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 March 31, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from __________ to
__________
Commission file number: 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)
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 |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes |X| No |_|
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 May 5, 2004, was 34,064,456 (net of 1,590,013
treasury shares).
ASBURY AUTOMOTIVE GROUP, INC.
INDEX
Page
PART I - Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 2004 (Unaudited)
and December 31, 2003........................................ 1
Consolidated Statements of Income for the Three Months
Ended March 31, 2004 and 2003 (Unaudited).................... 2
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2004 and 2003 (Unaudited).................... 3
Notes to Consolidated Financial Statements (Unaudited)......... 4
Independent Accountants' Report................................ 18
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 28
Item 4. Controls and Procedures.......................................... 28
PART II - Other Information
Item 6. Exhibits and Reports on Form 8-K................................ 29
Signatures...................................................... 30
Index to Exhibits............................................... 31
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
ASBURY AUTOMOTIVE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
March 31, December 31,
ASSETS 2004 2003
------ ------------ -------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents ........................................................ $ 45,986 $ 106,711
Contracts-in-transit ............................................................. 97,373 93,881
Restricted investments ........................................................... 1,637 1,591
Accounts receivable (net of allowance of $2,168
and $2,371, respectively) ...................................................... 117,922 114,201
Inventories ...................................................................... 707,513 650,397
Deferred income taxes ............................................................ 8,766 8,811
Prepaid and other assets ......................................................... 45,719 36,417
Assets held for sale ............................................................. 44,040 29,533
------------ ------------
Total current assets ................................................. 1,068,956 1,041,542
PROPERTY AND EQUIPMENT, net ........................................................ 270,451 266,991
GOODWILL ........................................................................... 430,625 404,143
RESTRICTED INVESTMENTS, net of current portion ..................................... 2,012 2,974
OTHER ASSETS ....................................................................... 108,998 98,629
------------ ------------
Total assets ......................................................... $ 1,881,042 $ 1,814,279
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Floor plan notes payable ....................................................... $ 625,153 $ 602,167
Current maturities of long-term debt ........................................... 34,839 33,250
Accounts payable ............................................................... 43,314 42,882
Accrued liabilities ............................................................ 95,402 78,727
Liabilities associated with assets held for sale ............................... 37,877 24,732
------------ ------------
Total current liabilities ..................................... 836,585 781,758
LONG-TERM DEBT ..................................................................... 557,100 559,128
DEFERRED INCOME TAXES .............................................................. 21,474 22,179
OTHER LIABILITIES .................................................................. 23,023 17,507
COMMITMENTS AND CONTINGENCIES (Note 12)
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,
34,026,317
and 34,022,008 shares issued, including shares held in treasury, respectively 340 340
Additional paid-in capital ..................................................... 411,147 411,082
Retained earnings .............................................................. 48,196 37,832
Treasury stock, at cost, 1,590,013 shares held ................................. (15,064) (15,064)
Accumulated other comprehensive loss ........................................... (1,759) (483)
------------ ------------
Total shareholders' equity .................................... 442,860 433,707
------------ ------------
Total liabilities and shareholders' equity .................... $ 1,881,042 $ 1,814,279
============ ============
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 March 31,
---------------------------
2004 2003
------------ ------------
REVENUES:
New vehicle ........................................... $ 725,278 $ 625,035
Used vehicle .......................................... 317,411 287,228
Parts, service and collision repair ................... 147,345 127,379
Finance and insurance, net ............................ 33,194 28,830
------------ ------------
Total revenues ..................................... 1,223,228 1,068,472
COST OF SALES:
New vehicle ........................................... 671,822 578,198
Used vehicle .......................................... 289,277 259,650
Parts, service and collision repair ................... 71,088 60,224
------------ ------------
Total cost of sales ................................ 1,032,187 898,072
GROSS PROFIT .............................................. 191,041 170,400
OPERATING EXPENSES:
Selling, general and administrative ................... 153,579 136,987
Depreciation and amortization ......................... 5,139 4,739
------------ ------------
Income from operations ............................. 32,323 28,674
OTHER INCOME (EXPENSE):
Floor plan interest expense ........................... (4,989) (4,418)
Other interest expense ................................ (10,322) (9,954)
Interest income ....................................... 275 180
Loss on sale of assets ................................ (42) (291)
Other expense ......................................... (162) (549)
------------ ------------
Total other expense, net ........................... (15,240) (15,032)
------------ ------------
Income from continuing operations before income taxes 17,083 13,642
INCOME TAX EXPENSE ........................................ 6,406 5,430
------------ ------------
Income from continuing operations .................. 10,677 8,212
DISCONTINUED OPERATIONS, net of tax ....................... (313) (1,115)
------------ ------------
Net income ......................................... $ 10,364 $ 7,097
============ ============
EARNINGS PER COMMON SHARE (basic and diluted) ............. $ 0.32 $ 0.21
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic .............................................. 32,435 33,052
============ ============
Diluted ........................................... 32,721 33,053
============ ============
See Notes to Consolidated Financial Statements.
2
ASBURY AUTOMOTIVE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the Three Months
Ended March 31,
-----------------------
2004 2003
---------- ----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income ................................................................................ $ 10,364 $ 7,097
Adjustments to reconcile net income to net cash (used in) provided by operating activities-
Depreciation and amortization .......................................................... 5,139 4,739
Depreciation and amortization from discontinued operations ............................. 67 746
Amortization of deferred financing fees ................................................ 533 1,278
Change in allowance for doubtful accounts .............................................. (203) (19)
Loss on sale of assets ................................................................. 42 291
Loss (gain) on sale of discontinued operations ......................................... 168 (816)
Change in deferred income taxes ........................................................ (660) (1,832)
Other adjustments ...................................................................... 1,546 643
Changes in operating assets and liabilities, net of acquisitions and divestitures-
Contracts-in-transit ................................................................... (3,492) 2,254
Accounts receivable .................................................................... (8,767) (1,485)
Proceeds from the sale of accounts receivable .......................................... 5,248 4,319
Inventories ............................................................................ (47,020) (26,627)
Prepaid and other assets ............................................................... (5,496) (3,623)
Floor plan notes payable ............................................................... 17,790 30,607
Accounts payable and accrued liabilities ............................................... 17,344 11,295
Other assets and liabilities ........................................................... (1,508) (232)
---------- ----------
Net cash (used in) provided by operating activities ............................. (8,905) 28,635
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures ...................................................................... (12,306) (14,445)
Payments for acquisitions ................................................................. (38,149) (250)
Proceeds from the sale of assets .......................................................... 357 327
Proceeds from the sale of discontinued operations ......................................... 445 1,591
Maturity of restricted marketable securities .............................................. 916 913
Net issuance of finance contracts ......................................................... (55) (1,464)
Other investing activities ................................................................ (3) (1,450)
---------- ----------
Net cash used in investing activities ........................................... (48,795) (14,778)
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from borrowings .................................................................. 2,832 20,962
Repayments of debt ........................................................................ (10,288) (13,165)
Proceeds from sale leaseback activity ..................................................... 4,386 --
Purchase of treasury stock ................................................................ -- (3,180)
Distributions to members .................................................................. -- (3,010)
Proceeds from the exercise of stock options ............................................... 45 --
---------- ----------
Net cash (used in) provided by financing activities ............................. (3,025) 1,607
---------- ----------
Net (decrease) increase in cash and cash equivalents ............................ (60,725) 15,464
CASH AND CASH EQUIVALENTS, beginning of period ................................................ 106,711 22,613
---------- ----------
CASH AND CASH EQUIVALENTS, end of period ...................................................... $ 45,986 $ 38,077
========== ==========
See Note 11 for supplemental cash flow information
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 140 franchises at 100 dealerships as of March 31, 2004. We offer an
extensive range of automotive products and services, including new and used
vehicles and related finance and insurance, vehicle maintenance and repair
services, replacement parts and service contracts. We offer 35 domestic and
foreign brands of new vehicles, including four heavy truck brands. Our retail
network is organized into nine regional dealership groups, or "platforms," which
are located in 20 markets in Southeastern, Midwestern, Southwestern and
Northwestern United States. In addition to our nine platforms, we operate two
dealerships in two markets in Northern California with the intention of
ultimately building a platform in Northern California through additional "tuck
in" acquisitions.
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 interim consolidated financial statements as of March 31, 2004, and for the
three months ended March 31, 2004 and 2003 have been included. The results of
operations for the three months ended March 31, 2004 are not necessarily
indicative of the results that may be expected for the full year. Our interim
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 for the year ended December 31, 2003.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the date
of the financial statements and 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.
