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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 September 30, 2002
Commission file number:
ASBURY AUTOMOTIVE GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 01-0609375
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
Three Landmark Square, Suite 500, Stamford, Connecticut 06901, (203) 356-4400
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- -------------------------------------------------------------------------------
(Address of, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
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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 the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date (applicable only to corporate
registrants).
The number of shares of common stock outstanding as of November 7, 2002 was
33,765,576 (net of 234,424 Treasury Shares).
===============================================================================
ASBURY AUTOMOTIVE GROUP, INC.
September 30, 2002 Form 10-Q Quarterly Report
Table of Contents
Part I - Financial Information
Page
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 2002 and December 31, 2001......................... 1
Consolidated Statements of Income -
Three Months and Nine Months Ended September 30, 2002 and 2001... 2
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2002 and 2001.................. ..3
Notes to Consolidated Financial Statements................... ....4
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations.........................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk........21
Item 4. Controls and Procedures...........................................21
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K..................................23
Signatures........................................................24
PAGE 22
Item 1. Financial Statements
ASBURY AUTOMOTIVE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except for share data)
September 30, December 31,
ASSETS 2002 2001
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 51,640 $ 60,506
Contracts-in-transit 80,603 93,044
Current portion of restricted marketable securities 1,499 1,410
Accounts receivable (net of allowance of $2,297 and $2,375) 94,472 81,347
Inventories 498,445 496,054
Deferred income taxes 11,740 -
Prepaid and other current assets 26,234 25,253
Total current assets 764,633 757,614
PROPERTY AND EQUIPMENT, net 273,350 256,402
GOODWILL, net 399,198 392,856
RESTRICTED MARKETABLE SECURITIES 4,892 6,807
OTHER ASSETS 61,800 51,334
Total assets $1,503,873 $1,465,013
LIABILITIES AND STOCKHOLDERS'/MEMBERS' EQUITY
CURRENT LIABILITIES:
Floor plan notes payable $ 426,754 $ 451,375
Short-term debt 10,167 10,000
Current maturities of long-term debt 43,264 35,789
Accounts payable 40,460 33,573
Deferred income taxes - 3,876
Accrued liabilities 88,441 75,384
Total current liabilities 609,086 609,997
LONG-TERM DEBT 414,011 492,548
DEFERRED INCOME TAXES 30,370 1,370
OTHER LIABILITIES 19,467 13,191
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS'/MEMBERS' EQUITY:
Preferred stock, $.01 par value, 10,000,000 shares authorized - -
Common stock, $.01 par value, 90,000,000 shares authorized,
34,000,000 issued and outstanding 340 -
Additional paid-in capital 413,607 -
Contributed capital - 305,363
Retained earnings 17,146 40,888
Accumulated other comprehensive income (loss) (154) 1,656
Total stockholders'/members' equity 430,939 347,907
Total liabilities and stockholders'/members' equity $1,503,873 $1,465,013
See Notes to Consolidated Financial Statements.
ASBURY AUTOMOTIVE GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)
(unaudited)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
REVENUES:
New vehicle $ 729,289 $ 639,890 $2,027,580 $1,829,167
Used vehicle 320,447 285,629 910,904 836,805
Parts, service and collision repair 130,310 122,414 379,669 354,625
Finance and insurance, net 34,051 28,676 89,427 76,995
Total revenues 1,214,127 1,076,609 3,407,580 3,097,592
cost of sales:
New vehicle 671,788 586,763 1,861,655 1,680,608
Used vehicle 292,796 260,234 829,003 763,117
Parts, service and collision repair 62,447 59,794 180,223 171,871
Total cost of sales 1,027,031 906,791 2,870,881 2,615,596
GROSS PROFIT 187,096 169,818 536,699 481,996
OPERATING EXPENSES:
Selling, general and administrative 142,595 128,182 411,144 366,443
Depreciation and amortization 5,732 7,869 17,498 22,492
Income from operations 38,769 33,767 108,057 93,061
OTHER INCOME (EXPENSE):
Floor plan interest expense (4,399) (6,013) (13,155) (22,121)
Other interest expense (10,104) (10,602) (28,838) (34,031)
Interest income 283 443 945 2,208
Net losses from unconsolidated affiliates - - (100) (1,000)
Other income (expense), net 182 412 (155) 1,257
Total other expense, net (14,038) (15,760) (41,303) (53,687)
Income before income taxes, minority interest,
discontinued operations and extraordinary loss 24,731 18,007 66,754 39,374
INCOME TAX PROVISIONS:
Income tax expense 9,843 1,437 21,183 4,184
Tax adjustment upon conversion from an L.L.C. to a
corporation - - 11,553
MINORITY INTEREST IN SUBSIDIARY EARNINGS - 328 - 829
Income before discontinued operations and extraordinary 14,888 16,242 34,018 34,361
loss
DISCONTINUED OPERATIONS (244) (54) (1,432) 930
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT - - - (1,433)
Net income $ 14,644 $ 16,188 32,586 $ 33,858
PRO FORMA TAX (BENEFIT) EXPENSE:
Pro forma income tax expense 5,299
Tax adjustment upon conversion from an L.L.C. to a
corporation (11,553)
Tax effected pro forma net income $ 38,840
EARNINGS PER SHARE:
Basic $.43 $.99
Diluted $.43 $.99
TAX EFFECTED PRO FORMA EARNINGS PER SHARE:
Basic $1.18
Diluted $1.18
WEIGHTED AVERAGE SHARES OUTSTANDING (in thousands):
Basic 34,000 32,813
Diluted 34,001 32,834
See Notes to Consolidated Financial Statements.
ASBURY AUTOMOTIVE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
For the Nine Months Ended
September 30,
2002 2001
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 32,586 $ 33,858
Adjustments to reconcile net income to net cash provided by operating activities-
Depreciation and amortization 17,498 22,492
Loss on disposal of discontinued operations, net of related taxes 345 -
Deferred income taxes 14,754 -
Extraordinary loss on early extinguishment of debt - 1,433
Losses from unconsolidated affiliates 100 1,000
Amortization of deferred financing fees 3,212 2,654
Change in operating assets and liabilities, net of effects from
acquisitions and divestiture of assets-
Contracts-in-transit 12,441 (4,242)
Accounts receivable, net (25,809) (18,170)
Proceeds from the sale of accounts receivable 12,597 13,218
Inventories 14,030 121,241
Floor plan notes payable (30,823) (102,607)
Accounts payable and accrued liabilities 14,895 5,165
Other 4,055 (2,584)
Net cash provided by operating activities 69,881 73,458
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures (38,102) (38,751)
Proceeds from the sale of assets 1,380 2,073
Proceeds from sale of discontinued operations 4,838 -
Acquisitions (net of cash acquired) (14,588) (40,991)
Equity investments - (1,200)
Proceeds from restricted marketable securities 1,826 1,225
Net issuance of finance contracts (276) (3,183)
Other investing activities (752) -
Net cash used in investing activities (45,674) (80,827)
CASH FLOW FROM FINANCING ACTIVITIES:
Distributions to members (11,680) (17,371)
Repurchase of members' equity - (3,713)
Contributions from members 800 -
Repayments of debt (352,362) (339,908)
Proceeds from borrowings 272,629 386,994
Proceeds from initial public offering, net 65,415 -
Payment of debt issuance costs (7,875) (12,530)
Net cash provided by (used in) financing activities (33,073) 13,472
Net increase (decrease) in cash and cash equivalents (8,866) 6,103
CASH AND CASH EQUIVALENTS, beginning of period 60,506 47,241
CASH AND CASH EQUIVALENTS, end of period $ 51,640 $ 53,344
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for-
Interest (net of amounts capitalized) $ 32,639 $ 56,659
Income taxes $ 15,534 $ 3,250
See Notes to Consolidated Financial Statements.
