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 September 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

 

01-0609375

(State or other jurisdiction of incorporation or organization)

 

(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 Exchange Act).

Yes  ý    No  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o    No  ý

 

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 November 7, 2005, was 32,826,289 (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 nine months ended September 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 September 30, 2005. 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 September 30, 2005 (Unaudited) and December 31, 2004, restated

1

 

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

2

 

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

3

 

Notes to Consolidated Financial Statements (Unaudited)

4

 

Report of Independent Registered Public Accounting Firm

23

 

 

 

Item 2.

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

24

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

41

Item 4.

Controls and Procedures

42

 

 

 

PART II – Other Information

 

 

 

 

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)

 

 

 

September 30,
2005

 

December 31,
2004

 

 

 

(Unaudited)
(Restated)*

 

(Restated)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

25,998

 

$

28,093

 

Contracts-in-transit

 

81,961

 

105,360

 

Restricted investments

 

909

 

1,645

 

Accounts receivable (net of allowance of $1,057 and $2,073, respectively)

 

143,149

 

148,196

 

Inventories

 

623,444

 

761,557

 

Deferred income taxes

 

15,570

 

15,576

 

Prepaid and other current assets

 

57,950

 

56,831

 

Assets held for sale

 

60,338

 

25,748

 

Total current assets

 

1,009,319

 

1,143,006

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT, net

 

206,900

 

195,788

 

GOODWILL

 

467,188

 

461,650

 

RESTRICTED INVESTMENTS, net of current portion

 

3,932

 

2,478

 

OTHER LONG-TERM ASSETS

 

94,842

 

95,037

 

Total assets

 

$

1,782,181

 

$

1,897,959

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Floor plan notes payable – manufacturer affiliated

 

$

160,013

 

$

336,369

 

Floor plan notes payable – non-manufacturer affiliated

 

338,925

 

314,579

 

Current maturities of long-term debt

 

24,407

 

33,880

 

Accounts payable

 

54,191

 

53,078

 

Accrued liabilities

 

103,635

 

89,066

 

Liabilities associated with assets held for sale

 

32,891

 

20,538

 

Total current liabilities

 

714,062

 

847,510

 

 

 

 

 

 

 

LONG-TERM DEBT

 

473,818

 

492,536

 

DEFERRED INCOME TAXES

 

39,991

 

40,360

 

OTHER LONG-TERM LIABILITIES

 

28,668

 

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 34,398,104 and 34,163,759 shares issued, including shares held in treasury, respectively

 

344

 

342

 

Additional paid-in capital

 

416,494

 

413,094

 

Retained earnings

 

128,484

 

87,905

 

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

 

(15,032

)

(15,032

)

Accumulated other comprehensive loss

 

(4,648

)

(4,577

)

Total shareholders’ equity

 

525,642

 

481,732

 

Total liabilities and shareholders’ equity

 

$

1,782,181

 

$

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 September 30,

 

For the Nine Months
Ended September 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

REVENUES:

 

 

 

 

 

 

 

 

 

New vehicle

 

$

900,618

 

$

803,696

 

$

2,559,809

 

$

2,254,514

 

Used vehicle

 

361,889

 

303,521

 

1,035,201

 

887,514

 

Parts, service and collision repair

 

167,789

 

148,580

 

482,801

 

425,081

 

Finance and insurance, net

 

40,380

 

36,024

 

115,514

 

99,353

 

Total revenues

 

1,470,676

 

1,291,821

 

4,193,325

 

3,666,462

 

 

 

 

 

 

 

 

 

 

 

COST OF SALES:

 

 

 

 

 

 

 

 

 

New vehicle

 

838,787

 

748,662

 

2,384,237

 

2,094,708

 

Used vehicle

 

329,385

 

279,605

 

943,710

 

813,532

 

Parts, service and collision repair

 

82,013

 

71,877

 

233,881

 

203,111

 

Total cost of sales

 

1,250,185

 

1,100,144

 

3,561,828

 

3,111,351

 

 

 

 

 

 

 

 

 

 

 

GROSS PROFIT

 

220,491

 

191,677

 

631,497

 

555,111

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

170,855

 

153,304

 

494,455

 

438,025

 

Depreciation and amortization

 

