UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 30, 2003
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 (I.R.S. Employer Identification No.)
Incorporation or Organization)
Three Landmark Square, Suite 500, Stamford, Connecticut 06901, (203) 356-4400
- -------------------------------------------------------------------------------
(Address of, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices
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 3 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 v No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes v No
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date (applicable only to corporate
registrants): The number of shares of common stock outstanding as of August 8,
2003 was 32,417,228 (net of 1,590,013 treasury shares).
ASBURY AUTOMOTIVE GROUP, INC.
June 30, 2003 Form 10-Q Quarterly Report
Table of Contents
Part I - Financial Information
Page
Item 1. Financial Statements
Consolidated Balance Sheets as of
June 30, 2003 and December 31, 2002...................................1
Consolidated Statements of Income -
Three Months and Six Months Ended June 30, 2003 and 2002..............2
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2003 and 2002...............................3
Notes to Consolidated Financial Statements............................4
Independent Accountants' Report .....................................10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........20
Item 4. Controls and Procedures..............................................21
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders..................22
Item 6. Exhibits and Reports on Form 8-K.....................................22
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ASBURY AUTOMOTIVE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except for share data)
December 31,
ASSETS June 30, 2003 2002
------ ------------- -------------
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents ................................................. $ 24,575 $ 22,613
Contracts-in-transit ...................................................... 102,573 91,190
Current portion of restricted marketable securities ....................... 1,545 1,499
Accounts receivable (net of allowance of $2,559 and $2,122) ............... 113,877 96,090
Inventories ............................................................... 642,375 604,791
Deferred income taxes ..................................................... 7,331 9,044
Prepaid and other current assets .......................................... 37,515 37,314
----------- -----------
Total current assets ......................................... 929,791 862,541
PROPERTY AND EQUIPMENT, net ................................................... 258,602 274,172
GOODWILL ...................................................................... 434,596 402,133
RESTRICTED CASH AND MARKETABLE SECURITIES ..................................... 3,933 4,892
OTHER ASSETS .................................................................. 64,308 61,906
----------- -----------
Total assets ................................................. $ 1,691,230 $ 1,605,644
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Floor plan notes payable .................................................. $ 585,768 $ 540,419
Current maturities of long-term debt ...................................... 30,369 36,412
Accounts payable .......................................................... 44,566 40,120
Accrued liabilities ....................................................... 81,890 77,325
----------- -----------
Total current liabilities .................................... 742,593 694,276
LONG-TERM DEBT ................................................................ 468,894 438,740
DEFERRED INCOME TAXES ......................................................... 26,450 29,972
OTHER LIABILITIES ............................................................. 15,310 15,705
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 10,000,000 shares authorized
Common stock, $.01 par value, 90,000,000 shares authorized,
34,000,000 issued ...................................................... 340 340
Additional paid-in capital ................................................ 410,748 410,718
Retained earnings ......................................................... 42,014 22,645
Treasury stock, at cost; 1,590,013 and 772,824 shares ..................... (15,064) (6,630)
Accumulated other comprehensive loss ...................................... (55) (122)
----------- -----------
Total stockholders' equity ................................... 437,983 426,951
----------- -----------
Total liabilities and stockholders' equity ................... $ 1,691,230 $ 1,605,644
=========== ===========
See Notes to Consolidated Financial Statements.
1
ASBURY AUTOMOTIVE GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)
(unaudited)
For the Three Months For the Six Month
Ended June 30, Ended June 30,
--------------------------- ---------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
REVENUES:
New vehicle ...................................... $ 765,271 $ 666,859 $ 1,398,791 $ 1,284,401
Used vehicle ..................................... 308,363 302,280 596,817 581,214
Parts, service and collision repair .............. 139,078 124,947 268,826 245,512
Finance and insurance, net ....................... 33,990 28,609 63,131 54,432
----------- ----------- ----------- -----------
Total revenues ............................... 1,246,702 1,122,695 2,327,565 2,165,559
----------- ----------- ----------- -----------
cost of sales:
New vehicle ...................................... 708,964 610,842 1,295,179 1,177,094
Used vehicle ..................................... 281,002 275,370 541,687 527,527
Parts, service and collision repair .............. 65,730 58,951 127,238 115,559
----------- ----------- ----------- -----------
Total cost of sales ......................... 1,055,696 945,163 1,964,104 1,820,180
----------- ----------- ----------- -----------
GROSS PROFIT ....................................... 191,006 177,532 363,461 345,379
OPERATING EXPENSES:
Selling, general and administrative .............. 147,825 134,931 286,860 264,136
Depreciation and amortization .................... 5,055 4,859 9,866 9,731
----------- ----------- ----------- -----------
Income from operations ....................... 38,126 37,742 66,735 71,512
OTHER INCOME (EXPENSE):
Floor plan interest expense ...................... (5,122) (4,500) (9,630) (8,691)
Other interest expense ........................... (9,997) (8,926) (19,951) (18,674)
Interest income .................................. 81 348 262 662
Net losses from unconsolidated affiliates ........ -- -- -- (100)
Loss on sale of assets ........................... (46) -- (359) --
Other, net ....................................... 638 54 89 (341)
----------- ----------- ----------- -----------
Total other expense, net ..................... (14,446) (13,024) (29,589) (27,144)
----------- ----------- ----------- -----------
Income before income taxes ................... 23,680 24,718 37,146 44,368
INCOME TAX EXPENSE:
Income tax expense ............................... 9,425 9,810 14,784 12,037
Tax adjustment upon conversion from an L.L.C. to a
corporation ................................... -- -- -- 11,553
----------- ----------- ----------- -----------
Total income tax expense ..................... 9,425 9,810 14,784 23,590
----------- ----------- ----------- -----------
Income from continuing operations ............ 14,255 14,908 22,362 20,778
DISCONTINUED OPERATIONS, net of tax ................. (1,982) (2,128) (2,992) (2,837)
----------- ----------- ----------- -----------
Net income ................................... $ 12,273 $ 12,780 $ 19,370 17,941
=========== =========== ===========
PRO FORMA TAX (BENEFIT) EXPENSE:
Pro forma income tax expense ..................... 5,621
Tax adjustment upon conversion from an L.L.C. to a
corporation ................................... (11,553)
-----------
Tax affected pro forma net income ............ $ 23,873
===========
EARNINGS PER SHARE:
Basic ............................................ $ 0.38 $ 0.38 $ 0.59 $ 0.56
=========== =========== =========== ===========
Diluted .......................................... $ 0.38 $ 0.37 $ 0.59 $ 0.56
=========== =========== =========== ===========
PRO FORMA EARNINGS PER SHARE:
Basic ............................................ $ 0.74
===========
Diluted .......................................... $ 0.74
===========
WEIGHTED AVERAGE SHARES OUTSTANDING (in thousands):
Basic ............................................ 32,701 34,000 32,876 32,210
=========== =========== =========== ===========
Diluted .......................................... 32,714 34,084 32,881 32,258
=========== =========== =========== ===========
See Notes to Consolidated Financial Statements.