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 and services is recognized upon
delivery of parts to the customer or at the time vehicle service work is
performed. Manufacturer incentives and rebates, including holdbacks, are
recognized when they are earned under the respective manufacturers' incentive
programs.
We receive commissions from the sale of vehicle service contracts,
credit life insurance and disability insurance to customers. In addition, we
arrange financing for customers and receive commissions from financing
institutions. We may be charged back ("chargebacks") for financing fees,
insurance or vehicle service contract commissions in the event of early
termination of the contracts by customers. The revenues from financing fees and
commissions are recorded at the time of the sale of the vehicles 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 revenues, net of estimated chargebacks, are included in
finance and insurance revenue in the accompanying Consolidated Statements of
Income.
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 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 Statement of Financial Accounting Standards ("SFAS") No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure-An amendment
of FASB Statement No. 123." The following table illustrates the effect on net
income and net income per share had stock-based employee compensation been
recorded based on the fair value method under SFAS No. 123:
4
For the Three Months
Ended March 31,
--------------------
2004 2003
(In thousands, except per share data) -------- --------
Net income-as reported $10,364 $ 7,097
Adjustments to net income:
Stock-based compensation expense included in net income, net of tax 20 14
Pro forma stock-based compensation expense, net of tax (1,189) (812)
-------- --------
Pro forma net income $ 9,195 $ 6,299
======== ========
Net income per common share--basic and diluted (as reported) $ 0.32 $ 0.21
======== ========
Pro forma net income per common share--basic and diluted $ 0.28 $ 0.19
======== ========
The measure of fair value most often employed under SFAS No. 123, and
used by us, is the Black-Scholes option valuation model ("Black-Scholes").
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 assumptions:
For the Three Months
Ended March 31,
--------------------
2004 2003
------- -------
Risk free interest rate 2.3% 2.5%
Expected life of options 4 years 5 years
Expected stock price volatility 53% 61%
Expected dividend yield N/A N/A
Discontinued Operations
In accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," certain amounts reflected in the accompanying
Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003, have
been classified as Assets Held for Sale and Liabilities Associated with Assets
Held for Sale. In addition, the accompanying Consolidated Statement of Income
and Consolidated Statement of Cash Flows for the three months ended March 31,
2003, have been reclassified to reflect the status of our discontinued
operations as of March 31, 2004, as though the businesses pending disposition
had been classified as discontinued operations during the respective periods
presented.
3. ACQUISITIONS
During the three months ended March 31, 2004 we acquired three
automotive dealership locations (three franchises) for an aggregate purchase
price of $38.1 million and during the three months ended March 31, 2003 we
acquired one ancillary business for $0.3 million. Acquisitions during the first
quarter of 2004 and 2003 were funded through the use of our working capital.
5
The allocation of purchase price for acquisitions is as follows:
For the Three Months
Ended March 31,
---------------------
2004 2003
(In thousands) -------- --------
Working capital $ 3,102 $ -
Fixed assets 1,367 154
Other assets 193 -
Goodwill 26,487 125
Franchise rights 7,000 -
Other liabilities - (29)
-------- --------
Total purchase price $ 38,149 $ 250
======== ========
The allocation of purchase price to assets acquired and liabilities
assumed for certain current and prior year acquisitions has been based on
preliminary estimates of fair value and may be revised as additional information
concerning valuation of such assets and liabilities becomes available. Assets
and liabilities recorded for certain acquisitions are subject to final purchase
price adjustments for items such as the seller's representations regarding the
adequacy of certain reserves.
4. INVENTORIES
Inventories consist of the following:
March 31, 2004 December 31, 2003
(In thousands) -------------- -----------------
New vehicles $ 565,831 $ 517,227
Used vehicles 99,011 90,683
Parts and accessories 42,671 42,487
--------- ---------
Total inventories $ 707,513 $ 650,397
========= =========
The lower of cost or market reserves for inventory were $4.7 million
and $4.6 million as of March 31, 2004 and December 31, 2003, respectively.
5. GOODWILL AND MANUFACTURER FRANCHISE RIGHTS
Goodwill represents the excess cost of businesses acquired over the
fair market value of the identifiable net assets. Goodwill is allocated to each
reporting unit at the platform level. The changes in the carrying amount of
goodwill for the three months ended March 31, 2004 are as follows:
(In thousands)
Balance, December 31, 2003 $ 404,143
Current year acquisitions 26,487
Adjustments associated with prior year acquisitions 216
Current year divestitures (221)
----------
Balance, March 31, 2004 $ 430,625
=========
During the three months ended March 31, 2004, we allocated $7.0 million
of the purchase price of our acquisitions to manufacturer franchise rights.
Manufacturer franchise rights totaled $45.0 million and $38.0 million as of
March 31, 2004 and December 31, 2003, respectively.
6
6. ASSETS HELD FOR SALE
Assets and liabilities classified as held for sale as of March 31, 2004
include five dealership locations (six franchises) and real estate associated
with two former dealership locations. Assets and liabilities classified as held
for sale as of December 31, 2003 include two dealership locations (three
franchises) and real estate associated with two former dealership locations.
In addition, assets classified as held for sale as of March 31, 2004
and December 31, 2003 include real estate that we intend to sell under
sale/leaseback agreements in the future. In connection with anticipated
sale/leaseback transactions, we incurred costs associated with the acquisition
of real estate and the construction of facilities that are expected to be
completed and sold within one year. Accordingly, these costs are included in
Assets Held for Sale on the accompanying Consolidated Balance Sheets. The book
value of the land and construction-in-progress totaled $27.2 million and $22.8
million as of March 31, 2004 and December 31, 2003, respectively. Under these
agreements, an unaffiliated third party purchased land at its fair value and is
advancing funds to us equal to the cost of construction incurred for the
facilities. We capitalize the cost of the land, construction and rent during the
construction period, and record a corresponding liability equal to the amount of
the advanced funds, included in Liabilities Associated with Assets Held for Sale
on the accompanying Consolidated Balance Sheets. Upon completion of the
construction, we will execute the sale/leaseback and remove the cost of the land
and the related liability from the accompanying Consolidated Balance Sheets.
A summary of assets and liabilities held for sale is as follows:
March 31, 2004 December 31, 2003
(In thousands) -------------- -----------------
Assets:
Inventories $ 12,003 $ 2,116
Property and equipment, net 32,037 27,417
Other - -
Total assets 44,040 29,533
Liabilities:
Floor plan notes payable 10,715 1,954
Other liabilities 27,162 22,778
Total liabilities 37,877 24,732
-------- --------
Net assets held for sale $ 6,163 $ 4,801
======== ========
7. LONG-TERM DEBT
Long-term debt consists of the following:
March 31, 2004 December 31, 2003
(In thousands) -------------- -----------------
9% Senior Subordinated Notes due 2012 $ 250,000 $ 250,000
8% Senior Subordinated Notes due 2014 200,000 200,000
Mortgage notes payable 113,616 116,664
Notes payable collateralized by loaner vehicles 19,422 15,744
Non-interest bearing note payable to former shareholders 3,445 4,228
Capital lease obligations 4,009 4,226
Other notes payable 1,447 1,516
591,939 592,378
Less--current portion (34,839) (33,250)
---------- ----------
Long-term debt $ 557,100 $ 559,128
========== ==========
7
8. COMPREHENSIVE INCOME
The following table provides a reconciliation of net income to
comprehensive income:
For the Three Months
Ended March 31,
-----------------------
2004 2003
(In thousands)
Net income $ 10,364 $ 7,097
Other comprehensive income:
Change in fair value of interest rate swaps (2,071) -
Income tax benefit (expense) associated with
interest rate swaps 795 -
(1,276) -
Reclassification adjustment of loss on
interest rate swaps included in net income - 57
Income tax expense associated with
interest rate swaps - (24)
--------- ---------
Comprehensive income $ 9,088 $ 7,130
========= =========
9. DISCONTINUED OPERATIONS AND DIVESTITURES
As of March 31, 2004 five dealership locations (six franchises) and
real estate associated with two former dealership locations were pending
disposition. The accompanying Consolidated Statement of Income for the three
months ended March 31, 2003 has been reclassified to reflect the status of our
discontinued operations as of March 31, 2004, as though the businesses pending
disposition had been classified as discontinued operations during the respective
periods presented.