ASBURY AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data)
(unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation:
The consolidated balance sheet at September 30, 2002, the consolidated
statements of income for the three-month and nine-month periods ended September
30, 2002 and 2001, and the consolidated statements of cash flows for the
nine-month periods ended September 30, 2002 and 2001, are unaudited. In the
opinion of management, all adjustments necessary to present fairly the financial
position, results of operations and cash flows for the interim periods were
made. Certain items in the September 30, 2001 financial statements were
reclassified to conform to the classification of the September 30, 2002
financial statements. Due to seasonality and other factors, the results of
operations for interim periods are not necessarily indicative of the results
that will be realized for the entire year.
Certain information and footnote disclosures, normally included in financial
statements prepared in accordance with generally accepted accounting principles,
were omitted. Accordingly, these consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
for the year ended December 31, 2001 which are included in the Company's Form
S-4 filing for its Senior Subordinated Notes issuance.
All significant intercompany balances and transactions have been eliminated in
consolidation.
Recent Accounting Pronouncements-
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Correction." This Statement eliminates extraordinary accounting
treatment for reporting gain or loss on debt extinguishment, and amends other
existing authoritative pronouncements to make various technical corrections. The
provisions of this Statement are effective for the Company with the beginning of
fiscal year 2003. Upon adoption of this statement, the Company will reclassify
to recurring operations, debt extinguishments reported as extraordinary items in
prior periods ($1,433 for the nine months ended September 30, 2001).
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement requires recording costs
associated with exit or disposal activities at their fair values when a
liability has been incurred. Under previous guidance, certain exit costs were
accrued upon management's commitment to an exit plan. The Company does not
anticipate that the ultimate adoption of this Statement will have a material
impact on its financial position or results of operations.
2. INITIAL PUBLIC OFFERING:
On March 14, 2002, the Company completed an initial public offering ("IPO") of
4,500,000 shares of its common shares at a price of $16.50 per share. The IPO
proceeds received, net of underwriting discount and expenses, were $62.5
million. Pursuant to the terms of the Company's $550 million Committed Credit
Facility, 80% of the net IPO proceeds were used to repay debt under this
facility. The remaining net proceeds will be used for working capital, future
platform or dealership acquisitions and general corporate purposes.
Upon the closing of the IPO on March 19, 2002, Asbury Automotive Group L.L.C.
became a wholly-owned subsidiary of Asbury Automotive Group, Inc. Membership
interests in the limited liability company were exchanged for 29,500,000 shares
of common stock in the new corporation on the basis of 295,000 shares of common
stock for each 1% membership interest.
3. INVENTORIES:
Inventories consisted of the following:
September 30, 2002 December 31, 2001
New vehicles $365,595 $381,011
Used vehicles 92,628 74,885
Parts, accessories and other 40,222 40,158
$498,445 $496,054
Effective March 19, 2002, the Company changed its method of valuing certain
inventories which were on the last-in, first-out ("LIFO") cost method to the
specific identification and the first-in, first-out ("FIFO") cost method. The
Company believes that the specific identification and FIFO methods of inventory
valuation provide a more meaningful presentation of its financial position since
these methods reflect a better matching of revenue and expense and most clearly
reflect periodic income.
The effect of the change in accounting principle was to decrease net income for
the year ended December 31, 2001 by $355. The change has been applied to prior
years through restating the financial statements presented for 2001. The effect
of the change was to increase members' equity as of December 31, 2001, by
$4,356.
4. EARNINGS PER SHARE:
Basic earnings per share is computed by dividing net income by the
weighted-average common shares outstanding during the period. Diluted earnings
per share is computed by dividing net income by the weighted-average common
shares and common share equivalents outstanding during the period.
The following table sets forth the computation of basic and diluted earnings per
share:
For the Three
Months Ended For the Nine
September 30, Months Ended
2002 September 30, 2002
Net income applicable to common shares:
Continuing operations $14,888 $34,018
Discontinued operations (244) (1,432)
$14,644 $32,586
Earnings per share:
Basic-
Continuing operations $.44 $1.04
Discontinued operations (.01) (.05)
$.43 $ .99
Diluted-
Continuing operations $.44 $1.04
Discontinued operations (.01) (.05)
$.43 $ .99
Common shares and common share equivalents:
Weighted-average shares outstanding 34,000 32,813
Basic shares 34,000 32,813
Shares issuable with respect to additional
common share equivalents (stock options) 1 21
Diluted equivalent shares 34,001 32,834
5. INCOME TAXES:
Effective March 19, 2002, the Company converted to a corporation and is now
subject to federal, state and local income taxes. In connection with the IPO and
in accordance with SFAS No. 109 "Accounting for Income Taxes," the Company
recorded a one-time, non-recurring charge of $11,553 for deferred taxes upon the
exchange of the limited liability company interest in Asbury Automotive Group
L.L.C. for the Company's stock. This charge relates to a net deferred tax
liability associated with the difference between the financial statement and tax
basis of the assets and liabilities of the Company at the conversion date. Prior
to the conversion to a corporation, Asbury Automotive Group L.L.C. was comprised
primarily of limited liability companies and partnerships (with Asbury
Automotive Group L.L.C. as the parent), which were treated as one partnership
for tax purposes. In addition, Asbury Automotive Group L.L.C. had nine
subsidiaries that were already corporations and followed the provisions of SFAS
No. 109. The tax provision for the nine months ended September 30, 2002 relates
to income from continuing operations of the Company's preexisting corporations
(noted above) for the nine months ended September 30, 2002, and income from
continuing operations for the remainder of the Company's subsidiaries for the
period from March 19, 2002 through September 30, 2002.
The tax effects of these temporary differences representing deferred tax assets
(liabilities) result principally from the following as of September 30, 2002:
Reserves and accruals not deductible until paid $ 12,077
Goodwill amortization (17,167)
Depreciation (11,980)
Other (1,560)
Net deferred tax liability ($18,630)
The net deferred tax assets (liabilities) are comprised of the following:
Deferred tax assets:
Current $ 16,133
Long term 39
Deferred tax liabilities:
Current (4,393)
Long term (30,409)
Net deferred tax liability ($18,630)
The following reconciles the statutory corporate federal income tax rate for the
period from March 19, 2002 through September 30, 2002:
Statutory federal income tax rate 35.0%
State income tax, net of federal tax effect 4.0
Other, net 0.8
Effective tax rate 39.8%
6. INTANGIBLE ASSETS AND GOODWILL:
On June 30, 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangibles."
SFAS No. 142 eliminates goodwill amortization over its estimated useful life.