2
ASBURY AUTOMOTIVE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
For the Six Months
Ended June 30,
-----------------------
2003 2002
---------- ----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income ...................................................................... $ 19,370 $ 17,941
Adjustments to reconcile net income to net cash provided by operating activities-
Depreciation and amortization ................................................ 9,866 9,731
Depreciation and amortization from discontinued operations ................... 1,232 2,131
Change in allowance for doubtful accounts .................................... 437 124
(Gain) loss on sale of discontinued operations, net of related taxes ......... (614) 345
Deferred income taxes ........................................................ (1,810) 13,512
Loss from unconsolidated affiliates, net ..................................... -- 100
Loss on sale of assets ....................................................... 359 --
Amortization of deferred finance fees ........................................ 2,582 2,128
Proceeds from the sale of accounts receivable ................................ 9,993 8,862
Change in operating assets and liabilities, net of effects from acquisitions and
divestitures-
Contracts-in-transit ......................................................... (11,383) 7,884
Accounts receivable, net ..................................................... (28,218) (17,614)
Inventories .................................................................. (24,464) (20,260)
Floor plan notes payable ..................................................... 45,793 3,032
Accounts payable and accrued liabilities ..................................... 10,707 5,109
Other ........................................................................ (1,853) 948
--------- --------
Net cash provided by operating activities .............................. 31,997 33,973
--------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures ............................................................ (24,613) (23,623)
Proceeds from the sale of assets ................................................ 698 1,077
Proceeds from sale of discontinued operations ................................... 7,210 4,838
Acquisitions (net of cash acquired) ............................................. (39,533) (9,402)
Proceeds from restricted marketable securities .................................. 913 913
Net issuance of finance contracts ............................................... (2,878) (119)
Other investing activities ...................................................... -- (1,700)
--------- --------
Net cash used in investing activities .................................. (58,203) (28,016)
--------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Distributions to members ........................................................ (3,010) (11,681)
Contributions ................................................................... -- 800
Repayments of debt .............................................................. (23,601) (311,842)
Proceeds from borrowings ........................................................ 63,213 265,735
Proceeds from initial public offering, net ...................................... -- 65,543
Payment of debt issuance costs .................................................. -- (7,875)
Purchase of treasury stock ...................................................... (8,434) --
--------- ---------
Net cash provided by financing activities .............................. 28,168 680
--------- ---------
Net increase in cash and cash equivalents .............................. 1,962 6,637
CASH AND CASH EQUIVALENTS, beginning of period ...................................... 22,613 60,506
--------- ---------
CASH AND CASH EQUIVALENTS, end of period ............................................ $ 24,575 $ 67,143
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for-
Interest ...................................................................... $ 27,730 $ 25,008
========= =========
Income taxes .................................................................. $ 5,681 $ 9,765
========= =========
See Notes to Consolidated Financial Statements.
3
ASBURY AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data)
(unaudited)
1. Summary of Significant Accounting Policies
Basis of Presentation:
The consolidated balance sheet at June 30, 2003, the consolidated statements of
income for the three-month and six-month periods ended June 30, 2003 and 2002,
and the consolidated statements of cash flows for the six-month periods ended
June 30, 2003 and 2002, are unaudited. In the opinion of management, all
adjustments necessary to present fairly the financial position, results of
operations and cash flows for the interim periods were made. Certain items in
the June 30, 2002 financial statements were reclassified to conform to the
classification of the June 30, 2003 financial statement presentation. Due to
seasonality and other factors, the results of operations for interim periods are
not necessarily indicative of the results that would be realized for the entire
year.
Certain information and footnote disclosures, normally included in financial
statements prepared in accordance with generally accepted accounting principles,
were omitted. Accordingly, these consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
included in the Company's annual report on Form 10-K for the year ended December
31, 2002.
New Accounting Pronouncements:
In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149
amends and clarifies the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 149 is generally effective for contracts entered
into or modified after June 30, 2003 and for hedging relationships designated
after June 30, 2003. The adoption of SFAS No. 149 on July 1, 2003, as required,
had no impact on the Company's consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires that certain financial statements be classified as liabilities
that were previously considered equity. The adoption of this standard on July 1,
2003, as required, had no impact on the Company's consolidated financial
statements.
All significant intercompany balances and transactions have been eliminated in
consolidation.
2. INVENTORIES:
Inventories consisted of the following:
June 30, 2003 December 31, 2002
------------- -----------------
New vehicles $501,026 $477,453
Used vehicles 99,858 86,392
Parts, accessories and other 41,491 40,946
-------- --------
$642,375 $604,791
======== ========
4
3. EARNINGS PER SHARE:
Basic earnings per share is computed by dividing net income by the
weighted-average common shares outstanding during the period. Diluted earnings
per share is computed by dividing net income by the weighted-average common
shares and common share equivalents outstanding during the period.
The following table sets forth the computation of basic and diluted earnings per
share:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------------- ---------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net income applicable to common shares:
Continuing operations ..................... $ 14,255 $ 14,908 $ 22,362 $ 20,778
Discontinued operations ................... (1,982) (2,128) (2,992) (2,837)
-------- -------- -------- --------
$ 12,273 $ 12,780 $ 19,370 $ 17,941
======== ======== ======== ========
Earnings per share:
Basic-
Continuing operations .................. $ 0.44 $ 0.44 $ 0.68 $ 0.65
Discontinued operations ................ (0.06) (0.06) (0.09) (0.09)
-------- -------- -------- --------
$ 0.38 $ 0.38 $ 0.59 $ 0.56
======== ======== ======== ========
Diluted-
Continuing operations .................. $ 0.44 $ 0.44 $ 0.68 $ 0.64
Discontinued operations ................ (0.06) (0.07) (0.09) (0.08)
-------- -------- -------- --------
$ 0.38 $ 0.37 $ 0.59 $ 0.56
======== ======== ======== ========
Common shares and common share equivalents:
Weighted-average shares outstanding ...... 32,701 34,000 32,876 32,210
Basic shares ............................. 32,701 34,000 32,876 32,210
Shares issuable with respect to additional
common share equivalents (stock options) 13 84 5 48
-------- -------- -------- --------
Diluted equivalent shares ................ 32,714 34,084 32,881 32,258
======== ======== ======== ========
4. INTANGIBLE ASSETS AND GOODWILL:
Intangible assets consist of the following (included in other assets on the
accompanying consolidated balance sheets):
June 30, December 31,
2003 2002
--------- ----------
Amortizable intangible assets:
Noncompete agreements ........................ $ 5,331 $ 5,331
Licensing agreements ......................... 1,750 1,750
Lease agreements (amortization is included
in rent expense) .......................... 6,527 6,527
-------- --------
Total ................................... 13,608 13,608
Less - Accumulated amortization ............. (9,778) (8,546)
-------- --------
Intangible assets, net ........................... $ 3,830 $ 5,062
======== ========
Unamortizable intangible assets - franchise rights $ 8,000 $ 8,000
======== ========
5
June 30,
------------------
2003 2002
------ ------
Amortization expense, net of discontinued operations:
For the three months ended $218 $232
==== ====
For the six months ended $443 $549
==== ====
Estimated amortization expense -
for the years ended December 31:
2004 $488
2005 105
2006 101
2007 101
2008 100
The changes in the carrying amounts of goodwill for the period ended June 30,
2003 are as follows:
Balance as of December 31, 2002 $402,133
Additions related to current year acquisitions 34,136
Goodwill associated with discontinued operations (1,673)
--------
Balance as of June 30, 2003 $434,596
========
5. COMPREHENSIVE INCOME:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------------- ---------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net income .............................................. $ 12,273 $ 12,780 $ 19,370 $ 17,941
Other comprehensive income, net of tax:
Change in fair value of interest rate swaps ........ -- (3,472) -- (1,985)
Income tax expense ................................. -- 1,357 -- 127
-------- -------- -------- --------
-- (2,115) -- (1,858)
Reclassification adjustment of loss on interest rate
swaps included in net income .................... 56 18 113 18
Income tax expense ................................. (22) (7) (46) (7)
-------- -------- -------- --------
Comprehensive income ................................... $ 12,307 $ 10,676 $ 19,437 $ 16,094
======== ======== ======== ========
6. EQUITY-BASED COMPENSATION:
The Company accounts for equity-based compensation issued to employees in
accordance with Accounting Principles Board ("APB") Opinion No. 25 "Accounting
for Stock Issued to Employees." APB 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. The Company makes disclosures of pro
forma net earnings and earnings per share as if the fair-value-based method of
accounting had been applied as required by SFAS No. 123 "Accounting for
Stock-Based Compensation" and as amended by SFAS No. 148 "Accounting for
Stock-Based Compensation - Transition Disclosure."
