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

 

 

For the quarterly period ended June 30, 2005

 

OR

 

 

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
(State or other jurisdiction of incorporation or organization)

 

01-0609375
(I.R.S. Employer Identification No.)

 

 

 

622 Third Avenue, 37th Floor
New York, New York

 

10017

(Address of principal executive offices)

 

(Zip Code)

 

(212) 885-2500
(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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 registrant’s 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, stockholder’s 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

 

 

PART I – Financial Information

 

 

 

 

Item 1.

Consolidated Financial Statements

 

 

Consolidated Balance Sheets as of June 30, 2005 (Unaudited) and December 31, 2004, restated

1

 

Consolidated Statements of Income for the Three and Six Months Ended June 30, 2005 and 2004 (Unaudited)

2

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2005 and 2004 (Unaudited), restated

3

 

Notes to Consolidated Financial Statements (Unaudited)

4

 

Report of Independent Registered Public Accounting Firm

22

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

40

Item 4.

Controls and Procedures

41

 

 

 

PART II – Other Information

 

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

43

Item 6.

Exhibits

43

 

Signatures

44

 

Index to Exhibits

45

 



 

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

 

ASBURY AUTOMOTIVE GROUP, INC.

CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)

 

 

 

June 30,

 

December 31,

 

 

 

2005

 

2004

 

 

 

(Unaudited)

 

(Restated)

 

 

 

(Restated)*

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

11,049

 

$

28,093

 

Contracts-in-transit

 

112,432

 

105,360

 

Restricted investments

 

1,813

 

1,645

 

Accounts receivable (net of allowance of $2,224 and $2,073, respectively)

 

150,183

 

148,196

 

Inventories

 

722,160

 

761,557

 

Deferred income taxes

 

15,576

 

15,576

 

Prepaid and other current assets

 

58,512

 

56,831

 

Assets held for sale

 

43,424

 

25,748

 

Total current assets

 

1,115,149

 

1,143,006

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT, net

 

205,982

 

195,788

 

GOODWILL

 

464,947

 

461,650

 

RESTRICTED INVESTMENTS, net of current portion

 

3,282

 

2,478

 

OTHER LONG-TERM ASSETS

 

99,139

 

95,037

 

Total assets

 

$

1,888,499

 

$

 1,897,959

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Floor plan notes payable – manufacturer affiliated

 

$

181,414

 

$

336,369

 

Floor plan notes payable – non-manufacturer affiliated

 

431,723

 

314,579

 

Current maturities of long-term debt

 

32,936

 

33,880

 

Accounts payable

 

66,649

 

53,078

 

Accrued liabilities

 

88,992

 

89,066

 

Liabilities associated with assets held for sale

 

27,619

 

20,538

 

Total current liabilities

 

829,333

 

847,510

 

 

 

 

 

 

 

LONG-TERM DEBT

 

476,408

 

492,536

 

DEFERRED INCOME TAXES

 

38,375

 

40,360

 

OTHER LONG-TERM LIABILITIES

 

39,927

 

35,821

 

COMMITMENTS AND CONTINGENCIES (Note 13)

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY:

 

 

 

 

 

Preferred stock, $.01 par value per share, 10,000,000 shares authorized

 

 

 

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

 

342

 

342

 

Additional paid-in capital

 

413,490

 

413,094

 

Retained earnings

 

113,532

 

87,905

 

Treasury stock, at cost; 1,586,587 shares held

 

(15,032

)

(15,032

)

Accumulated other comprehensive loss

 

(7,876

)

(4,577

)

Total shareholders’ equity

 

504,456

 

481,732

 

Total liabilities and shareholders’ equity

 

$

1,888,499

 

$

1,897,959

 

 


* 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)

 

 

 

For the Three Months
Ended June 30,

 

For the Six Months
Ended June 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

REVENUES:

 

 

 

 

 

 

 

 

 

New vehicle

 