4,945

 

4,432

 

14,434

 

13,757

 

Income from operations

 

44,691

 

33,941

 

122,608

 

103,329

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

Floor plan interest expense

 

(6,598

)

(4,867

)

(20,745

)

(13,698

)

Other interest expense

 

(10,317

)

(8,632

)

(30,188

)

(29,028

)

Interest income

 

163

 

218

 

599

 

591

 

Other income, net

 

29

 

205

 

481

 

413

 

Total other expense, net

 

(16,723

)

(13,076

)

(49,853

)

(41,722

)

Income before income taxes

 

27,968

 

20,865

 

72,755

 

61,607

 

 

 

 

 

 

 

 

 

 

 

INCOME TAX EXPENSE

 

10,488

 

7,825

 

27,283

 

22,925

 

INCOME FROM CONTINUING OPERATIONS

 

17,480

 

13,040

 

45,472

 

38,682

 

DISCONTINUED OPERATIONS, net of tax

 

(2,527

)

(924

)

(4,893

)

(1,454

)

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

14,953

 

$

12,116

 

$

40,579

 

$

37,228

 

 

 

 

 

 

 

 

 

 

 

EARNINGS PER COMMON SHARE:

 

 

 

 

 

 

 

 

 

Basic—

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.53

 

$

0.40

 

$

1.39

 

$

1.19

 

Discontinued operations

 

(0.07

(0.03

(0.15

(0.04

Net income

 

$

0.46

 

$

0.37

 

$

1.24

 

$

1.15

 

 

 

 

 

 

 

 

 

 

 

Diluted—

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.53

 

$

0.40

 

$

1.38

 

$

1.18

 

Discontinued operations

 

(0.08

)

(0.03

)

(0.14

)

(0.04

)

Net income

 

$

0.45

 

$

0.37

 

$

1.24

 

$

1.14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:

 

 

 

 

 

 

 

 

 

Basic

 

32,737

 

32,540

 

32,644

 

32,482

 

Diluted

 

33,032

 

32,647

 

32,847

 

32,675

 

 

See Notes to Consolidated Financial Statements.

 

2



 

ASBURY AUTOMOTIVE GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

For the Nine Months
Ended September 30,

 

 

 

2005

 

2004

 

 

 

(Restated)*

 

(Restated)*

 

CASH FLOW FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

40,579

 

$

37,228

 

Adjustments to reconcile net income to net cash provided by operating activities-

 

 

 

 

 

Depreciation and amortization

 

14,434

 

13,757

 

Depreciation and amortization from discontinued operations

 

1,361

 

2,034

 

Amortization of deferred financing fees

 

1,606

 

1,231

 

Change in allowance for doubtful accounts

 

(1,016

)

(723

)

Loss on sale of discontinued operations, net

 

416

 

737

 

Other adjustments

 

5,195

 

12,131

 

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

 

 

 

 

 

Contracts-in-transit

 

23,399

 

4,703

 

Accounts receivable

 

(6,438

)

(37,245

)

Proceeds from the sale of accounts receivable

 

12,390

 

14,222

 

Inventories

 

132,676

 

(14,228

)

Prepaid and other current assets

 

(19,114

)

(22,180

)

Floor plan notes payable – manufacturer affiliated

 

(175,442

)

(17,509

)

Accounts payable and accrued liabilities

 

2,381

 

19,245

 

Other long-term assets and liabilities

 

4,987

 

(2,153

)

Net cash provided by operating activities

 

37,414

 

11,250

 

 

 

 

 

 

 

CASH FLOW FROM INVESTING ACTIVITIES:

 

 

 

 

 

Capital expenditures – non-financed

 

(26,598

)

(36,193

)

Capital expenditures – financeable

 

(24,355

)

(20,397

)

Construction reimbursements associated with sale-leaseback agreements

 

4,127

 

10,088

 

Acquisitions

 

(24,621

)

(100,403

)

Proceeds from the sale of assets

 

12,794

 

11,795

 

Other investing activities

 

(707

)

1,346

 

Net cash used in investing activities

 

(59,360

)

(133,764

)

 

 

 

 

 

 

CASH FLOW FROM FINANCING ACTIVITIES:

 

 