6
A reconciliation of the Company's net earnings to pro forma net earnings, and
the related pro forma earnings per share amounts, is as follows:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net income $ 12,273 $ 12,780 $ 19,370 $ 17,941
Adjustment to net earnings for:
Stock-based compensation expense included in net
earnings, net of tax 15 29 30 95
Pro forma stock-based compensation expense, net of tax (892) (1,430) (1,816) (2,622)
-------- -------- -------- --------
Pro forma net income $ 11,396 $ 11,379 $ 17,584 $ 15,414
======== ======== ======== ========
Earnings per share:
Basic - as reported $ 0.38 $ 0.38 $ 0.59 $ 0.56
======== ======== ======== ========
Basic - pro forma $ 0.35 $ 0.33 $ 0.53 $ 0.48
======== ======== ======== ========
Diluted - as reported $ 0.38 $ 0.37 $ 0.59 $ 0.56
======== ======== ======== ========
Diluted - pro forma $ 0.35 $ 0.33 $ 0.53 $ 0.48
======== ======== ======== ========
7. DISCONTINUED OPERATIONS:
During the first six months of 2003, the Company classified as discontinued
operations eight full-service dealership locations (nine franchises), 10
used-only dealership locations and one ancillary business. Three full service
dealerships were divested during the first six months and five dealerships were
held for sale as of June 30, 2003. Of the 10 used-only locations, six were
closed during the quarter and four were subsequently closed in July. In
addition, the Company closed one ancillary business in the second quarter. The
results of operations of these entities are accounted for as discontinued
operations in the consolidated statements of income. A summary statement of
income information relating to the discontinued operations is as follows:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
Revenues $ 21,225 $ 29,284 $ 46,230 $ 57,329
Cost of sales 19,032 25,109 41,032 48,833
-------- -------- -------- --------
Gross profit 2,193 4,175 5,198 8,496
Operating expenses 4,894 5,929 10,280 11,347
-------- -------- -------- --------
Loss from operations (2,701) (1,754) (5,082) (2,851)
Other, net (102) (154) (235) (358)
-------- -------- -------- --------
Net loss (2,803) (1,908) (5,317) (3,209)
Gain (loss) on disposition of discontinued operations (508) (952) 330 (393)
-------- -------- -------- --------
Loss before income taxes (3,311) (2,860) (4,987) (3,602)
Related tax benefit 1,329 732 1,995 765
-------- -------- -------- --------
Discontinued operations ($ 1,982) ($ 2,128) ($ 2,992) ($ 2,837)
======== ======== ======== ========
7
The assets and liabilities of dealerships held for sale as of June 30, 2003 and
December 31, 2002 are included in the consolidated balance sheet. A summary of
balance sheet information related to dealerships held for sale is as follows:
December 31,
June 30, 2003 2002
------------- ------------
Inventories $ 6,046 $17,934
-------- -------
Total current assets 6,046 17,934
Property and equipment, net 563 1,704
-------- -------
Total assets $ 6,609 $19,638
======== =======
Floor plan notes payable $ 4,980 $17,354
Current liabilities 4,980 17,354
-------- -------
Total liabilities $ 4,980 $17,354
======== =======
8. PROPERTY AND EQUIPMENT:
During the first quarter of 2003, the Company sold, under four sale/leaseback
agreements with an independent third party, certain land and buildings for $16.9
million, recognizing a $0.1 million loss on the sales. Under the agreements, the
Company will leaseback the properties from the purchaser over a 20-year period.
The Company is accounting for the leasebacks as operating leases. The estimated
annual rental expense under these agreements will be approximately $1.6 million.
During the second quarter of 2003, the Company sold, under a sale/leaseback
agreement with an independent third party, certain land for $8.5 million. Under
the terms of the agreement, the Company will leaseback the property with the
intent to construct a new dealership facility. The Company anticipates the
facility to cost $8.5 million and take 18 months to construct. When completed,
the Company will sell the facility to the same third-party and amend the
existing land lease to leaseback the entire facility for a 22-year period. The
estimated annual rental expense under the agreement will be approximately
$742,000.
In addition, the Company sold, under three sale/leaseback agreements with the
same third party, certain land and building assets for $4.5 million. Under the
terms of the agreements, the Company will leaseback the properties from the
purchasers for 15 to 20 year periods. We will account for the leasebacks as
operating leases. The estimated annual rental expense under these agreements
will be approximately $376,000.
9. ACQUISITIONS:
During the second quarter of 2003, the Company made two acquisitions (three
franchises, one of which is held for sale) for $39.5 million in cash, which was
funded under the Company's existing credit facility. The acquisitions' purchase
price will be allocated to the underlying assets and liabilities based upon
their estimated fair values. The resulting preliminary estimate of goodwill and
intangibles assets from these transactions is approximately $34 million. The
results of operations for these acquisitions are included in the Company's
consolidated results from the dates of acquisition.
Subsequent to June 30, 2003, the Company completed the acquisition of one
dealership location (five franchises) for $8.4 million in cash, funded from the
Company's Committed Credit Facility. The seller was the existing president of
one of the Company's platforms. The purchase price will be allocated to the
underlying assets and liabilities based on their estimated fair values,
resulting in a preliminary estimate of goodwill and intangible assets of
approximately $7 million. The Company believes that this transaction involves
terms that would be comparable to terms that would be obtained from an
unaffiliated third party.
10. NON-CASH FINANCING ACTIVITY:
In connection with the sale/leaseback transactions mentioned in Note 8, $26.2
million of the sales proceeds were paid directly to the Company's lenders. Of
that amount, $5.7 million related to proceeds for the sale of assets that were
included in the Company's current period capital expenditures as shown on the
consolidated statement of cash flows.
8
11. COMMITMENTS AND CONTINGENCIES:
A significant portion of the Company's vehicle business involves the sale of
vehicles, parts or vehicles composed of parts that are manufactured outside the
United States. As a result, the Company's 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 or the countries from which the Company's 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 the Company to implement costly capital improvements to
dealerships as a condition for renewing the Company's 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 the Company to divert its financial resources to capital projects from
uses that management believes may be of higher long-term value to the Company,
such as acquisitions.
