UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
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 August 3, 2005, was 32,745,053 (net of
1,586,587 treasury shares).
ASBURY AUTOMOTIVE GROUP, INC.
INDEX
PART I - Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 2005 (Unaudited)
and December 31, 2004 1
Consolidated Statements of Income for the Three and
Six Months Ended June 30, 2005 and 2004 (Unaudited) 2
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2005 and 2004 (Unaudited) 3
Notes to Consolidated Financial Statements (Unaudited) 4
Report of Independent Registered Public Accounting Firm 21
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 37
Item 4. Controls and Procedures 37
PART II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders 39
Item 6. Exhibits 39
Signatures 40
Index to Exhibits 41
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
ASBURY AUTOMOTIVE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
June 30, December 31,
ASSETS 2005 2004
------ ----------- ------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents .................................... $ 11,049 $ 28,093
Contracts-in-transit ......................................... 112,432 105,360
Restricted investments ....................................... 1,813 1,645
Accounts receivable (net of allowance of
$2,224 and $2,073, respectively) ........................... 150,183 148,196
Inventories .................................................. 722,160 761,557
Deferred income taxes ........................................ 15,576 15,576
Prepaid and other current assets ............................. 58,512 56,831
Assets held for sale ......................................... 44,660 26,248
----------- -----------
Total current assets .................................... 1,116,385 1,143,506
PROPERTY AND EQUIPMENT, net ..................................... 205,982 195,788
GOODWILL ........................................................ 464,947 461,650
RESTRICTED INVESTMENTS, net of current portion .................. 3,282 2,478
OTHER LONG-TERM ASSETS .......................................... 97,903 94,537
----------- -----------
Total assets ............................................ $ 1,888,499 $ 1,897,959
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Floor plan notes payable ..................................... $ 613,137 $ 650,948
Current maturities of long-term debt ......................... 32,936 33,880
Accounts payable ............................................. 66,649 53,078
Accrued liabilities .......................................... 88,993 89,066
Liabilities associated with assets held for sale ............. 27,618 20,538
----------- -----------
Total current liabilities ............................... 829,333 847,510
LONG-TERM DEBT .................................................. 476,408 492,536
DEFERRED INCOME TAXES ........................................... 38,375 40,360
OTHER LONG-TERM LIABILITIES ..................................... 39,927 35,821
COMMITMENTS AND CONTINGENCIES (Note 13)
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value per share,
10,000,000 shares authorized ............................... -- --
Common stock, $.01 par value per share, 90,000,000 shares
authorized 34,195,206 and 34,163,759 shares issued,
including shares held in treasury, respectively ............ 342 342
Additional paid-in capital ................................... 413,490 413,094
Retained earnings ............................................ 113,532 87,905
Treasury stock, at cost; 1,586,587 shares held ............... (15,032) (15,032)
Accumulated other comprehensive loss ......................... (7,876) (4,577)
----------- -----------
Total shareholders' equity .............................. 504,456 481,732
----------- -----------
Total liabilities and shareholders' equity .............. $ 1,888,499 $ 1,897,959
=========== ===========
See 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 For the Six Months
Ended June 30, Ended June 30,
-------------------------- --------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
REVENUES:
New vehicle ....................... $ 903,767 $ 814,427 $ 1,688,962 $ 1,494,018
Used vehicle ...................... 366,917 316,278 705,023 615,330
Parts, service and collision repair 164,529 146,085 322,696 283,933
Finance and insurance, net ........ 41,646 37,453 79,334 68,374
----------- ----------- ----------- -----------
Total revenues ................ 1,476,859 1,314,243 2,796,015 2,461,655
----------- ----------- ----------- -----------
COST OF SALES:
New vehicle ....................... 841,065 755,381 1,571,227 1,383,735
Used vehicle ...................... 335,403 289,033 643,015 561,044
Parts, service and collision repair 79,016 68,224 154,701 134,172
----------- ----------- ----------- -----------
Total cost of sales ........... 1,255,484 1,112,638 2,368,943 2,078,951
----------- ----------- ----------- -----------
GROSS PROFIT ......................... 221,375 201,605 427,072 382,704
OPERATING EXPENSES:
Selling, general and administrative 170,551 156,332 338,358 300,694
Depreciation and amortization ..... 5,102 5,084 10,037 9,947
----------- ----------- ----------- -----------
Income from operations ........ 45,722 40,189 78,677 72,063
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Floor plan interest expense ....... (7,977) (4,883) (14,973) (9,128)
Other interest expense ............ (10,131) (10,186) (19,619) (20,506)
Interest income ................... 235 109 491 381
Other income (expense), net ....... 186 152 158 (59)
----------- ----------- ----------- -----------
Total other expense, net ...... (17,687) (14,808) (33,943) (29,312)
----------- ----------- ----------- -----------
Income before income taxes .... 28,035 25,381 44,734 42,751
INCOME TAX EXPENSE ................... 10,513 9,341 16,775 15,855
----------- ----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS .... 17,522 16,040 27,959 26,896
DISCONTINUED OPERATIONS, net of tax .. (1,536) (1,292) (2,332) (1,784)
----------- ----------- ----------- -----------
Net income .................... $ 15,986 $ 14,748 $ 25,627 $ 25,112
=========== =========== =========== ===========
EARNINGS PER COMMON SHARE:
Basic ............................. $ 0.49 $ 0.45 $ 0.79 $ 0.77
=========== =========== =========== ===========
Diluted ........................... $ 0.49 $ 0.45 $ 0.78 $ 0.77
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic ............................. 32,604 32,470 32,596 32,452
=========== =========== =========== ===========
Diluted ........................... 32,725 32,656 32,753 32,688
=========== =========== =========== ===========
See Notes to Consolidated Financial Statements.
2
ASBURY AUTOMOTIVE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the Six Months
Ended June 30,
----------------------
2005 2004
--------- ---------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income .......................................................................... $ 25,627 $ 25,112
Adjustments to reconcile net income to net cash provided by operating activities-
Depreciation and amortization ..................................................... 10,037 9,947
Depreciation and amortization from discontinued operations ........................ 552 719
Amortization of deferred financing fees ........................................... 1,013 1,170
Change in allowance for doubtful accounts ......................................... 151 (327)
(Gain) loss on sale of discontinued operations .................................... (10) 474
Other adjustments ................................................................. 2,993 3,543
Changes in operating assets and liabilities, net of acquisitions and divestitures-
Contracts-in-transit .............................................................. (7,072) (2,482)
Accounts receivable ............................................................... (10,375) (35,511)
Proceeds from the sale of accounts receivable ..................................... 8,126 9,976
Inventories ....................................................................... 31,705 (63,735)
Prepaid and other current assets .................................................. (14,027) (5,862)
Floor plan notes payable .......................................................... (19,777) 52,471
Accounts payable and accrued liabilities .......................................... 13,097 16,578
Other long-term assets and liabilities ............................................ 1,354 (7,422)
--------- ---------
Net cash provided by operating activities ...................................... 43,394 4,651
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures - non-financed ................................................. (16,942) (18,391)
Capital expenditures - financeable .................................................. (18,236) (16,130)
Construction advances associated with sale-leaseback agreements ..................... 2,595 9,493
Acquisitions ........................................................................ (4,692) (71,594)
Proceeds from the sale of property and equipment .................................... 477 870
Proceeds from the sale of discontinued operations ................................... 2,771 834
Purchases of restricted investments ................................................. (1,791) --
Maturities of restricted investments ................................................ 913 913
Net proceeds (issuance) of finance contracts ........................................ 253 (372)
--------- ---------
Net cash used in investing activities .......................................... (34,652) (94,377)
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from borrowings ............................................................ 20,734 3,850
Repayments of debt .................................................................. (41,989) (6,813)
Payments of debt issuance costs ..................................................... (4,927) --
Proceeds from the exercise of stock options ......................................... 396 857
--------- ---------
Net cash used in financing activities .......................................... (25,786) (2,106)
--------- ---------
Net decrease in cash and cash equivalents ...................................... (17,044) (91,832)
CASH AND CASH EQUIVALENTS, beginning of period ......................................... 28,093 106,711
--------- ---------
CASH AND CASH EQUIVALENTS, end of period ............................................... $ 11,049 $ 14,879
========= =========
See Note 12 for supplemental cash flow information
See Notes to Consolidated Financial Statements
3
ASBURY AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF BUSINESS
Asbury Automotive Group, Inc. is a national automotive retailer,
operating 94 dealership locations (129 franchises) as of June 30, 2005. We offer
an extensive range of automotive products and services, including new and used
vehicles, financing and insurance, vehicle maintenance and collision repair
services, replacement parts and service contracts. We offer 33 domestic and
foreign brands of new vehicles, including four heavy truck brands. We also
operate 22 collision repair centers that serve our markets. Our retail network
is organized into regional dealership groups, formerly called "platforms," in 23
metropolitan markets, which are marketed under different local brands.
During the first quarter of 2005, we reorganized our platforms into
principally four regions: (i) Florida (comprising our Coggin dealerships,
operating primarily in Jacksonville and Orlando, and our Courtesy dealerships
operating in Tampa), (ii) West (comprising our McDavid dealerships operating
throughout Texas, our Thomason dealerships operating in Portland, Oregon, our
Spirit dealerships operating primarily in Los Angeles, California and our
Northern California Dealerships operating in Sacramento and Fresno, California),
(iii) Mid-Atlantic (comprising our Crown dealerships operating in North
Carolina, South Carolina and Southern Virginia) and (iv) South (comprising our
Nalley dealerships operating in Atlanta, Georgia, and our North Point
dealerships operating in Little Rock, Arkansas.) Our Plaza dealerships operating
in St. Louis, Missouri and our Gray Daniels dealerships operating in Jackson,
Mississippi remain standalone operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited interim consolidated financial statements
reflect the consolidated accounts of Asbury Automotive Group, Inc. and our
wholly owned subsidiaries. All intercompany transactions have been eliminated in
consolidation. Certain prior year amounts have been reclassified to conform to
the current period presentation.
In the opinion of management, all adjustments (consisting only of
normal, recurring adjustments) considered necessary for a fair presentation of
the interim consolidated financial statements as of June 30, 2005, and for the
three and six months ended June 30, 2005 and 2004 have been included. The
results of operations for the three and six months ended June 30, 2005 are not
necessarily indicative of the results that may be expected for the full year.
Our interim 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, 2004.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America ("GAAP") requires
management to make estimates and assumptions that affect the amounts of assets
and liabilities and disclosures of contingent assets and liabilities as of the
date of the financial statements and the reported amounts of revenues and
expenses during the periods presented. Actual results could differ from these
estimates. Estimates and assumptions are reviewed periodically and the effects
of revisions are reflected in the consolidated financial statements in the
period they are determined to be necessary.
Revenue Recognition
Revenue from the sale of new and used vehicles is recognized upon
delivery, passage of title, signing of the sales contract and approval of
financing. Revenue from the sale of parts, service and collision repair is
recognized upon delivery of parts to the customer or at the time vehicle service
or repair work is completed. Manufacturer vehicle incentives and rebates,
including holdbacks, are recognized as a component of new vehicle cost of sales
when earned, generally at the time the related vehicles are sold.
We receive commissions from the sale of vehicle service contracts,
credit life insurance and disability insurance to customers. In addition, we
receive commissions from financing institutions for arranging customer
financing. We may be charged back ("chargebacks") for finance, insurance or
vehicle service contract commissions in the event a contract is terminated. The
revenues from financing fees and commissions are recorded at the time the
vehicles are sold and a reserve for future chargebacks is established based on
historical operating results and the termination provisions of the applicable
contracts. Finance, insurance and vehicle service contract commissions, net of
estimated chargebacks, are included in Finance and insurance, net in the
accompanying Consolidated Statements of Income.
4
Goodwill and Other Intangible Assets
Upon adoption of Statement of Financial Accounting Standards ("SFAS")
No. 142 "Goodwill and Other Intangible Assets," on January 1, 2002, we
determined that each of our platforms qualified as a reporting unit since we
operate in one segment, our platforms are one level below our corporate level,
discrete financial information existed for each platform and the management of
each platform directly reviewed the platform's performance. In late 2004, we
began the process of reorganizing our platforms into four regions. Within this
more streamlined structure, we will evaluate our operations and financial
results by dealership in the aggregate, rather than by platform. The general
managers, with direction from a centralized management team, including corporate
and regional management, will continue to have the independence and flexibility
to respond effectively to local market conditions. Based on the changes in our
management, operational and reporting structure during the first quarter of
2005, we evaluate goodwill at the operating segment level.
Stock-Based Compensation
We account for stock-based compensation issued to employees in
accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees." APB Opinion No. 25 requires the use of the
intrinsic value method, which measures compensation cost as the excess, if any,
of the quoted market price of the stock at the measurement date over the amount
an employee must pay to acquire the stock. We have adopted the disclosure
provisions of SFAS No. 148, "Accounting for Stock-Based Compensation-Transition
and Disclosure-An amendment of FASB Statement No. 123."
The following table illustrates the effect on net income and net income
per share had stock-based employee compensation been recorded based on the fair
value method under SFAS No. 123 "Accounting for Stock-Based Compensation":
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
(In thousands, except per share data) 2005 2004 2005 2004
-------- -------- -------- --------
Net income ....................................... $ 15,986 $ 14,748 $ 25,627 $ 25,112
Adjustments to net income:
Stock-based compensation expense included in
net income, net of tax ....................... -- 62 1 83
Pro forma stock-based compensation expense,
net of tax ................................... (674) (1,406) (1,340) (2,595)
-------- -------- -------- --------
Pro forma net income ............................. $ 15,312 $ 13,404 $ 24,288 $ 22,600
======== ======== ======== ========
Net income per common share--basic (as reported) . $ 0.49 $ 0.45 $ 0.79 $ 0.77
======== ======== ======== ========
Net income per common share--diluted (as reported) $ 0.49 $ 0.45 $ 0.78 $ 0.77
======== ======== ======== ========
Pro forma net income per common share--basic ..... $ 0.47 $ 0.41 $ 0.75 $ 0.70
======== ======== ======== ========
Pro forma net income per common share--diluted ... $ 0.47 $ 0.41 $ 0.74 $ 0.69
======== ======== ======== ========
We use the Black-Scholes option valuation model ("Black-Scholes"),
which is the measure of fair value most often utilized under SFAS No. 123.
Traded options, unlike our stock-based awards, are not subject to vesting
restrictions, are fully transferable and may use lower expected stock price
volatility measures than those assumed below. We estimated the fair value of
stock-based compensation issued to employees during each respective period using
Black-Scholes with the following weighted average assumptions:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- ------------------
2005 2004 2005 2004
-------- -------- ------- -------
Risk free interest rate................ 3.7% 3.6% 3.8% 3.3%
Expected life of options............... 4 years 4 years 4 years 4 years
Expected stock price volatility........ 45% 51% 45% 51%
Expected dividend yield................ N/A N/A N/A N/A
5
Derivative Instruments and Hedging Activities
We utilize derivative financial instruments to manage our capital
structure. The types of risks hedged are those relating to the variability of
cash flows and changes in the fair value of our financial instruments caused by
movements in interest rates. We document our risk management strategy and assess
hedge effectiveness at the inception and during the term of each hedge.
Derivatives are reported at fair value on the accompanying Consolidated
Balance Sheets. The changes in fair value of the effective portion of "cash
flow" hedges are reported as a component of accumulated other comprehensive
income (loss). Amounts in accumulated other comprehensive income (loss) are
reclassified to interest expense to the extent the hedge becomes ineffective.
The change in fair value of "fair value" hedges are recorded as a component of
interest expense. Changes in the fair value of the associated hedged exposures
(i.e., notes payable) are also recorded as a component of interest expense.
Measurements of hedge ineffectiveness are based on comparisons between
the gains or losses of the actual interest rate swaps and the gains or losses of
hypothetical interest rate swaps which are designed to reflect the critical
terms of the defined hedged exposures. Ineffective portions of these interest
rate swaps are reported as a component of interest expense in the accompanying
Consolidated Statements of Income. We recognized minor ineffectiveness during
the three and six months ended June 30, 2005 and no ineffectiveness during the
three and six months ended June 30, 2004.
Discontinued Operations
In accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," certain amounts reflected in the accompanying
Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004, have been
classified as Assets Held for Sale and Liabilities Associated with Assets Held
for Sale. In addition, the accompanying Consolidated Statements of Income for
the three and six months ended June 30, 2004, have been reclassified to reflect
the status of our discontinued operations as of June 30, 2005.
Statements of Cash Flows
The net change in floor plan financing of inventories is reflected as
an operating activity in the accompanying Consolidated Statements of Cash Flows.
The net change in service loaner vehicle financing is reflected as an
operating activity in the accompanying Consolidated Statements of Cash Flows.
Construction advances from third parties in connection with
sale-leaseback agreements for the construction of new dealership facilities or
leasehold improvements on our dealership facilities are included in investing
activities in the accompanying Consolidated Statements of Cash Flows, which is
the preferred presentation from a selection of alternatives.
Financeable capital expenditures include all expenditures that we have
financed during the reporting period or intend to finance in future reporting
periods through sale-leaseback transactions or mortgage financing. In addition,
in connection with the sale of one of our dealerships, we purchased the real
estate on which the dealership is located for approximately $5.4 million and the
buyer of our dealership has agreed to purchase the real estate from us for $5.4
million. We have classified this transaction as a financeable capital
expenditure in the accompanying Consolidated Statement of Cash Flows.
Non-financed capital expenditures include all capital expenditures that are not
included in financeable capital expenditures.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123 (revised 2004), "Share-based Payment." This statement
requires compensation costs related to share-based payment transactions to be
recognized in the financial statements. With limited exceptions, the amount of
compensation cost will be measured based on the grant-date fair value of the
equity or liability instruments issued. Compensation cost will be recognized
over the period that an employee provides service in exchange for the award.
SFAS No. 123 (revised 2004) replaces SFAS No. 123, "Accounting for Stock-Based
Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued
to Employees." In April 2005, the Securities and Exchange Commission adopted a
new rule that amends the compliance dates for SFAS No. 123 (revised 2004).
Registrants would have been required to implement the standard as of the
beginning of the first interim or annual period that begins after June 15, 2005.
The Commission's new rule allows companies to implement SFAS No 123 (Revised
2004) at the beginning of their next fiscal year, instead of the next reporting
period, that begins after June 15, 2005. We are currently evaluating the effect
of this statement on our consolidated financial statements and related
disclosures.
6
3. INVENTORIES
Inventories consist of the following:
June 30, December 31,
(In thousands) 2005 2004
--------- ------------
New vehicles.................. $ 563,414 $ 619,098
Used vehicles................. 114,429 98,071
Parts and accessories......... 44,317 44,388
--------- ---------
Total inventories.......... $ 722,160 $ 761,557
========= =========
The lower of cost or market reserves for inventory totaled $4.4 million
and $4.9 million as of June 30, 2005 and December 31, 2004, respectively.