 

 

 

Floor plan borrowings – non-manufacturer affiliated

 

2,454,384

 

1,744,093

 

Floor plan repayments – non-manufacturer affiliated

 

(2,406,138

)

(1,757,755

)

Proceeds from borrowings

 

23,266

 

21,606

 

Repayments of debt

 

(49,748

)

(90,316

)

Proceeds from the sale of assets associated with sale-leaseback agreements

 

 

114,873

 

Payments of debt issuance costs

 

(4,975

)

 

Proceeds from the exercise of stock options

 

3,062

 

1,557

 

Net cash provided by financing activities

 

19,851

 

34,058

 

Net decrease in cash and cash equivalents

 

(2,095

)

(88,456

)

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, beginning of period

 

28,093

 

106,711

 

CASH AND CASH EQUIVALENTS, end of period

 

$

25,998

 

$

18,255

 

 

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) in 23 metropolitan markets as of September 30, 2005. We offer an extensive range of automotive products and services, including new and used vehicles, vehicle maintenance, replacement parts, collision repair services, and financing, insurance 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 principally four regions and includes eleven dealership groups, each marketed under different local brands: (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 September 30, 2005, and for the three and nine months ended September 30, 2005 and 2004 have been included. The results of operations for the three and nine months ended September 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.

 

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” certain amounts reflected in the accompanying Consolidated Balance Sheets as of September 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 nine months ended September 30, 2004, have been reclassified to reflect the status of our discontinued operations as of September 30, 2005.

 

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

 

4



 

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:

 

(In thousands)

 

As of
September 30, 2005

 

Floor plan notes payable – manufacturer affiliated - previously reported

 

$

135,834

 

Floor plan notes payable – manufacturer affiliated

 

24,179

 

Floor plan notes payable – manufacturer affiliated – restated

 

$

160,013

 

 

 

 

 

Floor plan notes payable – non-manufacturer affiliated - previously reported

 

$

363,104

 

Floor plan notes payable – non-manufacturer affiliated

 

(24,179

)

Floor plan notes payable – non-manufacturer affiliated – restated

 

$

338,925

 

 

 

 

For the Nine Months Ended
September 30,

 

(In thousands)

 

2005

 

2004

 

Cash provided by (used in) operating activities – previously reported

 

$

50,292

 

$

(7,747

)

Floor plan notes payable – manufacturer affiliated

 

(15,414

)

19,530

 

Other

 

2,536

 

(533

)

Cash provided by operating activities – restated

 

$

37,414

 

$

11,250

 

 

 

 

 

 

 

Cash used in investing activities – previously reported

 

$

(49,170

)

$

(113,237

)

Acquisitions

 

(15,339

)

(28,809

)

Proceeds from the sale of assets

 

7,685

 

7,749

 

Other

 

(2,536

)

533

 

Cash used in investing activities – restated

 

$

(59,360

)

$

(133,764

)

 

 

 

 

 

 

Cash (used in) provided by financing activities – previously reported

 

$

(3,217

)

$

32,528

 

Floor plan notes payable – non-manufacturer affiliated

 

(25,178

)

15,192

 

Floor plan borrowings – non-manufacturer affiliated

 

2,454,384

 

1,744,093

 

Floor plan repayments – non-manufacturer affiliated

 

(2,406,138

)

(1,757,755

)

Cash provided by financing activities – restated

 

$

19,851

 

$

34,058

 

 

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 incentives and rebates, including manufacturer holdbacks and floor plan interest assistance, are recognized as a reduction of new vehicle cost of sales when earned, generally at the time the related vehicles are sold.