However, goodwill will be subject to at least an annual assessment for
impairment by applying a fair-value based test. Additionally, acquired
intangible assets should be separately recognized if the benefit of the
intangible asset is obtained through contractual or other legal rights, or if
the intangible asset can be sold, transferred, licensed, rented or exchanged,
regardless of the acquirer's intent to do so. Intangible assets with definitive
lives will need to be amortized over their useful lives. The statement requires
that by June 30, 2002, a company must establish its fair value benchmarks in
order to test for impairment. The Company adopted this statement effective
January 1, 2002. Such adoption did not result in an impairment of goodwill,
based on the fair value based test; however, changes in the facts and
circumstances relating to the Company's goodwill and other intangible assets
could result in an impairment of intangible assets in the future.
Intangible assets consist of the following (included in other assets on the
accompanying consolidated balance sheets):
As of September 30, 2002
Accumulated
Cost Amortization
Amortizable intangible assets-
Noncompete agreements $ 5,331 ($3,294)
Licensing agreements 1,750 (833)
Lease agreements (amortization
is included in rent expense) 6,527 (3,700)
$13,608 ($7,827)
Unamortizable intangible assets-
Franchise rights $ 6,500
Amortization expense-
For the three months ended September 30, 2002 $ 635
For the nine months ended September 30, 2002 $ 1,674
Estimated amortization expense- For the years ended December 31:
2003 $ 1,689
2004 849
2005 462
2006 443
2007 409
The changes in the carrying amount of goodwill for the period ended September
30, 2002 are as follows:
Balance as of December 31, 2001 $392,856
Additions 8,119
Goodwill associated with discontinued operations (1,777)
Balance as of September 30, 2002 $399,198
Goodwill amortization expense for the three- and nine-month periods ended
September 30, 2001 was $2,474 and $7,516, respectively. Income before income
taxes, minority interest, discontinued operations and extraordinary loss would
have been $20,481 and $46,890 for the three and nine months ended September 30,
2001, respectively, if goodwill was not amortized in 2001.
7. STOCKHOLDERS'/MEMBERS' EQUITY:
Accumulated
Additional Other
Common Paid-in Contributed Retained Comprehensive
Stock Capital Capital Earnings Income (Loss) Total
Balance, December 31, 2001 $ -- $ -- $ 305,363 $ 40,888 $ 1,656 $ 347,907
Contributions -- -- 800 -- -- 800
Distributions -- -- (11,680) -- -- (11,680)
Net income -- -- -- 32,586 -- 32,586
Change in fair value of interest rate
swaps, net of $103 tax effect -- -- -- -- (1,810) (1,810)
Stock and stock option compensation -- 593 -- -- -- 593
Proceeds from initial public offering,
net 45 62,498 -- -- -- 62,543
Reclassification of members'
equity due to the exchange of
membership interests for shares
of common stock 295 350,516 (294,483) (56,328) -- --
Balance, September 30, 2002 $ 340 $ 413,607 $ -- $ 17,146 ($ 154) $ 430,939
8. FINANCIAL INSTRUMENTS:
During the second quarter of 2002, the Company cancelled its three interest rate
swap agreements with a financial institution having a combined notional
principal of $300 million. The swap agreements had been designated and qualified
as cash flow hedges of the Company's forecasted variable interest rate payments.
Upon cancellation of the swaps, the Company realized a $202 loss, net of tax
benefit, in other comprehensive income (loss) which will be reclassified to
earnings as interest expense, over the original term of the related
indebtedness, through November 2003.
9. COMPREHENSIVE INCOME:
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
Net income $ 14,644 $ 16,188 $ 32,586 $ 33,858
Other comprehensive income:
Change in fair value of interest
rate swaps -- -- (1,985) --
Income tax benefit -- -- 127 --
-- -- (1,858) --
Reclassification adjustment of loss
on interest rate swaps included in
net income 54 -- 72 --
Income tax benefit (17) -- (24) --
37 -- 48 --
Comprehensive income $ 14,681 $ 16,188 $ 30,776 $ 33,858
10. DISCONTINUED OPERATIONS:
Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supercedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed of" and the accounting and reporting provisions of Accounting
Principles Board Opinion (APB) No. 30, "Reporting the Results of Operations -
Reporting the Effects of the Disposal of a Segment Business and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144
establishes a single accounting model for assets to be disposed of by sale
whether previously held and used or newly acquired. SFAS No. 144 retains the
provisions of APB No. 30 for presentation of discontinued operations in the
income statement, but broadens its application to include a component of an
entity which has separately identifiable cash flows. During the first nine
months of 2002, the Company divested four dealerships, one each in Oregon and
North Carolina and two in Mississippi. Additionally, two dealerships were held
for sale, one each in Georgia and Mississippi. As a result of adopting this
statement, the results of these operations are accounted for as discontinued
operations in the consolidated statements of income. A summary of statement of
income information relating to the discontinued operations is as follows:
Statement of Income:
For the Three Months For the Nine Months
---------------------- ------------------------
Ended September 30, Ended September 30,
2002 2001 2002 2001
Revenues $ 11,835 $ 30,105 $ 41,264 $ 96,561
Cost of sales 10,304 25,780 35,460 82,376
Gross profit 1,531 4,325 5,804 14,185
Operating expenses 1,868 4,116 6,813 12,287
Income (loss) from operations (337) 209 (1,009) 1,898
Other, net 93 (263) (78) (968)
Net income (loss) (244) (54) (1,087) 930
Loss on disposition of discontinued o
perations, net of related taxes -- -- (345) --
Discontinued operations $ (244) $ (54) $ (1,432) $ 930
The following is a summary of net assets held for sale as of September 30, 2002:
Assets:
Inventory $ 3,937
Property and equipment 4,334
Goodwill 2,325
Total assets 10,596
Liabilities:
Floor plan notes payable 3,145
Total liabilities 3,145
Net assets $ 7,451
11. LONG-TERM DEBT:
On June 5, 2002, the Company issued 9% Senior Subordinated Notes in the
aggregate principle amount of $250,000, receiving net proceeds of $242,125. The
costs related to the issuance of the notes were capitalized and are amortized to
interest expense over the term of the notes. The net proceeds from the notes
issuance were utilized to repay certain indebtedness under the Company's
Committed Credit Facility. The Company will pay interest on the notes on June 15
and December 15 of each year. The first such payment will be made on December
15, 2002. The notes will mature on June 15, 2012. At any time on or after June
15, 2007, the Company may, at its option, choose to redeem all or a portion of
the notes at the redemption prices set forth in the note indenture. On or before
June 15, 2005, the Company may, at its option, use the net proceeds of one or
more equity offerings to redeem up to 35% of the aggregate principal amount of
the notes at the redemption price set forth in this offering circular. At any
time before June 15, 2007, the Company may, at its own option, choose to redeem
all or a portion of the notes at a price equal to 100% of their principal amount
plus the make-whole premium set forth in the note indenture.
The notes are guaranteed by substantially all of the Company's current
subsidiaries and will be guaranteed by all of Asbury's future domestic
restricted subsidiaries that have outstanding indebtedness, incur or guarantee
any other indebtedness. The notes and the subsidiary guarantees rank behind all
of the Company's and the subsidiary guarantors' current and future indebtedness,
other than trade payables, except any future indebtedness that expressly
provides that it ranks equally with, or is subordinated in right of payment to,
the notes and subsidiary guarantees. The notes rank equally with all of the
Company's and the subsidiary guarantors' future senior subordinated
indebtedness. The notes are effectively subordinated to all debt of the
Company's subsidiaries that do not guarantee the notes.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and notes thereto included in Item 1 of this
report as well as our other filings with the Securities and Exchange Commission
("SEC").