4. ACQUISITIONS
During the six months ended June 30, 2005, we acquired one dealership
location (one franchise) for an aggregate purchase price of $5.2 million, of
which $4.7 million was paid in cash through the use of available funds, with the
remaining $0.5 million representing the fair value of future payments. During
the six months ended June 30, 2004, we acquired six dealership locations (six
franchises) for an aggregate purchase price of $73.8 million, of which $71.6
million was paid in cash through the use of available funds, with the remaining
$2.2 million representing the fair value of future payments associated with one
of our acquisitions.
The allocation of purchase price for acquisitions is as follows:
For the Six Months
Ended June 30,
------------------
(In thousands) 2005 2004
------- -------
Working capital.................... $ 8 $ 5,155
Fixed assets....................... 278 3,774
Other assets....................... -- 257
Goodwill........................... 3,541 53,101
Franchise rights................... 1,350 11,500
------- -------
Total purchase price............. $ 5,177 $73,787
======= =======
The allocation of purchase price to assets acquired and liabilities
assumed for certain current and prior year acquisitions was based on preliminary
estimates of fair value and may be revised as additional information concerning
valuation of such assets and liabilities becomes available.
5. GOODWILL AND MANUFACTURER FRANCHISE RIGHTS
The changes in the carrying amount of goodwill for the six months ended
June 30, 2005 are as follows:
(In thousands)
Balance, December 31, 2004............................... $461,650
Current year acquisitions.............................. 3,541
Adjustments associated with prior year acquisitions.... 519
Current year divestitures.............................. (763)
--------
Balance, June 30, 2005................................... $464,947
========
7
The changes in the carrying amount of manufacturer franchise rights,
which are included in Other Long-Term Assets on the accompanying Consolidated
Balance Sheets, are as follows:
(In thousands)
Balance, December 31, 2004............................... $ 41,513
Current year acquisitions.............................. 1,350
Franchises held for sale............................... (1,236)
Other.................................................. (294)
--------
Balance, June 30, 2005................................... $ 41,333
========
During the six months ended June 30, 2005, we sold two dealership
locations (four franchises) resulting in the removal of $0.8 million of goodwill
from our Consolidated Balance Sheets. Two of the franchises sold had been
allocated a total of $0.5 million of manufacturer franchise rights, which were
also removed from our Consolidated Balance Sheets.
During the six months ended June 30, 2005, we acquired one dealership
location (one franchise) and allocated $1.4 million of the purchase price to
manufacturer franchise rights.
6. ASSETS AND LIABILITIES HELD FOR SALE
Assets and liabilities classified as held for sale include (i) assets
and liabilities associated with discontinued operations and real estate
associated with former dealership locations, (ii) costs of completed
construction projects included in pending sale-leaseback transactions where an
unaffiliated third party has advanced us or will advance us funds equal to the
cost of construction and (iii) costs of completed construction projects included
in pending sale-leaseback transactions where an unaffiliated third party has
agreed to purchase the assets from us upon completion of the construction.
Assets and liabilities associated with discontinued operations include
three dealership locations (five franchises) and real estate associated with one
former dealership location as of June 30, 2005, and two dealership locations
(four franchises) and real estate associated with two former dealership
locations as of December 31, 2004. During the three months ended June 30, 2005,
we sold real estate associated with one former dealership location with a book
value of $0.8 million for $0.9 million. Assets associated with discontinued
operations totaled $44.7 million and $11.8 million, and liabilities associated
with discontinued operations totaled $27.6 million and $7.5 million as of June
30, 2005 and December 31, 2004, respectively.
Included in Assets Held for Sale as of December 31, 2004 was $14.5
million of costs associated with one completed project included in a pending
sale-leaseback transaction. As of December 31, 2004, Liabilities Associated with
Assets Held for Sale included $13.1 million of funds advanced to us from an
unaffiliated third party associated with the completed construction project.
During the six months ended June 30, 2005, we received $1.4 million of funds
from the unaffiliated third party and completed this pending sale-leaseback
transaction, which resulted in the removal of $14.5 million of Assets Held for
Sale and Liabilities Associated with Assets Held for Sale from our Consolidated
Balance Sheets.
A summary of assets and liabilities held for sale is as follows:
June 30, December 31,
(In thousands) 2005 2004
-------- ------------
Assets:
Inventories .............................. $30,722 $ 7,846
Property and equipment, net .............. 12,702 17,902
Manufacturer franchise rights............. 1,236 500
------- -------
Total assets ............................. 44,660 26,248
Liabilities:
Floor plan notes payable ................. 27,618 7,456
Other liabilities ........................ -- 13,082
------- -------
Total liabilities ........................ 27,618 20,538
------- -------
Net assets held for sale .................... $17,042 $ 5,710
======= =======
Included in Prepaid and Other Current Assets on the accompanying
Consolidated Balance Sheets are costs associated with construction projects,
which we intend to sell through sale-leaseback transactions but have not been
completed and therefore are not available for sale. In connection with these
8
construction projects, we have entered into sale-leaseback agreements whereby an
unaffiliated third party purchased the land and is either advancing funds to us
equal to the cost of construction of dealership facilities being constructed on
the land or has agreed to purchase the assets from us upon completion of the
project. We capitalize the cost of the construction and lease payments during
the construction period and record a corresponding liability equal to the amount
of the advanced funds. Upon completion of the construction, we will execute the
sale-leaseback transaction, remove the cost of construction and the related
liability from our Consolidated Balance Sheets and amortize the capitalized
lease payments on a straight-line basis over the lease term. During the six
months ended June 30, 2005, we completed one sale-leaseback transaction
associated with a construction project that was completed subsequent to December
31, 2004, which resulted in the removal of $1.2 million of Assets Held for Sale
and Liabilities Associated with Assets Held for Sale from our Consolidated
Balance Sheets. The book value of assets associated with construction projects
that have not been completed as of June 30, 2005 and December 31, 2004 totaled
$10.2 million and $6.7 million, respectively. As of June 30, 2005 and December
31, 2004, the book value of liabilities associated with these construction
projects totaled $1.6 million.
7. LONG-TERM DEBT
Long-term debt consists of the following:
June 30, December 31,
(In thousands) 2005 2004
--------- ------------
9% Senior Subordinated Notes due 2012 ............. $ 250,000 $ 250,000
8% Senior Subordinated Notes due 2014
($200.0 million face value, net of hedging
activity of $446 and $2,736, respectively) ..... 199,554 197,264
Mortgage notes payable ............................ 24,727 49,732
Notes payable collateralized by loaner vehicles.... 22,810 21,627
Committed Credit Facility ......................... 5,000 --
Capital lease obligations ......................... 4,370 4,421
Other notes payable ............................... 2,883 3,372
--------- ---------
509,344 526,416
Less--current portion ............................. (32,936) (33,880)
--------- ---------
Long-term debt .................................... $ 476,408 $ 492,536
========= =========
During the three months ended June 30, 2005, we borrowed $15.0 million
from our committed credit facility, of which $8.2 million was used for the
purchase of real estate on which two of our dealerships are located. The
remainder of the borrowings was used for general corporate purposes. During the
three months ended June 30, 2005, we repaid $10.0 million of the amounts
borrowed from our committed credit facility and subsequent to the end of the
quarter we repaid the remaining $5.0 million.
8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITY
We have entered into two forward interest rate swaps with a combined
notional principal amount of $170.0 million, 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 cash flow hedges of our variable rate floor plan notes
payable and will contain minor ineffectiveness. As of June 30, 2005 and December
31, 2004, the swaps had a fair value of $12.3 million and $7.1 million,
respectively, and are included in Other Long-term Liabilities on the
accompanying Consolidated Balance Sheets.
We have entered into an interest rate swap agreement with a notional
principal amount of $200.0 million as a hedge against changes in the fair value
of our 8% Senior Subordinated Notes due 2014. Under the terms of the swap
agreement, we are required to make variable rate payments based on six-month
LIBOR and receive a fixed rate of 8.0%. This swap agreement was designated and
qualifies as a fair value hedge of our 8% Senior Subordinated Notes due 2014 and
did not contain any ineffectiveness. As a result our 8% Senior Subordinated
Notes due 2014 have been adjusted by the fair value of the related swap. As of
June 30, 2005 and December 31, 2004, the swap agreement had a fair value of $0.4
million and $2.7 million, respectively, and is included in Other Long-Term
Liabilities on the accompanying Consolidated Balance Sheets.
We have entered into an interest rate swap agreement with a notional
principal amount of $15.2 million as a hedge against future changes in the
interest rate of our variable rate mortgage notes payable. Under the terms of
the swap agreement, we are required to make payments at a fixed rate of 6.08%
and receive a variable rate based on LIBOR. This swap agreement was designated
and qualifies as a cash flow hedge of changes in the interest rate of our
variable rate mortgage notes payable and will contain minor ineffectiveness. As
9
of June 30, 2005 and December 31, 2004, the swap agreement had a fair value of
$0.2 million, which was included in Other Long-Term Liabilities on the
accompanying Consolidated Balance Sheets.
9. COMPREHENSIVE INCOME
The following table provides a reconciliation of net income to
comprehensive income:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
(In thousands) 2005 2004 2005 2004
-------- -------- -------- --------
Net income ............................... $ 15,986 $ 14,748 $ 25,627 $ 25,112
Other comprehensive income:
Change in fair value of cash flow hedges (8,368) (4,631) (5,279) (6,701)
Income tax benefit associated with
cash flow hedges ..................... 3,138 1,737 1,980 2,532
-------- -------- -------- --------
Comprehensive income ..................... $ 10,756 $ 11,854 $ 22,328 $ 20,943
======== ======== ======== ========
10. DISCONTINUED OPERATIONS
During the six months ended June 30, 2005, we sold two dealership
locations (four franchises) and real estate associated with one former
dealership location and placed three dealership locations (five franchises) into
discontinued operations. As of June 30, 2005, three dealership locations (five
franchises) and real estate associated with one former dealership location were
pending disposition. The accompanying Consolidated Statements of Income for the
three and six months ended June 30, 2004, have been reclassified to reflect the
status of our discontinued operations as of June 30, 2005.
The following table provides further information regarding our
discontinued operations as of June 30, 2005, and includes the results of
businesses sold prior to June 30, 2005, and businesses pending disposition as of
June 30, 2005:
For the Three Months For the Three Months
Ended June 30, 2005 Ended June 30, 2004
--------------------------------- ---------------------------------
Pending Pending
(Dollars in thousands) Sold Disposition Total Sold* Disposition** Total
-------- ----------- --------- -------- ------------- ---------
Franchises ................................. 2 5 7 17 5 22
======== ======== ======== ======== ======== ========
Revenues ................................... $ 3,212 $ 34,060 $ 37,272 $ 48,938 $ 39,358 $ 88,296
Cost of sales .............................. 2,790 29,404 32,194 41,554 34,418 75,972
-------- -------- -------- -------- -------- --------
Gross profit ...................... 422 4,656 5,078 7,384 4,940 12,324
Operating expenses ......................... 806 5,523 6,329 7,426 6,010 13,436
-------- -------- -------- -------- -------- --------
Loss from operations .............. (384) (867) (1,251) (42) (1,070) (1,112)
Other expense, net ......................... (92) (738) (830) (351) (298) (649)
-------- -------- -------- -------- -------- --------
Net loss .......................... (476) (1,605) (2,081) (393) (1,368) (1,761)
Loss on disposition of discontinued
operations ............................... (376) -- (376) (306) -- (306)
-------- -------- -------- -------- -------- --------
Loss before income taxes .......... (852) (1,605) (2,457) (699) (1,368) (2,067)
Income tax benefit ......................... 313 608 921 252 523 775
-------- -------- -------- -------- -------- --------
Discontinued operations, net of tax $ (539) $ (997) $ (1,536) $ (447) $ (845) $ (1,292)
======== ======== ======== ======== ======== ========
10
For the Six Months For the Six Months
Ended June 30, 2005 Ended June 30, 2004
--------------------------------- ---------------------------------
Pending Pending
(Dollars in thousands) Sold Disposition Total Sold*** Disposition** Total
-------- ----------- --------- -------- ------------- ---------
Franchises ................................. 4 5 9 18 5 23
======== ======== ======== ======== ======== ========
Revenues ................................... $ 8,884 $ 66,906 $ 75,790 $ 99,166 $ 74,801 $173,967
Cost of sales .............................. 7,560 57,453 65,013 84,068 65,074 149,142
-------- -------- -------- -------- -------- --------
Gross profit ...................... 1,324 9,453 10,777 15,098 9,727 24,825
Operating expenses ......................... 2,044 11,108 13,152 15,120 10,810 25,930
-------- -------- -------- -------- -------- --------
Loss from operations .............. (720) (1,655) (2,375) (22) (1,083) (1,105)
Other expense, net ......................... (211) (1,155) (1,366) (711) (564) (1,275)
-------- -------- -------- -------- -------- --------
Net loss .......................... (931) (2,810) (3,741) (733) (1,647) (2,380)
Gain (loss) on disposition of discontinued
operations ............................ 10 -- 10 (474) -- (474)
-------- -------- -------- -------- -------- --------
Loss before income taxes .......... (921) (2,810) (3,731) (1,207) (1,647) (2,854)
Income tax benefit ......................... 336 1,063 1,399 433 637 1,070
-------- -------- -------- -------- -------- --------
Discontinued operations, net of tax $ (585) $ (1,747) $ (2,332) $ (774) $ (1,010) $ (1,784)
======== ======== ======== ======== ======== ========
* Businesses were sold between April 1, 2004 and June 30, 2005
** Businesses pending disposition as of June 30, 2005
*** Businesses were sold between January 1, 2004 and June 30, 2005
11. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the
weighted average common shares outstanding during the periods presented. Diluted
earnings per share is computed by dividing net income by the weighted average
common shares and common share equivalents outstanding during the periods
presented.
The following table sets forth the computation of basic and diluted
earnings per share:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------------- ---------------------
(In thousands, except per share data) 2005 2004 2005 2004
-------- -------- -------- --------
Net income:
Continuing operations ................................. $ 17,522 $ 16,040 $ 27,959 $ 26,896
Discontinued operations ............................... (1,536) (1,292) (2,332) (1,784)
-------- -------- -------- --------
Net income ..................................... $ 15,986 $ 14,748 $ 25,627 $ 25,112
======== ======== ======== ========
Earnings per share - basic and diluted:
Continuing operations - basic ......................... $ 0.54 $ 0.49 $ 0.86 $ 0.83
Discontinued operations - basic ....................... (0.05) (0.04) (0.07) (0.06)
-------- -------- -------- --------
Net income ..................................... $ 0.49 $ 0.45 $ 0.79 $ 0.77
======== ======== ======== ========
Continuing operations - diluted ....................... $ 0.54 $ 0.49 $ 0.85 $ 0.82
Discontinued operations - diluted ..................... (0.05) (0.04) (0.07) (0.05)
-------- -------- -------- --------
Net income ..................................... $ 0.49 $ 0.45 $ 0.78 $ 0.77
======== ======== ======== ========
Common shares and common share equivalents:
Weighted average common shares outstanding - basic .... 32,604 32,470 32,596 32,452
Common share equivalents (stock options) .............. 121 186 157 236
-------- -------- -------- --------
Weighted average common shares outstanding - diluted .. 32,725 32,656 32,753 32,688
======== ======== ======== ========
11
12. SUPPLEMENTAL CASH FLOW INFORMATION
During the six months ended June 30, 2005 and 2004, we made interest
payments, net of amounts capitalized, totaling $36.3 million and $29.8 million,
respectively. During the six months ended June 30, 2005 and 2004, we received
$2.5 million and $1.5 million, respectively, of proceeds associated with our
interest rate swap agreement that was entered into in December 2003 in
connection with the issuance of our 8% Senior Subordinated Notes due 2014.
During the six months ended June 30, 2005 and 2004, we made income tax
payments totaling $8.2 million and $9.3 million, respectively.
During the six months ended June 30, 2005, we completed two
sale-leaseback transactions, which resulted in the sale of approximately $15.7
million of Assets Held for Sale and the removal of $15.7 million of Liabilities
Associated with Assets Held for Sale from our Consolidated Balance Sheets.
13. COMMITMENTS AND CONTINGENCIES
A significant portion of our vehicle business involves the sale of
vehicles, parts or vehicles composed of parts that are manufactured outside the
United States of America. As a result, our operations are subject to customary
risks of importing merchandise, including fluctuations in the relative values of
currencies, import duties, exchange controls, trade restrictions, work stoppages
and general political and socio-economic conditions in foreign countries. The
United States of America or the countries from which our products are imported
may, from time to time, impose new quotas, duties, tariffs or other
restrictions, or adjust presently prevailing quotas, duties or tariffs, which
may affect our operations and our ability to purchase imported vehicles and/or
parts at reasonable prices.
Manufacturers may direct us to implement costly capital improvements to
dealerships as a condition upon entering into franchise agreements with them.
Manufacturers also typically require that their franchises meet specific
standards of appearance. These factors, either alone or in combination, could
cause us to divert our financial resources to capital projects from uses that
management believes may be of higher long-term value, such as acquisitions.
Substantially all of our facilities are subject to federal, state and local
provisions regarding the discharge of materials into the environment. Compliance
with these provisions has not had, nor do we expect such compliance to have, any
material effect upon our capital expenditures, net earnings, financial
condition, liquidity or competitive position. We believe that our current
practices and procedures for the control and disposition of such materials
comply with applicable federal, state and local requirements.
From time to time, we and our dealerships are named in claims involving the
manufacture and sale or lease of motor vehicles, including but not limited to
the charging of administrative fees, the operation of dealerships, contractual
disputes and other matters arising in the ordinary course of our business. With
respect to certain of these claims, the sellers of our acquired dealerships have
indemnified us. We do not expect that any potential liability from these claims
will materially affect our financial condition, liquidity, results of operations
or financial statement disclosures.
Our dealerships hold dealer agreements with a number of vehicle
manufacturers. In accordance with the individual dealer agreements, each
dealership is subject to certain rights and restrictions typical of the
industry. The ability of the manufacturers to influence the operations of the
dealerships or the loss of a dealer agreement could have a negative impact on
our operating results.
We have guaranteed a loan made by a financial institution directly to a
non-consolidated entity controlled by a former executive, which totaled
approximately $2.1 million as of June 30, 2005. This loan was made by a
corporation we acquired in October 1998, and guarantees an industrial revenue
bond, which we are legally required to guarantee. The primary obligor of the
note is a non-dealership business entity and that entity's partners as
individuals.
14. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Our 8% Senior Subordinated Notes due 2014 are guaranteed by all of our
current subsidiaries, other than our current Toyota and Lexus dealership
subsidiaries, and all of our future domestic restricted subsidiaries, other than
our future Toyota and Lexus dealership facilities. The following tables set
forth, on a condensed consolidating basis, our balance sheets, statements of
income and statements of cash flows, for our guarantor and non-guarantor
subsidiaries for all financial statement periods presented in our interim
consolidated financial statements.