 

We receive commissions from extended service and insurance providers for 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 by the customer. 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

 

Our retail network is organized into principally four regions and includes eleven dealership groups. We evaluate our

 

5



 

operations and financial results by dealership in the aggregate. The general managers, with direction from a centralized management team, including corporate and regional management, implement strategic initiatives while maintaining their ability to respond effectively to local market conditions. Based on our management, operational and reporting structure we operate in one segment and therefore we evaluate goodwill at the total company 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 common share (basic and diluted) 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 September 30,

 

For the Nine Months
Ended September 30,

 

(In thousands, except per share data)

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

14,953

 

$

12,116

 

$

40,579

 

$

37,228

 

Adjustments to net income:

 

 

 

 

 

 

 

 

 

Stock-based compensation expense included in net income, net of tax

 

 

3

 

1

 

86

 

Pro forma stock-based compensation expense, net of tax

 

(669

)

(1,410

)

(2,009

)

(4,012

)

Pro forma net income

 

$

14,284

 

$

10,709

 

$

38,571

 

$

33,302

 

 

 

 

 

 

 

 

 

 

 

Net income per common share—basic (as reported)

 

$

0.46

 

$

0.37

 

$

1.24

 

$

1.15

 

 

 

 

 

 

 

 

 

 

 

Net income per common share—diluted (as reported)

 

$

0.45

 

$

0.37

 

$

1.24

 

$

1.14

 

 

 

 

 

 

 

 

 

 

 

Pro forma net income per common share—basic

 

$

0.44

 

$

0.33

 

$

1.18

 

$

1.03

 

 

 

 

 

 

 

 

 

 

 

Pro forma net income per common share—diluted

 

$

0.43

 

$

0.33

 

$

1.17

 

$

1.02

 

 

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 September 30,

 

For the Nine Months
Ended September 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

Risk free interest rate

 

4.2

%

3.1

%

3.8

%

3.3

%

Expected life of options

 

4 years

 

4 years

 

4 years

 

4 years

 

Expected stock price volatility

 

44

%

50

%

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.

 

6



 

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 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 no ineffectiveness during the three months ended September 30, 2005 and during the three and nine months ended September 30, 2004, and minor ineffectiveness during the nine months ended 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 to 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 anticipation of the sale of two of our dealerships, we purchased the real estate on which each dealership is located for approximately $8.2 million and the buyers of these dealerships have agreed to purchase the real estate from us for $8.2 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 October 2005, the Financial Accounting Standards Board (“FASB”) issued Staff Position (“FSP”) No. FAS 13-1, “Accounting for Rental Costs Incurred during a Construction Period,” which requires rental costs associated with ground or building operating leases that are incurred during a construction period to be recognized as rental expense. This Staff Position is effective for reporting periods beginning after December 15, 2005. We currently capitalize rent incurred during the construction period and amortize the costs over the lease term. We will adopt the provisions of FSP No. FAS 13-1 as of January 1, 2006 and begin expensing all rent incurred during the construction period. We do not expect FSP No. FAS 13-1 to have a material effect on our consolidated financial statements.

 

In June 2005, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 05-6, “Determining the Amortization Period for Leasehold Improvements.”  The consensus reached is that leasehold improvements acquired in a business combination or purchased subsequent to the inception of the lease should be amortized over the lesser of the useful life of the asset or the lease term that includes reasonably assured lease renewals as determined on the date of the acquisition of the leasehold improvement. We have adopted the provisions of EITF No. 05-6 and are amortizing leasehold improvements over the lesser of the useful life or the lease term, including reasonably assured renewal periods.

 

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” which replaces APB Opinion No. 20, “Accounting Changes” and SFAS No. 3 “Reporting Accounting Changes in Interim Financial Statements.”  SFAS No. 154 requires all direct financial statement effects caused by a voluntary change in accounting principle to be applied retrospectively to prior period financial statements as if the new principle had always been applied, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change in principle. APB Opinion No. 20 and SFAS No. 3 previously required that a voluntary change in an accounting principle be recognized through a cumulative effect in net income in the period of change. SFAS No. 154 is effective for reporting periods beginning after December 15, 2005. We do not expect SFAS No. 154 to have a material effect on our consolidated financial statements.

 

7



 

In December 2004, the 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.

 

3. INVENTORIES

 

Inventories consist of the following:

 

 

 

As of

 

(In thousands)

 

September 30,
2005

 

December 31,
2004

 

 

 

 

 

 

 

New vehicles

 

$

 475,655

 

$

 619,098

 

Used vehicles

 

106,463

 

98,071

 

Parts and accessories

 

41,326

 

44,388

 

Total inventories

 

$

 623,444

 

$

 761,557

 

 

The lower of cost or market reserves for inventory totaled $4.8 million and $4.9 million as of September 30, 2005 and December 31, 2004, respectively. In addition to the inventories shown above, we have $41.5 million and $7.8 million of inventory as of September 30, 2005 and December 31, 2004, respectively, classified as Assets Held for Sale on the accompanying Consolidated Balance Sheets as they are associated with franchises held for sale.