The following table provides further information regarding our
discontinued operations as of March 31, 2004, including businesses sold prior to
March 31, 2004 and businesses pending disposition as of March 31, 2004:
For the Three Months For the Three Months
Ended March 31, 2004 Ended March 31, 2003
---------------------------------- ---------------------------------
Pending Pending
(Dollars in thousands) Sold Disposition Total Sold* Disposition** Total
---------- ----------- --------- -------- ------------ ---------
Franchises ................................. 1 6 7 6 6 12
======== ======== ========= ======== ========= =========
Used-only locations ........................ -- -- -- 10 -- 10
======== ======== ========= ======== ========= =========
Ancillary businesses ....................... -- -- -- 2 -- 2
======== ======== ========= ======== ========= =========
Revenues ................................... $ -- $ 15,112 $ 15,112 $ 20,307 $ 16,980 $ 37,287
Cost of sales .............................. -- 12,863 12,863 17,775 14,453 32,228
--------- --------- --------- --------- --------- ---------
Gross profit ...................... -- 2,249 2,249 2,532 2,527 5,059
Operating expenses ......................... 8 2,478 2,486 4,848 2,656 7,504
--------- --------- --------- --------- --------- ---------
Loss from operations .............. (8) (229) (237) (2,316) (129) (2,445)
Other expense, net ......................... -- (96) (96) (82) (147) (229)
--------- --------- --------- --------- --------- ---------
Net loss .......................... (8) (325) (333) (2,398) (276) (2,674)
(Loss) gain on disposition of discontinued
operations ............................ (168) -- (168) 816 -- 816
--------- --------- --------- --------- --------- ---------
Loss before income taxes .......... (176) (325) (501) (1,582) (276) (1,858)
Related tax benefit ........................ 66 122 188 632 111 743
--------- --------- --------- --------- --------- ---------
Discontinued operations, net of tax $ (110) $ (203) $ (313) $ (950) $ (165) $ (1,115)
========= ========= ========= ========= ========= =========
8
* Businesses were pending disposition as of March 31, 2003
** Businesses were pending disposition as of March 31, 2004
10. 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 March 31,
---------------------
(In thousands, except per share data) 2004 2003
--------- ---------
Net income:
Continuing operations ....................... $ 10,677 $ 8,212
Discontinued operations ..................... (313) (1,115)
--------- ---------
$ 10,364 $ 7,097
========= =========
Earnings per share - basic and diluted:
Continuing operations ....................... $ 0.33 $ 0.25
Discontinued operations ..................... (0.01) (0.04)
--------- ---------
$ 0.32 $ 0.21
========= =========
Common shares and common share equivalents:
Weighted average shares outstanding - basic . 32,435 33,052
Common share equivalents (stock options) .... 286 1
--------- ---------
Weighted average shares outstanding - diluted 32,721 33,053
========= =========
11. SUPPLEMENTAL CASH FLOW INFORMATION
During the three months ended March 31, 2004 and 2003, we made interest
payments, net of amounts capitalized, totaling $11.8 million and $8.4 million,
respectively. During the three months ended March 31, 2004, we received $1.5
million 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 three months ended March 31, 2004 and 2003, we made income
tax payments totaling $0.1 million and $0.1 million, respectively.
During the three months ended March 31, 2003, approximately $4.5
million of the proceeds from the sale of dealerships were paid directly to the
Lenders of our Committed Credit Facility. We received all proceeds from
dealerships we sold during the three months ended March 31, 2004 directly from
the purchasers.
During the three months ended March 31, 2003, approximately $16.6
million of the proceeds from sale/leaseback transactions were paid directly to
our lenders. We did not sell any land or buildings in connection with
sale/leaseback agreements during the three months ended March 31, 2004.
During the three months ended March 31, 2003, we entered into capital
leases for land and buildings of $0.4 million. We did not enter into any capital
lease agreements during the three months ended March 31, 2004.
9
During the three months ended March 31, 2004 and 2003, we borrowed $7.0
million and $4.6 million, respectively, under our loaner vehicle financing
arrangements in connection with the purchase of loaner vehicles.
12. COMMITMENTS AND CONTINGENCIES
Litigation
We are involved in legal proceedings and claims, which arise in the
ordinary course of business and with respect to certain of these claims, we have
been indemnified by the sellers of dealerships we have acquired. We do not
expect that the amount of ultimate liability with respect to the legal
proceedings and claims will materially affect our financial condition,
liquidity, results of operations or financial statement disclosures.
Guarantees
We have guaranteed two loans made by financial institutions directly to
one of our former platform executives and to a non-consolidated entity
controlled by a current platform executive, which totaled approximately $4.1
million as of March 31, 2004. One of these guarantees, made on behalf of a
former platform executive, was made in conjunction with the former executive
acquiring equity in us. The primary obligor of this note is the former platform
executive. This guarantee was made in November 1998, at which point we believed
that it was important for each of the individuals to have equity at risk. The
second loan that we guarantee was made by a corporation we acquired in October
1998 and guarantees an industrial revenue bond, which we are legally required to
guarantee. The primary obligor of the note is a non-dealership business entity
and that entity's partners as individuals.
In addition, we have other guarantees in the ordinary course of
business, which we believe will not have a material impact on our results of
operations or financial position.
Environmental Matters
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.
13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Our 8% Senior Subordinated Notes due 2014 are guaranteed by all of our
current subsidiaries, other than our current Toyota and Lexus dealership
subsidiaries, and all of our future domestic restricted subsidiaries, other than
our future Toyota and Lexus dealership facilities. The following tables set
forth, on a condensed consolidating basis, our balance sheets, statements of
income and statements of cash flows, for our guarantor and non-guarantor
subsidiaries for all financial statement periods presented in our interim
consolidated financial statements.
10
Condensed Consolidating Balance Sheet
As of March 31, 2004
Parent Guarantor Non-guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------- ------------ ------------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents....................... $ -- $ 42,176 $ 3,810 $ -- $ 45,986
Inventories .................................... -- 654,520 52,993 -- 707,513
Other current assets ........................... -- 217,352 54,065 -- 271,417
Assets held for sale ........................... -- 44,040 -- -- 44,040
---------- ----------- ----------- ----------- -----------
Total current assets ..................... -- 958,088 110,868 -- 1,068,956
Property and equipment, net ....................... -- 265,510 4,941 -- 270,451
Goodwill .......................................... -- 369,589 61,036 -- 430,625
Other assets ...................................... -- 98,327 12,683 -- 111,010
Investment in subsidiaries ........................ 442,860 84,501 -- (527,361) --
---------- ----------- ----------- ----------- -----------
Total assets ............................. $ 442,860 $1,776,015 $ 189,528 $ (527,361) $1,881,042
========== =========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Floor plan notes payable
$ -- $ 580,552 $ 44,601 $ -- $ 625,153
Other current liabilities ...................... -- 119,403 54,152 -- 173,555
Liabilities associated with assets held for sale -- 37,877 -- -- 37,877
---------- ----------- ----------- ----------- -----------
Total current liabilities ................ -- 737,832 98,753 -- 836,585
Long-term debt .................................... -- 557,052 48 -- 557,100
Other liabilities ................................. -- 38,271 6,226 -- 44,497
Shareholders' equity .............................. 442,860 442,860 84,501 (527,361) 442,860
---------- ----------- ----------- ----------- -----------
Total liabilities and shareholders' equity $ 442,860 $1,776,015 $ 189,528 $ (527,361) $1,881,042
========== =========== =========== =========== ===========
11
Condensed Consolidating Balance Sheet
As of December 31, 2003
Parent Guarantor Non-guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------- ------------ ------------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents ...................... $ -- $ 98,927 $ 7,784 $ -- $ 106,711
Inventories .................................... -- 601,923 48,474 -- 650,397
Other current assets ........................... 206,910 47,991 254,901
Assets held for sale ........................... -- 29,533 -- -- 29,533
---------- ----------- ----------- ----------- -----------
Total current assets ..................... -- 937,293 104,249 -- 1,041,542
Property and equipment, net ....................... -- 262,450 4,541 -- 266,991
Goodwill .......................................... -- 342,831 61,312 -- 404,143
Other assets ...................................... -- 90,800 10,803 -- 101,603
Investment in subsidiaries ........................ 433,707 69,240 -- (502,947) --
---------- ----------- ----------- ----------- -----------
Total assets ............................. $ 433,707 $1,702,614 $ 180,905 $ (502,947) $1,814,279
========== =========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Floor plan notes payable $ -- $ 558,586 $ 43,581 $ -- $ 602,167
Other current liabilities ...................... -- 93,064 61,795 -- 154,859
Liabilities associated with assets held for sale -- 24,732 -- -- 24,732
---------- ----------- ----------- ----------- -----------