Substantially all of the Company's 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 does the Company expect such
compliance to have, any material effect upon the capital expenditures, net
earnings, financial condition, liquidity or competitive position of the Company.
Management believes that its current practices and procedures for the control
and disposition of such materials comply with applicable federal, state and
local requirements.
The Company is involved in legal proceedings and claims which arise in the
ordinary course of its business and with respect to certain of these claims the
sellers have indemnified the Company. In the opinion of management of the
Company, the amount of ultimate liability with respect to these actions will not
materially affect the financial condition, liquidity or the results of
operations of the Company.
The dealerships operated by the Company hold franchise agreements with a number
of vehicle manufacturers. In accordance with the individual franchise
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 franchise agreement could have a
negative impact on the Company's operating results.
9
INDEPENDENT ACCOUNTANTS' REPORT
To Asbury Automotive Group, Inc.:
We have reviewed the accompanying consolidated balance sheet of Asbury
Automotive Group, Inc. and subsidiaries ("the Company") as of June 30, 2003,
and the related consolidated statements of income for the three-month and
six month periods ended June 30, 2003 and 2002, and of cash flows for the
six-month periods ended June 30, 2003 and 2002. These interim financial
statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with
auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such condensed consolidated interim financial statements for them to
be in conformity with accounting principles generally accepted in the United
States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Asbury Automotive Group, Inc. and subsidiaries as of December 31, 2002, and the
related consolidated statements of income, shareholders' equity, and cash flows
for the year then ended (not presented herein); and in our report dated February
25, 2003 (which includes an explanatory paragraph regarding the adoption of
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets"), we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 2002 is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
/s/ Deloitte & Touche LLP
Stamford, Connecticut
July 28, 2003
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and notes thereto included in Item 1 of this
report.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2003, Compared to Three Months Ended June 30, 2002
Net income for the second quarter of 2003 was $12.3 million compared with $12.8
million in the prior year period. Net income includes the results of
discontinued operations, the majority of which consists of certain now closed
non-core businesses, including our Price 1 pilot program (closed in July 2003)
and six "Thomason Select" used car stores. Basic earnings per share, including
discontinued operations, were $0.38 in both periods, while diluted earnings per
share were $0.38 for the three months ended June 30, 2003 versus $0.37 for the
same period in 2002.
Net income from continuing operations for the second quarter of 2003 was $14.3
million compared with $14.9 million in the corresponding period a year ago.
Basic and diluted earnings per share from continuing operations were $0.44 per
share in both periods.
Income from continuing operations before income taxes totaled $23.7 million for
the three months ended June 30, 2003, down 4% from $24.7 million for the same
period last year. The slight decrease can primarily be attributed to margin
pressure on new vehicles, deterioration of our expense structure, and the
continued poor performance of our Oregon platform offsetting strong finance and
insurance ("F&I") and fixed operations performance, and the impact of
acquisitions.
Revenues-
(dollars in thousands, except for unit and per vehicle
data)
For the Three Months
Ended June 30,
--------------------------- Increase %
2003 2002 (Decrease) Change
------------ ------------ ----------- ------
New Vehicle Data:
Retail revenues - same store (1) $ 721,257 $ 655,582 $ 65,675 10%
Retail revenues - acquisitions 27,784 310
----------- -----------
Total new retail 749,041 655,892 93,149 14%
Fleet revenues - same store (1) 16,238 10,967 5,271 48%
Fleet revenues -acquisitions (8) --
----------- -----------
Total new fleet revenues 16,230 10,967 5,263 48%
----------- -----------
New vehicle revenue, as reported $ 765,271 $ 666,859 $ 98,412 15%
=========== ===========
Retail units - same store (1) 25,260 24,253 1,007 4%
Retail units - actual 26,133 24,265 1,868 8%
Used Vehicle Data:
Retail revenues - same store (1) $ 231,096 $ 229,167 $ 1,929 1%
Retail revenues - acquisitions 8,050 268
----------- -----------
Total used retail revenues 239,146 229,435 9,711 4%
Wholesale revenues - same store (1) 67,023 72,843 (5,820) (8%)
Wholesale revenues - acquisitions 2,194 2
----------- -----------
Total wholesale revenues 69,217 72,845 (3,628) (5%)
----------- -----------
Used vehicle revenue, as reported $ 308,363 $ 302,280 $ 6,083 2%
=========== ===========
Retail units - same store (1) 15,096 14,898 198 1%
Retail units - actual 15,552 14,914 638 4%
11
(dollars in thousands, except for unit and per vehicle
data)
For the Three Months
Ended June 30,
--------------------------- Increase %
2003 2002 (Decrease) Change
------------ ------------ ----------- ------
Parts, Service and Collision Repair:
Revenues - same store (1) $ 133,730 $ 124,860 $ 8,870 7%
Revenues - acquisitions 5,348 87
----------- -----------
Parts, service and collision repair
revenue, as reported $ 139,078 $ 124,947 14,131 11%
=========== ===========
Finance and Insurance:
Revenues - same store (1) $ 33,136 $ 28,589 $ 4,547 16%
Revenues - acquisitions 854 20
----------- -----------
Finance and insurance revenue, as reported $ 33,990 $ 28,609 $ 5,381 19%
=========== ===========
Total Revenue:
Same store (1) $ 1,202,480 $ 1,122,008 $ 80,472 7%
Acquisitions 44,222 687
----------- -----------
Total revenue, as reported $ 1,246,702 $ 1,122,695 124,007 11%
=========== ===========
(1) Same store amounts include the results of dealerships for the identical
months for each period presented in the comparison, commencing with the
first full month in which the dealership was owned by the Company.
Revenues of $1.2 billion for the three months ended June 30, 2003, represented a
$124.0 million or 11% increase over the three months ended June 30, 2002. Same
store revenue grew $80.5 million or 7% with the remaining increase of $43.5
million derived from acquisitions. On a same store basis, our new retail units
were up 4% compared to the three months ended June 30, 2002, despite the
industry being down. New vehicle revenue growth continues to be a major focus.
Used retail vehicle unit sales were up 1% versus the prior year period with
improvements in our Tampa and Texas platforms offset by weaknesses in our Oregon
platform. Fixed operations revenues were up 7% on a same store basis, primarily
due to continued emphasis on customer retention and expanded product offerings,
as well as strong warranty business. Same store finance and insurance revenues
grew 16% and gross profit per vehicle retailed ("PVR") increased 12%.
Contributing to this success was strength in product sales, increased
penetration rates (number of finance and insurance contracts sold to the
combined total of new and used retail unit sales), maturing of our preferred
provider programs and continued focus on underperforming stores.