RESULTS OF OPERATIONS
Three Months Ended September 30, 2002, Compared to Three Months Ended
September 30, 2001
Net income from continuing operations for the three months ended September 30,
2002 was $14.9 million or $0.44 cents per share basic and diluted. These results
include a loss of $2.3 million or $0.04 cents per diluted share from the
Company's Price One pilot program. The Price One pilot program currently
consists of four stores in Houston, Texas that sell used vehicles on facilities
located on Wal-Mart parking lots. The evaluation of operating and financial
success of the pilot is ongoing. In addition, the results mentioned above
include a $1.0 million pre tax charge or $0.02 cents per diluted share charge
for auditing services, for a reaudit of prior years as required when a company's
predecessor auditor has ceased operations as discussed below. Excluding the
items mentioned above, net income from continuing operations before income taxes
and minority interest for the period was up 37.2% from the same period last year
after adjusting for the elimination of goodwill amortization. This increase was
mainly driven by volume increases in new vehicle retail units, higher per
vehicle gross margins on used retail vehicles, the continued strong performance
of both parts, service and collision repair ("fixed operations") and finance and
insurance lines of business, as well as lower inventory carrying costs as
interest rates continue to remain low. Tax effected net income amounts have not
been provided for the prior period, as the Company believes that such amounts
are not meaningful due to changes in the Company's tax status.
Revenues-
(dollars in thousands, except for unit and per
vehicle data) For the Three Months Ended $ Increase %
9/30/02 9/30/01 (Decrease) Change
New Vehicle Data:
Retail revenues - same store (1) $693,986 $632,917 61,069 10%
Retail revenues - acquisitions 24,476 --
Retail revenues - 2001 divestitures (2) -- 1,921
Total new retail revenues 718,462 634,838 83,624 13%
Fleet revenues - same store (1) 10,096 5,052
Fleet revenues - acquisitions 731 --
Total new fleet revenues 10,827 5,052
New vehicle revenue, as reported $729,289 $639,890 89,399 14%
Retail units - same store (1) 26,207 24,606 1,601 7%
Retail units - actual 27,040 24,702 2,338 9%
=
(dollars in thousands, except for unit and per
vehicle data) For the Three Months Ended $ Increase %
9/30/02 9/30/01 (Decrease) Change
Used Vehicle Data:
Retail revenues - same store (1) $ 224,719 $ 225,177 (458) 0%
Retail revenues - acquisitions 18,783 --
Retail revenues - 2001 divestitures (2) -- 411
Total used retail revenues 243,502 225,588 17,914 8%
Wholesale revenues - same store (1) 69,282 59,903 9,379 16%
Wholesale revenues - acquisitions 7,693 --
Wholesale revenues - 2001 divestitures (2) -- 138
Total used retail revenues 76,975 60,041 16,934 28%
Used vehicle revenue, as reported $ 320,477 $ 285,629 34,848 12%
Retail units - same store (1) 14,674 15,491 (817) (5%)
Retail units - actual 15,923 15,527 396 3%
Parts, Service and Collision Repair:
Revenues - same store (1) $ 125,513 $ 121,758 3,755 3%
Revenues - acquisitions 4,797 --
Revenues - 2001 divestitures (2) -- 656
Parts, service and collision repair
revenue, as reported $ 130,310 122,414 7,896 6%
Finance and Insurance:
Revenues - same store (1) $ 32,647 $ 28,624 4,023 14%
Revenues - acquisitions 1,404 --
Revenues - 2001 divestitures -- 52
Finance and insurance revenue,
as reported $ 34,051 $ 28,676 5,375 19%
Profit per vehicle retailed - same store (1) $ 799 $ 714 85 12%
Profit per vehicle retailed - actual $ 793 $ 713 80 11%
Total Revenues:
Same store $1,156,243 $1,073,431 82,812 8%
Acquisitions 57,884 --
2001 divestitures -- 3,178
Total revenues, as reported $1,214,127 $1,076,609 137,518 13%
(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 dealership was owned by the Company.
(2)The results of operations of divestitures made in fiscal year 2001 are
included in the "as reported" numbers for 2001 for the period through the
date of disposal. The results of operations of divestitures made in fiscal
year 2002 are accounted for under SFAS No. 144 as "discontinued operations"
and accordingly are not included in 2001 or 2002 sales or gross profit
amounts for "same store" or "as reported."
Revenues for the three months ended September 30, 2002 were $1,214.1 million
representing an increase of $137.5 million, or 13%, over the same period last
year. Acquisitions net of 2001 divestitures accounted for $54.7 million of this
increase, with the remainder made up by the Company's strong same store
performance, up 8% over the prior year's quarter. New vehicle retail revenues
remained solid, up 10% on a same store basis, as manufacturer incentives
continued to drive demand. Used vehicle retail revenues were flat on a same
store basis, as the relatively large volume of new vehicle incentives continued
to attract higher-end used car buyers. Fixed operations revenues were up 3% on a
same store basis, primarily resulting from successful customer retention and new
service product offerings. Finance and insurance revenues were up 14%, on a same
store basis principally due to the continued focus on menu selling, the maturing
of the Company's preferred product provider programs and the introduction of new
products.
Gross Profit-
(dollars in thousands, except for unit and per
vehicle data) For the Three Months Ended $ Increase %
9/30/02 9/30/01 (Decrease) Change
New Vehicle Data:
Retail gross profit - same store (1) $ 55,164 $ 52,491 2,673 5%
Retail gross profit - acquisitions 1,963 --
Retail gross profit - 2001 divestitures (2) -- 138
Total new retail gross profit 57,127 52,629 4,498 9%
Fleet gross profit - same store (1) 373 498
Fleet gross profit - acquisitions 1 --
Total new fleet gross profit 374 498
New vehicle gross profit, as reported $ 57,501 $ 53,127 4,374 8%
Retail units - same store (1) 26,207 24,606 1,601 7%
Retail units - actual 27,040 24,702 2,338 9%
Used Vehicle Data:
Retail gross profit - same store (1) $ 27,929 $ 26,316 1,613 6%
Retail gross profit - acquisitions 1,871 --
Retail gross profit - 2001 divestitures -- 52
Total used retail gross profit 29,800 26,368 3,432 13%
Wholesale gross profit - same store (1) (1,756) (955) (801) (84%)
Wholesale gross profit - acquisitions (363) --
Wholesale gross profit - 2001 divestitures (2) -- (18)
Total used wholesale gross profit (2,119) (973) (1,146) (118%)
Used vehicle gross profit, as reported $ 27,681 $ 25,395 2,286 9%
Retail units - same store (1) 14,674 15,491 (817) (5%)
Retail units - actual 15,923 15,527 396 3%
Parts, Service and Collision Repair:
Gross profit - same store (1) $ 65,179 $ 62,216 2,963 5%
Gross profit - acquisitions 2,684 --
Gross profit - 2001 divestitures (2) -- 404
Parts, service and collision repair
gross profit, as reported $ 67,863 $ 62,620 5,243 8%
Total Gross Profit (3):
Same store $ 179,536 $ 169,190 10,346 6%
Acquisitions 7,560 --
2001 divestitures -- 628
Total gross profit, as reported $ 187,096 $ 169,818 17,278 10%
(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 dealership was owned by the Company.