12
Condensed Consolidating Balance Sheet
As of June 30, 2005
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents .............. $ -- $ 11,049 $ -- $ -- $ 11,049
Inventories ............................ -- 668,522 53,638 -- 722,160
Other current assets ................... -- 282,270 56,246 -- 338,516
Assets held for sale ................... -- 44,660 -- -- 44,660
-------- ---------- -------- --------- ----------
Total current assets .............. -- 1,006,501 109,884 -- 1,116,385
Property and equipment, net ............... -- 200,708 5,274 -- 205,982
Goodwill .................................. -- 403,635 61,312 -- 464,947
Other assets .............................. -- 98,140 3,045 -- 101,185
Investment in subsidiaries ................ 504,456 132,159 -- (636,615) --
-------- ---------- -------- --------- ----------
Total assets ...................... $504,456 $1,841,143 $179,515 $(636,615) $1,888,499
======== ========== ======== ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Floor plan notes payable ............... $ -- $ 570,793 $ 42,344 $ -- $ 613,137
Other current liabilities .............. -- 184,540 4,038 -- 188,578
Liabilities associated with assets held
for sale ............................. -- 27,618 -- -- 27,618
-------- ---------- -------- --------- ----------
Total current liabilities ......... -- 782,951 46,382 -- 829,333
Long-term debt ............................ -- 476,377 31 -- 476,408
Other liabilities ......................... -- 77,359 943 -- 78,302
Shareholders' equity ...................... 504,456 504,456 132,159 (636,615) 504,456
-------- ---------- -------- --------- ----------
Total liabilities and shareholders'
equity .......................... $504,456 $1,841,143 $179,515 $(636,615) $1,888,499
======== ========== ======== ========= ==========
13
Condensed Consolidating Balance Sheet
As of December 31, 2004
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents .............. $ -- $ 28,093 $ -- $ -- $ 28,093
Inventories ............................ -- 713,205 48,352 -- 761,557
Other current assets ................... -- 286,675 40,933 -- 327,608
Assets held for sale ................... -- 26,248 -- -- 26,248
-------- ---------- -------- --------- ----------
Total current assets .............. -- 1,054,221 89,285 -- 1,143,506
Property and equipment, net ............... -- 190,706 5,082 -- 195,788
Goodwill .................................. -- 400,338 61,312 -- 461,650
Other assets .............................. -- 78,935 18,080 -- 97,015
Investment in subsidiaries ................ 481,732 130,098 -- (611,830) --
-------- ---------- -------- --------- ----------
Total assets ...................... $481,732 $1,854,298 $173,759 $(611,830) $1,897,959
======== ========== ======== ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Floor plan notes payable ............... $ -- $ 613,539 $ 37,409 $ -- $ 650,948
Other current liabilities .............. -- 170,227 5,797 -- 176,024
Liabilities associated with assets held
for sale ............................. -- 20,538 -- -- 20,538
-------- ---------- -------- --------- ----------
Total current liabilities ......... -- 804,304 43,206 -- 847,510
Long-term debt ............................ -- 492,499 37 -- 492,536
Other liabilities ......................... -- 75,763 418 -- 76,181
Shareholders' equity ...................... 481,732 481,732 130,098 (611,830) 481,732
-------- ---------- -------- --------- ----------
Total liabilities and shareholders'
equity .......................... $481,732 $1,854,298 $173,759 $(611,830) $1,897,959
======== ========== ======== ========= ==========
14
Condensed Consolidating Statement of Income
For the Three Months Ended June 30, 2005
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------- ------------ ------------
Revenues ................................ $ -- $1,284,148 $195,781 $ (3,070) $1,476,859
Cost of sales ........................... -- 1,090,200 168,354 (3,070) 1,255,484
-------- ---------- -------- --------- ----------
Gross profit .................... -- 193,948 27,427 -- 221,375
Operating expenses:
Selling, general and administrative .. -- 150,436 20,115 -- 170,551
Depreciation and amortization ........ -- 4,636 466 -- 5,102
-------- ---------- -------- --------- ----------
Income from operations .......... -- 38,876 6,846 -- 45,722
Other income (expense):
Floor plan interest expense .......... -- (7,477) (500) -- (7,977)
Other interest expense ............... -- (8,682) (1,449) -- (10,131)
Other income, net .................... -- 413 8 -- 421
Equity in earnings of subsidiaries ... 15,986 3,065 -- (19,051) --
-------- ---------- -------- --------- ----------
Total other income (expense), net 15,986 (12,681) (1,941) (19,051) (17,687)
-------- ---------- -------- --------- ----------
Income before income taxes ...... 15,986 26,195 4,905 (19,051) 28,035
Income tax expense ...................... -- 8,673 1,840 -- 10,513
-------- ---------- -------- --------- ----------
Income from continuing operations ....... 15,986 17,522 3,065 (19,051) 17,522
Discontinued operations, net of tax ..... -- (1,536) -- -- (1,536)
-------- ---------- -------- --------- ----------
Net income ...................... $ 15,986 $ 15,986 $ 3,065 $(19,051) $ 15,986
======== ========== ======== ========= ==========
15
Condensed Consolidating Statement of Income
For the Three Months Ended June 30, 2004
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------- ------------ ------------
Revenues ................................ $ -- $1,145,371 $173,196 $ (4,324) $1,314,243
Cost of sales ........................... -- 966,546 150,416 (4,324) 1,112,638
-------- ---------- -------- --------- ----------
Gross profit .................... -- 178,825 22,780 -- 201,605
Operating expenses:
Selling, general and administrative .. -- 138,462 17,870 -- 156,332
Depreciation and amortization ........ -- 4,658 426 -- 5,084
-------- ---------- -------- --------- ----------
Income from operations .......... -- 35,705 4,484 -- 40,189
Other income (expense):
Floor plan interest expense .......... -- (4,510) (373) -- (4,883)
Other interest expense ............... -- (9,005) (1,181) -- (10,186)
Other income, net .................... -- 225 36 -- 261
Equity in earnings of subsidiaries ... 14,748 1,854 -- (16,602) --
-------- ---------- -------- --------- ----------
Total other income (expense), net 14,748 (11,436) (1,518) (16,602) (14,808)
-------- ---------- -------- --------- ----------
Income before income taxes ...... 14,748 24,269 2,966 (16,602) 25,381
Income tax expense ...................... -- 8,229 1,112 -- 9,341
-------- ---------- -------- --------- ----------
Income from continuing operations ....... 14,748 16,040 1,854 (16,602) 16,040
Discontinued operations, net of tax ..... -- (1,292) -- -- (1,292)
-------- ---------- -------- --------- ----------
Net income ...................... $ 14,748 $ 14,748 $ 1,854 $(16,602) $ 14,748
======== ========== ======== ========= ==========
16
Condensed Consolidating Statement of Income
For the Six Months Ended June 30, 2005
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------- ------------ ------------
Revenues ................................ $ -- $2,433,434 $368,797 $ (6,216) $2,796,015
Cost of sales ........................... -- 2,058,827 316,332 (6,216) 2,368,943
-------- ---------- -------- --------- ----------
Gross profit .................... -- 374,607 52,465 -- 427,072
Operating expenses:
Selling, general and administrative .. -- 299,233 39,125 -- 338,358
Depreciation and amortization ........ -- 9,142 895 -- 10,037
-------- ---------- -------- --------- ----------
Income from operations .......... -- 66,232 12,445 -- 78,677
Other income (expense):
Floor plan interest expense .......... -- (14,055) (918) -- (14,973)
Other interest expense ............... -- (16,861) (2,758) -- (19,619)
Other income, net .................... -- 628 21 -- 649
Equity in earnings of subsidiaries ... 25,627 5,493 -- (31,120) --
-------- ---------- -------- --------- ----------
Total other income (expense), net 25,627 (24,795) (3,655) (31,120) (33,943)
-------- ---------- -------- --------- ----------
Income before income taxes ...... 25,627 41,437 8,790 (31,120) 44,734
Income tax expense ...................... -- 13,478 3,297 -- 16,775
-------- ---------- -------- --------- ----------
Income from continuing operations ....... 25,627 27,959 5,493 (31,120) 27,959
Discontinued operations, net of tax ..... -- (2,332) -- -- (2,332)
-------- ---------- -------- --------- ----------
Net income ...................... $ 25,627 $ 25,627 $ 5,493 $ (31,120) $ 25,627
======== ========== ======== ========= ==========
17
Condensed Consolidating Statement of Income
For the Six Months Ended June 30, 2004
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------- ------------ ------------
Revenues ................................ $ -- $2,129,007 $340,407 $ (7,759) $2,461,655
Cost of sales ........................... -- 1,792,859 293,851 (7,759) 2,078,951
-------- ---------- -------- --------- ----------
Gross profit .................... -- 336,148 46,556 -- 382,704
Operating expenses:
Selling, general and administrative .. -- 265,860 34,834 -- 300,694
Depreciation and amortization ........ -- 9,122 825 -- 9,947
-------- ---------- -------- --------- ----------
Income from operations .......... -- 61,166 10,897 -- 72,063
Other income (expense):
Floor plan interest expense .......... -- (8,417) (711) -- (9,128)
Other interest expense ............... -- (18,258) (2,248) -- (20,506)
Other income, net .................... -- 294 28 -- 322
Equity in earnings of subsidiaries ... 25,112 4,979 -- (30,091) --
-------- ---------- -------- --------- ----------
Total other income (expense), net 25,112 (21,402) (2,931) (30,091) (29,312)
-------- ---------- -------- --------- ----------
Income before income taxes ...... 25,112 39,764 7,966 (30,091) 42,751
Income tax expense ...................... -- 12,868 2,987 -- 15,855
-------- ---------- -------- --------- ----------
Income from continuing operations ....... 25,112 26,896 4,979 (30,091) 26,896
Discontinued operations, net of tax ..... -- (1,784) -- -- (1,784)
-------- ---------- -------- --------- ----------
Net income ...................... $ 25,112 $ 25,112 $ 4,979 $ (30,091) $ 25,112
======== ========== ======== ========= ==========
18
Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 2005
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------- ------------ ------------
Net cash provided by (used in) operating
activities ............................... $ -- $ 47,723 $ (4,329) $ -- $ 43,394
Cash flow from investing activities:
Capital expenditures ..................... -- (34,707) (471) -- (35,178)
Acquisitions ............................. -- (4,692) -- -- (4,692)
Other investing activities ............... -- 5,217 1 -- 5,218
-------- -------- -------- -------- --------
Net cash used in investing activities -- (34,182) (470) -- (34,652)
Cash flow from financing activities:
Proceeds from borrowings ................. -- 20,734 -- -- 20,734
Repayments of debt ....................... -- (41,983) (6) -- (41,989)
Intercompany financing ................... -- (4,805) 4,805 -- --
Other financing activities ............... -- (4,531) -- -- (4,531)
-------- -------- -------- -------- --------
Net cash (used in) provided by
financing activities .............. -- (30,585) 4,799 -- (25,786)
-------- -------- -------- -------- --------
Net decrease in cash and cash
equivalents ....................... -- (17,044) -- -- (17,044)
Cash and cash equivalents, beginning of
period ................................... -- 28,093 -- -- 28,093
-------- -------- -------- -------- --------
Cash and cash equivalents, end of period .... $ -- $ 11,049 $ -- $ -- $ 11,049
======== ======== ======== ======== ========
19
Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 2004
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------- ------------ ------------
Net cash used in operating activities ....... $ -- $(15,752) $ 20,403 $ -- $ 4,651
Cash flow from investing activities: --
Capital expenditures ..................... -- (32,771) (1,750) -- (34,521)
Payments for acquisitions ................ -- (71,594) -- -- (71,594)
Other investing activities ............... -- 11,738 -- -- 11,738
-------- -------- -------- -------- --------
Net cash used in investing activities -- (92,627) (1,750) -- (94,377)
Cash flow from financing activities:
Proceeds from borrowings ................. -- 3,850 -- -- 3,850
Repayments of debt ....................... -- (6,808) (5) -- (6,813)
Intercompany financing ................... -- 26,432 (26,432) -- --
Other financing activities ............... -- 857 -- -- 857
-------- -------- -------- -------- --------
Net cash (used in) financing
activities ........................ -- 24,331 (26,437) -- (2,106)
-------- -------- -------- -------- --------
Net decrease in cash and cash
equivalents ....................... -- (84,048) (7,784) -- (91,832)
Cash and cash equivalents, beginning of
period ................................... -- 98,927 7,784 -- 106,711
-------- -------- -------- -------- --------
Cash and cash equivalents, end of period .... $ -- $ 14,879 $ -- $ -- $ 14,879
======== ======== ======== ======== ========
20
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Asbury Automotive Group, Inc.:
We have reviewed the accompanying consolidated balance sheet of Asbury
Automotive Group, Inc. and subsidiaries (the "Company") as of June 30, 2005,
and the related consolidated statements of income for the three and six-month
periods ended June 30, 2005 and 2004, and statements of cash flows for the
six-month periods ended June 30, 2005 and 2004. These interim financial
statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards of the Public Company
Accounting Oversight Board (United States). 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 the
standards of the Public Company Accounting Oversight Board (United States), 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 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 standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
the Company as of December 31, 2004, 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 14, 2005 we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of December 31, 2004 is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/s/ DELOITTE & TOUCHE LLP
- ------------------------------------
New York, New York
August 4, 2005
21
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
We are one of the largest automotive retailers in the United States,
operating 94 dealership locations (129 franchises) in 23 metropolitan markets
within 11 states as of June 30, 2005. We offer 33 different brands of new
vehicles, including four heavy truck brands. We also operate 22 collision repair
centers that serve our markets.
We have grown our business through the acquisition of large dealership
groups formerly referred to as "platforms" and numerous "tuck-in" acquisitions.
"Tuck-in" acquisitions refer to the purchase of dealerships in the market areas
in which we have existing dealerships. We use "tuck-in" acquisitions to increase
the number of vehicle brands we offer in a particular market area and to create
a larger gross profit base over which to spread overhead costs.
During the first quarter of 2005, we reorganized our dealerships into
principally four regions: (i) Florida (comprising our Coggin dealerships,
operating primarily in Jacksonville and Orlando, and our Courtesy dealerships
operating in Tampa), (ii) West (comprising our McDavid dealerships operating
throughout Texas, our Thomason dealerships operating in Portland, Oregon, our
Spirit dealerships operating primarily in Los Angeles, California and our
Northern California Dealerships operating in Sacramento and Fresno, California),
(iii) Mid-Atlantic (comprising our Crown dealerships operating in North
Carolina, South Carolina and Southern Virginia) and (iv) South (comprising our
Nalley dealerships operating in Atlanta, Georgia and our North Point dealerships
operating in Little Rock, Arkansas). Our Plaza dealerships operating in St.
Louis, Missouri and our Gray Daniels dealerships operating in Jackson,
Mississippi remain standalone operations. Within this more streamlined
structure, we will evaluate our operations and financial results by dealership
in the aggregate, rather than by platform. The general managers, with direction
from a centralized management team, including corporate and regional management,
will continue to have the independence and flexibility to respond effectively to
local market conditions. We expect a significant improvement in management
effectiveness as a result of this reorganization, as well as added operating and
cost efficiencies. During the six months ended June 30, 2005, we incurred $3.6
million in severance and other costs related to our regional reorganization. We
expect to complete the final phases of our reorganization during the remainder
of 2005. Currently, we estimate that the regional reorganization will have a
negative impact on income from continuing operations of $0.03 per diluted share
during 2005 and will improve income from continuing operations by approximately
$3.0 million or $0.10 per diluted share each year beginning in 2006.
Our revenues are derived primarily from four offerings: (i) the sale
of new vehicles to individual retail customers ("new retail") and the sale of
new vehicles to commercial customers ("fleet") (the terms "new retail" and
"fleet" being collectively referred to as "new"); (ii) the sale of used vehicles
to individual retail customers ("used retail") and the sale of used vehicles to
other dealers at auction ("wholesale") (the terms "used retail" and "wholesale"
being collectively referred to as "used"); (iii) maintenance and collision
repair services and the sale of automotive parts (collectively referred to as
"fixed operations"); and (iv) the arrangement of vehicle financing and the sale
of various insurance and warranty products (collectively referred to as "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
aggregate gross profit, and F&I based on gross profit PVR. We assess the organic
growth of our revenue and gross profit by comparing the year-to-year results of
stores that we have operated for at least twelve months ("same store").
Our gross profit percentage varies with our revenue mix. The sale of
vehicles generally results in lower gross profit percentages than our fixed
operations. As a result, when fixed operations revenue increases as a percentage
of total revenue, we expect our overall gross profit percentage to increase.
Selling, general and administrative ("SG&A") expenses consist
primarily of fixed and incentive-based compensation, advertising, rent,
insurance, utilities and other customary 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 SG&A expenses in the aggregate as a percentage of total gross
profit.
Sales of 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 will be
mitigated by increased used vehicle sales, stability in our fixed operations,
our variable cost structure, our regional diversity and our advantageous brand
mix. Historically, our brand mix, which is weighted towards luxury and mid-line
import brands, has been less affected by market volatility than the U.S.
automobile retailing industry as a whole. We expect the recent industry-wide
gain in market share of the luxury and mid-line import brands to continue in the
near future.
Our operations are generally subject to modest seasonal variations as
we tend to generate more revenue and operating income in the second and third
quarters than in the first and fourth quarters of a calendar year. Historically,
the seasonal variations in our operations have been caused by factors relating
to weather conditions, model changeovers and consumer buying patterns, among
other things. Over the past several years, certain automobile manufacturers have
used a combination of vehicle pricing and financing incentive programs to
22
generate increased customer demand for new vehicles. In addition to the
traditional manufacturer incentive programs, domestic manufacturers have begun
to offer customers "employee discount pricing". The extensive use of
manufacturer incentive programs and pricing promotions has impacted the
historical cyclicality of new vehicle sales in the United States as customers
have been conditioned to postpone the purchase of a vehicle until a manufacturer
program or promotion is available.
The manufacturer incentive programs on new vehicles have also served
to increase competition with late-model used vehicles. We anticipate that the
manufacturers will continue to use these incentive programs in the future and,
as a result, we will continue to monitor and adjust our used vehicle inventory
mix in response to these programs. In addition, we will continue to expand our
service capacity in order to meet anticipated future demand as we expect the
relatively high volume of new vehicle sales, resulting from the highly
"incentivized" new vehicle market, will drive future service demand at our
dealership locations.
Interest rates over the past several years have been at historic lows.
We do not believe that changes in interest rates significantly impact customer
overall 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 7.0% over 60 months increases by approximately $5.90 with each 0.5%
increase in interest rates.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2005, Compared to Three Months Ended June 30, 2004
Net income increased $1.3 million to $16.0 million, or $0.49 per
diluted share, for the three months ended June 30, 2005, from $14.7 million, or
$0.45 per diluted share, for the three months ended June 30, 2004.