 

4. ACQUISITIONS

 

During the nine months ended September 30, 2005, we acquired three franchises (one dealership location) for an aggregate purchase price of $26.8 million, including $9.3 million of cash, $15.3 million of borrowings from our floor plan facilities, the exchange of two of our franchises valued at $1.5 million and $0.7 million of future payments. During the nine months ended September 30, 2004, we acquired six franchises (six dealership locations) for an aggregate purchase price of $103.0 million, including $71.6 million of cash, $28.8 million of borrowings from our floor plan facilities and $2.6 million of future payments.

 

The allocation of purchase price for acquisitions is as follows:

 

 

 

For the Nine Months
Ended September 30,

 

(In thousands)

 

2005

 

2004

 

 

 

 

 

 

 

Inventories

 

$

17,156

 

$

32,540

 

Fixed assets

 

344

 

3,723

 

Other assets

 

1

 

1,666

 

Goodwill

 

6,400

 

53,555

 

Franchise rights

 

2,850

 

11,500

 

Total purchase price

 

$

26,751

 

$

102,984

 

 

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.

 

8



 

5. GOODWILL AND MANUFACTURER FRANCHISE RIGHTS

 

The changes in the carrying amount of goodwill for the nine months ended September 30, 2005 are as follows:

 

(In thousands)

 

 

 

 

 

 

 

Balance, December 31, 2004

 

$

461,650

 

Current year acquisitions

 

6,400

 

Adjustments associated with prior year acquisitions

 

519

 

Current year divestitures

 

(1,381

)

Balance, September 30, 2005

 

$

467,188

 

 

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

 

2,850

 

Divestitures

 

(1,536

)

Other

 

(843

)

Balance, September 30, 2005

 

$

42,484

 

 

During the nine months ended September 30, 2005, we sold six franchises (two dealership locations) resulting in the removal of $1.4 million of goodwill from our Consolidated Balance Sheets.

 

During the nine months ended September 30, 2005, we acquired three franchises (one dealership location) and allocated $2.9 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 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 transaction.

 

Assets and liabilities associated with discontinued operations include the six remaining franchises (six dealership locations) in Oregon and two franchises (two dealership locations) in Southern California as of September 30, 2005. As of December 31, 2004, assets and liabilities associated with discontinued operations included two franchises (one dealership location) in Florida and two franchises (one dealership location) in Oregon. During the nine months ended September 30, 2005, we sold all four franchises (two dealership locations) that had been held for sale as of December 31, 2004. Assets associated with discontinued operations totaled $60.3 million and $11.2 million, and liabilities associated with discontinued operations totaled $32.9 million and $7.4 million as of September 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 reimbursements from an unaffiliated third party associated with this completed construction project. During the nine months ended September 30, 2005, we received $1.4 million of funds from the unaffiliated third party and completed this 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.

 

9



 

A summary of assets and liabilities held for sale is as follows:

 

 

 

As of

 

(In thousands)

 

September 30,
2005

 

December 31,
2004

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

Inventories

 

$

41,540

 

$

7,846

 

Property and equipment, net

 

18,793

 

17,902

 

Other assets

 

5

 

 

Total assets

 

60,338

 

25,748

 

Liabilities:

 

 

 

 

 

Floor plan notes payable

 

32,270

 

7,456

 

Other liabilities

 

621

 

13,082

 

Total liabilities

 

32,891

 

20,538

 

Net assets held for sale

 

$

27,447

 

$

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 during the construction period and record a corresponding liability equal to the amount of the reimbursed funds. Upon completion of the construction, we will execute the sale-leaseback transaction and remove the cost of construction and the related liability from our Consolidated Balance Sheets. During the nine months ended September 30, 2005, we sold real estate in connection with two sale-leaseback transactions, which resulted in the removal of $2.7 million of Prepaid and Other Current Assets and $1.2 million of Accrued Liabilities from our Consolidated Balance Sheets. The book value of assets associated with construction projects that have not been completed as of September 30, 2005 and December 31, 2004 totaled $12.8 million and $7.1 million, respectively. As of September 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)