$

880,684

 

$

786,669

 

$

1,659,191

 

$

1,450,818

 

Used vehicle

 

350,740

 

300,639

 

673,312

 

583,993

 

Parts, service and collision repair

 

160,635

 

142,237

 

315,012

 

276,501

 

Finance and insurance, net

 

39,386

 

34,917

 

75,134

 

63,329

 

Total revenues

 

1,431,445

 

1,264,462

 

2,722,649

 

2,374,641

 

 

 

 

 

 

 

 

 

 

 

COST OF SALES:

 

 

 

 

 

 

 

 

 

New vehicle

 

820,187

 

730,750

 

1,545,450

 

1,346,046

 

Used vehicle

 

320,654

 

275,400

 

614,325

 

533,927

 

Parts, service and collision repair

 

77,588

 

66,666

 

151,868

 

131,234

 

Total cost of sales

 

1,218,429

 

1,072,816

 

2,311,643

 

2,011,207

 

GROSS PROFIT

 

213,016

 

191,646

 

411,006

 

363,434

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

162,706

 

147,801

 

323,600

 

284,721

 

Depreciation and amortization

 

4,782

 

4,753

 

9,489

 

9,325

 

Income from operations

 

45,528

 

39,092

 

77,917

 

69,388

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

Floor plan interest expense

 

(7,541

)

(4,724

)

(14,147

)

(8,831

)

Other interest expense

 

(10,270

)

(10,132

)

(19,871

)

(20,396

)

Interest income

 

171

 

106

 

436

 

373

 

Other income, net

 

337

 

84

 

452

 

208

 

Total other expense, net

 

(17,303

)

(14,666

)

(33,130

)

(28,646

)

Income before income taxes

 

28,225

 

24,426

 

44,787

 

40,742

 

 

 

 

 

 

 

 

 

 

 

INCOME TAX EXPENSE

 

10,584

 

8,982

 

16,795

 

15,100

 

INCOME FROM CONTINUING OPERATIONS

 

17,641

 

15,444

 

27,992

 

25,642

 

 

 

 

 

 

 

 

 

 

 

DISCONTINUED OPERATIONS, net of tax

 

(1,655

)

(696

)

(2,365

)

(530

)

NET INCOME

 

$

15,986

 

$

14,748

 

$

25,627

 

$

25,112

 

 

 

 

 

 

 

 

 

 

 

EARNINGS PER COMMON SHARE:

 

 

 

 

 

 

 

 

 

Basic—

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.54

 

$

0.48

 

$

0.86

 

$

0.79

 

Discontinued operations

 

(0.05

)

(0.03

)

(0.07

)

(0.02

)

Net income

 

$

0.49

 

$

0.45

 

$

0.79

 

$

0.77

 

 

 

 

 

 

 

 

 

 

 

Diluted—

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.54

 

$

0.47

 

$

0.85

 

$

0.78

 

Discontinued operations

 

(0.05

)

(0.02

)

(0.07

)

(0.01

)

Net income

 

$

0.49

 

$

0.45

 

$

0.78

 

$

0.77

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:

 

 

 

 

 

 

 

 

 

Basic

 

32,604

 

32,470

 

32,596

 

32,452

 

Diluted

 

32,725

 

32,656

 

32,753

 

32,688

 

 

See Notes to Consolidated Financial Statements.