Income from continuing operations increased $1.5 million to $17.5
million, or $0.54 per diluted share, for the three months ended June 30, 2005,
from $16.0 million, or $0.49 per diluted share, for the three months ended June
30, 2004.
The 8% increase in net income and 9% increase in income from continuing
operations resulted from several factors, including: (i) increases in new and
used vehicle sales volumes, (ii) an improvement in the average gross profit of
used vehicles, (iii) substantial increases in our fixed operations gross profit,
(iv) significant increases in same store F&I revenue resulting from a
combination of an increase in platform F&I PVR and an increase in new and used
retail vehicle sales and (v) a significant improvement in our wholesale
business. These factors were partially offset by the following: (i) margin
pressure on new vehicle retail sales and (ii) increased floor plan expense due
to rising interest rates.
Revenues-
For the Three Months
Ended June 30,
----------------------- Increase %
(Dollars in thousands) 2005 2004 (Decrease) Change
---------- ---------- ---------- ------
New vehicle data:
Retail revenues-same store (1) ..................... $ 848,376 $ 798,482 $ 49,894 6%
Retail revenues-acquisitions ....................... 30,826 --
---------- ----------
Total new retail revenues ..................... 879,202 798,482 80,720 10%
Fleet revenues-same store (1) ...................... 23,346 15,945 7,401 46%
Fleet revenues-acquisitions ........................ 1,219 --
---------- ----------
Total fleet revenues .......................... 24,565 15,945 8,620 54%
---------- ----------
New vehicle revenue, as reported .............. $ 903,767 $ 814,427 $ 89,340 11%
========== ==========
New retail units-same store (1) .................... 27,866 27,114 752 3%
========== ==========
New retail units-actual ............................ 29,094 27,114 1,980 7%
========== ==========
23
For the Three Months
Ended June 30,
----------------------- Increase %
(Dollars in thousands) 2005 2004 (Decrease) Change
---------- ---------- ---------- ------
Used vehicle data:
Retail revenues-same store (1) ..................... $ 272,140 $ 234,321 $ 37,819 16%
Retail revenues-acquisitions ....................... 7,311 --
---------- ----------
Total used retail revenues .................... 279,451 234,321 45,130 19%
Wholesale revenues-same store (1) .................. 84,552 81,957 2,595 3%
Wholesale revenues-acquisitions .................... 2,914 --
---------- ----------
Total wholesale revenues ...................... 87,466 81,957 5,509 7%
---------- ----------
Used vehicle revenue, as reported ............. $ 366,917 $ 316,278 $ 50,639 16%
========== ==========
Used retail units-same store (1) ................... 16,005 15,072 933 6%
========== ==========
Used retail units-actual ........................... 16,520 15,072 1,448 10%
========== ==========
Parts, service and collision repair:
Revenues-same store (1) ............................ $ 162,302 $ 146,085 $ 16,217 11%
Revenues-acquisitions .............................. 2,227 --
---------- ----------
Parts, service and collision repair
revenue, as reported ........................ $ 164,529 $ 146,085 $ 18,444 13%
========== ==========
Finance and insurance, net:
Platform revenues-same store (1) ................... $ 38,715 $ 35,547 $ 3,168 9%
Platform revenues-acquisitions ..................... 1,564 --
---------- ----------
Platform finance and insurance revenue ........ 40,279 35,547 4,732 13%
Corporate revenues ................................. 1,367 1,906
---------- ----------
Finance and insurance revenue, as reported .... $ 41,646 $ 37,543 $ 4,193 11%
========== ==========
Total revenue:
Same store (1) ..................................... $1,429,431 $1,312,337 $117,094 9%
Corporate .......................................... 1,367 1,906
Acquisitions ....................................... 46,061 --
---------- ----------
Total revenue, as reported .................... $1,476,859 $1,314,243 $162,616 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 the dealership was owned by us.
Total revenues increased 12% to $1.5 billion for the three months ended
June 30, 2005, from $1.3 billion for the three months ended June 30, 2004. Same
store revenues increased 9% to $1.4 billion for the three months ended June 30,
2005, from $1.3 billion for the three months ended June 30, 2004.
Same store new retail revenue increased 6% for the three months ended
June 30, 2005, compared to the prior year period, reflecting a 3% increase in
new retail unit sales due to the "employee pricing programs" and an increase in
the percentage of luxury and mid-line import sales, which on average have a
higher selling price. Same store used vehicle retail revenue increased 16% to
$272.1 million, compared to $234.3 million for the prior year period. Our
same-store used retail unit sales increased 6% due to the strength of the used
vehicle market during the quarter. We anticipate that the manufacturer
incentives on new vehicles will continue to drive customers toward new vehicles
during 2005, which may create a challenging used vehicle retail market in the
near future. However, we do believe that opportunities to increase unit sales
exist in the used vehicle retail market, especially with respect to customers
interested in lower priced inventory, which we view as a separate market from
higher priced used and new vehicle inventory.
Fixed operations revenue increased 13%, to $164.5 million for the three
months ended June 30, 2005, from $146.1 million for the three months ended June
30, 2004. Same store fixed operations revenue increased 11%, for the three
months ended June 30, 2005, compared to the three months ended June 30, 2004,
where we had substantial growth across each line of our fixed business (9%
increase in parts, 16% increase in service and 7% increase in collision repair)
24
driven by "customer pay" and warranty work. The growth in our "customer pay"
business is a result of (i) our continued service adviser training, (ii)
expansion of our product offerings and (iii) the implementation of more
aggressive advertising campaigns. Our warranty business continued its positive
performance driven by continued manufacturer recall programs and increased work
on imported vehicles, which typically generates higher revenue due to customer
retention. We expect fixed operations to continue to grow as we expand our
service capacity in 2005 with the addition of approximately 100 service stalls,
the hiring of 200 to 250 technicians and a focused effort on more rigorous and
consistent training of our service advisors.
Platform F&I revenue increased 9% to $38.7 million on a same store
basis for the three months ended June 30, 2005, compared to the three months
ended June 30, 2004. The increase in Platform F&I is attributable to (i)
increased service contract penetration, (ii) utilization of menus in the F&I
sales process and (iii) maturation of our corporate-sponsored programs. Platform
F&I excludes revenue resulting from contracts negotiated by our corporate
office, which is attributable to retail units sold during prior periods.
Corporate F&I revenue was $1.4 million for the three month periods ended June
30, 2005, compared to $1.9 million for the prior year period. We expect this
revenue to decrease significantly over the next few years and ultimately be zero
by 2008 as the portfolio runs off.
We expect total revenue to increase as we continue to acquire
dealerships, expand our service capacity and improve our platform F&I PVR.
However, future revenue growth will rely heavily on our performance in the
vehicle retail business, in particular our ability to maintain or improve upon
our sales volumes of new and used vehicles.
Gross Profit-
For the Three Months
Ended June 30,
----------------------- Increase %
(Dollars in thousands, except for per vehicle data) 2005 2004 (Decrease) Change
---------- ---------- ---------- ------
New vehicle data:
Retail gross profit-same store (1) ................. $ 59,975 $ 58,397 $ 1,578 3%
Retail gross profit-acquisitions ................... 1,928 --
---------- ----------
Total new retail gross profit ................. 61,903 58,397 3,506 6%
Fleet gross profit-same store (1) .................. 808 649 159 24%
Fleet gross profit-acquisitions .................... (9) --
---------- ----------
Total fleet gross profit ...................... 799 649 150 23%
---------- ----------
New vehicle gross profit, as reported ......... $ 62,702 $ 59,046 $ 3,656 6%
========== ==========
New retail units-same store (1) .................... 27,866 27,114 752 3%
========== ==========
New retail units-actual ............................ 29,094 27,114 1,980 7%
========== ==========
Used vehicle data:
Retail gross profit-same store (1) ................. $ 30,763 $ 28,050 $ 2,713 10%
Retail gross profit-acquisitions ................... 724 --
---------- ----------
Total used retail gross profit ................ 31,487 28,050 3,437 12%
Wholesale gross profit-same store (1) .............. 52 (805) 857 106%
Wholesale gross profit-acquisitions ................ (25) --
---------- ----------
Total wholesale gross profit .................. 27 (805) 832 103%
---------- ----------
Used vehicle gross profit, as reported ........ $ 31,514 $ 27,245 $ 4,269 16%
========== ==========
Used retail units-same store (1) ................... 16,005 15,072 933 6%
========== ==========
Used retail units-actual ........................... 16,520 15,072 1,448 10%
========== ==========
Parts, service and collision repair:
Gross profit-same store (1) ........................ $ 84,015 $ 77,861 $ 6,154 8%
Gross profit-acquisitions .......................... 1,498 --
---------- ----------
Parts, service and collision repair gross
profit, as reported ......................... $ 85,513 $ 77,861 $ 7,652 10%
========== ==========
25
For the Three Months
Ended June 30,
----------------------- Increase %
(Dollars in thousands, except for per vehicle data) 2005 2004 (Decrease) Change
---------- ---------- ---------- ------
Finance and insurance, net:
Platform gross profit-same store (1) ............... $ 38,715 $ 35,547 $ 3,168 9%
Platform gross profit-acquisitions ................. 1,564 --
---------- ----------
Platform finance and insurance gross profit (2) 40,279 35,547 4,732 13%
Gross profit-corporate ............................. 1,367 1,906
---------- ----------
Finance and insurance gross profit, as reported $ 41,646 $ 37,453 $ 4,193 11%
========== ==========
Platform gross profit PVR-same store (1) ........... $ 882 $ 843 $ 39 5%
========== ==========
Platform gross profit PVR-actual (2) ............... $ 883 $ 843 $ 40 5%
========== ==========
Gross profit PVR-actual ............................ $ 913 $ 888 $ 25 3%
========== ==========
Total gross profit:
Same store (1) ..................................... $ 214,328 $ 199,699 $14,629 7%
Corporate .......................................... 1,367 1,906
Acquisitions ....................................... 5,680 --
---------- ----------
Total gross profit, as reported ............... $ 221,375 $ 201,605 $19,770 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 the dealership was owned by us.
(2) Refer to "Reconciliation of Non-GAAP Financial Information" for further
discussion regarding platform finance and insurance gross profit PVR.
Gross profit increased 10% to $221.4 million for the three months ended
June 30, 2005, from $201.6 million for the three months ended June 30, 2004.
Same store gross profit increased 7% to $214.3 million for the three months
ended June 30, 2005, compared to the three months ended June 30, 2004.
Same store gross profit on new retail vehicle sales increased $1.5
million to $60.0 million for the three months ended June 30, 2005, compared to
the three months ended June 30, 2004. The overall increase in same store gross
profit on new retail vehicle sales was directly attributable to a 3% increase in
unit sales. We expect that margins on new vehicles will continue to be under
pressure for the foreseeable future, as the automotive manufacturers continue
offer incentive programs and pricing promotions to contend with overcapacity in
their factories.
Same store gross profit on used vehicle retail sales increased $2.7
million to $30.8 million for the three months ended June 30, 2005, compared to
the three months ended June 30, 2004. Due to a strong market during the first
part of the quarter, we were able to increase average gross profit dollars
earned per vehicle retailed by 3% over the prior year period. In addition, the
strength of the used vehicle market enabled us to generate a modest profit in
our wholesale business, compared to a wholesale loss of $0.8 million for the
three months ended June 30, 2004.
Same store gross profit from fixed operations increased 8% to $84.0
million for the three months ended June 30, 2005, from $77.9 million for the
three months ended June 30, 2004, resulting primarily from "customer pay" and
warranty work.
Same-store platform F&I PVR revenue increased 5% to $882 for the three
months ended June 30, 2005, from $843 for the three months ended June 30, 2004.
The increase in F&I PVR is attributable to (i) increased service contract
penetration, (ii) utilization of menus in the F&I sales process and (iii)
maturation of our corporate-sponsored programs. We anticipate that the positive
trends in platform F&I PVR will continue in the future as we focus on improving
F&I PVR levels at our lowest performing stores and continue to add new products.
Selling, General and Administrative Expenses-
SG&A expenses increased $14.3 million to $170.6 million for the three
months ended June 30, 2005, from $156.3 million for the three months ended June
30, 2004. SG&A expenses as a percentage of gross profit for the three months
ended June 30, 2005, improved slightly to 77.0%, from 77.5% for the prior year
period. SG&A expenses for the three months ended June 30, 2005, includes
incremental rent of $2.3 million resulting from the refinancing of 20 of our
dealerships using a sale-leaseback transaction early in the third quarter of
26
2004. Excluding rent expense from both periods, SG&A expenses as a percentage of
gross profit decreased to 71.4% for the three months ended June 30, 2005,
compared to 73.2% for the three months ended June 30, 2004. The improvement in
SG&A expense as a percentage of gross profit, after adjusting for the
incremental rent expense, was attributable to the reorganization of the company
into regions largely completed during the first quarter of 2005, a strategic
reduction in new vehicle advertising and lower insurance costs principally in
the area of workman's compensation.
Although there are many variables which impact the ratio of SG&A
expenses as a percentage of gross profit, including the seasonality of the
automotive retail business, we believe our regional reorganization demonstrates
our commitment to reducing our fixed cost structure and, absent other factors,
will result in a decrease in SG&A expenses as a percentage of gross profit in
future periods. During the first six months of 2005 we incurred approximately
$3.6 million in severance and other costs related to our regional
reorganization. We expect to incur between $0.8 million and $1.0 million of
additional reorganization costs during the remainder of 2005. Currently, we
estimate that our regional reorganization will reduce SG&A expenses by
approximately $5.0 million annually, beginning in 2006.
Depreciation and Amortization-
Depreciation and amortization expense totaled $5.1 million for the
three months ended June 30, 2005 and 2004, as depreciation and amortization
expense related to property and equipment additions and dealership facilities
purchased during 2004, were offset by reductions in property and equipment sold
in a sale-leaseback transaction completed in the third quarter of 2004.
We expect depreciation and amortization expense to increase in the
future as we continue to upgrade our facilities, expand our service centers and
acquire additional dealerships.
Other Income (Expense)-
Floor plan interest expense increased $3.1 million to $8.0 million for
the three months ended June 30, 2005, from $4.9 million for the three months
ended June 30, 2004. The increase in floor plan interest expense over the prior
year period is principally attributable to higher interest rates. We expect
interest rates to continue to rise in the future.
Other interest expense decreased $0.1 million to $10.1 million for the
three months ended June 30, 2005, from $10.2 million for the three months ended
June 30, 2004. The decrease was principally attributable to the repayment of
$63.7 million of mortgage notes payable with the proceeds from a sale-leaseback
transaction in the third quarter of 2004 and the repayment of approximately
$29.0 million of variable rate mortgage notes payable during the six months
ended June 30, 2005. We expect that our outstanding debt balances will remain
relatively consistent for the near future, as we anticipate our next several
acquisitions will be funded with our available cash. Fluctuations in other
interest expense during the remainder of 2005 will be affected by potential
changes in interest rates on $236.2 million of variable rate debt.
Income Tax Expense-
Income tax expense increased $1.2 million to $10.5 million for the
three months ended June 30, 2005, from $9.3 million for the three months ended
June 30, 2004, due to a $2.7 million increase in income before income taxes for
the three months ended June 30, 2005, compared to the three months ended June
30, 2004. In addition, our effective tax rate for the six months ended June 30,
2005, was 37.5% compared to 36.8% for the six months ended June 30, 2004, as we
received a state tax benefit of $0.2 million during the second quarter of 2004,
which reduced our tax provision. As a result of operating nationally, our
effective tax rate is dependent upon our geographic revenue mix, and we evaluate
our effective tax rate periodically based on our revenue sources. We expect that
our annual effective tax rate will be approximately 37.5% for the year ending
December 31, 2005.
Discontinued Operations-
During the three months ended June 30, 2005, we sold one dealership
location (two franchises), and as of June 30, 2005, we were actively pursuing
the sale of three dealership locations (five franchises) and real estate
associated with one former dealership location. The $1.5 million loss from
discontinued operations is attributable to the net loss on the sale of
dealerships and real estate associated with one former dealership location
during the quarter and the operating losses of the franchises mentioned above.
The loss from discontinued operations for the three months ended June 30, 2004,
of $1.3 million included the results of operations of the dealerships mentioned
above; eleven dealership locations (fifteen franchises) that were sold or closed
between April 1, 2004 and March 31, 2005; and the net loss on the sale of
businesses during the three months ended June 30, 2004.
27
Six Months Ended June 30, 2005, Compared to Six Months Ended June 30, 2004
Net income increased $0.5 million to $25.6 million, or $0.78 per
diluted share, for the six months ended June 30, 2005, from $25.1 million, or
$0.77 per diluted share, for the six months ended June 30, 2004.
Income from continuing operations increased $1.1 million to $28.0
million, or $0.85 per diluted share, for the six months ended June 30, 2005,
from $26.9 million, or $0.82 per diluted share, for the six months ended June
30, 2004.
The 2% increase in net income and 4% increase in income from continuing
operations resulted from several factors, including: (i) increases in new and
used vehicle sales volumes, (ii) an improvement in the average gross profit of
used vehicles, (iii) substantial increases in our fixed operations gross profit,
(iv) significant increases in same store F&I revenue resulting from a
combination of an increase in platform F&I PVR and an increase in new and used
retail vehicle sales and (v) a significant improvement in our wholesale
business. These factors were partially offset by the following: (i) margin
pressure on new vehicle retail sales and (ii) increased floor plan expense due
to rising interest rates.