Total current liabilities ................ -- 676,382 105,376 -- 781,758
Long-term debt .................................... -- 559,079 49 -- 559,128
Other liabilities ................................. -- 33,446 6,240 -- 39,686
Shareholders' equity .............................. 433,707 433,707 69,240 (502,947) 433,707
---------- ----------- ----------- ----------- -----------
Total liabilities and shareholders' equity $ 433,707 $1,702,614 $ 180,905 $ (502,947) $1,814,279
========== =========== =========== =========== ===========
12
Condensed Consolidating Statement of Income
For the Three Months Ended March 31, 2004
Parent Guarantor Non-guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------- ------------ ------------
(In thousands)
Revenues ................................. $ -- $ 1,062,887 $ 163,776 $ (3,435) $ 1,223,228
Cost of sales ............................ -- 895,622 140,000 (3,435) 1,032,187
--------- ----------- ----------- ---------- -----------
Gross profit .................... -- 167,265 23,776 -- 191,041
Operating expenses:
Selling, general and administrative ... -- 136,615 16,964 -- 153,579
Depreciation and amortization ......... -- 4,740 399 -- 5,139
--------- ----------- ----------- ---------- -----------
Income from operations .......... -- 25,910 6,413 -- 32,323
Other income (expense):
Floor plan interest expense ........... -- (4,651) (338) -- (4,989)
Other interest expense ................ -- (9,255) (1,067) -- (10,322)
Other income (expense) ................ -- 79 (8) -- 71
Equity in earnings of subsidiaries .... 10,364 3,125 -- (13,489) --
--------- ----------- ------------ ---------- ------------
Total other expense, net ........ 10,364 (10,702) (1,413) (13,489) (15,240)
--------- ----------- ------------ ---------- ------------
Income from continuing operations
before income taxes ........... 10,364 15,208 5,000 (13,489) 17,083
Income tax expense ....................... -- 4,531 1,875 -- 6,406
--------- ----------- ------------ ---------- ------------
Income from continuing operations 10,364 10,677 3,125 (13,489) 10,677
Discontinued operations, net of tax ...... -- (313) -- -- (313)
--------- ----------- ------------ ---------- ------------
Net income ...................... $ 10,364 $ 10,364 $ 3,125 $ (13,489) $ 10,364
========= =========== ============ ========== ============
13
Condensed Consolidating Statement of Income
For the Three Months Ended March 31, 2003
Parent Guarantor Non-guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------- ------------ ------------
(In thousands)
Revenues $ -- $ 925,461 $ 146,191 $ (3,180) $ 1,068,472
Cost of sales ............................ -- 776,233 125,019 (3,180) 898,072
---------- ------------ ------------ ------------ ------------
Gross profit .................... -- 149,228 21,172 -- 170,400
Operating expenses:
Selling, general and administrative ... -- 121,021 15,966 -- 136,987
Depreciation and amortization ......... -- 4,292 447 -- 4,739
---------- ------------ ------------ ------------ ------------
Income from operations .......... -- 23,915 4,759 -- 28,674
Other income (expense):
Floor plan interest expense ........... -- (4,114) (304) -- (4,418)
Other interest expense ................ -- (8,943) (1,011) -- (9,954)
Other income (expense) ................ -- (515) (145) -- (660)
Equity in earnings of subsidiaries .... 7,097 1,986 -- (9,083) --
---------- ------------ ------------ ------------ ------------
Total other expense, net ........ 7,097 (11,586) (1,460) (9,083) (15,032)
---------- ------------ ------------ ------------ ------------
Income from continuing operations
before income taxes ........... 7,097 12,329 3,299 (9,083) 13,642
Income tax expense ....................... -- 4,117 1,313 -- 5,430
---------- ------------ ------------ ------------ ------------
Income from continuing operations 7,097 8,212 1,986 (9,083) 8,212
Discontinued operations, net of tax ...... -- (1,115) -- -- (1,115)
---------- ------------ ------------ ------------ ------------
Net income ...................... $ 7,097 $ 7,097 $ 1,986 $ (9,083) $ 7,097
========== ============ ============ ============ ============
14
Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2004
Parent Guarantor Non-guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------- ------------ ------------
(In thousands)
Net cash used in operating activities ........ $ -- $ (6,356) $ (2,549) $ -- $ (8,905)
Cash flow from investing activities:
Capital expenditures ...................... -- (11,692) (614) -- (12,306)
Payments for acquisitions ................. -- (38,149) -- -- (38,149)
Other investing activities ................ -- 1,660 -- -- 1,660
---------- ---------- ---------- --------- ----------
Net cash used in investing activities -- (48,181) (614) -- (48,795)
Cash flow from financing activities:
Proceeds from borrowings .................. -- 2,832 -- -- 2,832
Repayments of debt ........................ -- (9,477) (811) -- (10,288)
Proceeds from sale leaseback activity ..... -- 4,386 -- -- 4,386
Other financing activities ................ -- 45 -- -- 45
---------- ---------- ---------- --------- ----------
Net cash used in financing activities -- (2,214) (811) -- (3,025)
---------- ---------- ---------- --------- ----------
Net decrease in cash and cash
equivalents ....................... -- (56,751) (3,974) -- (60,725)
Cash and cash equivalents, beginning of period -- 98,927 7,784 -- 106,711
---------- ---------- ---------- --------- ----------
Cash and cash equivalents, end of period ..... $ -- $ 42,176 $ 3,810 $ -- $ 45,986
========== ========== ========== ========= ==========
15
Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2003
Parent Guarantor Non-guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------- ------------ ------------
(In thousands)
Net cash provided by operating activities .... $ -- $ 27,007 $ 1,628 $ -- $ 28,635
Cash flow from investing activities:
Capital expenditures ...................... -- (14,300) (145) -- (14,445)
Payments for acquisitions ................. -- (250) -- -- (250)
Other investing activities ................ -- (83) -- -- (83)
--------- --------- --------- -------- ---------
Net cash used in investing activities -- (14,633) (145) -- (14,778)
Cash flow from financing activities:
Proceeds from borrowings .................. -- 20,962 -- -- 20,962
Repayments of debt ........................ -- (12,321) (844) -- (13,165)
Purchase of treasury stock ................ -- (3,180) -- -- (3,180)
Distributions to members .................. -- (3,010) -- -- (3,010)
--------- --------- --------- -------- ---------
Net cash provided by (used in)
financing activities .............. -- 2,451 (844) -- 1,607
--------- --------- --------- -------- ---------
Net increase in cash and cash
equivalents ....................... -- 14,825 639 -- 15,464
Cash and cash equivalents, beginning of period -- 18,779 3,834 -- 22,613
--------- --------- --------- -------- ---------
Cash and cash equivalents, end of period ..... $ -- $ 33,604 $ 4,473 $ -- $ 38,077
========= ========= ========= ======== =========
16
14. SUBSEQUENT EVENTS
Acquisitions
During the second quarter of 2004, we acquired one dealership location
(one franchise) in Northern California and two dealership locations (two
franchises) in Southern California for a total purchase price of $33.2 million
through the use of our working capital. We estimate annual revenues of the
acquired franchises will total approximately $144.0 million, based on historical
performance.
Exchange of 8% Senior Subordinated Notes due 2014
In May 2004, we completed the exchange of all of our outstanding 8%
Senior Subordinated Notes due 2014 for $200.0 million of new notes with
identical terms that have been registered under the Securities Act of 1933, as
amended.
17
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Shareholders of Asbury Automotive Group, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of Asbury
Automotive Group, Inc. and subsidiaries ("the Company") as of March 31, 2004,
and the related condensed consolidated statements of income and cash flows for
the three-month periods ended March 31, 2004 and 2003. 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 the
Company as of December 31, 2003, 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 March 5, 2004 (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.
/s/ DELOITTE & TOUCHE LLP
Stamford, Connecticut
April 30, 2004
18
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
We are a national automotive retailer, operating 140 franchises at 100
dealership locations in 11 states and 22 markets in the U.S., offering 35
different brands of vehicles, including four heavy truck brands. We also operate
23 collision repair centers that serve our markets.
Our revenues are derived primarily from three basic products: (i) the
sale of new and used vehicles; (ii) maintenance and collision repair services
and the sale of automotive parts (collectively, "fixed operations"); and (iii)
the arrangement of vehicle financing and the sale of various insurance and
warranty products (collectively, "F&I"). We evaluate the results of our new and
used vehicle sales based on unit volumes and gross profit per vehicle retailed
("PVR"); our fixed operations based on gross profit dollars; and F&I based on
gross profit PVR.
Since inception, we have grown through the acquisition of nine
platforms and numerous "tuck-in" acquisitions. "Tuck-in" acquisitions are the
purchase of dealerships in the market areas of our existing platforms. We use
"tuck-in" acquisitions to increase the amount of vehicle brands we offer in a
particular market area. In addition to our nine established platforms, we
operate two franchises in Northern California and acquired three franchises in
Southern California during the second quarter of 2004, with the intention of
ultimately building platforms in each of these respective regions through
additional acquisitions. All acquisitions were accounted for using the purchase
method of accounting and the operations of the acquired dealerships are included
in the consolidated statements of income commencing on the date acquired. We
evaluate the organic growth of our revenue and gross profit on a same store
basis.