Gross Profit-
(dollars in thousands, except for unit and per vehicle
data)
For the Three Months
Ended June 30,
--------------------------- Increase %
2003 2002 (Decrease) Change
------------ ------------ ----------- ------
New Vehicle Data:
Retail gross profit - same store (1) $ 54,063 $ 55,638 $ (1,575) (3%)
Retail gross profit - acquisitions 2,017 20
--------- ---------
Total new retail gross profit 56,080 55,658 422 1%
Fleet gross profit - same store (1) 234 359 (125) (35%)
Fleet gross profit -acquisitions (7) --
--------- ---------
Total new fleet gross profit 227 359 (132) (37%)
--------- ---------
New vehicle gross profit, as reported $ 56,307 $ 56,017 290 1%
========= =========
Retail units - same store (1) 25,260 24,253 1,007 4%
Retail units - actual 26,133 24,265 1,868 8%
12
(dollars in thousands, except for unit and per vehicle
data)
For the Three Months
Ended June 30,
--------------------------- Increase %
2003 2002 (Decrease) Change
------------ ------------ ----------- ------
Used Vehicle Data:
Retail gross profit - same store (1) $ 26,860 $ 27,525 $ (665) (2%)
Retail gross profit - acquisitions 691 32
--------- ---------
Total used retail gross profit 27,551 27,557 (6) (0%)
Wholesale gross profit - same store (1) (176) (647) 471 73%
Wholesale gross profit - acquisitions (14) --
--------- ---------
Total wholesale gross profit (190) (647) 457 71%
--------- ---------
Used vehicle gross profit, as reported $ 27,361 $ 26,910 $ 451 2%
========= =========
Retail units - same store (1) 15,096 14,898 198 1%
Retail units - actual 15,552 14,914 638 4%
Parts, Service and Collision Repair:
Gross profit - same store (1) $ 69,908 $ 65,938 $ 3,970 6%
Gross profit - acquisitions 3,440 58
--------- ---------
Parts, service and collision repair
gross profit, as reported $ 73,348 $ 65,996 $ 7,352 11%
========= =========
Finance and Insurance:
Gross profit - same store (1) $ 33,136 $ 28,589 $ 4,547 16%
Gross profit - acquisitions 854 20
--------- ---------
Finance and insurance gross profit, as reported $ 33,990 $ 28,609 $ 5,381 19%
========= =========
Gross profit per vehicle retailed - same store (1) 821 730 91 12%
Gross profit per vehicle retailed - actual 815 730 85 12%
Total Gross Profit:
Gross profit - same store (1) $ 184,025 $ 177,402 $ 6,623 4%
Gross profit - acquisitions 6,981 130
--------- ---------
Total gross profit, as reported $ 191,006 $ 177,532 $ 13,474 8%
========= =========
(1) Same store amounts include the results of dealerships for the identical
months for each period presented in the comparison, commencing with the
first full month in which the dealership was owned by the Company.
Gross profit for the quarter ended June 30, 2003, increased $13.5 million or 8%
over the quarter ended June 30, 2002. Same store retail gross profit was up 4%
for the same period. Consistent with our business model, we achieved significant
same store growth in finance and insurance of 16% and steady increases in fixed
operations of 6% during the period. This was offset by continued margin pressure
on new and used vehicles.
Operating Expenses-
Selling, general and administrative ("SG&A") expenses for the quarter ended June
30, 2003, increased $12.9 million or 10% over the quarter ended June 30, 2002.
Incremental expenses from acquisitions, rising insurance costs, $1.2 million in
severance expenses, $1.0 million in increased legal fees, as well as typical
variable (salesperson compensation and personnel) expense increases due to
incremental gross profit, all contributed to the overall increase in SG&A. As a
result, SG&A expenses as a percentage of gross profit increased to 77.4% from
76.0% for the quarter ended June 30, 2003, compared to the same period in 2002.
SG&A expenses as a percent of revenue decreased due to a slight shift in the
sales mix to new vehicles as we continue to focus on that element of our
business.
Depreciation and Amortization-
Depreciation and amortization expense increased $196,000 to $5.1 million for the
quarter ended June 30, 2003, as compared to the same period in 2002. The
increase is almost entirely related to acquisitions.
13
Other Income (Expense)-
Floor plan interest expense increased to $5.1 million from $4.5 million for the
three months ended June 30, 2003. This 13.8% increase was primarily due to
higher inventory levels in the current quarter. Non-floor plan interest expense
increased by $1.1 million from the prior year's second quarter primarily from
the increased interest rate on our Senior Subordinated Notes issued in June
2002.
Income Tax Provision-
Income tax expense was $9.4 million for the three months ended June 30, 2003
versus $9.8 million for the prior year quarter. Our tax rate for the three
months ended June 30, 2003, was 39.8% and was based on the estimated effective
tax rate for the year.
Discontinued Operations-
During the second quarter of 2003, we decided to close our Price 1 pilot program
(four stores), closed our "Thomason Select" used vehicle program (six stores),
began actively pursuing the sale of four "full service" dealerships and sold one
dealership. The $2.0 million loss from discontinued operations in the three
months ended June 30, 2003 includes the operating losses of the entities
mentioned above as well as another dealership that was classified as
discontinued operations during the first quarter of 2003, which is still held
for sale. The Price 1 stores ceased operations in July 2003. Discontinued
operations for the quarter ended June 30, 2002 were $2.1 million, including the
operating losses from the stores mentioned above as well as the operating losses
and net loss on the sale of one dealership and the related real estate sold in
the second quarter of 2002 and the operating losses of one dealership sold in
the third quarter of 2002.
Six Months Ended June 30, 2003, Compared to Six Months Ended June 30, 2002
Net income for the six months ended June 30, 2003 was $19.4 million or $0.59 per
basic and diluted share, including a $3.0 million loss from discontinued
operations. For the six months ended June 30, 2002, tax affected pro forma net
income was $23.9 million or $0.74 per basic and diluted share. Pro forma net
income from continuing operations for the six months ended June 30, 2003 was
$26.7 million or $0.78 per diluted share. The pro forma results for the prior
year exclude a nonrecurring deferred income tax provision required by SFAS 109
related to our change in tax status from a limited liability company to a "C"
corporation in conjunction with our March 2002 initial public offering ("IPO").
In addition, the pro forma results from continuing operations also assume that
we were a publicly traded "C" corporation for the entire period. A
reconciliation of pro forma net income from continuing operations to GAAP net
income from continuing operations follows - see "Reconciliation of Non-GAAP
Financial Information".
Income from continuing operations before income taxes totaled $37.1 million for
the six months ended June 30, 2003, down 16% from $44.4 million for the same
period last year. The decrease can be attributed to continued vehicle margin
pressure, deterioration of our expense structure in the first quarter and weak
performance in the Oregon platform offset by second quarter improvement in
expense controls and the improved performance of the Arkansas platform, which
was underperforming during the first half of 2002.