Revenues-
For the Six Months
Ended June 30,
----------------------- Increase %
(Dollars in thousands) 2005 2004 (Decrease) Change
---------- ---------- ---------- ------
New vehicle data:
Retail revenues-same store (1) ..................... $1,567,930 $1,467,999 $ 99,931 7%
Retail revenues-acquisitions ....................... 71,122 --
---------- ----------
Total new retail revenues ..................... 1,639,052 1,467,999 171,053 12%
Fleet revenues-same store (1) ...................... 48,418 26,019 22,399 86%
Fleet revenues-acquisitions ........................ 1,492 --
---------- ----------
Total fleet revenues .......................... 49,910 26,019 23,891 92%
---------- ----------
New vehicle revenue, as reported .............. $1,688,962 $1,494,018 $194,944 13%
========== ==========
New retail units-same store (1) .................... 51,264 49,692 1,572 3%
========== ==========
New retail units-actual ............................ 53,997 49,692 4,305 9%
========== ==========
Used vehicle data:
Retail revenues-same store (1) ..................... $ 514,403 $ 458,351 $ 56,052 12%
Retail revenues-acquisitions ....................... 17,528 --
---------- ----------
Total used retail revenues .................... 531,931 458,351 73,580 16%
Wholesale revenues-same store (1) .................. 165,545 156,979 8,566 5%
Wholesale revenues-acquisitions .................... 7,547 --
---------- ----------
Total wholesale revenues ...................... 173,092 156,979 16,113 10%
---------- ----------
Used vehicle revenue, as reported ............. $ 705,023 $ 615,330 $ 89,693 15%
========== ==========
Used retail units-same store (1) ................... 30,908 29,795 1,113 4%
========== ==========
Used retail units-actual ........................... 32,027 29,795 2,232 7%
========== ==========
Parts, service and collision repair:
Revenues-same store (1) ............................ $ 313,819 $ 283,933 $ 29,886 11%
Revenues-acquisitions .............................. 8,877 --
---------- ----------
Parts, service and collision repair revenue, as
reported .................................... $ 322,696 $ 283,933 $ 38,763 14%
========== ==========
28
For the Six Months
Ended June 30,
----------------------- Increase %
(Dollars in thousands) 2005 2004 (Decrease) Change
---------- ---------- ---------- ------
Finance and insurance, net:
Platform revenues-same store (1) ................... $ 73,487 $ 65,225 $ 8,262 13%
Platform revenues-acquisitions ..................... 3,277 --
---------- ----------
Platform finance and insurance revenue ........ 76,764 65,225 11,539 18%
Corporate revenues ................................. 2,570 3,149
---------- ----------
Finance and insurance revenue, as reported .... $ 79,334 $ 68,374 $ 10,960 16%
========== ==========
Total revenue:
Same store (1) ..................................... $2,683,602 $2,458,506 $225,096 9%
Corporate .......................................... 2,570 3,149
Acquisitions ....................................... 109,843 --
---------- ----------
Total revenue, as reported .................... $2,796,015 $2,461,655 $334,360 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 14% to $2.8 billion for the six months ended
June 30, 2005, from $2.5 billion for the six months ended June 30, 2004. Same
store revenue grew 9% to $2.7 billion for the six months ended June 30, 2005,
from $2.5 billion for the six months ended June 30, 2004.
Same store new vehicle retail revenue grew $99.9 million, or 7%, during
the first six months of 2005, compared to the first six months of 2004,
reflecting a 3% increase in new retail unit sales and an increase in our sales
mix toward luxury and mid-line import sales. Same store used vehicle retail
revenue increased $56.1 million, or 12%, to $514.4 million on a 4% increase in
unit sales and 8% increase in average selling price per vehicle retailed in the
first six months of 2005, compared to the same period of 2004.
Fixed operations revenue increased 14%, 11% on a same store basis, for
the six months ended June 30, 2005, compared to the six months ended June 30,
2004. Our warranty business continued its positive performance, driven by
continued manufacturer recall programs and increased work on import brands,
which typically generate higher revenues than domestic brands.
Platform F&I increased $8.3 million to $73.5 million on a same store
basis for the six months ended June 30, 2005, compared to the six months ended
June 30, 2004. Corporate F&I revenue was $2.6 million for the six month periods
ended June 30, 2005, compared to $3.1 million for the prior year period.
Gross Profit-
For the Six Months
Ended June 30,
----------------------- Increase %
(Dollars in thousands, except for per vehicle data) 2005 2004 (Decrease) Change
---------- ---------- ---------- ------
New vehicle data:
Retail gross profit-same store (1) ................. $ 111,467 $ 109,268 $ 2,199 2%
Retail gross profit-acquisitions ................... 4,868 --
---------- ----------
Total new retail gross profit ................. 116,335 109,268 7,067 6%
Fleet gross profit-same store (1) .................. 1,404 1,015 389 38%
Fleet gross profit-acquisitions .................... (4) --
---------- ----------
Total fleet gross profit ...................... 1,400 1,015 385 38%
---------- ----------
New vehicle gross profit, as reported ......... $ 117,735 $ 110,283 $ 7,452 7%
========== ==========
New retail units-same store (1) .................... 51,264 49,692 1,572 3%
========== ==========
New retail units-actual ............................ 53,997 49,692 4,305 9%
========== ==========
29
For the Six Months
Ended June 30,
----------------------- Increase %
(Dollars in thousands, except for per vehicle data) 2005 2004 (Decrease) Change
---------- ---------- ---------- ------
Used vehicle data:
Retail gross profit-same store (1) ................. $ 59,150 $ 55,179 $ 3,971 7%
Retail gross profit-acquisitions ................... 1,720 --
---------- ----------
Total used retail gross profit ................ 60,870 55,179 5,691 10%
Wholesale gross profit-same store (1) .............. 1,125 (893) 2,018 226%
Wholesale gross profit-acquisitions ................ 13 --
---------- ----------
Total wholesale gross profit .................. 1,138 (893) 2,031 227%
---------- ----------
Used vehicle gross profit, as reported ........ $ 62,008 $ 54,286 $ 7,722 14%
========== ==========
Used retail units-same store (1) ................... 30,908 29,795 1,113 4%
========== ==========
Used retail units-actual ........................... 32,027 29,795 2,232 7%
========== ==========
Parts, service and collision repair:
Gross profit-same store (1) ........................ $ 163,134 $ 149,761 $13,373 9%
Gross profit-acquisitions .......................... 4,861 --
---------- ----------
Parts, service and collision repair gross
profit, as reported ......................... $ 167,995 $ 149,761 $18,234 12%
========== ==========
Finance and insurance, net:
Platform gross profit-same store (1) ............... $ 73,487 $ 65,225 $ 8,262 13%
Platform gross profit-acquisitions ................. 3,277 --
---------- ----------
Platform finance and insurance gross profit (2) 76,764 65,225 11,539 18%
Gross profit-corporate ............................. 2,570 3,149
---------- ----------
Finance and insurance gross profit, as reported $ 79,334 $ 68,374 $10,960 16%
========== ==========
Platform gross profit PVR-same store (1) ........... $ 894 $ 821 $ 73 9%
========== ==========
Platform gross profit PVR-actual (2) ............... $ 892 $ 821 $ 71 9%
========== ==========
Gross profit PVR-actual ............................ $ 922 $ 860 $ 62 7%
========== ==========
Total gross profit:
Same store (1) ..................................... $ 409,767 $ 379,555 $30,212 8%
Corporate .......................................... 2,570 3,149
Acquisitions ....................................... 14,735 --
---------- ----------
Total gross profit, as reported ............... $ 427,072 $ 382,704 $44,368 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 the dealership was owned
by us.
(2) Refer to "Reconciliation of Non-GAAP Financial Information" for
further discussion regarding platform finance and insurance gross
profit PVR.
Gross profit increased 12% to $427.1 million for the six months ended
June 30, 2005, from $382.7 million for the six months ended June 30, 2004. Same
store gross profit increased 8% to $409.8 million for the six months ended June
30, 2005, from $379.6 million for the six months ended June 30, 2004.
Same store gross profit on new retail vehicle sales increased 2% for
the six months ended June 30, 2005, compared to the six months ended June 30,
2004 due to a 3% increase in unit sales.
Same store gross profit on used vehicle retail sales increased 7% to
$59.2 million for the six months ended June 30, 2005, from $55.2 million for the
six months ended June 30, 2004, due to a strong used vehicle market in the
during the first half of 2005.
Same store gross profit from fixed operations increased 9% to $163.1
million for the six months ended June 30, 2005, from $149.8 million for the six
months ended June 30, 2004, resulting primarily from increased "customer pay"
and warranty work in both parts and service.
30
Same-store platform F&I PVR revenue increased 9% to $894 for the six
months ended June 30, 2005, from $821 for the six months ended June 30, 2004.
The increase in F&I PVR is attributable to (i) increased service contract
penetration, (ii) utilization of menus in the F&I sales process and (iii)
maturation of our corporate-sponsored programs.
Selling, General and Administrative Expenses-
For the six months ended June 30, 2005, SG&A expenses increased $37.7
million to $338.4 million, from $300.7 million for the six months ended June 30,
2004. SG&A expenses as a percentage of gross profit for the six months ended
June 30, 2005 increased to 79.2%, from 78.6% for the six months ended June 30,
2004. Excluding the $3.6 million of reorganization costs, SG&A expenses as a
percentage of gross profit for the six months ended June 30, 2005, improved to
78.4%, from 78.6% for the prior year period. In addition, SG&A expenses for the
six months ended June 30, 2005, includes incremental rent of $4.6 million
resulting from the refinancing of 20 of our dealerships using a sale-leaseback
transaction in the third quarter of 2004. Excluding rent expense from both
periods, as well as the previously discussed reorganization costs, SG&A expenses
as a percentage of gross profit decreased to 72.5 % for the three months ended
June 30, 2005, compared to 74.1% for the prior year period. The improvement in
SG&A expense as a percentage of gross profit, after adjusting for reorganization
costs and rent expense, was attributable to the reorganization of the company
into regions, a reduction in advertising expense PVR and lower insurance costs
principally in the area of workman's compensation.
Depreciation and Amortization-
Depreciation and amortization expense increased $0.1 million to $10.0
million for the six months ended June 30, 2005, from $9.9 million for the six
months ended June 30, 2004. The slight increase in depreciation and amortization
was primarily related to the addition of property and equipment acquired during
2004 and 2005, offset by a reduction in property and equipment sold in
sale-leaseback transactions completed during 2004 and 2005.
Other Income (Expense)-
Floor plan interest expense increased $5.9 million to $15.0 million for
the six months ended June 30, 2005, from $9.1 million for the six months ended
June 30, 2004. This increase was attributable to higher average interest rates
on our floor plan note payable.
Other interest expense decreased $0.9 million to $19.6 million for the
six months ended June 30, 2005, as compared to the six months ended June 30,
2004, as a result of our decision to repay approximately $29.0 million of our
variable rate mortgage notes payable during 2005.
Income Tax Provision-
Income tax expense increased $0.9 million to $16.8 million for the six
months ended June 30, 2005, compared to the six months ended June 30, 2004, due,
in part, to the $2.0 million increase in income from continuing operations
before taxes for the six months ended June 30, 2005, compared to the six months
ended June 30, 2004. In addition, our effective tax rate for the six months
ended June 30, 2005, was 37.5% compared to 37.1% for the six months ended June
30, 2004.
Discontinued Operations-
During the six months ended June 30, 2005, we sold two dealership
locations (four franchises), and as of June 30, 2005, we were actively pursuing
the sale of three dealership locations (five franchises) and real estate
associated with one former dealership location. The $2.3 million loss from
discontinued operations is attributable to the net gain on sale of dealerships
and real estate associated with one former dealership location sold during the
six months ended June 30, 2005, and the operating losses of the franchises
mentioned above. The loss from discontinued operations for the six months ended
June 30, 2004, of $1.8 million includes the net operating losses of the
dealerships mentioned above; ten dealership locations (fourteen franchises),
that were sold during 2004, and the net loss on the sale of businesses during
the six months ended June 30, 2004.
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 June 30, 2005, our funds generated through future
operations and the funds available for borrowings under our committed credit
facility, floor plan financing agreements, mortgage notes payable 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.
31
As of June 30, 2005, we had cash and cash equivalents of $11.0 million
and working capital of $287.1 million. In addition, we had $145.0 million
available for borrowings under our committed credit facility for working
capital, general corporate purposes and acquisitions.
Committed Credit Facility
On March 23, 2005, we entered into a committed credit facility (the
"Committed Credit Facility") with JPMorgan Chase, N.A., 17 other financial
institutions (the "Syndicate") and Ford Motor Credit Corporation ("FMCC"),
collectively the Lenders. Concurrently with entering into the Committed Credit
Facility we terminated our First Amended and Restated Credit Agreement with
FMCC, General Motors Acceptance Corporation ("GMAC") and DaimlerChrysler
Financial Services North America LLC. The Committed Credit Facility provides us
with $650.0 million of new and used vehicle inventory financing ("Floor Plan
Tranche") and $150.0 million of working capital borrowing capacity ("Working
Capital Tranche"). In addition, FMCC and GMAC have committed $150.0 million and
$100.0 million, respectively, of floor plan financing outside of the Syndicate
to finance inventory at our "Ford Family" (Ford, Lincoln Mercury, Mazda, Volvo,
Jaguar and Land Rover) and General Motors' dealerships. In total, these
commitments give us $150.0 million of working capital borrowing capacity and
$900.0 million of floor plan borrowing capacity.
During the three months ended June 30, 2005, we borrowed $15.0 million
from our Committed Credit Facility, of which $8.2 million was used for the
purchase of real estate on which two of our dealerships are located. The
remainder of the borrowings was used for general corporate purposes. During the
three months ended June 30, 2005, we repaid $10.0 million of the amounts
borrowed from our Committed Credit Facility and subsequent to the end of the
quarter we repaid the remaining $5.0 million.
Floor Plan Financing-
We finance substantially all of our new vehicle inventory and a portion
of our used vehicle inventory. As of June 30, 2005, total borrowing capacity
under the floor plan financing agreements with our vehicle floor plan providers
totaled $900.0 million. In addition, as of June 30, 2005, we had total borrowing
capacity of $32.2 million under ancillary floor plan financing agreements with
Comerica Bank and Navistar Financial for our heavy trucks business in Atlanta,
Georgia. As of June 30, 2005, we had $613.1 million outstanding under all our
floor plan financing agreements.
Acquisitions and Acquisition Financing-
During the second quarter of 2005, we acquired one dealership location
(one franchise) in Arkansas for a total purchase price of $5.2 million, of which
$4.7 million was paid in cash through the use of our working capital, with the
remaining $0.5 million representing the fair value of future payments. We
estimate annual revenues of the acquired franchises will total approximately
$35.0 million, based on historical performance. We plan to use our available
cash, borrowings under our Committed Credit Facility or proceeds from future
sale-leaseback transactions to finance future acquisitions.
Sale-Leaseback Transactions
During the six months ended June 30, 2005, we completed two
sale-leaseback transactions, which resulted in the sale of approximately $15.7
million of real estate and construction improvements and the commencement of
long-term operating leases for the assets sold.
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) an adjusted current ratio of at least 1.2 to 1, of
which our ratio was approximately 1.5 to 1 as of June 30, 2005; (ii) a fixed
charge coverage ratio of at least 1.2 to 1, of which our ratio was approximately
1.5 to 1 as of June 30, 2005; (iii) an adjusted leverage ratio of not more than
4.5 to 1, of which our ratio was approximately 3.6 to 1 as of June 30, 2005 and
(iv) a minimum adjusted net worth of not less than $350.0 million, of which our
adjusted net worth was approximately $464.3 million as of June 30, 2005. A
breach of these covenants could cause an acceleration of repayment of our
Committed Credit Facility if not otherwise waived or cured. 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 1.4
to 1 as of June 30, 2005 and (ii) an EBITDA based coverage ratio of at least 1.5
to 1, of which our ratio was approximately 2.8 to 1 as of June 30, 2005. 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
32
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 June 30, 2005, we were in compliance with all our debt and lease
agreement covenants.
Cash Flows for the Six Months Ended June 30, 2005 Compared to the Six Months
Ended June 30, 2004
Operating Activities-
Net cash provided by operating activities totaled $43.4 million and
$4.7 million for the six months ended June 30, 2005, and 2004, respectively.
Cash flow from operating activities includes 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 our cash flow from operating activities for the six
months ended June 30, 2005, compared to the six months ended June 30, 2004, was
primarily attributable to (i) the timing of collection of accounts receivable,
(ii) the timing of inventory purchases resulting from changes in the equity of
our inventory and increased sales activity in June 2005 compared to June 2004,
which caused contracts-in-transit to increase compared to June of last year and
(iii) timing of payments of accounts payable and accrued liabilities and timing
differences in prepaid assets and other assets and liabilities.
As of June 30, 2005, we had approximately $64.7 million of equity in
our vehicle inventory (vehicle inventory in excess of floor plan borrowings), as
compared to $66.2 million as of December 31, 2004. Had we maintained the same
level of equity in our vehicle inventory as of June 30, 2005 as we had as of
December 31, 2004, our cash flow from operations for the six months ended June
30, 2005, would have increased by approximately $2.1 million. As of June 30,
2004, we had approximately $30.0 million of equity in our vehicle inventory, as
compared to $5.7 million as of December 31, 2003. Had we maintained the same
level of equity in our vehicle inventory as of June 30, 2004 as we had as of
December 31, 2003, our cash flow from operations for the six months ended June
30, 2004 would have improved by approximately $23.3 million.
Investing Activities--
Net cash used in investing activities totaled $34.7 million and $94.4
million for the six months ended June 30, 2005 and 2004, respectively. Cash
flows from investing activities relate primarily to capital expenditures,
acquisition and divestiture activity, sale of property and equipment and
construction advances from lessors in connection with our sale-leaseback
agreements.
Capital expenditures were $35.2 million and $34.5 million for the six
months ended June 30, 2005 and 2004, respectively, of which $18.2 million and
$16.1 million, were financed or were pending financing through sale-leaseback
agreements or mortgage notes payable for the six months ended June 30, 2005 and
2004, respectively. Our capital investments consisted of upgrades of our
existing facilities and construction of new facilities. Future capital
expenditures will relate primarily to upgrading existing dealership facilities
and operational improvements that we expect will provide us with acceptable
rates of return on our investments. During the six months ended June 30, 2005
and 2004, we received $2.6 million and $9.5 million, respectively, in
construction advances from lessors in connection with our sale-leaseback
agreements. We expect that capital expenditures during 2005 will total between
$80.0 million and $90.0 million, of which we intend to finance between 60% and
70% principally through sale-leaseback agreements.
Cash used for acquisitions totaled $4.7 million and $71.6 million for
the six months ended June 30, 2005 and 2004, respectively. We anticipate that we
will spend between $25.0 million to $50.0 million on acquisitions in 2005.
Proceeds from the sale of discontinued operations totaled $2.8 million
and $0.8 million for the six months ended June 30, 2005 and 2004, respectively.
We continuously monitor the profitability and market value of our dealerships
and, under certain conditions, may strategically divest non-profitable
dealerships.
Financing Activities--
Net cash used in financing activities totaled $25.8 million and $2.1
million for the six months ended June 30, 2005 and 2004, respectively. During
the six months ended June 30, 2005 and 2004, proceeds from borrowings amounted
to $20.7 million and $3.9 million, which was used to finance construction on our
dealership facilities and general corporate purposes. In addition, we incurred
$4.9 million of debt issuance costs associated with our Committed Credit
Facility.
During the six months ended June 30, 2005 and 2004, we repaid debt of
$42.0 million and $6.8 million, respectively. During the six months ended June
30, 2005, we repaid $30.7 million of our outstanding mortgage notes payable the
majority of which resulted from our decision to repay approximately $29.0
million of our variable rate mortgage notes payable.
33
Off-Balance Sheet Transactions
We had no material off-balance sheet transactions during the periods
presented other than those disclosed in Note 13 of our consolidated financial
statements.
Stock Repurchase Restrictions
Pursuant to the indentures governing our 9% Senior Subordinated Notes
due 2012, our 8% Senior Subordinated Notes due 2014 and our Committed Credit
Facility, our ability to repurchase shares of our common stock is limited. As of
June 30, 2005, our ability to repurchase shares was limited to an aggregate
purchase price of $29.6 million due to these restrictions. We did not repurchase
any shares of our common stock during 2005 or 2004.