Our gross profit percentage varies with our revenue mix. The sale of
vehicles generally results in lower gross profit percentage than our fixed
operations. As a result, when vehicle sales decrease as a percentage of total
sales, we expect that our overall gross profit percentage would increase.
Selling, general and administrative expenses consist primarily of fixed
and incentive-based compensation, advertising, rent, insurance, utilities and
other typical operating expenses. A significant portion of our selling expenses
is variable (such as sales commissions), or controllable expenses (such as
advertising), generally allowing our cost structure to adapt in response to
trends in our business. We evaluate commissions paid to salespeople as a
percentage of retail vehicle gross profit and all other selling, general and
administrative expenses in the aggregate as a percentage of gross profit.
Sales of motor vehicles (particularly new vehicles) have historically
fluctuated with general macroeconomic conditions, including consumer confidence,
availability of consumer credit and fuel prices. Although these factors may
impact our business, we believe that any future negative trends may be mitigated
by the performance of our used vehicle sales, fixed operations, our variable
cost structure, regional diversity and advantageous brand mix.
Our operations are subject to modest seasonal variations that are
somewhat offset by our regional diversity. We typically generate more revenue
and operating income in the second and third quarters than in the first and
fourth quarters. Seasonality is based upon, among other factors, weather
conditions, manufacturer incentive programs, model changeovers and consumer
buying patterns.
Over the past several years certain automobile manufacturers have used
a combination of vehicle pricing and financing incentive programs to stimulate
customer demand for new vehicles. These programs serve to increase competition
for late model used vehicles. We foresee the manufacturers continuing to use
these incentive programs in the future and, as a result, we will continue to
monitor our used inventory mix in order to carry higher levels of used vehicle
inventory at lower price points, thereby reducing competition with our new
vehicle sales. In addition, we expect to continue to expand our service capacity
in order to meet anticipated future demand, as the relatively high volume of new
vehicle sales resulting from the highly "incentivized" new vehicle market will
drive service demand in the future.
We expect the industry-wide gain in market share of the luxury and
mid-line import brands to continue in the near future. We feel that our brand
mix, which is heavily weighted toward these brands, is well positioned to take
advantage of this continued shift in customer buying habits.
Interest rates over the past several years have been at historical
lows. We do not believe that changes in interest rates significantly impact
customer buying patterns, as changes in interest rates do not dramatically
increase the monthly payment of a financed vehicle. For example, the monthly
payment for a typical vehicle financing transaction in which a customer finances
$25,000 at 5.5% over 60 months only increases by $5.80 with a 50 basis point
increase in interest rates.
19
RESULTS OF OPERATIONS
Three Months Ended March 31, 2004, Compared to Three Months Ended March 31, 2003
Net income increased $3.3 million, or $0.11 per basic share, to $10.4
million, or $0.32 per basic share, for the three months ended March 31, 2004,
from $7.1 million or $0.21 per basic share, for the three months ended March 31,
2003.
Income from continuing operations increased $2.5 million, or $0.08 per
basic share, to $10.7 million, or $0.33 per share, for the three months ended
March 31, 2004, from $8.2 million, or $0.25 per share, for the three months
ended March 31, 2003.
The increases in net income and income from continuing operations are a
result of several factors, including: (i) the operations of franchises we
acquired during 2003 and the first quarter of 2004, (ii) the sale of
non-profitable dealerships (iii) our continued focus on cost reduction and (iv)
a significant improvement in the performance of our Arkansas and Oregon
platforms. Improvements in the cost structure of our Oregon platform and
increased used vehicle retail unit sales have led to a significant improvement
in net income from continuing operations at the platform compared to the same
period of the prior year. These improvements in our operations were offset by a
decline in the performance of our Texas platform compared to the prior year
period. Our Texas platform has been negatively impacted by a loss of market
share in Houston, a significant reduction in the gross profit recognized on the
sale of certain brands of new vehicles and general economic conditions in Texas.
Revenues
For the Three Months
(Dollars in thousands) Ended March 31,
---------------------- Increase %
2004 2003 (Decrease) Change
---------- ---------- ---------- -------
New vehicle data:
Retail revenues-same store (1) ........... $ 647,696 $ 611,600 $ 36,096 6%
Retail revenues-acquisitions ............. 62,715 --
--------- ---------
Total new retail revenues ....... 710,411 611,600 98,811 16%
Fleet revenues-same store (1) ............ 14,867 13,435 1,432 11%
Fleet revenues-acquisitions .............. -- --
--------- ---------
Total fleet revenues ............ 14,867 13,435 1,432 11%
--------- ---------
New vehicle revenue, as reported $ 725,278 $ 625,035 $ 100,243 16%
========= =========
New retail units-same store (1) .......... 21,796 21,767 29 --
New retail units-actual .................. 23,869 21,767 2,102 10%
Used vehicle data:
Retail revenues-same store (1) ........... $ 216,357 $ 223,638 $ (7,281) (3%)
Retail revenues-acquisitions ............. 22,773 --
--------- ---------
Total used retail revenues ...... 239,130 223,638 15,492 7%
Wholesale revenues-same store (1) ........ 71,213 63,590 7,623 12%
Wholesale revenues-acquisitions .......... 7,068 --
Total wholesale revenues ........ 78,281 63,590 14,691 23%
--------- ---------
Used vehicle revenue, as reported $ 317,411 $ 287,228 $ 30,183 11%
========= =========
Used retail units-same store (1) ......... 14,540 14,750 (210) (1%)
Used retail units-actual ................. 15,782 14,750 1,032 7%
20
For the Three Months
(Dollars in thousands) Ended March 31,
---------------------- Increase %
2004 2003 (Decrease) Change
---------- ---------- ---------- -------
Parts, service and collision repair:
Revenues-same store (1) ................... $ 134,105 $ 127,379 $ 6,726 5%
Revenues-acquisitions ..................... 13,240 --
---------- ----------
Parts, service and collision
repair revenue, as reported $ 147,345 $ 127,379 $ 19,966 16%
========== ==========
Finance and insurance, net:
Platform revenues-same store (1) .......... $ 30,198 $ 28,830 $ 1,368 5%
Platform revenues-acquisitions ............ 2,157 --
---------- ----------
Platform finance and
insurance, net ................. 32,355 28,830 3,525 12%
Corporate revenues ........................ 839 --
---------- ----------
Finance and insurance
revenue, as reported ........... $ 33,194 $ 28,830 $ 4,364 15%
========== ==========
Total revenue:
Same store (1) ............................ $1,114,436 $1,068,472 $ 45,964 4%
Corporate ................................. 839 --
Acquisitions .............................. 107,953 --
---------- ----------
Total revenue, as reported ....... $1,223,228 $1,068,472 $ 154,756 14%
========== ==========
(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 us.
Total revenues increased $154.8 million to $1.2 billion for the three
months ended March 31, 2004 from $1.1 billion for the three months ended March
31, 2003. Same store revenue grew $46.0 million, or 4%, to $1.1 billion for the
three months ended March 31, 2004. On a same store basis, new retail units were
relatively flat. However, same store new vehicle retail revenues were up 6%
reflecting an increase in our average selling price driven by our strong luxury
and mid-line import sales mix. Same store used vehicle revenue decreased $7.3
million, or 3%, to $216.4 million as manufacturer incentive programs on new
vehicles and a competitive used vehicle market negatively impacted our used
retail unit sales volume and sales revenue per used vehicle retailed. Although
we have experienced this negative trend in the used vehicle market over the last
several quarters, we have slowed the rate of deterioration of our used vehicle
sales revenues through managing our used inventory mix in order to carry higher
levels of used vehicle inventory at lower price points, thereby reducing
competition with our new retail vehicle sales.
Fixed operations revenue increased 5% on a same store basis due to
increased warranty work generated by certain manufacturer recalls, an increase
in the wholesale of parts to local automotive service and repair businesses and
growth in service as a result of our continued focus on "customer pay" business,
service adviser training, expansion of our product offerings, implementation of
advertising campaigns and growth in our import warranty business.
We achieved 5% same store growth in Platform F&I revenue, as we
continue to benefit from increased product offerings, the utilization of menus
in the F&I sales process, the maturation of our corporate sponsored programs and
the sharing of best practices between our platforms. Also contributing to our
same store results of Platform F&I is the improvement of the finance and
insurance operations at franchises we acquired in prior years, which generally
continue to improve for several years after the acquisition date. Platform F&I
excludes revenue resulting from contracts negotiated by our corporate office,
which is attributable to retail units sold during prior periods.