(2) The results of operations of divestitures made in fiscal year 2001 are
included in the "as reported" numbers for 2001 for the period through the
date of disposal. The results of operations of divestitures made in fiscal
year 2002 are accounted for under SFAS No. 144 as "discontinued operations"
and accordingly are not included in 2001 or 2002 sales or gross profit
amounts for "same store" or "as reported."
(3) Gross profit amounts for finance and insurance have not been included above
because these amounts are recorded net (sales equals gross profit).
Gross profit for the three months ended September 30, 2002 was $187.1 million,
up $17.3, or 10%, over the same quarter last year. Acquisitions accounted for
$7.6 million of the increase, with same store gross profit accounting for the
majority of the increase, up 6% over the same period in 2001. The same store new
vehicle retail gross profit increase of $2.7 million, or 5%, was virtually all
volume driven, as the average margin per car retailed remained relatively flat.
Used vehicle retail gross profit rose $1.6 million, or 6%, on a same store
basis, even though related unit sales were down 5%. This increase was attributed
to a mix shift to higher margin vehicles such as certified used, sport utility
vehicles ("SUVs") and light trucks; however, almost half of this increase was
offset by increased wholesale losses in the third quarter of 2002 that resulted
from pricing pressure in the industry which forced used vehicle auction prices
down. Fixed operations gross profit dollars were up 5% on a same store basis,
resulting from the volume increase in the customer pay (non-warranty) business,
as well as strong wholesale parts performance, and the introduction of new
higher margin service products.
Selling, General and Administrative Expenses -
Selling, general and administrative ("SG&A") expenses for the quarter ended
September 30, 2002, increased $14.4 million or 11% over the quarter ended
September 30, 2001. Contributing to this increase was increased variable
compensation related to higher gross profit, increased insurance costs and
expenses of $1.8 million related to the Price One used car pilot program. SG&A
expenses as a percentage of revenues decreased 20 basis points to 11.7% in the
third quarter of 2002 compared to the same quarter in 2001.
Also included in SG&A is a charge of $1.0 million related to the reaudit of the
Company's financial statements for the years ended December 31, 2001 and 2000.
In August 2002 the Auditing Standards Board ("ASB") issued a draft
interpretation of Statement of Auditing Standards No. 79, to give guidance to
auditors when opining on companies whose previously issued financial statements
were audited by auditors whose firm has ceased operations. In this
interpretation, the ASB details five conditions that would cause a company's
previously issued financial statements to be re-audited. One of those conditions
is the reporting of discontinued operations. As a result of this interpretation,
the recent dissolution of the Company's former auditors, Arthur Andersen L.L.P.,
and the fact that the Company adopted SFAS 144, reporting discontinued
operations in 2002, the Company has decided to engage our current auditors,
Deloitte & Touche L.L.P., to re-audit fiscal years 2001 and 2000.
Depreciation and Amortization-
Depreciation and amortization expense decreased $2.1 million for the three
months ended September 30, 2002 as compared to the same quarter in 2001. The
decrease is primarily the result of the adoption of SFAS No. 142, which requires
that goodwill and other indefinite life intangibles no longer be amortized.
Other Income (Expense)-
Floor plan interest expense decreased to $4.4 million for the quarter ended
September 30, 2002 from $6.0 million for the quarter ended September 30, 2001.
This decline was primarily due to lower interest rates in 2002 versus 2001.
Other interest expense decreased by $0.5 million from the prior year, as lower
borrowings on the Company's committed credit facility (see credit facilities in
the Liquidity and Capital Resources Section) offset the incremental interest
expense of the Company's recently issued senior subordinated debt.
Income Tax Provision-
The Company's effective income tax rate for the three months ended September 30,
2002 was 39.8%, which is based on the estimated effective tax rate for the year.
During the three months ended September 30, 2001, the Company was structured as
a limited liability company and only provided a tax provision in accordance with
SFAS No. 109 on the "C" corporations that it owned directly or indirectly during
that period.
Discontinued Operations-
The $0.2 million loss from discontinued operations in the third quarter this
year resulted primarily from the net operating losses of two dealerships, which
the Company expects to sell in the fourth quarter.
Nine Months Ended September 30, 2002, Compared to Nine Months Ended
September 30, 2001
Tax effected pro forma net income for the nine months ended September 30, 2002
was $38.8 million or $1.18 per share basic and diluted. These pro forma results
(i) exclude a non-recurring charge of $11.6 million related to the establishment
of a net deferred tax liability associated with the Company's conversion to a
corporation and (ii) include a pro forma tax charge of $5.3 million as if the
Company was a corporation for the entire period. Tax effected pro forma net
income for the nine months ended September 30, 2002 excluding the after tax
losses from the Price One pilot program of $3.3 million, the re-audit of the
Company's prior year financial statements of $0.6 million and discontinued
operations of $1.4 million, would have been $44.1 million, or $1.30 per share
basic and diluted. Actual net income was $32.6 million, or $0.99 per share basic
and diluted.
Income before income taxes, minority interest, discontinued operations and
extraordinary loss totaled $66.8 million for the nine months ended September 30,
2002, up 42.4% over the same period last year, after adjusting for the
elimination of goodwill amortization. The increase can be primarily attributed
to higher unit volumes of new vehicles, increased selling prices on new and used
vehicles, the continued strong performance of fixed operations and finance and
insurance and the impact of lower interest rates on floor plan financing. Tax
effected pro forma net income and per share amounts have not been provided for
the prior year, as the Company believes that such comparisons with the current
year would not be meaningful due to changes in its tax status.
Revenues-
(dollars in thousands, except for unit and per
vehicle data) For the Nine Months Ended $ Increase %
9/30/02 9/30/01 (Decrease) Change
New Vehicle Data:
Retail revenues - same store (1) $1,878,818 $1,795,948 82,870 5%
Retail revenues - acquisitions 115,792 --
Retail revenues - 2001 divestitures (2) -- 8,352
Total new retail revenues 1,994,610 1,804,300 190,310 11%
Fleet revenues - same store (1) 23,717 24,867
Fleet revenues - acquisitions 9,253 --
Total new fleet revenues 32,970 24,867
New vehicle revenues, as reported $2,027,580 $1,829,167 198,413 11%
Retail units - same store (1) 69,935 69,208 727 1%
Retail units - actual 73,951 69,614 4,337 6%
Used Vehicle Data:
Retail revenues - same store (1) $ 633,539 $ 646,967 (13,428) (2%)
Retail revenues - acquisitions 63,418 --
Retail revenues - 2001 divestitures (2) -- 3,100
Total used retail revenues 696,957 650,067 46,890 7%
Wholesale revenues - same store (1) 194,732 185,931 8,801 5%
Wholesale revenues - acquisitions 19,215 --
Wholesale revenues - 2001 divestitures (2) -- 807
Total used retail revenues 213,947 186,738 27,209 15%
Used vehicle revenues, as reported 910,904 836,805 74,099 9%
Retail units - same store (1) 41,769 44,141 (2,372) (5%)
Retail units - actual 45,899 44,357 1,542 3%
For the Nine Months Ended $ Increase %
9/30/02 9/30/01 (Decrease) Change
Parts, Service and Collision Repair:
Revenues - same store (1) $ 359,422 $ 352,729 6,693 2%
Revenues - acquisitions 20,247 --
Revenues - 2001 divestitures (2) -- 1,896
Parts, service and collision repair
revenues, as reported $ 379,669 $ 354,625 25,044 7%
Finance and Insurance:
Revenues - same store (1) $ 84,907 $ 76,637 8,270 11%
Revenues - acquisitions 4,520 --
Revenues - 2001 divestitures (2) -- 358
Finance and insurance, as reported 89,427 76,995 12,432 16%
Profit per vehicle retailed - Same Store (1) $ 760 $ 676 84 12%
Profit per vehicle retailed - actual $ 746 $ 676 70 10%
Total Revenues:
Same store $3,175,135 $3,083,079 92,056 3%
Acquisitions 232,445 --
2001 divestitures -- 14,513
Total revenues, as reported $3,407,580 $3,097,592 309,988 10%
(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 dealership was owned by the Company.