 

September 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 $5,522 and $2,736, respectively)

 

194,478

 

197,264

 

Mortgage notes payable

 

25,642

 

49,732

 

Notes payable collateralized by service loaner vehicles

 

21,438

 

21,627

 

Capital lease obligations

 

4,616

 

4,421

 

Other notes payable

 

2,051

 

3,372

 

 

 

498,225

 

526,416

 

Less—current portion

 

(24,407

)

(33,880

)

Long-term debt

 

$

473,818

 

$

492,536

 

 

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 September 30, 2005 and December 31, 2004, the swaps had a fair value of $7.5 million and $7.1 million, and are included in Accrued Liabilities and Other Long-Term Liabilities, respectively, on the accompanying Consolidated Balance Sheets.

 

10



 

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 value of the related swap. The swap is scheduled to expire in March 2006. As of September 30, 2005 and December 31, 2004, the swap agreement had a fair value of $5.5 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 September 30, 2005, the swap agreement had a fair value of $0.1 million, which was included in Other Long-Term Assets on the accompanying Consolidated Balance Sheets. As of 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.

 

9. COMPREHENSIVE INCOME

 

The following table provides a reconciliation of net income to comprehensive income:

 

 

 

For the Three Months Ended September 30,

 

For the Nine Months
Ended September 30,

 

(In thousands)

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

14,953

 

$

12,116

 

$

40,579

 

$

37,228

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Change in fair value of cash flow hedges

 

5,165

 

(8,187

)

(114

)

(7,176

)

Income tax benefit (expense) associated with cash flow hedges

 

(1,937

)

3,070

 

43

 

2,666

 

Comprehensive income

 

$

18,181

 

$

6,999

 

$

40,508

 

$

32,718

 

 

10. DISCONTINUED OPERATIONS

 

During the nine months ended September 30, 2005, we sold six franchises (two dealership locations) and placed ten franchises (eight dealership locations) into discontinued operations. As of September 30, 2005, eight franchises (eight dealership locations) were pending disposition. The accompanying Consolidated Statements of Income for the three and nine months ended September 30, 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:

 

11



 

 

 

For the Three Months
Ended September 30, 2005

 

For the Three Months
Ended September 30, 2004

 

(Dollars in thousands)

 

Sold

 

Pending
Disposition

 

Total

 

Sold(a)

 

Pending
Disposition(b)

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Franchises:

 

 

 

 

 

 

 

 

 

 

 

 

 

Mid-line Domestic

 

2

 

3

 

5

 

9

 

3

 

12

 

Mid-line Import

 

 

3

 

3

 

5

 

3

 

8

 

Value

 

 

2

 

2

 

2

 

2

 

4

 

Luxury

 

 

 

 

2

 

 

2

 

Total

 

2

 

8

 

10

 

18

 

8

 

26

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

3,846

 

$

84,978

 

$

88,824

 

$

45,871

 

$

96,774

 

$

142,645

 

Cost of sales

 

3,704

 

73,235

 

76,939

 

39,635

 

81,939

 

121,574

 

Gross profit

 

142

 

11,743

 

11,885

 

6,236

 

14,835

 

21,071

 

Operating expenses

 

494

 

13,921

 

14,415

 

7,160

 

14,339

 

21,499

 

Income (loss) from operations

 

(352

)

(2,178

)

(2,530

)

(924

)

496

 

(428

)

Other expense, net

 

(240

)

(848

)

(1,088

)

(561

)

(227

)

(788

)

Net income (loss)

 

(592

)

(3,026

)

(3,618

)

(1,485

)

269

 

(1,216

)

Loss on disposition of discontinued operations

 

(426

)

 

(426

)

(263

)

 

(263

)

Income (loss) before income taxes

 

(1,018

)

(3,026

)

(4,044

)

(1,748

)

269

 

(1,479

)

Income tax benefit (expense)

 

380

 

1,137

 

1,517

 

649

 

(94

)

555

 

Discontinued operations, net of tax

 

$

(638

)

$

(1,889

)

$

(2,527

)

$

(1,099

)