We expect total revenue to increase as we continue to acquire
dealerships and expand our service capacity in order to meet anticipated future
demand, as the relatively high volume of new vehicles sales resulting from the
highly "incentivized" new vehicle market will drive service demand.
21
Gross Profit
For the Three Months
(Dollars in thousands, except for per vehicle data) Ended March 31,
----------------------- Increase %
2004 2003 (Decrease) Change
---------- ---------- ---------- ------
New vehicle data:
Retail gross profit-same store (1) .......................... $ 47,763 $ 46,485 $ 1,278 3%
Retail gross profit-acquisitions ............................ 5,319 --
--------- ---------
Total new retail gross profit ...................... 53,082 46,485 6,597 14%
Fleet gross profit-same store (1) ........................... 374 352 22 6%
Fleet gross profit-acquisitions ............................. -- --
Total fleet gross profit ........................... 374 352 22 6%
--------- ---------
New vehicle gross profit, as reported .............. $ 53,456 $ 46,837 $ 6,619 14%
========= =========
New retail units-same store (1) ............................. 21,796 21,767 29 --
New retail units-actual ..................................... 23,869 21,767 2,102 10%
Used vehicle data:
Retail gross profit-same store (1) .......................... $ 26,160 $ 27,292 $ (1,132) (4%)
Retail gross profit-acquisitions ............................ 2,481 --
--------- ---------
Total used retail gross profit ..................... 28,641 27,292 1,349 5%
Wholesale gross profit-same store (1) ....................... (442) 286 (728) (255%)
Wholesale gross profit-acquisitions ......................... (65) --
--------- ---------
Total wholesale gross profit ....................... (507) 286 (793) (277%)
--------- ---------
Used vehicle gross profit, as reported ............. $ 28,134 $ 27,578 $ 556 2%
========= =========
Used retail units-same store (1) ............................ 14,540 14,750 (210) (1%)
Used retail units-actual .................................... 15,782 14,750 1,032 7%
Parts, service and collision repair:
Gross profit-same store (1) ................................. $ 69,482 $ 67,155 $ 2,327 3%
Gross profit-acquisitions ................................... 6,775 --
--------- ---------
Parts, service and collision repair
gross profit, as reported $ 76,257 $ 67,155 $ 9,102 14%
========= =========
Finance and insurance, net:
Platform gross profit-same store (1) ........................ $ 30,198 $ 28,830 $ 1,368 5%
Platform gross profit-acquisitions .......................... 2,157 --
--------- ---------
Platform finance and insurance, net (2) ..... 32,355 28,830 3,525 12%
Gross profit-corporate ...................................... 839 --
--------- ---------
Finance and insurance gross profit, as reported .... $ 33,194 $ 28,830 $ 4,364 15%
========= =========
Platform gross profit PVR-same store (1) .................... $ 831 $ 789 $ 42 5%
Platform gross profit PVR-actual (2) ........................ $ 816 $ 789 $ 27 3%
Gross profit PVR-actual ..................................... $ 837 $ 789 $ 48 6%
Total gross profit:
Gross profit-same store (1) ................................. $ 173,535 $ 170,400 $ 3,135 2%
Gross profit-acquisitions ................................... 16,667 --
Gross profit-corporate ...................................... 839 --
--------- ---------
Total gross profit, as reported .................... $ 191,041 $ 170,400 $ 20,641 12%
========= =========
(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 we owned the dealership.
(2) Refer to "Reconciliation of Non-GAAP Financial Information" for further
discussion regarding platform finance and insurance gross profit PVR.
22
Gross profit increased $20.6 million, or 12%, to $191.0 million for the
three months ended March 31, 2004 from $170.4 million for the three months ended
March 31, 2003. Same store gross profit increased $3.1 million, or 2%, to $173.5
million for the three months ended March 31, 2004. Same store gross profit on
new retail vehicle sales increased 3% for the three months ended March 31, 2004.
The improvement in gross profit on new retail vehicle sales was primarily due to
a shift in our sales mix toward luxury vehicles. Same store gross profit on used
vehicle retail sales decreased $1.1 million, or 4%, to $26.2 million for the
three months ended March 31, 2004, as a highly competitive used vehicle market
and manufacturer incentives on new vehicles continued to negatively impact used
vehicle unit sales volumes and gross profit per used vehicle retailed. Same
store fixed operations increased $2.3 million, or 3%, to $69.5 million for the
three months ended March 31, 2004, resulting primarily from increased warranty
work generated by manufacturer recalls and an increase in the wholesale of
manufacturer parts to local automotive service and repair businesses.
Selling, General and Administrative Expenses-
Selling, general and administrative expenses increased $16.6 million to
$153.6 million for the three months ended March 31, 2004, from $137.0 million
for the three months ended March 31, 2003. Selling, general and administrative
expenses as a percentage of gross profit for the three months ended March 31,
2004 remained constant at 80.4% compared to the three months ended March 31,
2003. Our continued focus on cost reduction enabled us to maintain this expense
ratio, even though selling, general and administrative expenses for the three
months ended March 31, 2004 included $1.2 million of expenses arising from
management changes made in 2003. Advertising expense as a percentage of gross
profit increased to 6.7% for the three months ended March 31, 2004, as compared
to 6.2% for the three months ended March 31, 2003. The increase in selling,
general and administrative expenses are partially attributable additional rent
expense resulting from sale/leaseback transactions completed during 2003.
We expect selling, general and administrative expenses in the aggregate
and as a percentage of gross profit to increase in the future as we incur
additional rent resulting from the anticipated completion of a sales/leaseback
transaction with an unaffiliated third party. In connection with this
transaction we intend to sell certain land and buildings with a net book value
of approximately $100.0 million for a sales price in excess of the book value
and enter into long-term operating leases for the related facilities.
Depreciation and Amortization-
Depreciation and amortization expense increased $0.4 million to $5.1
million for the three months ended March 31, 2004, from $4.7 million for the
three months ended March 31, 2003. This increase is primarily related to the
addition of property, plant and equipment acquired during the nine months ended
December 31, 2003 and the three months ended March 31, 2004, off-set by the sale
of property, plant and equipment during 2004, in connection with sale/leaseback
agreements.
We expect depreciation and amortization expense to decrease in the
future as a result of the anticipated completion of the sales/leaseback
transaction with an unaffiliated third party, under which we intend to sell
certain land and buildings with a net book value of approximately $100.0
million.
Other Income (Expense)-
Floor plan interest expense increased $0.6 million to $5.0 million for
the three months ended March 31, 2004, from $4.4 million for the three months
ended March 31, 2003. This increase was due to higher average new vehicle
inventory levels during 2004 as compared to 2003, resulting primarily from the
additional inventory of acquired franchises.
Other interest expense increased $0.3 million to $10.3 million for the
three months ended March 31, 2004, from $10.0 million for the three months ended
March 31, 2003. The increase was principally attributable to the higher interest
rate on our 8% Senior Subordinated Notes due 2014, which were issued in December
2003, as compared to the lower variable rate interest associated with our
committed credit facility during the three months ended March 31, 2003. The
increase in other interest expense was off-set by interest received from an
interest rate swap agreement we entered into in December 2003 in connection with
the issuance of our 8% Senior Subordinated Notes due 2014, and the reduction of
mortgage indebtedness resulting from our sale/leaseback transactions.
Other income (expense) includes costs that are dependent upon many
factors and are difficult to predict; however, we expect future increases or
decreases in other income (expense) to result primarily from the increase or
decrease in interest rates and average new vehicle inventories, and the use of
our committed credit facility to finance future acquisitions. In addition, we
expect interest expense associated with outstanding mortgages to decrease as a
result of the anticipated sale/leaseback transaction with an unaffiliated third
party.
23
Income Tax Provision-
Income tax expense increased $1.0 million to $6.4 million for the three
months ended March 31, 2004, from $5.4 million for the three months ended March
31, 2003, as increases in net income before taxes more than offset the reduction
of our effective tax rate. Our effective tax rate for the three months ended
March 31, 2004, was 37.5% compared to 39.8% for the three months ended March 31,
2003. As we operate nationally, our effective tax rate is dependent upon our
geographic revenue mix. We evaluate our effective tax rate periodically based on
our revenue sources. We will continue to evaluate our effective tax rate in the
future, and expect that our annual effective tax rate will fluctuate between 37%
and 38% for the year ending December 31, 2004.
Discontinued Operations-
As of March 31, 2004, we were actively pursuing the sale of five
dealership locations (six franchises) and real estate associated with two former
dealership locations. The $0.3 million loss from discontinued operations is
primarily attributable to the operating losses of the franchises mentioned
above. The loss from discontinued operations for the three months ended March
31, 2003, of $1.1 million included the results of operations of the dealerships
mentioned above and five dealership locations (six franchises), ten used-only
dealership locations and two ancillary businesses that were closed during 2003
offset by the net gain on the sale of businesses sold during the period.