(2) The results of operations of divestitures made in fiscal year 2001 are
included in the "as reported" numbers for 2001 for the period through the
date of disposal. The results of operations of divestitures made in fiscal
year 2002 are accounted for under SFAS No. 144 as "discontinued operations"
and accordingly are not included in 2001 or 2002 sales or gross profit
amounts for "same store" or "as reported."
Revenues for the nine months ended September 30, 2002 increased $310.0 million,
or 10%, over the same period last year, to $3,407.6 million. Same store revenue
growth accounted for $92.1 million of the increase with the remainder made up
from acquisitions, net of 2001 divestitures. New vehicle retail revenues
continued to be strong, up 5% on a same store basis driven mainly on a by a
shift to higher priced vehicles such as SUVs, light trucks and minivans and to a
lesser extent the impact of manufacturer incentives on demand. Used vehicle
retail units were down 5% on a same store basis, as the relatively large volume
of new vehicle incentives continued to attract higher-end used car buyers;
however, the Company was able to partially make up for the unit decrease by
shifting its mix to higher priced certified used vehicles, light trucks and
SUVs, resulting in only a 2% decline in same store used retail revenues period
over period. Fixed operations revenues were up 2% on a same store basis,
primarily resulting from successful customer retention and new service product
offerings. Finance and insurance revenues were up 11% on a same store basis,
principally due to the continued focus on menu selling, the maturing of the
Company's preferred product provider programs and the introduction of new
products.
Gross Profit-
(dollars in thousands, except for unit and per Year-to-Date Year-to-Date $ Increase
vehicle data) 9/30/02 9/30/01 (Decrease) % Change
New Vehicle Data:
Retail gross profit - same store (1) $ 155,320 $ 146,341 8,979 6%
Retail gross profit - acquisitions 9,611 --
Retail gross profit - 2001 divestitures (2) -- 528
Total new retail gross profit 164,931 146,869 18,062 12%
Fleet gross profit - same store (1) 788 1,690
Fleet gross profit - acquisitions 206 --
Total fleet gross profit 994 1,690
New vehicle gross profit, as reported $ 165,925 $ 148,559 17,366 12%
Retail units - same store (1) 69,935 69,208 727 1%
Retail units - actual 73,951 69,614 4,337 6%
Used Vehicle Data:
Retail gross profit - same store (1) $ 77,733 $ 75,536 2,197 3%
Retail gross profit - acquisitions 6,594 --
Retail gross profit - 2001 divestitures (2) -- 329
Total used retail gross profit 84,327 75,865 8,462 11%
Wholesale gross profit - same store (1) (1,787) (2,075)
Wholesale gross profit - acquisitions (639) --
Wholesale gross profit - 2001 divestitures (2) -- (102)
Total used retail gross profit (2,426) (2,177)
Used vehicle gross profit, as reported $ 81,901 $ 73,688 8,213 11%
Retail units - same store (1) 41,769 44,141 (2,372) (5%)
Retail units - actual 45,899 44,357 1,542 3%
Parts, Service and Collision Repair:
Gross profit - same store (1) $ 186,710 $ 181,916 4,794 3%
Gross profit - acquisitions 12,736 --
Gross profit - 2001 divestitures (2) -- 838
Parts, service and collision repair
gross profit, as reported $ 199,446 $ 182,754 16,692 9%
Total Gross Profit (3):
Same store $ 503,671 $ 480,045 23,626 5%
Acquisitions 33,028 --
2001 divestitures -- 1,951
Total gross profit, as reported $ 536,699 $ 481,996 54,703 11%
(1) Same store amounts include the results of dealerships for the identical
months for each period presented in the comparison, commencing with the
first full month in which dealership was owned by the Company.
(2) The results of operations of divestitures made in fiscal year 2001 are
included in the "as reported" numbers for 2001 for the period through the
date of disposal. The results of operations of divestitures made in fiscal
year 2002 are accounted for under SFAS No. 144 as "discontinued operations"
and accordingly are not included in 2001 or 2002 sales or gross profit
amounts for "same store" or "as reported."
(3) Gross profit amounts for finance and insurance have not been included above
because these amounts are recorded net (sales equals gross profit).
Gross profit for the nine months ended September 30, 2002 was $536.7 million, up
$54.7, or 11%, over the same period last year. Same store gross profit growth
accounted for $23.6 million of the increase, with the remainder made up from
acquisitions, net of 2001 divestitures. Same store new vehicle retail gross
profit increased $9.0 million, or 6%, for the nine months as compared to the
same period last year. The increase was primarily driven by a shift to higher
priced SUVs, light trucks and minivans, as same store retail units only grew 1%
period over period. Used vehicle retail gross profit rose 3% on a same store
basis, even though related unit sales were down 5%. This increase was attributed
to a mix shift to higher margin vehicles such as certified used vehicles, sport
utility vehicles and light trucks. Fixed operations gross profit dollars were up
3% on a same store basis, resulting from the volume increase in the customer pay
business, as well as strong wholesale parts performance, and the introduction of
new higher margin service products.
Selling, General and Administrative Expenses -
Selling, general and administrative ("SG&A") expenses for the nine months ended
September 30, 2002 increased $44.7 million, or 12%, over the nine months ended
September 30, 2001. Contributing to this increase was increased variable
compensation related to higher gross profit, increased insurance costs, expenses
of $4.0 million related to the Price One used car pilot program and the $1.0
million charge for the reaudit of the Company's prior year financial statements.
As a result, SG&A expenses as a percentage of revenues increased 30 basis points
to 12.1% for the nine months ended September 31, 2002, compared to the same
period in 2001.
Depreciation and Amortization-
Depreciation and amortization expense decreased $5.0 million for the nine months
ended September 30, 2002, as compared to the same period in 2001. The decrease
is primarily the result of the adoption of SFAS No. 142, which requires that
goodwill and other indefinite life intangibles no longer be amortized, offset by
$1.3 million of incremented depreciation and amortization for the Price One
pilot program.