14
Revenues-
(dollars in thousands, except for unit and per vehicle
data)
For the Six Months
Ended June 30,
--------------------------- Increase %
2003 2002 (Decrease) Change
------------ ------------ ----------- ------
New Vehicle Data:
Retail revenues - same store (1) $ 1,331,002 $ 1,261,948 $ 69,054 5%
Retail revenues - acquisitions 38,101 310
----------- -----------
Total new retail 1,369,103 1,262,258 106,845 8%
Fleet revenues - same store (1) 29,689 22,143 7,546 34%
Fleet revenues -acquisitions (1) --
----------- -----------
Total new fleet revenues 29,688 22,143 7,545 34%
----------- -----------
New vehicle revenue, as reported $ 1,398,791 $ 1,284,401 $ 114,390 9%
=========== ===========
Retail units - same store (1) 47,041 46,305 736 2%
Retail units - actual 48,274 46,317 1,957 4%
Used Vehicle Data:
Retail revenues - same store (1) $ 449,820 $ 445,178 $ 4,642 1%
Retail revenues - acquisitions 13,926 268
----------- -----------
Total used retail revenues 463,746 445,446 18,300 4%
Wholesale revenues - same store (1) 128,985 135,767 (6,782) (5%)
Wholesale revenues - acquisitions 4,086 1
----------- -----------
Total wholesale revenues 133,071 135,768 (2,697) (2%)
----------- -----------
Used vehicle revenue, as reported $ 596,817 $ 581,214 $ 15,603 3%
=========== ===========
Retail units - same store (1) 29,492 29,344 148 1%
Retail units - actual 30,371 29,360 1,011 3%
Parts, Service and Collision Repair:
Revenues - same store (1) $ 260,210 $ 245,424 $ 14,786 6%
Revenues - acquisitions 8,616 88
----------- -----------
Parts, service and collision repair
revenue, as reported $ 268,826 $ 245,512 $ 23,314 9%
=========== ===========
Finance and Insurance:
Revenues - same store (1) $ 61,637 $ 54,412 $ 7,225 13%
Revenues - acquisitions 1,494 20
----------- -----------
Finance and insurance revenue, as reported $ 63,131 $ 54,432 $ 8,699 16%
=========== ===========
Total Revenue:
Same store (1) $ 2,261,343 $ 2,164,872 $ 96,471 4%
Acquisitions 66,222 687
----------- -----------
Total revenue, as reported $ 2,327,565 $ 2,165,559 $ 162,006 7%
=========== ===========
(1) Same store amounts include the results of dealerships for the identical
months for each period presented in the comparison, commencing with the
first full month in which the dealership was owned by the Company.
Revenues of $2.3 billion for the six months ended June 30, 2003, represented a
$162.0 million or 7% increase over the six months ended June 30, 2002. Same
store revenue grew $96.5 million or 4% with the remainder derived from
acquisitions. On a same store basis our new retail units were up 2% while the
industry was down 2.5%. Our relative success can be attributed to our
advantageous brand mix and an increased focus on new vehicles sales in an effort
to meet manufacturer sales requirements. Used retail vehicle unit sales were
basically flat versus the prior year in a difficult used car market, as new
vehicle incentives continue to have an adverse affect on the used vehicle
15
market. With ongoing focus on fixed operations and F&I, we achieved 6% and 13%
same store growth, respectively, as we continue to benefit from the sharing of
best practices between our platforms in these areas.
Gross Profit-
(dollars in thousands, except for unit and per vehicle
data)
For the Six Months
Ended June 30,
------------------------ Increase %
2003 2002 (Decrease) Change
---------- ------------ ----------- ------
New Vehicle Data:
Retail gross profit - same store (1) $ 100,341 $ 106,669 ($ 6,328) (6%)
Retail gross profit - acquisitions 2,695 19
--------- ---------
Total new retail gross profit 103,036 106,688 (3,652) (3%)
Fleet gross profit - same store (1) 577 619 (42) (7%)
Fleet gross profit -acquisitions (1) --
--------- ---------
Total new fleet gross profit 576 619 (43) (7%)
--------- ---------
New vehicle gross profit, as reported $ 103,612 $ 107,307 (3,695) (3%)
========= =========
Retail units - same store (1) 47,041 46,305 736 2%
Retail units - actual 48,274 46,317 1,957 4%
Used Vehicle Data:
Retail gross profit - same store (1) $ 53,562 $ 53,855 ($ 293) (1%)
Retail gross profit - acquisitions 1,421 32
--------- ---------
Total used retail gross profit 54,983 53,887 1,096 2%
Wholesale gross profit - same store (1) 224 (200) 424 212%
Wholesale gross profit - acquisitions (77) --
--------- ---------
Total wholesale gross profit 147 (200) 347 174%
--------- ---------
Used vehicle gross profit, as reported $ 55,130 $ 53,687 $ 1,443 3%
========= =========
Retail units - same store (1) 29,492 29,344 148 1%
Retail units - actual 30,371 29,360 1,011 3%
Parts, Service and Collision Repair:
Gross profit - same store (1) $ 136,044 $ 129,894 $ 6,150 5%
Gross profit - acquisitions 5,544 59
--------- ---------
Parts, service and collision repair
gross profit, as reported $ 141,588 $ 129,953 $ 11,635 9%
========= =========
Finance and Insurance:
Gross profit - same store (1) $ 61,637 $ 54,412 $ 7,225 13%
Gross profit - acquisitions 1,494 20
--------- ---------
Finance and insurance gross profit, as reported $ 63,131 $ 54,432 8,699 16%
========= =========
Gross profit per vehicle retailed - same store (1) 805 719 86 12%
Gross profit per vehicle retailed - actual 803 719 84 12%
Total Gross Profit:
Gross profit - same store (1) $ 352,385 $ 345,249 $ 7,136 2%
Gross profit - acquisitions 11,076 130
--------- ---------
Total gross profit, as reported $ 363,461 $ 345,379 $ 18,082 5%
========= =========
(1) Same store amounts include the results of dealerships for the identical
months for each period presented in the comparison, commencing with the
first full month in which the dealership was owned by the Company.
Gross profit for the quarter ended June 30, 2003, increased $18.1 million or 5%
over the same period ended June 30, 2002. Same store gross profit increased 2%
year over year driven by significant growth in F&I of 13% and moderate growth in
16
fixed operations of 5%, offset by slight same store decreases in gross profit
for new and used vehicles.
Operating Expenses-
Selling, general and administrative ("SG&A") expenses for the six months ended
June 30, 2003 were $286.9 million, up 8.6% from $264.1 million for the six
months ended June 30, 2002. The majority of the increase was due to expense
deterioration in several platforms in the first quarter. We saw significant
improvement in the second quarter with the implementation of expense reduction
initiatives.
Depreciation and Amortization-
Depreciation and amortization expense increased $135,000 to $9.7 million for the
six months ended June 30, 2003, as compared to the same period in 2002.
Other Income (Expense)-
Floor plan interest expense increased to $9.6 million for the six months ended
June 30, 2003. This 10.8% increase was due to high inventory levels, primarily
in our domestic brands. Non-floor plan interest expense increased by $1.3
million from the prior year's first six months mostly driven by the increased
interest rate on our Senior Subordinated Notes issued in June 2002.
Income Tax Provision-
Income tax expense was $14.8 million for the six months ended June 30, 2003
versus $23.6 million for the same period last year. For the time period from
January 1, 2002 through the date of our IPO, we were structured as a limited
liability company and only provided a tax provision in accordance with SFAS 109
for the nine "C" corporations that we owned directly or indirectly during that
period. Effective with our IPO, which closed March 19, 2002, we converted to a
corporation and became subject to federal, state and local income taxes. During
the six months ended June 30, 2002, we recorded, in accordance with SFAS No.
109, a one-time non-recurring charge of $11.6 million related to the
establishment of a net deferred tax liability, in connection with our
conversion. This liability represented the difference between the financial
statement and tax basis of our assets and liabilities at the conversion date.
Our tax rate for the six months ended June 30, 2003, was 39.8% and was based on
the estimated effective tax rate for the year.