LIQUIDITY AND CAPITAL RESOURCES
We require cash to fund working capital needs, finance acquisitions of
new dealerships and fund capital expenditures. We believe that our cash and cash
equivalents on hand as of March 31, 2004, our funds generated through future
operations and the funds available for borrowings under our committed credit
facility, Floor Plan Facilities (as defined below), mortgage notes and proceeds
from sale/leaseback transactions will be sufficient to fund our debt service and
working capital requirements, commitments and contingencies, acquisitions and
any seasonal operating requirements for the foreseeable future.
As of March 31, 2004, we had cash and cash equivalents of $46.0 million
and working capital of $232.4 million as compared to cash and cash equivalents
of $106.7 million and working capital of $259.8 million as of December 31, 2003.
Floor Plan Financing-
We finance substantially our entire 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 provide used vehicle
financing up to a fixed percentage of the value of each financed used vehicle.
Total availability under our Floor Plan Facilities is $695.0 million, which is
distributed among the Ford Motor Credit Company, DaimlerChrysler Financial
Services North America, L.L.C and General Motors Acceptance Corporation. In
addition, we have total availability of $32.2 million as of March 31, 2004,
under ancillary floor plan facilities with Comerica Bank and Navistar Financial
for our heavy trucks business within our Atlanta platform. As of March 31, 2004
we had $625.2 million outstanding under all our floor plan financing agreements.
Acquisitions and Acquisition Financing-
During the three months ended March 31, 2004 we acquired two
dealerships (three franchises) for approximately $38.1 million, which were
funded through the use of our working capital. We plan to utilize either our
working capital or our committed credit facility to finance future acquisitions.
As of March 31, 2004, we had $250.0 million available under our committed credit
facility to finance acquisitions.
Pending Acquisitions and Divestitures-
As of March 31, 2004, we had executed contracts to acquire four
dealership locations (four franchises) representing combined annual revenues of
approximately $210.0 million for $51.2 million. During April 2004, we acquired
three of these franchises, which are located in Southern California for
approximately $33.2 million through the use of our working capital.
As of March 31, 2004, we were actively pursuing the divestiture of five
dealership locations (six franchises) and real estate associated with two former
dealership locations.
24
Sales/Leaseback Transactions
We have entered into an agreement with an unaffiliated third party in
connection with future sale/leaseback transactions, under which we intend to
sell certain land and buildings with a net book value of approximately $100.0
million to the third party for a sales price in excess of book value and enter
into long-term operating leases for the related facilities. We have not yet
finalized the specific properties to be sold or the final sales price. At such a
time that the specific properties and sales price has been agreed upon, we will
classify the related real estate as Assets Held for Sale and the related
mortgages as Liabilities associated with Assets Held for Sale. Upon completion
of this transaction, we intend to use approximately $65.0 million of the
proceeds from these transactions to repay the related mortgage indebtedness.
Debt Covenants-
We are subject to certain financial covenants in connection with our
debt and lease agreements, including the financial covenants described below.
Our Committed Credit Facility includes certain financial ratios with the
following requirements: (i) a current ratio of at least 1.2 to 1, of which our
ratio was approximately 1.3 to 1 as of March 31, 2004; (ii) a fixed charge
coverage ratio of at least 1.2 to 1, of which our ratio was approximately 1.4 to
1 as of March 31, 2004 and (iii) a leverage ratio of not more than 4.4 to 1, of
which our ratio was approximately 0.8 to 1 as of March 31, 2004. A breach of
these covenants could cause an acceleration of repayment and termination of the
facility by the Lenders. Certain of our lease agreements include financial
ratios with the following requirements: (i) a liquidity ratio of at least 1.2 to
1, of which our ratio was approximately 1.3 to 1 as of March 31, 2004 and (ii)
an EBITDA based coverage ratio of at least 1.5 to 1, of which our ratio was
approximately 2.5 to 1 as of March 31, 2004. A breach of these covenants would
give rise to certain lessor remedies under our various lease agreements, the
most severe of which include the following: (a) termination of the applicable
lease, (b) termination of certain of the tenant's lease rights, such as renewal
rights and rights of first offer or negotiation relating to the purchase of the
premises, and/or (c) a liquidated damages claim equal to the extent to which the
accelerated rents under the applicable lease for the remainder of the lease term
exceed the fair market rent over the same periods. As of March 31, 2004, we were
in compliance with all our debt and lease agreement covenants.
Cash Flows for the Three Months Ended March 31, 2004 Compared to the Three
Months Ended March 31, 2003
Operating Activities-
Net cash used in operating activities totaled $8.9 million for the
three months ended March 31, 2004 and net cash provided by operating activities
totaled $28.6 million for the three months ended March 31, 2003. Cash flow from
operating activities include net income adjusted for non-cash items and changes
in working capital, including changes in floor plan notes payable related to
vehicle inventory.
The increase in cash used in operating activities during the three
months ended March 31, 2004, was primarily due to differences in the timing of
inventory purchases and obtaining the related floor plan financing. These timing
differences resulted in net cash outflow of $29.2 million.
Investing Activities-
Net cash used in investing activities totaled $48.8 million and $14.8
million for the three months ended March 31, 2004 and 2003, respectively. Cash
used in investing activities relate primarily to capital expenditures and
acquisitions.
Capital expenditures totaled $12.3 million and $14.4 million for the
three months ended March 31, 2004 and 2003, respectively. Capital expenditures
are related to required improvements of our existing dealerships, upgrades of
existing facilities and construction of new facilities. Future capital
expenditures will be primarily related to operational improvements to maintain
our current operations or to provide us with acceptable rates of return on
investments and manufacturer-required spending to upgrade existing dealership
facilities. We expect that capital expenditures will total between $50.0 million
and $60.0 million during 2004.
Cash used to acquire dealerships totaled $38.1 million for the three
months ended March 31, 2004, compared to $0.3 million for the three months ended
March 31, 2003. During the three months ended March 31, 2004, we funded the
acquisition of three dealership locations (three franchises) through the use of
our working capital.
25
Financing Activities-
Cash used in financing activities totaled $3.0 million and $1.6 million
for the three months ended March 31, 2004 and 2003, respectively, which
consisted primarily of proceeds from borrowings and repayments under our
Committed Credit Facility and mortgages, proceeds from sale/leaseback activity
and, during the first quarter of 2003, purchases of treasury stock and
distributions to our former members.
During the three months ended March 31, 2004 and 2003 our borrowings of
$2.8 million and $21.0 million, respectively, and repayments of debt of $10.3
million and $13.2 million, respectively, related primarily to mortgages
associated with our land and buildings.
During the 2004 period, we received $4.4 million of advances from
lessors in connection with future sale/leaseback transactions. These
sale/leaseback transactions related primarily to facility construction and
improvement projects at two of our dealership locations.
During the 2003 period, we paid $3.2 million to repurchase shares of
our common stock. We have no immediate plans to repurchase additional shares of
our common stock.
We distributed $3.0 million to our former members (current
shareholders) during the 2003 period to cover their income tax liabilities. This
distribution represented our final limited liability company distribution to our
former members.
Off Balance Sheet Transactions
We had no off balance sheet transactions during the periods presented
other than those disclosed in Note 12 of our interim consolidated financial
statements.
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the date
of the financial statements and reported amounts of revenues and expenses during
the periods presented. Actual amounts could differ from those estimates. On an
ongoing basis, management evaluates its estimates and assumptions and the
effects of revisions are reflected in the financial statements in the period in
which they are determined to be necessary. We have disclosed all significant
accounting policies in note 2 to the consolidated financial statements included
in our Annual Report on Form 10-K for the year ended December 31, 2003. We have
identified the following policies, which were discussed with the Audit Committee
of our Board of Directors, as critical to understanding our results of
operations.
Inventories-
Our inventories are stated at the lower of cost or market. We use the
specific identification method to value our vehicle inventories and the
"first-in, first-out" method ("FIFO") to account for our parts inventories. We
maintain a reserve for specific inventory units that have a cost basis in excess
of fair value. These reserves were $4.7 million and $4.6 million as of March 31,
2004 and December 31, 2003, respectively. In assessing lower of cost or market
for new vehicles, we primarily consider the aging of vehicles along with the
timing of annual and model changeovers. The assessment of lower of cost or
market for used vehicles considers recent data and trends such as loss history,
current aging of the inventory and current market conditions.