 

2



 

ASBURY AUTOMOTIVE GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

For the Six Months
Ended June 30,

 

 

 

2005

 

2004

 

 

 

(Restated)*

 

(Restated)*

 

CASH FLOW FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

25,627

 

$

25,112

 

Adjustments to reconcile net income to net cash used in operating activities-

 

 

 

 

 

Depreciation and amortization

 

9,489

 

9,325

 

Depreciation and amortization from discontinued operations

 

1,100

 

1,341

 

Amortization of deferred financing fees

 

1,013

 

1,170

 

Change in allowance for doubtful accounts

 

151

 

(327

)

(Gain) loss on sale of discontinued operations

 

(10

)

474

 

Other adjustments

 

2,993

 

3,543

 

Changes in operating assets and liabilities, net of acquisitions and divestitures-

 

 

 

 

 

Contracts-in-transit

 

(7,072

)

(2,482

)

Accounts receivable

 

(10,375

)

(35,511

)

Proceeds from the sale of accounts receivable

 

8,126

 

9,976

 

Inventories

 

31,705

 

(63,735

)

Prepaid and other current assets

 

(13,190

)

(6,454

)

Floor plan notes payable – manufacturer affiliated

 

(141,120

)

25,078

 

Accounts payable and accrued liabilities

 

13,097

 

16,578

 

Other long-term assets and liabilities

 

770

 

(7,202

)

Net cash used in operating activities

 

(77,696

)

(23,114

)

 

 

 

 

 

 

CASH FLOW FROM INVESTING ACTIVITIES:

 

 

 

 

 

Capital expenditures – non-financed

 

(16,942

)

(18,391

)

Capital expenditures – financeable

 

(18,236

)

(16,130

)

Construction reimbursements associated with sale-leaseback agreements

 

2,595

 

9,493

 

Acquisitions

 

(11,562

)

(100,403

)

Proceeds from the sale of assets

 

7,989

 

3,522

 

Other investing activities

 

(878

)

913

 

Net cash used in investing activities

 

(37,034

)

(120,996

)

 

 

 

 

 

 

CASH FLOW FROM FINANCING ACTIVITIES:

 

 

 

 

 

Floor plan borrowings – non-manufacturer affiliated

 

1,753,115

 

1,185,266

 

Floor plan repayments – non-manufacturer affiliated

 

(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 Company’s 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



 



(In thousands)

 

As of
June 30, 2005

 

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
June 30,

 

(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 platform’s 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 share—basic (as reported)

 

$

0.49

 

$

0.45

 

$

0.79

 

$

0.77

 

 

 

 

 

 

 

 

 

 

 

Net income per common share—diluted (as reported)

 

$

0.49

 

$

0.45

 

$

0.78

 

$

0.77

 

 

 

 

 

 

 

 

 

 

 

Pro forma net income per common share—basic

 

$

0.47

 

$

0.41

 

$

0.75

 

$

0.70

 

 

 

 

 

 

 

 

 

 

 

Pro forma net income per common share—diluted

 

$

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
Ended June 30,

 

For the Six Months
Ended June 30,

 

 

 

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

 

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” certain amounts reflected in the accompanying Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004, have been classified as Assets Held for Sale and Liabilities Associated with Assets Held for Sale. In addition, 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.

 

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 Commission’s 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,
2005

 

December 31,
2004

 

 

 

 

 

 

 

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
Ended June 30,

 

(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,
2005

 

December 31,
2004

 

 

 

 

 

 

 

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,
2005

 

December 31,
2004

 

 

 

 

 

 

 

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

 

Less—current 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
Ended June 30,

 

For the Six Months
Ended June 30,

 

(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
Ended June 30, 2005

 

For the Three Months
Ended June 30, 2004

 

(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
June 30, 2005

 

For the Six Months Ended
June 30, 2004

 

(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
June 30,

 

For the Six Months Ended
June 30,

 

(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 entity’s 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
Company

 

Guarantor
Subsidiaries

 

Non-guarantor
Subsidiaries

 


Eliminations

 


Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

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
Company

 

Guarantor
Subsidiaries

 

Non-guarantor
Subsidiaries

 


Eliminations

 


Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

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
Company

 

Guarantor
Subsidiaries

 

Non-guarantor
Subsidiaries

 


Eliminations

 


Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

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
Company

 

Guarantor
Subsidiaries

 

Non-guarantor
Subsidiaries

 


Eliminations

 


Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

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