Discontinued Operations-
During the first six months of 2003, we completed the sale of three full service
dealerships and closed six "Thomason Select" used-only lots in Oregon. In
addition, we decided to close our four Price 1 pilot program used vehicle stores
and began actively pursuing the sale of five full service dealerships. The $3.0
million loss from discontinued operations includes the operating losses of the
dealership mentioned above offset by net gain on the sales of the stores sold in
the first half of the year. Discontinued operations for the six months ended
June 30, 2002 was $2.8 million, including the results and related real estate of
operations of the dealerships mentioned above and the operating losses and net
loss on the sale of three dealerships and related real estate assets, sold
during the first half of 2002 and the operating losses of another dealership
sold in the third quarter of 2002.
LIQUIDITY AND CAPITAL RESOURCES
We require cash to fund working capital needs, finance acquisitions of new
dealerships and fund capital expenditures. These requirements are met
principally from cash flow from operations, borrowings under the First Amended
and Restated Credit Agreement and the Floor Plan Facility (as defined below),
mortgage notes and proceeds from sale/leaseback transactions. As of June 30,
2003 we had cash and cash equivalents of $24.6 million.
Credit Facilities-
On January 17, 2001, we entered into a committed financing agreement (the
"Committed Credit Facility") with Ford Motor Credit Company, General Motors
Acceptance Corporation and DaimlerChrysler Services North America, LLC (the
"Lenders") with total availability of $550 million. The Committed Credit
Facility is used for acquisition financing and working capital purposes. On June
6, 2003, we signed the First Amended and Restated Credit Agreement (the "ARCA")
retaining all the essential provisions of the Committed Credit Facility, but
17
reducing the availability for borrowings to $450 million and increasing our
working capital borrowing capacity from $25 million to $75 million. Our decision
to amend the existing credit facility was driven by our desire to reduce the
commitment fee paid to the Lenders, which is based on the unused portion of the
facility, and to extend the facility by one year through January 2006. At June
30, 2003, $341.6 million was available for borrowings. All borrowings under the
ARCA and the Committed Credit Facility (collectively the "Committed Credit
Facility") bear (bore) interest at variable rates based on 1-month LIBOR plus a
specified percentage that is dependent upon our adjusted level of debt leverage
as of the end of each calendar quarter.
During the third quarter of 2002, we obtained consent from the Lenders for a
cash management sublimit of $75 million under our Committed Credit Facility. The
cash management sublimit allows us to repay up to $75 million of debt
outstanding under our Committed Credit Facility using cash that has been
centrally collected by our cash management system. This sublimit remains in
place under the terms of the ARCA. The net amount repaid under the cash
management sublimit may be borrowed by us on short-term notice for general
corporate purposes. As of June 30, 2003, we had $18 million available for
borrowings under the cash management sublimit.
Floor Plan Financing-
We finance substantially all of our new vehicle inventory and a portion of our
used vehicle inventory under the floor plan financing credit facilities (the
"Floor Plan Facilities"). The Floor Plan Facilities also provide used vehicle
financing up to a fixed percentage of the value of each financed used vehicle.
In connection with the ARCA signed June 6, 2003, total availability under the
floor plan facilities was reduced from $750 million to $695 million. Amounts
financed under the floor plan arrangements bear interest at variable rates,
which are typically tied to LIBOR or the prime rate. As of June 30, 2003, we had
$585.8 million outstanding under all of our floor plan financing agreements.
Sale/Leaseback Agreements-
During the first quarter of 2003, we sold, under four sale/leaseback agreements
with an independent third party, certain land and buildings for $16.9 million,
recognizing an approximate $100,000 loss on the sales. Under the agreements, we
will leaseback the properties from the purchaser over a 20-year period. We are
accounting for the leasebacks as operating leases. The estimated annual rental
expense under these agreements will be approximately $1.6 million.
During the second quarter of 2003, we sold, under a sale/leaseback agreement
with an independent third party, certain land for $8.5 million. Under the terms
of the agreement, we will leaseback the property with the intent to construct a
new dealership facility. We anticipate the facility to cost $8.5 million and
take 18 months to construct. When completed, we will sell the facility to the
same third party and amend the existing land lease to leaseback the entire
facility for a 22-year period. The estimated annual rental expense under the
agreement will be approximately $742,000.
In addition, we sold, under three sale/leaseback agreements with the same third
party certain, land and building assets for $4.5 million. Under the terms of the
agreements we will leaseback the properties from the purchasers for 15 to 20
year periods. We will account for the leasebacks as operating leases. The
estimated annual rental expense under these agreements will be approximately
$376,000.
Acquisitions and Acquisition Financing-
During the first half of 2003, we completed the acquisitions of two dealerships
(three franchises, one of which is currently held for sale) for an aggregate
purchase price of $39.5 million, all funded through borrowings under our
Committed Credit Facility.
Subsequent to June 30, 2003, we completed the acquisition of one dealership
location (5 franchises) for $8.4 million in cash, funded from our Committed
Credit Facility. The seller was the existing president of one of our platforms.
The purchase price will be allocated to the underlying assets and liabilities
based on their estimated fair values, resulting in a preliminary estimate of
goodwill and intangible assets of approximately $7 million. We believe that this
transaction involves terms that would be comparable to terms that would be
obtained from an unaffiliated third party.
18
Capital Expenditure Financing
In addition, during the first six months of 2003, we used the proceeds from $6.8
million of current period borrowings for current period capital spending.
Cash Flow
Operating Activities-
Net cash provided by operating activities totaled $32.0 million for the six
months ended June 30, 2003 consisting of net income of $19.4 million, non-cash
items of $22.0 million (primarily depreciation and amortization and proceeds
from the sale of accounts receivable) and a $9.4 million net increase in
operating assets and liabilities. Operating assets in the aggregate increased as
incremental sales led to increases in accounts receivable and inventory
partially offset by additional floor plan borrowings.
Net cash provided by operating activities totaled $34.0 million for the six
months ended June 30, 2002 as net income of $17.9 million plus non-cash items of
$37.0 million (primarily depreciation and amortization, the proceeds from the
sale of accounts receivable, and deferred income taxes) offset a $20.9 million
net increase in operating assets and liabilities. This net increase was
primarily due to higher used vehicle inventories without the related increases
in floor plan notes payable.
Investing Activities-
Net cash used in investing activities for the six months ended June 30, 2003 was
$58.2 million , as capital expenditures of $24.6 million, dealership
acquisitions of $39.5 million and the net issuance of finance contracts of $2.9
million was offset by proceeds from the sale of discontinued operations and
fixed assets of $7.9 million.
Net cash used in investing activities for the six months and June 30, 2002 was
$28.0 million, as capital expenditures of $23.6 million and other investing
activities of $1.7 million were offset by the proceeds from the sale of
discontinued operations and fixed assets of $5.9 million.
Financing Activities-
Net cash provided by financing activities for the six months ended June 30, 2003
was $28.2 million, as net proceeds from borrowings of $63.2 million offset debt
repayments of $23.6 million, distributions to members and the repurchase of
treasury stock. (We made our final L.L.C. distribution to our members in the
first quarter of 2003).