Notes Receivable-Finance Contracts-
As of March 31, 2004 and December 31, 2003, we had outstanding notes
receivable from finance contracts of $33.2 million and $33.1 million,
respectively (net of an allowance for credit losses of $5.7 million and $4.7
million, respectively). These notes have initial terms ranging from 12 to 60
months, and are collateralized by the related vehicles. The assessment of our
allowance for credit losses considers historical loss ratios and the performance
of the current portfolio with respect to past due accounts. We continually
analyze our current portfolio against our historical performance. In addition,
we consider the value of the underlying collateral in our assessment of the
reserve.
Chargeback Reserve-
We receive commissions from the sale of various insurance and vehicle
service contracts to customers and through the arrangement of vehicle financing
for customers. We may be charged back ("chargeback") for such commissions in the
event of early termination of the contracts by customers. The revenues from
financing fees and commissions are recorded at the time of the sale of the
26
vehicles and a reserve for future chargebacks is established at that time. The
reserve considers our historical chargeback experience, including timing, as
well as national industry trends. This data is evaluated on a product-by-product
basis. These reserves totaled $11.6 million and $11.8 million as of March 31,
2004 and December 31, 2003, respectively.
Goodwill and Other Intangible Assets-
Our intangible assets relate primarily to goodwill and manufacturer
franchise rights associated with acquisitions of dealerships, which we account
for under the purchase method of accounting as required by SFAS No. 141,
"Business Combinations." In accordance with SFAS No. 142, "Goodwill and Other
Intangible Assets," we do not amortize goodwill and other intangible assets,
which are deemed to have indefinite lives, but test these assets for impairment
at least annually, or more frequently if any event occurs or circumstances
change that indicate possible impairment. We have determined that manufacturer
franchise rights have an indefinite life as there are no legal, contractual,
economic or other factors that limit their useful lives and they are expected to
generate cash flows indefinitely due to the historically long lives of the
manufacturers' brand names. Goodwill and franchise rights are allocated to each
reporting unit at the platform and franchise level, respectively. The fair
market value of our manufacturer franchise rights is determined at the
acquisition date through discounting the projected cash flows attributable to
each manufacturer franchise right. Goodwill represents the excess cost of the
businesses acquired over the fair market value of the identifiable net assets.
Upon adoption of SFAS No. 142 on January 1, 2002, we determined that
each of our platforms qualified as a reporting unit as we operated in one
segment, and our platforms are one level below our corporate level, discrete
financial information existed for each platform and the management of each
platform directly reviewed the platform's performance. We are continuously
adapting our operating structure and searching for ways to standardize policies,
share best practices and centralize administrative functions. In the future, if
we determine that our platforms no longer meet the requirements of a reporting
unit, we will reevaluate the reporting units with respect to the changes in our
reporting structure.
We review platform goodwill and manufacturer franchise rights for
impairment during the fourth quarter of each year. The first step of the
impairment test identifies potential impairments by comparing the estimated fair
value of each reporting unit with its corresponding net book value, including
goodwill. If the net book value of a reporting unit exceeds its fair value, the
second step of the impairment test determines the potential impairment loss by
comparing the estimated fair value of goodwill with its carrying amount. If the
estimated fair value of goodwill is less than the carrying amount, the carrying
value of goodwill is adjusted to reflect its estimated fair value.
All other intangible assets are deemed to have definite lives and are
amortized on a straight-line basis over the life of the asset ranging from 3-15
years and are tested for impairment when circumstances indicate that the
carrying value of the asset might be impaired.
RECONCILIATION OF NON-GAAP FINANCIAL INFORMATION
Platform Finance and Insurance Gross Profit PVR-
We evaluate our finance and insurance gross profit performance on a PVR
basis by dividing our total finance and insurance gross profit by the number of
retail vehicles sold. During 2003, our corporate office renegotiated a contract
with one of our third party finance and insurance product providers, which
resulted in the recognition of revenue during the three months ended March 31,
2004 that was attributable to retail vehicles sold during prior periods. We
believe that platform finance and insurance, which excludes the additional
revenue derived from this contract, provides a more accurate measure of our
finance and insurance operating performance. The following table reconciles
finance and insurance gross profit to platform finance and insurance gross
profit, and provides the necessary components to calculate platform finance and
insurance gross profit PVR (in thousands, except for unit and per vehicle data):
For the Three Months
Ended March 31, 2004
--------------------
Finance and insurance gross profit, net (as reported) $ 33,194
Less: Corporate finance and insurance gross profit (839)
--------
Platform finance and insurance gross profit $ 32,355
========
Platform finance and insurance gross profit PVR $ 816
========
Retail units sold:
New retail units 23,869
Used retail units 15,782
--------
Total 39,651
========
27
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. Based on $287.7 million of
variable rate long-term debt (including the current portion) outstanding at
March 31, 2004, a 1% change in interest rates would result in a change of
approximately $2.9 million to our annual other interest expense. Based on floor
plan amounts outstanding at March 31, 2004, a 1% change in the interest rates
would result in a $6.3 million change to annual floor plan interest expense.
We receive interest credit assistance from certain automobile
manufacturers, which is accounted for as a reduction in the cost of inventory on
our consolidated balance sheet and recognized as a reduction to cost of sales
upon the sale of the related inventory. For the three months ended March 31,
2004, we recognized $5.8 million as a reduction to cost of sales associated with
interest credit assistance. Although we can provide no assurance as to the
amount of future interest credit assistance, it is our expectation, based on
historical data, that an increase in prevailing interest rates would result in
increased interest credit assistance from certain automobile manufacturers.
Interest Rate Hedges
We use interest rate swaps to manage our capital structure. In December
2003, we entered into two forward interest rate swaps with a combined notional
principal amount of $200.0 million, which will 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 interest rate hedges of future changes in interest rates of our
variable rate floor plan indebtedness and we expect that these hedges will
contain minor ineffectiveness once they become effective in March 2006. As of
March 31, 2004, the swaps had a fair value of $6.8 million, which was included
in other liabilities and accumulated other comprehensive loss on the
accompanying Consolidated Balance Sheets.
During December 2003, we 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
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 fixed rate senior
subordinated debt and does not contain any ineffectiveness. As of March 31,
2004, the swap agreement had a fair value of $3.9 million, which was included in
other assets and accumulated other comprehensive loss on the accompanying
Consolidated Balance Sheets.
Item 4. Controls and Procedures
Based on their evaluation as of a date within 45 days of the filing
date of this Quarterly Report on Form 10-Q, our principal executive officer and
principal financial officer have concluded that our disclosure controls and
procedures as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934 (the Exchange Act) are effective to ensure that information
required to be disclosed by us in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms.
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation and up to the filing date of this Quarterly Report on Form
10-Q. There were no significant deficiencies or material weaknesses, and
therefore there were no corrective actions taken.
It should be noted that any system of controls, however well designed
and operated, can provide only reasonable, and not absolute, assurance that the
objectives of the system are met. In addition, the design of any control system
is based in part upon certain assumptions about the likelihood of future events.
Because of these and other inherent limitations of control systems, there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions, regardless of how remote.
---
Forward-Looking Statements
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
28
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.
29
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
3.1 Amended and Restated By-Laws of Asbury Automotive Group, Inc.
dated April 13, 2004
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 January 20, 2004, under Item 5, relating to the issuance of a
press release announcing that the Board of Directors elected Michael J.
Durham as Non-Executive Chairman and Thomas R. Gibson as Chairman Emeritus.
Report filed February 11, 2004, under Item 5, relating to the issuance of a
press release announcing that it has changed the release date of its
financial results for the fourth quarter and year ended December 31, 2003.
Report furnished February 25, 2004, under Item 12, relating to the issuance
of a press release announcing the Company's earnings for the fourth quarter
and year ended December 31, 2003.
Report filed February 25, 2004, under Item 5, relating to the issuance of a
press release announcing the Company's acquisition of Mercedes-Benz of
Sacramento, California.
Report filed April 13, 2004, under Item 5, relating to the issuance of a
press release announcing the Company's financial results for the quarter
ended March 31, 2004.
Report filed May 3, 2004, under Item 5, relating to the completion of an
investigation into the facts and circumstances surrounding the Company's
sub-lease of its new headquarters in New York.
30
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: May 10, 2004 By: /s/ KENNETH B. GILMAN
--------------------------------------------
Name: Kenneth B. Gilman
Title: Chief Executive Officer and President
Date: May 10, 2004 By: /s/ J. GORDON SMITH
--------------------------------------------
Name: J. Gordon Smith
Title: Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
31
INDEX TO EXHIBITS
Exhibit
Number Description of Documents
3.1 Amended and Restated By-Laws of Asbury Automotive Group, Inc.
dated April 13, 2004
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
32