$

175

 

$

(924

)

 

 

 

For the Nine Months
Ended September 30, 2005

 

For the Nine Months
Ended September 30, 2004

 

(Dollars in thousands)

 

Sold

 

Pending Disposition

 

Total

 

Sold(c)

 

Pending Disposition(b)

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Franchises:

 

 

 

 

 

 

 

 

 

 

 

 

 

Mid-line Domestic

 

5

 

3

 

8

 

9

 

3

 

12

 

Mid-line Import

 

 

3

 

3

 

6

 

3

 

9

 

Value

 

 

2

 

2

 

3

 

2

 

5

 

Luxury

 

1

 

 

1

 

2

 

 

2

 

Total

 

6

 

8

 

14

 

20

 

8

 

28

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

22,808

 

$

250,943

 

$

273,751

 

$

163,695

 

$

259,630

 

$

423,325

 

Cost of sales

 

20,056

 

214,098

 

234,154

 

139,258

 

219,206

 

358,464

 

Gross profit

 

2,752

 

36,845

 

39,597

 

24,437

 

40,424

 

64,861

 

Operating expenses

 

3,606

 

40,389

 

43,995

 

25,167

 

38,816

 

63,983

 

Income (loss) from operations

 

(854

)

(3,544

)

(4,398

)

(730

)

1,608

 

878

 

Other expense, net

 

(1,091

)

(1,924

)

(3,015

)

(1,853

)

(615

)

(2,468

)

Net income (loss)

 

(1,945

)

(5,468

)

(7,413

)

(2,583

)

993

 

(1,590

)

Loss on disposition of discontinued operations

 

(416

)

 

(416

)

(737

)

 

(737

)

Income (loss) before income taxes

 

(2,361

)

(5,468

)

(7,829

)

(3,320

)

993

 

(2,327

)

Income tax benefit (expense)

 

875

 

2,061

 

2,936

 

1,251

 

(378

)

873

 

Discontinued operations, net of tax

 

$

(1,486

)

$

(3,407

)

$

(4,893

)

$

(2,069

)

$

615

 

$

(1,454

)

 


(a)

Businesses were sold between July 1, 2004 and September 30, 2005

(b)

Businesses were pending disposition as of September 30, 2005

(c)

Businesses were sold between January 1, 2004 and September 30, 2005

 

12



 

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 September 30,

 

For the Nine Months
Ended September 30,

 

(In thousands, except per share data)

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

Net income:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

17,480

 

$

13,040

 

$

45,472

 

$

38,682

 

Discontinued operations, net of tax

 

(2,527

)

(924

)

(4,893

)

(1,454

)

Net income

 

$

14,953

 

$

12,116

 

$

40,579

 

$

37,228

 

Earnings per share – basic and diluted:

 

 

 

 

 

 

 

 

 

Continuing operations – basic

 

$

0.53

 

$

0.40

 

$

1.39

 

$

1.19

 

Discontinued operations - basic

 

(0.07

)

(0.03

)

(0.15

)

(0.04

)

Net income

 

$

0.46

 

$

0.37

 

$

1.24

 

$

1.15

 

 

 

 

 

 

 

 

 

 

 

Continuing operations – diluted

 

$

0.53

 

$

0.40

 

$

1.38

 

$

1.18

 

Discontinued operations - diluted

 

(0.08

)

(0.03

)

(0.14

)

(0.04

)

Net income

 

$

0.45

 

$

0.37

 

$

1.24

 

$

1.14

 

 

 

 

 

 

 

 

 

 

 

Common shares and common share equivalents:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding – basic

 

32,737

 

32,540

 

32,644

 

32,482

 

Common share equivalents (stock options)

 

295

 

107

 

203

 

193

 

Weighted average common shares outstanding – diluted

 

33,032

 

32,647

 

32,847

 

32,675

 

 

12. SUPPLEMENTAL CASH FLOW INFORMATION

 

During the nine months ended September 30, 2005 and 2004, we made interest payments, net of amounts capitalized, totaling $51.3 million and $44.5 million, respectively. During the nine months ended September 30, 2005 and 2004, we received $3.7 million and $4.9 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 nine months ended September 30, 2005 and 2004, we made income tax payments totaling $17.8 million and $11.0 million, respectively.