Net cash provided by financing activities for the six months ended June 30, 2002
was $680,000 as proceeds from our initial public offering of $65.5 million and
the net proceeds from borrowings of $265.7 million (mainly the issuance of the
Senior Subordinated Notes), were offset by repayments of debt of $311.8 million
(as we were required under our Committed Credit Facility to use the majority of
IPO proceeds and all subordinated debt proceeds to repay existing debt), and
distributions to members.
Capital Expenditures
Capital spending for the six months ended June 30, 2003 and 2002 was $24.6
million and $23.6 million, respectively. Capital spending other than from
acquisitions is expected to be approximately $50 million for the year ended
December 31, 2003 and will be primarily related to operational improvements and
manufacturer-required spending to upgrade existing dealership facilities.
Stock Repurchase
Pursuant to our Senior Subordinated Note indenture, we are permitted to
repurchase shares subject to the following restrictions: (i) up to $15 million
under a "Restricted Payments" building basket, plus (ii) up to $2 million per
fiscal year under our "Stock Repurchase" basket. The Restricted Payments
building basket equals the greater of $15 million, or 50% of the consolidated
net income beginning April 1, 2002 (less the cumulative amount of any Restricted
Payments since the Senior Subordinated Notes' inception). During 2002, we
repurchased 772,824 shares of our common stock for a purchase price of $6.6
million. During the first six months of 2003, we repurchased an additional
817,189 shares for an aggregate purchase price of $8.4 million. During the
second quarter of 2003, we reached the $15 million limit of the "Restricted
Payments" building basket.
19
New Accounting Pronouncements
In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149
amends and clarifies the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 149 is generally effective for contracts entered
into or modified after June 30, 2003 and for hedging relationships designated
after June 30, 2003. The adoption of SFAS No. 149 on July 1, 2003, as required,
had no impact on the Company's consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires that certain financial statements be classified as liabilities
that were previously considered equity. The adoption of this standard on July 1,
2003, as required, had no impact on the Company's consolidated financial
statements.
Reconciliation of "Non-GAAP" Financial Information
For analysis purposes, in Management's Discussion and Analysis we discuss pro
forma net income from continuing operations and related earnings per share for
the six months ended June 30, 2002. The consolidated statement of income
reconciles GAAP net income to tax affected pro forma net income by assuming that
we were taxed as a "C" corporation for all twelve months of 2002 and excluding
the one-time charge for our conversion from a limited liability company to a
corporation. The following table assumes that all discontinued entities were
sold prior to 2002 and all shares issued in our IPO were outstanding on January
1, 2002.
(in thousands, except for per share data) For the Six Months
Ended June 30, 2002
-------------------
Tax affected pro forma net income $23,873
Discontinued operations 2,837
-------
Pro forma net income from continuing operations $26,710
=======
Pro forma earnings per share:
Basic $0.79
=====
Diluted $0.78
=====
Pro forma common shares and share equivalents:
Weighted average shares outstanding-
Basic 32,210
Adjustment for 4,500 shares offered March 14,
2002 as if offered on January 1, 2002 1,790
-------
Pro forma basic shares 34,000
Shares issuable with respect to additional
common share equivalents (stock options) 48
-------
Pro forma diluted shares 34,048
=======
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We are exposed to market risk from changes in interest rates on a significant
portion of our outstanding indebtedness. Given the total amount of variable rate
indebtedness outstanding at June 30, 2003 ($243.1 million), a 1% change in the
LIBOR rate would result in a change of approximately $2.4 million to our annual
non-floor plan interest expense. Based on floor plan amounts outstanding at June
30, 2003, a 1% change in the LIBOR rate would result in a $5.9 million change to
annual floor plan interest expense.
20
Item 4. Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company conducted an
evaluation (under the supervision of and with the participation of the Company's
management, including the chief executive officer and chief financial officer),
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures (as defined in Rule 13a-15e and 15d-15e under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")). Based on this
evaluation, the Company's chief executive officer and chief financial officer
concluded that as of the end of such period: such disclosure controls and
procedures were reasonably designed to ensure that information required to be
disclosed by the Company in reports it files or submits under the Exchange Act
is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange Commission.
CHANGES IN INTERNAL CONTROLS
There have not been any changes in the Company's internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
. . .
Forward Looking Information
This report contains "forward-looking statements" as that term is defined in the
Private Securities Litigation Reform Act of 1995. The forward-looking statements
include statements relating to goals, plans and projections regarding the
Company's financial position, results of operations, market position, product
development and business strategy. These statements are based on management's
current expectations and involve significant risks and uncertainties that may
cause results to differ materially from those set forth in the statements. These
risks and uncertainties include, among other things,
o market factors,
o the Company's relationships with vehicle manufacturers and other suppliers,
o risks associated with the Company's substantial indebtedness,
o risks related to pending and potential future acquisitions, and
o general economic conditions both nationally and locally and governmental
regulations and legislation.
There can be no guarantees the Company's plans for future operations will be
successfully implemented or that they will prove to be commercially successful.
We undertake no obligation to publicly update any forward-looking statement,
whether as a result of new information, future events or otherwise.
21
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The information required by this Item, with respect to the Company's Annual
Meeting of Stockholders held on May 8, 2003, was included in Part II, Item 4 of
the Company's Quarterly Report on Form 10-Q for the for the quarter ended March
31, 2003.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
10.1 First Amended and Restated Credit Agreement, dated June 6, 2003
10.2 Severance Agreement with Vice President and General Counsel Lynne
Burgess, dated April 21, 2003
10.3 Severance Agreement with Vice President, Human Resources Philip
Johnson, dated April 21, 2003
31.1 Certificate of Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certificate of Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certificate of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
32.2 Certificate of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
b. Reports on Form 8-K
Report filed April 17, 2003, under Item 5, related to issuance of a press
release announcing the Company would release its first quarter financial
results before the market opens on April 30, 2003, and that it met the
fixed charge coverage requirement under its credit facility as of March 31,
2003.
Report filed April 30, 2003, under Item 9, related to issuance of a press
release announcing the Company's earnings for the first quarter ended March
31, 2003.
Report filed July 11, 2003, related to issuance of a press release
announcing that the Company has reached a mutual agreement with Wal-Mart
Stores, Inc. to end the pilot "Price 1" program.
Report filed July 30, 2003, under Item 9, related to the issuance of a
press release announcing that Michael Kane has been named President and CEO
of the Company's Texas platform.
Report filed July 31, 2003, under Item 9, related to issuance of a press
release announcing the Company's earnings for the second quarter and six
months ended June 30, 2003.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Asbury Automotive Group, Inc.
------------------------------------------
(Registrant)
Date: August 13, 2003 /s/ Kenneth B. Gilman
-----------------------------------------
Kenneth B. Gilman
Chief Executive Officer
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Asbury Automotive Group, Inc.
------------------------------------------
(Registrant)
Date: August 13, 2003 /s/ Thomas F. Gilman
------------------------------------------
Thomas F. Gilman
Senior Vice President and Chief Financial Officer
24
Index to Exhibits
Exhibit
Number Description
- ------- -----------
10.1 First Amended and Restated Credit Agreement, dated June 6, 2003
10.2 Severance Agreement with Vice President and General Counsel Lynne
Burgess, dated April 21, 2003
10.3 Severance Agreement with Vice President, Human Resources Philip
Johnson, dated April 21, 2003
31.1 Certificate of Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 Certificate of Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
32.1 Certificate of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
32.2 Certificate of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
25