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. The accounting policies described
below are those that most frequently require management to make estimates and
judgments, and therefore are critical to understanding our results of
operations. Senior management has discussed the development and selection of
these accounting estimates and the related disclosures with the audit committee
of our board of directors.
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 vehicles where cost basis exceeds fair
value and for parts that we believe are excess or obsolete. In assessing lower
of cost or market for new vehicles, we primarily consider the aging of vehicles
and loss histories, 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 histories, current aging of the inventory and current
market conditions. The assessment of excess and obsolete parts considers the
sales activity of specific parts over the last twelve months. These reserves
were $4.4 million and $4.9 million as of June 30, 2005 and December 31, 2004,
respectively.
Notes Receivable--Finance Contracts--
As of June 30, 2005 and December 31, 2004, we had outstanding notes
receivable from finance contracts of $30.4 million and $30.9 million,
respectively (net of an allowance for credit losses of $4.6 million and $6.3
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 attribute minimal value to the underlying collateral in our assessment of the
reserve.
F&I Chargeback Reserve--
We receive commissions from the sale of vehicle service contracts,
credit life insurance and disability insurance to customers. In addition, we
receive commissions from financing institutions for arranging customer
financing. We may be charged back ("chargebacks") for finance, insurance or
vehicle service contract commissions in the event a contract is terminated. The
revenues from financing fees and commissions are recorded at the time the
vehicles are sold and a reserve for future chargebacks is established based on
historical operating results and the termination provisions of the applicable
contracts. This data is evaluated on a product-by-product basis. These reserves
were $12.0 million as of June 30, 2005 and December 31, 2004.
Equity-Based Compensation--
We account for stock-based compensation issued to employees in
accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees." APB Opinion No. 25 requires the use of the
intrinsic value method, which measures compensation cost as the excess, if any,
of the quoted market price of the stock at the measurement date over the amount
an employee must pay to acquire the stock. We have adopted the disclosure
provisions of SFAS No. 148, "Accounting for Stock-Based Compensation-Transition
and Disclosure-An amendment of FASB Statement No. 123." See also "Recent
34
Accounting Pronouncements" below for a discussion of the impact on our financial
statements from the adoption of SFAS No. 123 (revised 2004), "Share-based
Payment."
Goodwill and Other Intangible Assets--
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets," we do not amortize goodwill and
other intangible assets that are deemed to have indefinite lives. We 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 is allocated at the
entity level and manufacturer franchise rights are allocated to each individual
dealership franchise, respectively. Goodwill represents the excess cost of the
businesses acquired over the fair market value of the identifiable net assets.
The fair market value of our manufacturer franchise rights is determined at the
acquisition date through discounting the projected cash flows attributable to
each franchise.
Upon adoption of SFAS No. 142 "Goodwill and Other Intangible Assets,"
on January 1, 2002, we determined that each of our platforms qualified as a
reporting unit since we operate in one segment, our platforms are one level
below our corporate level, discrete financial information existed for each
platform and the management of each platform directly reviewed the platform's
performance. In late 2004, we began the process of reorganizing our platforms
into four regions. Within this more streamlined structure, we will evaluate our
operations and financial results by dealership in the aggregate, rather than by
platform. The general managers, with direction from a centralized management
team, including corporate and regional management, will continue to have the
independence and flexibility to respond effectively to local market conditions.
Based on the changes in our management, operational and reporting structure
during the first quarter of 2005, we evaluate goodwill at the operating segment
level.
We review goodwill and indefinite lived manufacturer franchise rights
for impairment annually on October 1st of each year, or more often if events or
circumstances indicate that impairment may have occurred. We are subject to
financial statement risk to the extent that intangible assets become impaired
due to decreases in the related fair market value of our underlying businesses
or entity.
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 to
15 years and are tested for impairment when circumstances indicate that the
carrying value of the asset might be impaired.
Accrued Expenses--
Payments owed to our various service providers are expensed during the
month in which the applicable service is performed. The amount of these expenses
is dependent upon information provided by our internal systems and processes.
Due to the length of time necessary to receive accurate information, estimates
of amounts due are necessary in order to record monthly expenses. In subsequent
months, expenses are reconciled and adjusted where necessary. We continue to
refine the estimation process based on an increased understanding of the time
requirements and close working relationships with our service providers.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123 (revised 2004), "Share-based Payment." This statement
requires compensation costs related to share-based payment transactions to be
recognized in the financial statements. With limited exceptions, the amount of
compensation cost will be measured based on the grant-date fair value of the
equity or liability instruments issued. Compensation cost will be recognized
over the period that an employee provides service in exchange for the award.
SFAS No. 123 (revised 2004) replaces SFAS No. 123, "Accounting for Stock-Based
Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued
to Employees." In April 2005, the Securities and Exchange Commission adopted a
new rule that amends the compliance dates for SFAS No. 123 (revised 2004).
Registrants would have been required to implement the standard as of the
beginning of the first interim or annual period that begins after June 15, 2005.
The Commission's new rule allows companies to implement SFAS No 123 (Revised
2004) at the beginning of their next fiscal year, instead of the next reporting
period, that begins after June 15, 2005. We are currently evaluating the effect
of this statement on our consolidated financial statements and related
disclosures.
35
RECONCILIATION OF NON-GAAP FINANCIAL INFORMATION
Platform Finance and Insurance Gross Profit PVR-
We evaluate our finance and insurance gross profit performance on a Per
Vehicle Retailed ("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
and six months ended June 30, 2005 and 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:
For the Three Months
Ended June 30,
---------------------
(In thousands, except for unit and per vehicle data) 2005 2004
--------- ---------
Reconciliation of Finance and Insurance Gross Profit
to Platform Finance and Insurance Gross
Profit:
Finance and insurance gross profit, net (as reported) $ 41,646 $ 37,453
Less: Corporate finance and insurance gross profit (1,367) (1,906)
-------- --------
Platform finance and insurance gross profit ......... $ 40,279 $ 35,547
======== ========
Platform finance and insurance gross profit PVR ....... $ 883 $ 843
======== ========
Retail units sold:
New retail units .................................... 29,094 27,114
Used retail units ................................... 16,520 15,072
-------- --------
Total ............................................... 45,614 42,186
======== ========
For the Six Months
Ended June 30,
---------------------
(In thousands, except for unit and per vehicle data) 2005 2004
--------- ---------
Reconciliation of Finance and Insurance Gross Profit
to Platform Finance and Insurance Gross
Profit:
Finance and insurance gross profit, net (as reported) $ 79,334 $ 68,374
Less: Corporate finance and insurance gross profit (2,570) (3,149)
-------- --------
Platform finance and insurance gross profit ......... $ 76,764 $ 65,225
======== ========
Platform finance and insurance gross profit PVR ....... $ 892 $ 821
======== ========
Retail units sold:
New retail units .................................... 53,997 49,692
Used retail units ................................... 32,027 29,795
-------- --------
Total ............................................... 86,024 79,487
======== ========
Adjusted SG&A Expense-
Our operating income was largely impacted by reorganization costs
incurred during the first six months of 2005 and incremental rent expense
associated with a sale-leaseback transaction that was entered into in the third
quarter of 2004. During the first six months of 2005, we incurred severance
costs of $3.6 million associated with the reorganization of our regional
structure. We believe that excluding the reorganization costs and rent expense
from the selling, general and administrative expense provides a more meaningful
36
basis to measure the results of our operations compared to that of the prior
year period. A reconciliation of our adjusted selling, general and
administrative expense is presented below.
For the Three Months
Ended June 30,
---------------------
2005 2004
--------- ---------
Reconciliation of SG&A Expense to Adjusted SG&A Expense:
SG&A expense ........................................ $170,551 $156,332
Less: Rent expense ................................. (12,544) (8,811)
-------- --------
Adjusted SG&A expense ............................... $158,007 $147,521
======== ========
Gross Profit ........................................ $221,375 $201,605
======== ========
Adjusted SG&A expense as a percentage of Gross Profit 71.4% 73.2%
======== ========
For the Six Months
Ended June 30,
---------------------
2005 2004
--------- ---------
Reconciliation of SG&A Expense to Adjusted SG&A Expense:
SG&A expense ........................................ $338,358 $300,694
Less: Reorganization costs ......................... (3,566) --
-------- --------
SG&A, net of reorganization costs ................... 334,792 300,694
Less: Rent expense ................................. (25,299) (16,993)
-------- --------
Adjusted SG&A expense ............................... $309,493 $283,701
======== ========
Gross Profit ........................................ $427,072 $382,704
======== ========
SG&A, net of reorganization costs, as a percentage
of Gross Profit .................................. 78.4% 78.6%
======== ========
Adjusted SG&A expense as a percentage of Gross
Profit ........................................... 72.5% 74.1%
======== ========
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 $236.2 million of
variable rate long-term debt (including the current portion) outstanding at June
30, 2005, a 1% change in interest rates would result in a change of
approximately $2.4 million to our annual other interest expense. Conversely,
based on fixed-rate debt of $273.6 million a 1% change in interest would mean we
would not experience the impact of a $2.7 million change in interest expense.
Based on floor plan amounts outstanding at June 30, 2005, a 1% change in the
interest rates would result in a change of approximately $6.1 million to annual
floor plan interest expense.
We received $14.0 million of interest credit assistance from certain
automobile manufacturers during the six months ended June 30, 2005. Interest
credit assistance reduced new vehicle cost of sales for the six months ended
June 30, 2005 by $13.7 million and reduced new vehicle inventory by $4.2 million
and $3.9 million as of June 30, 2005 and December 31, 2004, respectively.
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 have entered into two forward interest rate swaps with a combined
notional principal amount of $170.0 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 cash flow hedges of our variable rate floor plan notes
payable and will contain minor ineffectiveness. As of June 30, 2005 and December
31, 2004, the swaps had a fair value of $12.3 million and $7.1 million,
respectively, and are included in Other Long-term Liabilities on the
accompanying Consolidated Balance Sheets
We have entered into an interest rate swap agreement with a notional
principal amount of $200.0 million as a hedge against changes in the fair value
of our 8% Senior Subordinated Notes due 2014. Under the terms of the swap
agreement, we are required to make variable rate payments based on six-month
LIBOR and receive a fixed rate of 8.0%. This swap agreement was designated and
qualifies as a fair value hedge of our 8% Senior Subordinated Notes due 2014 and
did not contain any ineffectiveness. As a result our 8% Senior Subordinated
Notes due 2014 have been written down by the fair value of the related swap. As
of June 30, 2005 and December 31, 2004, the swap agreement had a fair value of
$0.4 million and $2.7 million, respectively, and is included in Other Long-Term
Liabilities on the accompanying Consolidated Balance Sheets.
37
We have entered into an interest rate swap agreement with a notional
principal amount of $15.2 million as a hedge against future changes in the
interest rate of our variable rate mortgage notes payable. Under the terms of
the swap agreement, we are required to make payments at a fixed rate of 6.08%
and receive a variable rate based on LIBOR. This swap agreement was designated
and qualifies as a cash flow hedge of changes in the interest rate of our
variable rate mortgage notes payable and will contain minor ineffectiveness. As
of June 30, 2005 and December 31, 2004, the swap agreement had a fair value of
$0.2 million, which was included in Other Long-Term Liabilities on the
accompanying Consolidated Balance Sheets.
Item 4. Controls and Procedures
As of the end of the period covered by this report, the Company
conducted an evaluation, under the supervision and with the participation of the
Company's chief executive officer and chief financial officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended ("Exchange Act"). Based on this evaluation, the
Company's chief executive officer and chief financial officer concluded that as
of the end of such period such disclosure controls and procedures (i) 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 period specified in the rules
and forms of the Securities and Exchange Commission and (ii) were effective.
There have not been any changes in the Company's internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the fiscal quarter to which this report relates
that have materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.
---
Forward-Looking 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 our financial position, results of operations, market
position, product development and business strategy. These statements are based
on management's current expectations and involve significant risks and
uncertainties that may cause results to differ materially from those set forth
in the statements. These risks and uncertainties include, among other things:
o market factors;
o our relationships with vehicle manufacturers and other suppliers;
o risks associated with our substantial indebtedness;
o risks related to pending and potential future acquisitions;
o general economic conditions both nationally and locally; and
o governmental regulations and legislation.
There can be no guarantees that our 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.
38
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The results of the votes cast at the Company's Annual Meeting on April 28, 2005
were as follows:
Election of Class I Directors:
For Withheld
Timothy C. Collins 27,919,315 3,304,680
Kenneth B. Gilman 30,989,588 234,407
Vernon E. Jordan, Jr. 27,919,115 3,304,880
Thomas F. McLarty, III 30,946,203 277,792
Ratification of appointment of Deloitte & Touche L.L.P. as independent
public accountants for 2005:
For 31,217,012
Against 1,240
Abstain 5,743
Item 6. Exhibits
Exhibits required to be filed by Item 601 of Regulation S-K:
10.1 1999 Stock Option Plan, as amended.
10.2 Severance Pay Agreement of Charles B. Tomm, dated as of June 10, 2005.
10.3 Compensation Plan of Charles B. Tomm
31.1 Certificate of the 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,
dated August 4, 2005.
31.2 Certificate of the 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,
dated August 4, 2005.
32.1 Certificate of Chief Executive Officer pursuant to Rule
13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, dated August 4, 2005.
32.2 Certificate of Chief Financial Officer pursuant to Rule
13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, dated August 4, 2005.
39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Asbury Automotive Group, Inc.
(Registrant)
Date: August 4, 2005 By: /s/ KENNETH B. GILMAN
--------------------------------------------
Name: Kenneth B. Gilman
Title: Chief Executive Officer and President
Date: August 4, 2005 By: /s/ J. GORDON SMITH
--------------------------------------------
Name: J. Gordon Smith
Title: Senior Vice President and Chief Financial
Officer
(Principal Financial Officer)
40
INDEX TO EXHIBITS
Exhibit
Number Description of Documents
- ------ ------------------------
10.1 1999 Stock Option Plan, as amended.
10.2 Severance Pay Agreement of Charles B. Tomm, dated as of June 10, 2005.
10.3 Compensation Plan of Charles B. Tomm
31.1 Certificate of the 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, dated August 4,
2005.
31.2 Certificate of the 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, dated August 4,
2005.
32.1 Certificate of Chief Executive Officer pursuant to Rule 13a-14(b)/
15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, dated August 4, 2005.
32.2 Certificate of Chief Financial Officer pursuant to Rule 13a-14(b)/
15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, dated August 4, 2005.
Exhibit 31.1
CERTIFICATION 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
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 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and we have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ Kenneth B. Gilman
- -----------------------------------------------
Kenneth B. Gilman
Chief Executive Officer
August 4, 2005
Exhibit 31.2
CERTIFICATION 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
I, J. Gordon Smith, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Asbury Automotive
Group, Inc.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and we have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision 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 report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ J. Gordon Smith
- -----------------------------------------
J. Gordon Smith
Chief Financial Officer
August 4, 2005
Exhibit 32.1
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 quarter ended June 30, 2005 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 results of
operations of the Company.
/s/ Kenneth B. Gilman
- ------------------------------------------------
Kenneth B. Gilman
Chief Executive Officer
August 4, 2005
Exhibit 32.2
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 quarter ended June 30, 2005 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, J. Gordon Smith, 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 results of
operations of the Company.
/s/ J. Gordon Smith
- ---------------------------------------------
J. Gordon Smith
Chief Financial Officer
August 4, 2005
Exhibit 10.1
ASBURY AUTOMOTIVE GROUP, INC.
1999 OPTION PLAN
As Amended and Restated Effective March 19, 2002
The purpose of the Asbury Automotive Group, Inc. 1999 Option Plan (the
"Plan") is to provide designated officers and other key employees of Asbury
Automotive Group, Inc., a Delaware corporation (the "Company"), and its
subsidiaries with the opportunity to receive grants of options to purchase
common shares of the Company, $0.01 par value ("Shares"). The Company believes
that the Plan will encourage the participants to contribute materially to the
growth of the Company, attract talented management personnel and align the
economic interests of the participants with those of the owners.
1. Administration. (a) Committee. The Plan shall be administered and
interpreted by a committee of two or more individuals (the "Committee")
appointed by the Board of Directors of the Company (the "Board"); however, the
Board itself may ratify or approve any grants as the Board deems appropriate.
(b) Committee Authority. The Committee shall have the sole authority to (i)
determine the individuals to whom grants shall be made under the Plan, (ii)
determine the type, size and terms of the grants to be made to each such
individual, (iii) determine the time when the grants will be made and the
duration of any applicable exercise or restriction period, including the
criteria for exercisability and the acceleration of exercisability, (iv) amend
the terms of any previously issued grant and (v) deal with any other matters
arising under the Plan.
(c) Committee Determination. The Committee shall have full power and
authority to administer and interpret the Plan, to make factual determinations
and to adopt or amend such rules, regulations, agreements and instruments for
implementing the Plan and for the conduct of its business as it deems necessary
or advisable, in its sole discretion. The Committee's interpretations of the
Plan and all determinations made by the Committee pursuant to the powers vested
in it hereunder shall be conclusive and binding on all persons having any
interest in the Plan or in any grants awarded hereunder. All powers of the
Committee shall be executed in its sole discretion, in the best interest of the
Company, not as a fiduciary, and in keeping with the objectives of the Plan and
need not be uniform as to similarly situated individuals.
1
2. Grants. Awards under the Plan shall consist of grants (each, a "Grant")
of nonqualified options (the "Options"), as described in Section 5. All Grants
shall be subject to the terms and conditions set forth herein and to such other
terms and conditions consistent with this Plan as the Committee deems
appropriate and as are specified in writing by the Committee to the individual
in a grant instrument or an amendment to the grant instrument (the "Grant
Instrument"). The Committee shall approve the form and provisions of each Grant
Instrument. Grants need not be uniform as among the Grantees (as defined below).
3. Shares Subject to the Plan. (a) Nature of Options Granted. Each Option
granted under the Plan shall provide the Grantee solely the right to acquire
Shares in exchange for a dollar amount (the "Exercise Price") specified in such
Option.
(b) Sources of Shares Deliverable Under Options. Any Shares delivered
pursuant to an Option may consist, in whole or in part, of authorized and
unissued Shares or of treasury Shares.
(c) Share Certificates. All certificates for Shares or other securities of
the Company or any Affiliate delivered under the Plan pursuant to any Option or
the exercise thereof shall be subject to such stop transfer orders and other
restrictions as the Committee may deem advisable under the Plan or the rules,
regulations, and other requirements of the Securities and Exchange Commission,
any stock exchange upon which such Shares or other securities are then listed,
and any applicable federal or state laws, and the Committee may cause a legend
or legends to be put on any such certificates to make appropriate reference to
such restrictions.
(d) No Fractional Shares. No fractional Shares shall be issued or delivered
pursuant to the Plan or any Option, and the Committee shall determine whether
cash, other securities, or other property shall be paid or transferred in lieu
of any fractional Shares or whether such fractional Shares or any rights thereto
shall be canceled, terminated, or otherwise eliminated.