 

During the nine months ended September 30, 2005, we completed two sale-leaseback transactions, one of which resulted in the sale of approximately $14.5 million of Assets Held for Sale and the removal of $14.5 million of Liabilities Associated with Assets Held for Sale from our Consolidated Balance Sheets.

 

During the nine months ended September 30, 2005, we acquired one franchise with $4.0 million in cash and the exchange of two of our franchises valued at $1.5 million.

 

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.

 

13



 

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.

 

In connection with the sale of one of our dealership locations, we have guaranteed the future lease payments on one dealership operating lease. The primary obligor of the lease is the buyer of the dealership. We would have to make the lease payments if the buyer were to default under the terms of the lease. The total amount of future payments is approximately $2.8 million through 2009.

 

14



 

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, of our guarantor and non-guarantor subsidiaries for all financial statement periods presented in our interim consolidated financial statements.

 

Condensed Consolidating Balance Sheet
As of September 30, 2005
(In thousands)

(Restated)

 

 

 

Parent
Company

 

Guarantor
Subsidiaries

 

Non-guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

$

25,998

 

$

 

$

 

$

25,998

 

Inventories

 

 

582,085

 

41,359

 

 

623,444

 

Other current assets

 

 

248,177

 

51,362

 

 

299,539

 

Assets held for sale

 

 

53,387

 

6,951

 

 

60,338

 

Total current assets

 

 

909,647

 

99,672

 

 

1,009,319

 

Property and equipment, net

 

 

200,960

 

5,940

 

 

206,900

 

Goodwill

 

 

405,876

 

61,312

 

 

467,188

 

Other long-term assets

 

 

94,513

 

4,261

 

 

98,774

 

Investment in subsidiaries

 

525,642

 

134,044

 

 

(659,686

)

 

Total assets

 

$

525,642

 

$

1,745,040

 

$

171,185

 

$

(659,686

)

$

1,782,181

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Floor plan notes payable –Manufacturer affiliated

 

$

 

$

160,013

 

$

 

$

 

$

160,013

 

Floor plan notes payable – Non – Manufacturer affiliated

 

 

311,800

 

27,125

 

 

338,925

 

Other current liabilities

 

 

176,723

 

5,510

 

 

182,233

 

Liabilities associated with assets held for sale

 

 

28,609

 

4,282

 

 

32,891

 

Total current liabilities

 

 

677,145

 

36,917

 

 

714,062

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

473,751

 

67

 

 

473,818

 

Other long-term liabilities

 

 

68,502

 

157

 

 

68,659

 

Shareholders’ equity

 

525,642

 

525,642

 

134,044

 

(659,686

)

525,642

 

Total liabilities and shareholders’ equity

 

$

525,642

 

$

1,745,040

 

$

171,185

 

$

(659,686

)

$

1,782,181

 

 

15



 

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 long-term 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 long-term 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

 

 

16



 

Condensed Consolidating Statement of Income
For the Three Months Ended September 30, 2005
(In thousands)

 

 

 

Parent
Company

 

Guarantor
Subsidiaries

 

Non-guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

 

$

1,295,612

 

$

175,938

 

$

(874

)

$

1,470,676

 

Cost of sales

 

 

1,100,691

 

150,368

 

(874

)

1,250,185

 

Gross profit

 

 

194,921

 

25,570

 

 

220,491

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

152,370

 

18,485

 

 

170,855

 

Depreciation and amortization

 

 

4,567

 

378

 

 

4,945

 

Income from operations

 

 

37,984

 

6,707

 

 

44,691

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Floor plan interest expense

 

 

(6,164

)

(434

)

 

(6,598

)

Other interest expense

 

 

(8,924

)

(1,393

)

 

(10,317

)

Other income, net

 

 

189

 

3

 

 

192

 

Equity in earnings of subsidiaries

 

14,953

 

2,789

 

 

(17,742

)

 

Total other expense, net

 

14,953

 

(12,110

)

(1,824

)

(17,742

)

(16,723

)

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

14,953

 

25,874

 

4,883

 

(17,742

)

27,968

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

8,657

 

1,831

 

 

10,488

 

Income from continuing operations