Other Income (Expense)-
Floor plan interest expense decreased to $13.2 million for the nine months ended
September 30, 2002 compared with $22.1 million for the nine months ended
September 30, 2001. This decline was primarily due to lower interest rates in
2002 versus 2001. Other interest expense decreased by $5.2 million from the
prior nine month period, as lower borrowings on the Company's committed credit
facility resulting from the use of proceeds from the Company's initial public
offering in March and the implementation of a consolidated cash management
system in the third quarter of 2002, offset the incremental interest expense of
the Company's recently issued senior subordinated debt. Interest income was down
$1.3 million for the nine months ended September 30, 2002, as compared to the
nine-month period last year, as the result of lower interest rates during 2002.
Net losses from unconsolidated affiliates for the nine months ended September
30, 2001, were related to the Company's share of losses in a finance company.
The $0.1 million loss for the nine months ended September 30, 2002 represents
the write-off of the remaining investment in that finance company. Other income
(expense) for the nine months ended September 30, 2002 reflected a charge of
$0.6 million related to certain non-operating expenses associated with the IPO,
while the first nine months of 2001 included a gain on an interest rate swap
transaction of $0.4 million.
Income Tax Provision-
During the nine months ended September 30, 2002, the Company recorded, in
accordance with SFAS No. 109, a one-time non-recurring charge of $11.6 million
related to the establishment of a net deferred tax liability, in connection with
the Company's conversion from a limited liability company to a corporation. This
liability represented the difference between the financial statement and tax
basis of the assets and liabilities of the Company at the conversion date. The
Company's pro forma tax rate for the first nine months of 2002, approximately
39.8%, is based on the estimated effective tax rate for the year. During the
nine months ended September 30, 2001, the Company was a limited liability
company and only provided a tax provision in accordance with SFAS No. 109 on the
"C" corporations that it owned directly or indirectly during that period.
Discontinued Operations-
The $1.4 million loss from discontinued operations for the nine months ended
September 30, 2002 reflects the combined net operating losses of dealerships
sold or to be sold in 2002 plus the $0.3 million net loss on disposal of
dealerships sold in 2002.
Extraordinary Loss on the Early Extinguishment of Debt -
In connection with the repayment of certain term notes with the proceeds from
borrowings under the committed credit facility, the Company incurred prepayment
penalties and wrote-off the unamortized portion of deferred finance fees,
aggregating $1.4 million, in the first quarter of 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires cash to fund working capital needs, finance acquisitions of
new dealerships and fund capital expenditures. These requirements are met
principally from cash flow from operations, borrowings under the Committed
Credit Facility and the Floor Plan Lines (as defined below), and mortgage notes.
As of September 30, 2002, the Company had cash and cash equivalents of $51.6
million.
Credit Facilities-
The Company has a three-year committed financing agreement (the "Committed
Credit Facility") with total availability of $550 million. Earlier this year,
the Company extended the maturity of the Committed Credit Facility to January
2005. The Committed Credit Facility is primarily used to finance acquisitions.
Borrowings under the Committed Credit Facility bear interest at variable rates
based on LIBOR plus a specified percentage depending on the attainment of
certain leverage ratios and the outstanding balance. As of September 30, 2002,
approximately $481.7 million remained available to the Company for additional
borrowings under the Committed Credit Facility.
During the third quarter of 2002, the Company obtained lender consent for a Cash
Management Sublimit of $75 million under its Committed Credit Facility. The Cash
Management Sublimit allows the Company to repay up to $75 million of Committed
Credit Facility outstanding, using cash that has been centrally collected by the
Company's new cash management. The net amount repaid under the Cash Management
Sublimit is available to be borrowed by the Company on short-term notice for
general corporate purposes. As of September 30, 2002, the Company had $35.0
million available for borrowings under its Cash Management Sublimit.
Floor Plan Financing-
The Company has uncommitted floor plan financing lines of credit for new and
used vehicles (the "Floor Plan Lines"). The Floor Plan Lines do not have
specified maturities and bear interest at variable rates based on LIBOR or the
prime rate with total availability of $750 million. As of September 30, 2002,
the Company had $426.8 million outstanding under its floor plan financing
agreements.
Cash Management System-
The Company is in the process of implementing a consolidated cash management
system to sweep cash from its dealership locations on a daily basis. In the
third quarter of 2002, the Company swept $30 million of cash from its
dealerships which was used to make repayments on the Committed Credit Facility.
Implementation of the consolidated cash management system continues, with
further concentration and use of cash for future debt reductions anticipated.
Cash Flow-
Operating Activities:
Cash flow from operations totaled $69.9 million for the nine months ended
September 30, 2002, as net income plus non-cash items of $68.4 million,
decreases in inventories and contracts-in-transit of a combined $26.5 million
and increases in accounts payable and accrued liabilities and other of $19.0
million, offset an increase in net accounts receivable (driven primarily by
increases in our wholesale parts business) of $13.2 million and a decrease in
floor plan notes payable of $30.8 million.
Cash from operations totaled $73.5 million for the nine months ended September
30, 2001, as net income plus non-cash items of $61.4 million, decreases in
inventories and contracts-in transit of a combined $117.0 million and increases
in accounts payable and accrued liabilities and other of $2.6 million offset an
increase in net accounts receivable of $5.0 million and a decrease in floor plan
notes payable of $102.6 million.
Investing Activities:
Net cash flow used in investing activities for the nine months ended September
30, 2002 was $45.7 million, as spending for capital expenditures of $38.1
million and the acquisition of three dealerships for $14.6 million were offset
by proceeds from the dispositions of three franchises for $4.8 million and other
investing activities.
Net cash flow used in investing activities for the nine months ended September
30, 2001 was $80.8 million, as spending for capital expenditures of $38.8
million, the acquisition of six dealerships for $41.0 million and equity
investment of $1.2 million were offset by proceeds from other investing
activities.
Financing Activities:
Net cash flow used in financing activities for the nine months ended September
30, 2002 was $33.1 million, as net proceeds from the Company's initial public
offering and the subordinated debt refinancing of $338.0 million, were offset by
a net reduction in borrowings of $352.4 million, distributions to members and
payment of debt issuance costs related to the subordinated debt refinancing.
Net cash flow from financing activities for the nine months ended September 30,
2001 was $13.5 million, as net proceeds from borrowings, including the
refinancing of the Company's Committed Credit Facility of $387.0 million, were
offset by a net reduction in borrowings of $339.9 million, distributions to
members, payment of debt issuance costs related to Committed Credit Facility
refinancing and the repurchase of members' interest.
Capital Expenditures-
Capital spending for the nine months ended September 30, 2002 and 2001 was $38.1
million and $38.8 million, respectively. Capital spending other than from
acquisitions is expected to be approximately $60 million during the year ended
December 31, 2002, and will be primarily related to operational improvements and
manufacturer-required spending to upgrade existing dealership facilities.
Acquisitions and Acquisition Financing-
In the first nine months of 2002, the Company closed the acquisitions of three
dealerships (three franchises) for an aggregate purchase price of $14.7 million,
all funded through borrowings under the Company's Committed Credit Facility.
Subsequent to September 30, 2002, the Company closed the acquisition of one
dealership for $2.9 million, all of which was funded through borrowings under
its Committed Credit Facility.
In addition, the Company has signed a purchase agreement to acquire Bob Baker
Auto Group ("Baker") of San Diego, California, a dealer group consisting of six
dealerships and ten franchises, for $89.5 million, including anticipated
transactions costs. The Company expects to fund the transaction through
borrowing $73.3 million under its Committed Credit Facility, with the remaining
portion of the purchase price to be funded using shares of its common stock,
either through the issuance of additional shares or through shares repurchased
on the open market as described in the Stock Repurchase section below.