4. Eligibility for Participation. (a) Eligible Persons. All officers and
other key employees of the Company and its Subsidiaries ("Employees") shall be
eligible to participate in the Plan. Effective March 19, 2002, no new Grants
will be made under the Plan, and eligible participants in the Plan shall consist
of those persons who hold, as of March 19, 2002, outstanding Options granted
under the Plan.
(b) Selection of Grantees. The Committee shall select the Employees who
receive Grants under this Plan (the "Grantees").
5. Granting of Options. (a) Amount of Exercise Price. The Committee shall
determine the Exercise Price with respect to each Option at the time of grant,
which, except as the Committee may otherwise provide, shall not be less than the
Fair Market Value (as defined below) of the Shares in respect of which the
Option is granted. Subject to adjustment as provided in Section 6 of this Plan,
the aggregate number of Shares for which Options may be issued under this Plan
shall not, in the aggregate, exceed 1,072,738 Shares.
(b) Type of Option. Grants shall be "nonqualified options" that are not
intended to satisfy the provisions of Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code") and shall be made in accordance with the terms
and conditions set forth herein.
(c) Option Term. The Committee shall determine the term of each Option. The
term of any Option shall not exceed 10 years from the date of Grant.
(d) Exercisability of Options; Conditions. Options shall become exercisable
in accordance with such terms and conditions, consistent with the Plan, as may
2
be determined by the Committee and specified in the Grant Instrument. The
Committee may accelerate the vesting or exercisability of any or all outstanding
Options at any time for any reason. Unless the Committee provides otherwise in
the Grant Instrument, only Options that are vested may be exercised and Options
shall vest, subject to the continuous employment of the Grantee by the Company,
at the rate of 33-1/3% for each year the Grantee is employed by, or rendering
services to, the Company following the date of Grant; provided that, unless the
Committee provides otherwise in the Grant Instrument, no Option shall vest until
the Grantee has been employed by, or rendering services to, the Company for a
period of one year following the date of Grant.
(e) Termination of Employment, Disability or Death. (i) Except as provided
below or as otherwise provided by the Committee in the Grant Instrument, an
Option may only be exercised while the Grantee is employed by, or providing
services to, the Company as an Employee, consultant or member of the Board.
Unless the Committee provides otherwise in the Grant Instrument, in the event
that a Grantee ceases to be employed by, or provide services to, the Company for
any reason other than resignation (except resignation in connection with
retirement) or termination for Cause (as defined below), any Option which is
otherwise vested and exercisable by the Grantee shall terminate unless exercised
within 90 days after the date on which the Grantee ceases to be employed by, or
provide services to, the Company (or within such other period of time as may be
specified by the Committee), but in any event no later than the date of
expiration of the Option term. Except as otherwise provided by the Committee,
any of the Grantee's Options that are not otherwise vested and exercisable as of
the date on which the Grantee ceases to be employed by, or provide services to,
the Company shall terminate as of such date.
(ii) Except as otherwise provided by the Committee, in the event that the
Grantee ceases to be employed by, or provide services to, the Company on account
of a resignation (except resignation in connection with retirement) or a
termination for Cause by the Company, any Option held by the Grantee (whether or
not then vested and exercisable) shall terminate and be canceled as of the date
the Grantee ceases to be employed by, or provide services to, the Company.
Except as otherwise provided by the Committee, any of the Grantee's Options that
are not otherwise vested and exercisable as of the date on which the Grantee
ceases to be employed by, or provide services to, the Company shall terminate as
of such date.
(iii) For purposes of Section 5(d), Section 5(e) and Section 7:
(A) The term "Company" shall mean the Company and its Affiliates.
(B) "Employed by, or provide services to, the Company" shall mean
employment or service as an employee, consultant or Board member (so that,
for purposes of exercising Options, a Grantee shall not be considered to
have terminated employment or service until the Grantee ceases to be an
employee, consultant or Board member), unless the Committee determines
otherwise.
(C) "Cause" shall mean, except to the extent specified otherwise by
the Committee in the Grant Instrument, a finding by the Committee that the
Grantee (i) has breached his or her employment or service contract with the
Company, (ii) has engaged in disloyalty to the Company, including, without
limitation, fraud, embezzlement, theft, commission of a felony or proven
dishonesty in the course of his or her employment or service, (iii) has
disclosed trade secrets or confidential information of the Company to
persons not entitled to receive such information or (iv) has engaged in
such other behavior detrimental to the interests of the Company as the
Committee determines.
(f) Exercise of Options. Except as otherwise provided by the Committee in
the Grant Instrument, a Grantee may exercise an Option that has become vested
and exercisable, in whole or in part, by delivering a notice of exercise to the
3
Company with payment of the Exercise Price (plus the amount of any withholding
tax due at the time of exercise after the application of Section 7 hereof) and
taking such other action as the Committee may request or approve.
(g) Payment. (i) No Shares shall be delivered pursuant to any exercise of
an Option until payment in full of the aggregate exercise price therefor is
received by the Company. Such payment may be made in cash, or its equivalent, or
(A) by exchanging Shares owned by the Grantee (which are not the subject of any
pledge or other security interest and which have been owned by such Grantee for
at least six (6) months), or (B) if there shall be a public market for the
Shares at such time, subject to such rules as may be established by the
Committee, through delivery of irrevocable instructions to a broker to sell the
Shares otherwise deliverable upon the exercise of the Option and to deliver
promptly to the Company an amount equal to the aggregate exercise price, or by a
combination of the foregoing; provided that the combined value of all cash and
cash equivalents and the Fair Market Value of any such Shares so tendered to the
Company as of the date of such tender is at least equal to such aggregate
exercise price.
(ii) Wherever in this Plan or any Grant Instrument a Grantee is permitted
to pay the exercise price of an Option or taxes relating to the exercise of an
Option by delivering Shares, the Grantee may, subject to procedures satisfactory
to the Committee, satisfy such delivery requirement by presenting proof of
beneficial ownership of such Shares, in which case the Company shall treat the
Option as exercised without further payment and shall withhold such number of
Shares from the Shares acquired by the exercise of the Option.
(h) Adjustments Upon Conversion. As of March 19, 2002, no new Grants shall
be made under the Plan. The terms of Options granted under the Plan and
outstanding on March 19, 2002, shall continue, with adjustments being made to
such Options as appropriate as a result of the conversion of membership
interests in Asbury Automotive Group, L.L.C. into Shares in connection with the
Company's initial public offering.
6. Adjustments. (a) In the event that the Committee determines that any
dividend or other distribution (whether in the form of cash, Shares, other
securities, or other property), recapitalization, stock split, reverse stock
split, reorganization, merger, consolidation, split-up, spin-off, combination,
repurchase, or exchange of Shares or other securities of the Company, issuance
of warrants or other rights to purchase Shares or other securities of the
Company, or other similar corporate transaction or event affects the Shares such
that an adjustment is determined by the Committee in its discretion to be
appropriate or desirable in order to prevent dilution or enlargement of the
benefits or potential benefits intended to be made available under the Plan,
then the Committee shall, in such manner as it may deem equitable or desirable,
adjust any or all of (i) the number of Shares or other securities of the Company
(or number and kind of other securities or property) with respect to which
Options may be granted, including the maximum number of Shares or other
securities of the Company (or number and kind of other securities or property)
with respect to which Options may be granted to any Grantee in any fiscal year
of the Company; (ii) the number of Shares or other securities of the Company (or
number and kind of other securities or property) subject to outstanding Options
and (iii) the exercise price with respect to any Option or, if deemed
appropriate or desirable, make provision for a cash payment to the holder of an
outstanding Option in consideration for the cancellation of such Option in an
amount equal to the excess, if any, of the Fair Market Value of the Shares
subject to the Options over the aggregate exercise price of such Option.
(b) Amendments to Options. The Committee may waive any conditions or rights
under, amend any terms of, or alter, suspend, discontinue, cancel or terminate,
any Option theretofore granted, prospectively or retroactively; provided that
any such waiver, amendment, alteration, suspension, discontinuance, cancellation
or termination that would impair the rights of any Grantee or any holder or
beneficiary of any Option theretofore granted shall not to that extent be
effective without the consent of the affected Grantee holder or beneficiary.
4
(c) Adjustment of Options Upon the Occurrence of Certain Unusual or
Nonrecurring Events. The Committee is hereby authorized to make adjustments in
the terms and conditions of, and the criteria included in, Options in
recognition of unusual or nonrecurring events (including, without limitation,
the events described in Section 6(a) hereof) affecting the Company, any
Affiliate, or the financial statements of the Company or any Affiliate, or of
changes in applicable laws, regulations, or accounting principles, whenever the
Committee determines that such adjustments are appropriate in order to prevent
dilution or enlargement of the benefits or potential benefits intended to be
made available under the Plan.
7. Withholding of Taxes. Each Grant (and each issuance of Shares pursuant
to the exercise of any Option) shall be subject to applicable federal (including
FICA), state and local tax withholding requirements. The Company shall have the
right to deduct from other wages paid to the Grantee any federal, state or local
taxes required by law to be withheld with respect to such Grants, or the
exercise thereof, or require that the Grantee or other person receiving or
exercising Grants pay to the Company the amount of any federal, state or local
taxes that the Company is required to withhold with respect to such Grants or
exercise and the Company may defer issuance of Shares until such requirements
are satisfied.
8. Nontransferability of Grants. (a) Except as provided below, only the
Grantee may exercise rights under a Grant during the Grantee's lifetime. A
Grantee may not transfer those rights except by will or by the laws of descent
and distribution. When a Grantee dies, the personal representative or other
person entitled to succeed to the rights of the Grantee ("Successor Grantee")
may exercise such rights. A Successor Grantee must furnish proof satisfactory to
the Company of his or her right to receive the Grant under the Grantee's will or
under the applicable laws of descent and distribution.
(b) If any transfer of all or any portion of an Option or of any beneficial
interest therein, upon default, foreclosure, forfeit, bankruptcy (voluntary or
involuntary), court order, levy of attachment, execution or otherwise than
voluntarily (an "Involuntary Transfer") or a transfer in violation of this Plan
or the applicable Grant Instrument has occurred and not been cured within 30
days after written notice has been given to the person transferring such Option
(the "Transferor") or to the person to whom or to which such Option is
transferred (the "Transferee"), the Company shall have the right to terminate
such Option without consideration.
9. Requirements for Issuance of Shares. The Committee may refuse to issue
or transfer any Shares or other consideration under an Option if, acting in its
sole discretion, it determines that the issuance or transfer of such Shares or
such other consideration might violate any applicable law or regulation or
entitle the Company to recover the same under Section 16(b) of the Securities
Exchange Act of 1934, as amended, and any payment tendered to the Company by a
Grantee, other holder or beneficiary in connection with the exercise of such
Option shall be promptly refunded to the relevant Grantee, holder or
beneficiary. Without limiting the generality of the foregoing, no Option granted
hereunder shall be construed as an offer to sell securities of the Company, and
no such offer shall be outstanding, unless and until the Committee in its sole
discretion has determined that any such offer, if made, would be in compliance
with all applicable requirements of the U.S. federal and any other applicable
securities laws.
10. Change of Control of the Company. Unless otherwise defined in the Grant
Instrument, a "Change of Control" shall be deemed to have occurred if Ripplewood
Holdings L.L.C., or its affiliates, cease to control the Company or its
business.
(a) Notice and Acceleration. Unless otherwise set forth in the Grant
Instrument, upon a Change of Control (i) the Company shall provide each Grantee
with outstanding Grants written notice of such Change of Control and (ii) all
outstanding Options shall automatically accelerate and become fully exercisable
unless otherwise determined by the Committee.
5
(b) Assumption of Grants. In the event of (i) a merger of the Company with
or into another corporation, (ii) a merger of any Subsidiary with or into
another corporation that requires the approval of the Company's stockholders
under the law of the Company's jurisdiction of organization, or (iii) the sale
or disposition of substantially all of the assets of the Company, each
outstanding Option shall either continue in effect, be assumed or an equivalent
option substituted therefor by the successor corporation or a "parent
corporation" (as defined in Section 424(e) of the Code) or "subsidiary
corporation" (as defined in Section 424(f) of the Code) of the successor
corporation. In the event that the Option does not continue in effect or the
successor corporation refuses to assume or substitute for the Option, the
Grantee shall fully vest in and have the right to exercise the Option as to all
Shares subject to the Option, including Shares as to which it would not
otherwise be vested or exercisable. If an Option becomes fully vested and
exercisable in lieu of continuation, assumption or substitution as set forth
herein, the Company shall notify the Grantee in writing or electronically that
the Option shall be fully vested and exercisable for a period of fifteen (15)
days from the date of such notice, or such shorter period as the Committee may
determine to be reasonable, and the Option shall terminate upon the expiration
of such period. For the purposes of this paragraph, the Option shall be
considered assumed if, following the merger or sale or disposition of assets,
the Option confers the right to purchase or receive, for each Share subject to
the Option immediately prior to the merger or sale or disposition of assets, the
consideration (whether stock, cash, or other securities or property) received in
the merger or sale or disposition of assets by holders of Shares for each Share
held on the effective date of the transaction (and if holders were offered a
choice of consideration, the type of consideration chosen by the holders of a
majority of the outstanding Shares); provided, however, that if such
consideration received in the merger or sale or disposition of assets is not
solely common stock of the successor corporation or its "parent corporation" or
"subsidiary corporation", the Committee may, with the consent of the successor
corporation, provide for the consideration to be received upon the exercise of
the Option, for each Share subject to the Option, to be solely common stock of
the successor corporation or its "parent corporation" or "subsidiary
corporation" equal in fair market value to the per share consideration received
by holders of Shares in the merger or sale or disposition of assets.
11. Amendment and Termination of the Plan. (a) Amendment. The Board may
amend or terminate the Plan at any time; provided that no such amendment or
termination shall be made without shareholder approval if such approval is
necessary to comply with any tax or regulatory requirement applicable to the
Plan.
(b) Termination of Plan. The Plan shall terminate on December 31, 2008,
unless the Plan is terminated earlier by the Board or is extended by the Board.
(c) Termination and Amendment of Outstanding Grants. A termination or
amendment of the Plan that occurs after a Grant is made shall not materially
impair the rights of a Grantee unless the Grantee consents. The termination of
the Plan shall not impair the power and authority of the Committee with respect
to an outstanding Grant. Whether or not the Plan has terminated, an outstanding
Grant may be terminated or amended (i) by the Company as provided hereunder or
(ii) by agreement of the Company and the Grantee consistent with the Plan.
(d) Governing Document. This Plan shall be the controlling document. No
other statements, representations, explanatory materials or examples, oral or
written, may amend this Plan in any manner, except for termination or amendment
pursuant to Section 11 hereof. This Plan shall be binding upon and enforceable
against the Company and its successors and assigns.
6
12. Funding of the Plan. This Plan shall be unfunded. The Company shall not
be required to establish any special or separate fund or to make any other
segregation of assets to assure the payment of any Grants under this Plan. In no
event shall interest be paid or accrued on any Grant, including unpaid
installments of Grants.
13. Rights of Participants. Nothing in this Plan shall entitle any Employee
or other person to any claim or right to be granted a Grant under this Plan.
Neither this Plan nor any action taken hereunder shall be construed as giving
any individual any rights to be retained by or in the employ of the Company or
any other employment rights. No Grantee shall have any rights as a shareholder
with respect to any Shares to be distributed under the Plan until he or she has
become the holder of such Shares.
14. Headings. Section headings are for reference only. In the event of a
conflict between a heading and the content of a Section, the content of the
Section shall control.
15. Effective Date of the Plan. The amended and restated Plan shall be
effective March 19, 2002.
16. Miscellaneous. (a) Compliance with Law. The Plan, the exercise of
Options and the obligations of the Company to issue Shares under Grants shall be
subject to all applicable laws and to approvals by any governmental or
regulatory agency as may be required, including national or foreign securities
exchanges. The Committee may revoke any Grant if it is contrary to law,
including the federal securities laws and any applicable state or foreign
securities laws or modify a Grant to bring it into compliance with any valid and
mandatory government regulation. The Committee may also adopt rules regarding
the withholding of taxes on payments to Grantees. The Committee may, in its sole
discretion, agree to limit its authority under this Section.
(b) Governing Law. THE VALIDITY, CONSTRUCTION, INTERPRETATION AND EFFECT OF
THE PLAN AND GRANT INSTRUMENTS ISSUED UNDER THE PLAN SHALL BE GOVERNED AND
CONSTRUED BY AND DETERMINED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE
WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PROVISIONS THEREOF.
(c) Indemnification. Each person who is or shall have been a member of the
Board or the Committee shall be indemnified and held harmless by the Company to
the fullest extent permitted by law against and from any loss, cost, liability
or expense (including any related attorney's fees and advances thereof) in
connection with, based upon or arising or resulting from any claim, action, suit
or proceeding to which such person may be made a party or in which such person
may be involved by reason of any action taken or failure to act under or in
connection with the Plan or any Grant Instrument and from and against any and
all amounts paid by such person in settlement thereof, with the Company's
approval, or paid by such person in satisfaction of any judgment in any such
action, suit or proceeding against such person, provided that he or she shall
give the Company an opportunity, at its own expense, to handle and defend the
same before he or she undertakes to handle and defend it on his or her own
behalf. The foregoing right of indemnification shall not be exclusive and shall
be independent of any other rights of indemnification to which such persons may
be entitled under by contract, as a matter of law or otherwise.
(d) No Limitation on Compensation. Nothing in the Plan shall be construed
to limit the right of the Company to establish other plans or to pay
compensation to its employees in cash or property, in a manner which is not
expressly authorized under the Plan.
(e) No Impact on Benefits. Options granted under the Plan are not
compensation for purposes of calculating an employee's rights under any employee
benefit plan, except to the extent provided in any such plan.
7
(f) Freedom of Action. Subject to Section 11, nothing in the Plan or any
Grant Instrument shall be construed as limiting or preventing the Company or any
of its Affiliates from taking any action with respect to the operation or
conduct of its or their business that it deems appropriate or in its best
interest.
(g) No Right to Particular Assets. Nothing contained in this Plan and no
action taken pursuant to this Plan shall create or be construed to create a
trust of any kind or any fiduciary relationship between the Company and its
Affiliates, on the one hand, and any Grantee or executor, administrator or other
personal representative or designated beneficiary of such Grantee, on the other
hand, or any other persons. Any reserves that may be established by the Company
or its Affiliates in connection with this Plan shall continue to be held as part
of the general funds of the Company or such Affiliate, and no individual or
entity other than the Company or such Affiliate shall have any interest in such
funds until paid to a Grantee. To the extent that any Grantee or such Grantee's
executor, administrator or other personal representative, as the case may be,
acquires a right to receive any payment from the Company or any of its
Affiliates pursuant to this Plan, such right shall be no greater than the right
of an unsecured general creditor of the Company or such Affiliate.
