|
|
847,510 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Long-term debt |
|
|
|
492,499 |
|
37 |
|
|
|
492,536 |
|
|||||
Other liabilities |
|
|
|
75,763 |
|
418 |
|
|
|
76,181 |
|
|||||
Shareholders equity |
|
481,732 |
|
481,732 |
|
130,098 |
|
(611,830 |
) |
481,732 |
|
|||||
Total liabilities and shareholders equity |
|
$ |
481,732 |
|
$ |
1,854,298 |
|
$ |
173,759 |
|
$ |
(611,830 |
) |
$ |
1,897,959 |
|
15
Condensed Consolidating Statement of
Income
For the Three Months Ended June 30, 2005
(In thousands)
|
|
Parent |
|
Guarantor |
|
Non-guarantor |
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Revenues |
|
$ |
|
|
$ |
1,264,661 |
|
$ |
168,612 |
|
$ |
(1,828 |
) |
$ |
1,431,445 |
|
Cost of sales |
|
|
|
1,075,959 |
|
144,298 |
|
(1,828 |
) |
1,218,429 |
|
|||||
Gross profit |
|
|
|
188,702 |
|
24,314 |
|
|
|
213,016 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Selling, general and administrative |
|
|
|
145,559 |
|
17,147 |
|
|
|
162,706 |
|
|||||
Depreciation and amortization |
|
|
|
4,427 |
|
355 |
|
|
|
4,782 |
|
|||||
Income from operations |
|
|
|
38,716 |
|
6,812 |
|
|
|
45,528 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|||||
Floor plan interest expense |
|
|
|
(7,112 |
) |
(429 |
) |
|
|
(7,541 |
) |
|||||
Other interest expense |
|
|
|
(8,969 |
) |
(1,301 |
) |
|
|
(10,270 |
) |
|||||
Other income, net |
|
|
|
503 |
|
5 |
|
|
|
508 |
|
|||||
Equity in earnings of subsidiaries |
|
15,986 |
|
3,065 |
|
|
|
(19,051 |
) |
|
|
|||||
Total other expense, net |
|
15,986 |
|
(12,513 |
) |
(1,725 |
) |
(19,051 |
) |
(17,303 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Income before income taxes |
|
15,986 |
|
26,203 |
|
5,087 |
|
(19,051 |
) |
28,225 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Income tax expense |
|
|
|
8,675 |
|
1,909 |
|
|
|
10,584 |
|
|||||
Income from continuing operations |
|
15,986 |
|
17,528 |
|
3,178 |
|
(19,051 |
) |
17,641 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Discontinued operations, net of tax |
|
|
|
(1,542 |
) |
(113 |
) |
|
|
(1,655 |
) |
|||||
Net income |
|
$ |
15,986 |
|
$ |
15,986 |
|
$ |
3,065 |
|
$ |
(19,051 |
) |
$ |
15,986 |
|
16
Condensed Consolidating Statement of
Income
For the Three Months Ended June 30, 2004
(In thousands)
|
|
Parent |
|
Guarantor |
|
Non-guarantor |
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Revenues |
|
$ |
|
|
$ |
1,118,991 |
|
$ |
148,456 |
|
$ |
(2,985 |
) |
$ |
1,264,462 |
|
Cost of sales |
|
|
|
947,184 |
|
128,617 |
|
(2,985 |
) |
1,072,816 |
|
|||||
Gross profit |
|
|
|
171,807 |
|
19,839 |
|
|
|
191,646 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Selling, general and administrative |
|
|
|
132,558 |
|
15,243 |
|
|
|
147,801 |
|
|||||
Depreciation and amortization |
|
|
|
4,428 |
|
325 |
|
|
|
4,753 |
|
|||||
Income from operations |
|
|
|
34,821 |
|
4,271 |
|
|