If the Company were to deliver the repurchased shares in conjunction with the
Baker acquisition, those shares would be subject to the same lock-up provisions
as the shares issued to the Company's platform principals described in the
Company's registration statement on Form S-1, declared effective March 13, 2002
(the "Lock-up"). Such Lock-up is in effect until March 13, 2004.
The Baker acquisition is subject to customary closing conditions, including
approval from various automobile manufacturers. The Company is in the process of
seeking the required manufacturer consents, although there is no assurance that
every manufacturer will consent to the Baker acquisition. If a manufacturer
refuses to provide its consent, it could lead to an alteration in the structure
of the Baker acquisition or prevent it from being consummated altogether.
Stock Repurchase-
The Company's board of directors has authorized the repurchase of up to $15
million of its common stock. Pursuant to the Company's senior subordinated debt
indenture, the Company is permitted to repurchase shares under the following
restrictions: (i) up to $15 million under a "Restricted Payments" building
basket plus (ii) up to $2 million per fiscal year under the Company's "Stock
Repurchase" basket. The Restricted Payments building basket equals the greater
of $15 million, or 50% of the Company's consolidated net income beginning April
1, 2002 (less the cumulative amount of any Restricted Payments since the bonds'
inception). From September 30, 2002 to November 8, 2002 the Company repurchased
234,424 shares for approximately $2.2 million.
Recent Accounting Pronouncements-
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Correction." This Statement eliminates extraordinary accounting
treatment for reporting gain or loss on debt extinguishment, and amends other
existing authoritative pronouncements to make various technical corrections. The
provisions of this Statement are effective for the Company with the beginning of
fiscal year 2003. Upon adoption of this statement, the Company will reclassify
to recurring operations debt extinguishments reported as extraordinary items in
prior periods ($1.4 million for the nine months ended September 30, 2001).
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement requires recording costs
associated with exit or disposal activities at their fair values when a
liability has been incurred. Under previous guidance, certain exit costs were
accrued upon management's commitment to an exit plan. Adoption of this Statement
is required with the beginning of fiscal year 2003. The Company does not
anticipate that the ultimate adoption of this statement will have a material
impact on its financial position or results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
INTEREST RATE RISK
The Company is exposed to market risk from changes in interest rates on a
significant portion of its outstanding indebtedness. Given amounts outstanding
at September 30, 2002, a 100 basis-point change in variable interest rates would
result in a change of approximately $2.0 million to our annual non-floor plan
interest expense. Based on floor plan amounts outstanding at September 30, 2002,
a 100 basis-point change in variable interest rates would result in a $4.3
million change to annual floor plan interest expense.
INTEREST RATE SWAPS
During the second quarter of 2002 and in connection with its subordinated debt
refinancing, the Company terminated three swap agreements, having a combined
total notional principal amount of $300 million, all maturing in November 2003.
In connection with these terminations, the Company incurred a $0.2 million loss,
which is being amortized to interest expense over the remainder of the original
agreement (see Note 8 of the Consolidated Financial Statements).
Item 4. Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of the date (the "Evaluation Date") within 90 days prior to the date of this
report, the Company conducted an evaluation (under the supervision and with the
participation of the Company's management, including the chief executive officer
and chief financial officer), pursuant to Rule 13a-15 promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on this evaluation, the Company's chief executive officer
and chief financial officer concluded that as of the Evaluation Date: such
disclosure controls and procedures were reasonably designed to ensure that
information required to be disclosed by the Company in reports it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the Securities and
Exchange Commission.
CHANGES IN INTERNAL CONTROLS
Since the Evaluation Date (last evaluation by the Company's management of the
Company's internal controls), there have not been any significant changes in the
internal controls or in other factors that could significantly affect the
internal controls.
. . .
Forward Looking Information
This report contains "forward-looking statements" as that term is defined in the
Private Securities Litigation Reform Act of 1995. The forward-looking statements
include statements relating to goals, plans and pending acquisitions projections
regarding the Company's financial position, results of operations, market
position, product development and business strategy. These statements are based
on management's current expectations and involve significant risks and
uncertainties that may cause results to differ materially from those set forth
in the statements. These risks and uncertainties include, among other things,
market factors, the Company's relationships with vehicle manufacturers and other
suppliers, risks associated with the Company's substantial indebtedness, risks
related to pending and potential future acquisitions, 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. These and other risk factors are discussed in the
Company's registration statements on Form S-1 declared effective on March 13,
2002 and Form S-4 declared effective on July 22, 2002. We undertake no
obligation to publicly update any forward-looking statement, whether as a result
of new information, future events or otherwise.
PART II - OTHER INFORMAITON
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
10 - Stock Purchase Agreement by and Among Bob Baker Enterprises, Inc.
and its Affiliate Corporations, Their Shareholders and Asbury Automotive
Group, Inc. (August 28, 2002)
99.1 - Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive
Officer)
99.2 - Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial
Officer)
b. Reports on Form 8-K
Report filed August 29, 2002, under Item 5, related to issuance of a press
release announcing the Company entered into an agreement to acquire all the
companies which comprise the Bob Baker Auto Group of San Diego, California.
Report furnished September 13, 2002, under Item 9, related to the issuance
of selected financial data for the Bob Baker Auto Group of San Diego,
California for the last twelve months ended May 31, 2002.
Report furnished October 31, 2002, under Item 9, related to the issuance of
two press releases announcing earnings for the third quarter ending
September 30, 2002, and the Board of Directors' authorization to purchase
up to $15 million of the Company's outstanding common shares.
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: November 13, 2002 /s/ Thomas F. Gilman
-------------------------------------------------
Thomas F. Gilman
Senior Vice President and Chief Financial Officer
CERTIFICATION PURSUANT TO
RULE 13a-14 OF THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Kenneth B. Gilman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Asbury Automotive
Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing
the equivalent function):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
/s/ Kenneth B. Gilman
- -----------------------------------------------------
Kenneth B. Gilman1
Chief Executive Officer
November 13, 2002
CERTIFICATION PURSUANT TO
RULE 13a-14 OF THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Thomas F. Gilman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Asbury Automotive
Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing
the equivalent function):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
/s/ Thomas F. Gilman
Thomas F. Gilman
Chief Financial Officer
November 13, 2002
Index to Exhibits
Exhibit
Number Description
10 Stock Purchase Agreement by and Among Bob Baker Enterprises, Inc. and
its Affiliate Corporations, Their Shareholders and Asbury Automotive
Group, Inc. (August 28, 2002)
99.1 Certificate pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer)
99.2 Certificate pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer)
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Asbury Automotive Group, Inc. (the
"Company") on Form 10-Q for the period ending September 30, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Kenneth B. Gilman, Chief Executive Officer of the Company, certify, pursuant to
18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that, to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ Kenneth B. Gilman
Kenneth B. Gilman
Chief Executive Officer
November 13, 2002
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Asbury Automotive Group, Inc. (the
"Company") on Form 10-Q for the period ending September 30, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Thomas F. Gilman, Chief Financial Officer of the Company, certify, pursuant to
18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that, to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ Thomas F. Gilman
Thomas F. Gilman
Chief Financial Officer
November 13, 2002