(h) Notices. Each Grantee shall be responsible for furnishing the Committee
with his or her current and proper address for the mailing of notices and
delivery of agreements. Any notices required or permitted to be given shall be
deemed given if directed to the person to whom addressed at such address and
mailed by regular United States mail, first-class and prepaid. If any item
mailed to such address is returned as undeliverable to the addressee, mailing
will be suspended until the Grantee furnishes the proper address.
(i) Severability of Provisions. If any provision of this Plan shall be held
invalid or unenforceable, such invalidity or unenforceability shall not affect
any other provisions hereof, and this Plan shall be construed and enforced as if
such provision had not been included.
(j) Incapacity. Any benefit payable to or for the benefit of a minor, an
incompetent person or other person incapable of receiving such benefit shall be
deemed paid when paid to such person's guardian or to the party providing or
reasonably appearing to provide for the care of such person, and such payment
shall fully discharge the Board, the Committee, the Company, its Affiliates and
other parties with respect thereto.
(k) Definitions. As used in the Plan, the following terms shall have the
meanings set forth below:
"Affiliate" shall mean, with respect to any person, any other person
that directly or indirectly, through one or more intermediaries, controls,
is controlled by, or is under common control with, such first person. For
purposes of this definition, "control" (including, with correlative
meanings, the terms "controlled by" and "under common control with"), as
used with respect to any person, means the possession, directly or
indirectly, of the power to direct or cause the direction of the management
and policies of such person, whether through the ownership of voting
securities, by contract or credit arrangement, as trustee or executor, or
otherwise.
"Fair Market Value" shall mean, (i) with respect to any property other
than Shares, the fair market value of such property determined by such
methods or procedures as shall be established from time to time by the
Committee and (ii) with respect to the Shares, as of any date, (A) the mean
between the high and low sales prices of the Shares as reported on the
composite tape for securities traded on the New York Stock Exchange for
such date (or if not then trading on the New York Stock Exchange, the mean
between the high and low sales price of the Shares on the stock exchange or
over-the-counter market on which the Shares are principally trading on such
date), or, if there were no sales on such date, on the closest preceding
date on which there were sales of Shares or (B) in the event there shall be
8
no public market for the Shares on such date, the fair market value of the
Shares as determined in good faith by the Committee.
"Subsidiary" shall mean (i) any entity that, directly or indirectly,
is controlled by the Company and (ii) any entity in which the Company has a
significant equity interest, in either case as determined by the Committee.
9
Exhibit 10.2
SEVERANCE PAY AGREEMENT FOR KEY EMPLOYEE
This agreement is entered into as of April 1, 2005 (the "Employment Date")
between Asbury Automotive Group, Inc. ("Asbury") and Charlie Tomm ("Executive"),
a key employee of Asbury, in order to provide for an agreed-upon compensation in
the event that Executive's employment is terminated as defined in this
agreement.
1. Severance Pay Arrangement
If a Termination (as defined below) of Executive's employment occurs at any
time during Executive's employment, except as provided herein, Asbury will
pay Executive Severance Pay based upon Executive's base salary as of the
date of Termination, as calculated below. Payment (subject to required
withholding) will be made by Asbury to Executive monthly on the regular
payroll dates of Asbury starting with the date of Termination. The amount
of Executive's Severance Pay will at no time be less than 18 months or
greater than 36 months of Executive's base salary. If Executive's
employment were terminated in the first month following the Employment
Date, Executive would be eligible for 36 months of Severance Pay. Following
the first month after the Employment Date and each successive month of
employment that Executive completes, up to 18, one month of severance pay
eligibility will be removed. For example, after 6 completed months of
employment, Executive would be eligible for 30 months of Severance Pay.
After 18 months of employment, and for the duration of Executive's
employment with Asbury, Executive will be eligible for 18 months of
Severance Pay. For purposes of calculating Severance Pay eligibility, time
spent by Executive on any type of approved or required leave of absence,
vacation or holiday will count towards completed months of employment
determinations.
If Executive participates in a bonus compensation plan at the date of
Termination, Severance Pay will also include a bonus payment in an amount
equal to the bonus earned but not already paid for the year of Termination
prorated through the date of Termination.
In addition, Executive shall be entitled for 12 months following the date
of Termination to continue to participate at the same level of coverage and
Executive contribution in any health and dental plans, as may be amended
from time to time, in which Executive was participating immediately prior
to the date of Termination. Such participation will terminate 30 days after
Executive has obtained other employment under which Executive is covered by
equal benefits. Executive agrees to notify Asbury promptly upon obtaining
such other employment. At the option of Executive, COBRA coverage will be
available, as provided by company policy, at the termination of the
extended benefits provided above.
However, nothing herein shall be construed to provide Executive Severance
Pay eligibility should Executive be found to have engaged in conduct that
would qualify as "cause" for termination, as that term is defined in
Section 2 below, even if the conduct was discovered by the Company after
Executive's "termination" and the commencement of Severance Pay. If such
"cause" is found after any amount of Severance Pay has already been
1
remitted to Executive, Executive agrees and understands that the Company
expressly reserves the right to stop any future payments, and recover any
amounts already paid.
2. Definition of Termination Triggering Severance Pay
A "Termination" triggering the Severance Pay set forth above in Section 1
is defined as (1) termination of Executive's employment by Asbury for any
reason, except death, disability, retirement, voluntary resignation or
"cause", or (2) Asbury's reduction of Executive's base salary. The
definition of "cause" is: (a) Executive's gross negligence or serious
misconduct (including, without limitation, any criminal, fraudulent or
dishonest conduct) that is injurious to Asbury or any of its affiliates; or
(b) Executive being convicted of, or entering a plea of nolo contendere to,
any crime that constitutes a felony or involves moral turpitude; or (c)
Executive's material breach of Sections 3, 4 or 5 below; or (d) Executive's
willful and continued failure to substantially perform Executive's duties
with Asbury; (e) Executive's material breach of a material written policy
of Asbury; or (f) Executive's acceptance of compensation from any source
and in any form, other than that specifically provided for by this
Agreement, related in any way to Executive's position with the Company. The
definition of "disability" is a physical or mental disability or infirmity
that prevents the performance by Executive of his duties lasting (or likely
to last, based on competent medical evidence presented to Asbury) for a
continuous period of six months or longer.
3. Confidential Information Nondisclosure Provision
During and after employment with Asbury, Executive agrees not to disclose
to any person (other to an employee or director of Asbury or any affiliate
and except as may be required by law) and not to use to compete with Asbury
or any affiliate any confidential or proprietary information, knowledge or
data that is not in the public domain that was obtained by Executive while
employed by Asbury with respect to Asbury or any affiliate or with respect
to any products, improvements, customers, methods of distribution, sales,
prices, profits, costs, contracts, suppliers, business prospects, business
methods, techniques, research, trade secrets or know-how of Asbury or any
affiliate (collectively, "Confidential Information"). In the event
Executive's employment terminates for any reason, Executive will deliver to
Asbury on or before the date of termination all documents and data of any
nature pertaining to Executive's work with Asbury and will not take any
documents or data or any reproduction, or any documents containing or
pertaining to any Confidential Information. Executive agrees that in the
event of a breach by Executive of this provision, Asbury shall be entitled
to inform all potential or new employers of this provision and to cease
payments and benefits that would otherwise be made pursuant to Section 1
above, as well as to obtain injunctive relief and damages which may include
recovery of amounts paid to Executive under this agreement.
4. Non-Solicitation of Employees
Executive agrees that for a period of one year from Executive's last day of
employment with Asbury, Executive shall not directly or indirectly solicit
for employment or employ any person who, at any time during the 12 months
preceding such last day of Executive's employment, is or was employed by
Asbury or any affiliate or induce or attempt to persuade any employee of
Asbury or any affiliate to terminate their employment relationship.
Executive agrees that in the event of a breach by Executive of this
provision, Asbury shall be entitled to inform all potential or new
employers of this provision and to cease payments and benefits that would
otherwise be made pursuant to Section 1 above, as well as to obtain
2
injunctive relief and damages which may include recovery of amounts paid to
Executive under this agreement.
5. Covenant Not to Compete
While Executive is employed by Asbury, Executive shall not directly or
indirectly engage in, participate in, represent or be connected with in any
way, as an officer, director, partner, owner, employee, agent, independent
contractor, consultant, proprietor or stockholder (except for the ownership
of a less than 5% stock interest in a publicly-traded corporation) or
otherwise, any business or activity which competes with the business of
Asbury or any affiliate unless expressly consented to in writing by the
Chief Executive Officer of Asbury (collectively, "Covenant Not To
Compete").
Covenant Not To Compete shall remain in effect for one year following the
date of termination except that the prohibition above on "any business or
activity which competes with the business of Asbury or any affiliate" shall
be limited to any business competing with Asbury that is located or does
business within 50 miles of any Asbury location where Executive had
supervisory responsibility while employed by Asbury. Executive shall
disclose in writing to Asbury the name, address and type of business
conducted by any proposed new employer of Executive if requested in writing
by Asbury. Executive agrees that in the event of a breach by Executive of
this Covenant Not To Compete, Asbury shall be entitled to inform all
potential or new employers of this Covenant and to cease payments and
benefits that would otherwise be made pursuant to Section 1 above, as well
as to obtain injunctive relief and damages which may include recovery of
amounts paid to Executive under this agreement.
GENERAL PROVISIONS
A. Employment is At Will
Executive and Asbury acknowledge and agree that Executive is an "at will"
employee, which means that either Executive or Asbury may terminate the
employment relationship at any time, for any reason, with or without cause
or notice, and that nothing in this agreement shall be construed as an
express or implied contract of employment.
B. Execution of Release
As a condition to the receipt of the Severance Pay payments and benefits
described in Section 1 above, Executive agrees to execute a release of all
claims arising out of Executive's employment or termination, including, but
not limited to, any claim of discrimination, harassment or wrongful
discharge under local, state or federal law.
C. Other Provisions
This agreement shall be binding upon the heirs, executors, administrators,
successors and assigns of Executive and Asbury, including any successor to
Asbury.
The transfer of Executive from Asbury to any of its affiliates shall not be
deemed to be a Termination pursuant to clause (1) of Section 2 of this
agreement until such time as Executive is no longer employed by Asbury or
any of its affiliates. If Executive is transferred to an affiliate of
Asbury, references to "Asbury" herein shall be deemed to include the
applicable affiliate to which Executive is transferred.
Any controversy or claim arising out of or relating to Executive's
employment with the Company, the termination of Executive's employment,
this Agreement, or the breach thereof, shall be finally settled by binding
arbitration in accordance with the Federal Arbitration Act before an
arbitrator (who shall be an attorney with at least ten years' experience in
employment law) mutually-agreed to by the parties, in or near the city
where Executive resides. The arbitrator will be bound to follow the
substantive law governing the claims pled in the jurisdiction in which the
claims arise, and shall apply the federal rules of procedure and evidence
applicable to disputes resolved by a bench trial in a United States
District Court. Executive and the Company agree that any judgment upon any
award rendered by the arbitrators may be entered in any court having
jurisdiction thereof.
The headings and captions are provided for reference and convenience only
and shall not be considered part of this agreement.
If any provision of this agreement shall be held invalid or unenforceable,
such holding shall not affect any other provisions, and this agreement
shall be construed and enforced as if such provisions had not been
included.
All notices and other communications required or permitted under this
agreement shall be in writing (including a facsimile or similar writing)
and shall be deemed given when (1) delivered personally, (2) sent by
certified or registered mail, postage prepaid, return receipt requested or
delivered by overnight courier (provided that a written acknowledgment of
receipt is obtained by the overnight courier) to the party concerned at the
address indicated below or to such changed address as such party may
subsequently give such notice of or (3) if given by facsimile, at the time
transmitted to the respective facsimile numbers set forth below, or to such
other facsimile number as either party may have furnished to the other in
writing in accordance herewith, and the appropriate confirmation received
(or, if such time is not during a business day, at the beginning of the
next such business day); provided, however, that notice of change of
address shall be effective only upon receipt:
If to Asbury: Asbury Automotive Group, Inc.
c/o General Counsel
622 Third Avenue
37th Floor
New York, NY 10017
Facsimile: (212) 297-2653
If to Executive: To the most recent address and facsimile number, if
applicable, of Executive set forth in the personnel records of Asbury.
This agreement supersedes any and all agreements between Asbury and
Executive relating to payments upon termination of employment or severance
pay and may only be modified in writing signed by Asbury and Executive.
This agreement shall be governed by and construed in accordance with the
laws of the State of Florida.
3
All payments hereunder shall be subject to any required withholding of
federal, state, local and foreign taxes pursuant to any applicable law or
regulation.
No provision of this agreement shall be waived unless the waiver is agreed
to in writing and signed by Executive and the Chief Executive Officer of
Asbury. No waiver by either party of any breach of, or of compliance with,
any condition or provision of this agreement by the other party shall be
considered a waiver of any other condition or provision or of the same
condition or provision at another time.
This agreement may be executed in one or more counterparts, each of which
shall be deemed to be an original but all of which together will constitute
one and the same instrument.
AGREED TO ON JUNE 10, 2005, EFFECTIVE AS OF THE DATE FIRST WRITTEN ABOVE:
BY EXECUTIVE BY ASBURY AUTOMOTIVE
GROUP, INC.
/s/ Charlie Tomm /s/ Kenneth B. Gilman
President and Chief Executive Officer
-------------------- -------------------------------------
Exhibit 10.3
Charlie Tomm
2005 Platform CEO Compensation Plan
Goals:
o Accountability for the most important operating performance elements
managed by you
o Financial reward for successfully managing these elements
o Financially reward "recovery" results if the first half of the year is
less than par
2004 Compensation Elements
o Base Salary is $600,000 (This is an increase from 500,000)
o Total Par Bonus Percent is 80%
o Total Par Bonus Dollars are $480,000
o Annual Net Operating Income Bonus (70% of the total Par Bonus Dollars) is
$336,000
o Semi annual NOI Par Bonus is $168,000
o Annual Business Development Bonus (30% of the total Par Bonus Dollars) is
$144,000
Net Operating Income Bonus Formula (70% of the total Par Bonus)
The Bonus Plan is being divided into 2 half-year opportunities but will never
pay you less than an annual plan calculation. The approach provides you with the
opportunity to rebound from a disappointing first half with a new bonus
opportunity in the second half. The details are shown in the chart below.
- ------------------------------------ -----------------------------------------
The first half Bonus: Final year end Bonus (2)
- ------------------------------------ -----------------------------------------
If NOI Result: Using the first Final Payment Final Bonus payment
half bonus will be will be:
formula the Mid calculated: (1)
year payment
will be:
- ------------------------------------ -----------------------------------------
Meets or exceeds Par Bonus for Using the The annual calculation
Par the first 1/2 Annual Bonus less the par bonus
year calculation paid in the first half.
- ------------------------------------ -----------------------------------------
Between Threshold Actual first Second half Actual second half
and par half Bonus Bonus Formula Bonus.
This can pay up to 10%
more than the annual
Plan calculation
- ------------------------------------ -----------------------------------------
Below Threshold No Bonus Second half Actual second half
Bonus Formula Bonus.
Potential for
meaningful increase
over the annual plan
- ------------------------------------ -----------------------------------------
1. First 1/2 Payments are never forfeited
2. The annual Business Development bonus will be paid out with the
final Bonus payment
1
The Bonus targets and formulas for 2005 are detailed in the next 2 charts.
Annual Targets
- ----------------------------------------------------------------------------------------------------------------------
NOI
(% of
Level NOI Dollars Budget)(1) Bonus Dollars Annual Formula
- --------------------- ------------------- --------------- ------------------- ----------------------------------------
Threshold 47,300,000 90% $67,200 $67,200
- --------------------- ------------------- --------------- ------------------- ----------------------------------------
Par 52,500,000 100% $336,000 $67,200 Plus 5.1% of NOI over threshold
- --------------------- ------------------- --------------- ------------------- ----------------------------------------
Double 62,000,000 118% $672,000 $336,000 Plus 3.6% of NOI over Par
- --------------------- ------------------- --------------- ------------------- ----------------------------------------
(1) Intentionally Omitted
Semi Annual Targets (based upon your calendarized budgets)
- ----------------------------------------------------------------------------------------------------------------------
Level First Half NOI First Half Formula Second half NOI Second half Formula
Dollars Dollars
- ---------------- ----------------- ---------------------------- ----------------- ------------------------------------
Threshold 23,100,000 $33,600 24,100,000 $33,600
- ---------------- ----------------- ---------------------------- ----------------- ------------------------------------
Par 25,700,000 $33,600plus 5.2% of NOI in 26,800,000 $33,600 plus 5% of NOI in excess
excess of the threshold of the threshold
- ---------------- ----------------- ---------------------------- ----------------- ------------------------------------
Double 30,300,000 $168,000 Plus 3.6% of NOI 31,600,000 $168,000 Plus 3.5% of NOI in
in excess of Par excess of Par
- ---------------- ----------------- ---------------------------- ----------------- ------------------------------------
Business Development Objectives Bonus (30% of the total Par Bonus)
o Goals/metrics for each of the objectives, addressing the specific
challenges, are set at the beginning of the year. The categories are
detailed below.
o Regular reviews with Ken Gilman to evaluate YTD performance against these
objectives. The metrics will facilitate a fact-based discussion.
o Final review with Ken Gilman at the end of the year to establish year- end
payout. The payout will not be based upon a numerical calculation, rather a
subjective evaluation of the Business Development topics in the below table
(including related metrics).
o Payout range 0% to 200% of the Par.
- --------------- --------------- ------------------------- -------------------
Frame work
Agreement General Manager
Compliance Success Productivity Pre-owned Vehicles
- --------------- --------------- ------------------------- -------------------
Toyota, Honda, Market Share Total platform personnel Used Car Inventory
GM,Nissan expense (including "core" percent
- --------------- --------------- management co.) as a % total.
Unit sales for GM Turnover of total gross: Evaluated Goal is 65%
all but Honda versus budget and trend
- --------------- --------------- to prior years'
CSI for Honda Management performance
Turnover
- --------------- --------------- ------------------------- -------------------
2
Tuck-in Acquisition Bonus
o 12-month measurement period using NOI vs. the deal pro-forma
o 3-month grace period (longer periods may be set when the pro-forma is
created)
o Team Bonus- For team members who helped with integration- 20% of CEO bonus
o Payout scale- see table below
- ------------------------------------------------------------------
Franchise bonus %
----------------------------------
Actual NOI vs. Pro-forma Non-Targeted Targeted*
- ------------------------------------------------------------------
% % Of NOI % Of NOI
- ------------------------------------------------------------------
80%- 99% 2% 4%
100%- 109% 3% 5%
110%-119% 4% 6%
120% and up 5% 7%
- ------------------------------------------------------------------
*Acura, BMW, Honda, Lexus, Mercedes Benz, Toyota, Nissan