Form 8-K
ASBURY AUTOMOTIVE GROUP INC false 0001144980 0001144980 2021-11-01 2021-11-01

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 8-K

 

 

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported): November 1, 2021

 

 

Asbury Automotive Group, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

(State or other jurisdiction

of incorporation)

 

001-31262   01-0609375
(Commission
File Number)
  (IRS Employer
Identification No.)

 

2905 Premiere Parkway NW Suite 300

Duluth, GA

  30097
(Address of principal executive offices)   (Zip Code)

(770) 418-8200

(Registrant’s telephone number, including area code)

N/A

(Former name or former address, if changed since last report)

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading
Symbol(s)

 

Name of each exchange
on which registered

Common stock, par value $0.01 per share   ABG   New York Stock Exchange

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

 

 


Item 1.01

Entry into a Material Definitive Agreement.

Amendment to 2019 Senior Credit Facility

On October 29, 2021, Asbury Automotive Group, Inc. (the “Company”) obtained an amendment (the “Amendment”) to the Third Amended and Restated Credit Agreement dated, as of September 26, 2019, among the Company, as a borrower, certain of its subsidiaries, as vehicle borrowers, Bank of America, N.A., as administrative agent, revolving swing line lender, new vehicle floorplan swing line lender, used vehicle floorplan swingline lender and an L/C issuer, and the other lenders party thereto, JPMorgan Chase Bank, N.A. and Wells Fargo Bank, N.A., as co-syndication agents, Mercedes-Benz Financial Services USA LLC and Toyota Motor Credit Corporation, as co-documentation agents, and BofA Securities, Inc. as sole lead arranger and sole bookrunner.

Pursuant to the terms of the Amendment, upon the Company’s delivery of a notice at its discretion indicating the effective date of certain of the amendments therein, and satisfaction of certain other customary closing conditions, the Amendment will, among other things,

 

   

increase the aggregate commitments under the Revolving Credit Facility to $450.0 million;

 

   

increase the aggregate commitments under the Used Vehicle Floorplan Facility to $350.0 million;

 

   

increase the aggregate commitments under the New Vehicle Floorplan Facility to $1.75 billion;

 

   

remove our minimum consolidated current ratio covenant; and

 

   

provide for limited conditionality with respect to the borrowings under the 2019 Senior Credit Agreement to be used to fund a portion of the consideration for the LHM Acquisition (as defined below).

The foregoing description of the Amendment does not purport to be complete and is subject to, and qualified in its entirety by reference to, the full text of the Amendment, a copy of which will be filed with the Company’s Annual Report on Form 10-K for the fiscal year ending December 31, 2021.

 

Item 7.01

Regulation FD Disclosure.

On September 28, 2021, Asbury Automotive Group, LLC (“Purchaser”), a Delaware limited liability company and a wholly-owned subsidiary of Asbury Automotive Group, Inc., a Delaware corporation (the “Company”), entered into (i) a Purchase Agreement with certain members of the Larry H. Miller Dealership family of entities; (ii) a Real Estate Purchase and Sale Agreement with Miller Family Real Estate, L.L.C. and (iii) a Purchase Agreement with certain equity owners of the Total Care Auto, Powered by Landcar insurance business affiliated with the Larry H. Miller Dealership family of entities (the transaction contemplated thereby, the “LHM Acquisition”).

The Company is furnishing herewith the following historical financial statements of each of (i) the Larry H. Miller Dealerships; (ii) the Larry H. Miller Automotive Real Estate Properties and (iii) the Total Care Auto, Powered by Landcar.

The audited combined financial statements for each of the Larry H. Miller Dealerships, Larry H. Miller Automotive Real Estate Properties and Total Care Auto, Powered by Landcar as of and for the years ended December 31, 2020 and 2019, together with the notes thereto and the independent auditors’ report thereon, which are furnished as Exhibits 99.1, 99.2, and 99.3, respectively, and are incorporated herein by reference.

The unaudited combined interim financial statements for each of the Larry H. Miller Dealerships, the Larry H. Miller Automotive Real Estate Properties and Total Care Auto, Powered by Landcar as of and for the nine months ended September 30, 2021 and September 30, 2020, together with the notes thereto, which are furnished as Exhibits 99.4, 99.5 and 99.6, respectively, and are incorporated herein by reference.

In addition, the Company is furnishing herewith the following pro forma condensed combined financial statements of the Company.

The unaudited pro forma condensed combined balance sheet of the Company as of September 30, 2021, and unaudited pro forma condensed combined statements of income of the Company for the nine months ended September 30, 2021 and September 30, 2020 and for the year ended December 31, 2020 which are furnished as Exhibit 99.7 hereto and are incorporated herein by reference.


Item 9.01

Financial Statements and Exhibits.

(d) Exhibits.

 

Exhibit
No.

  

Description

99.1    Audited combined financial statements of the Larry H. Miller Dealerships as of and for the years ended December 31, 2020 and 2019 (with independent auditors’ report thereon)
99.2    Audited combined financial statements of the Larry H. Miller Automotive Real Estate Properties as of and for the years ended December 31, 2020 and 2019 (with independent auditors’ report thereon)
99.3    Audited combined financial statements of Total Care Auto, Powered by Landcar as of and for the years ended December 31, 2020 and 2019 (with independent auditors’ report thereon)
99.4    Unaudited condensed combined interim financial statements of the Larry H. Miller Dealerships as of September 30, 2021 and for the nine months ended September 30, 2021 and September 30, 2020
99.5    Unaudited condensed combined interim financial statements of the Larry H. Miller Automotive Real Estate Properties as of September 30, 2021 and for the nine months ended September 30, 2021 and September 30, 2020
99.6    Unaudited combined interim financial statements of Total Care Auto, Powered by Landcar as of and for the nine months ended September 30, 2021 and September 30, 2020
99.7    Unaudited pro forma condensed combined balance sheet of the Company as of September 30, 2021, and unaudited pro forma condensed combined statements of income of the Company for the nine months ended September 30, 2021 and September 30, 2020 and for the year ended December 31, 2020
104    Cover Page Interactive Data File (embedded within the Inline XBRL document)


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 hereunto duly authorized.

 

    ASBURY AUTOMOTIVE GROUP, INC.
Date: November 1, 2021     By:  

/s/ Michael D. Welch

    Name:  

Michael D. Welch

    Title:  

Senior Vice President and Chief Financial Officer

 

- 2 -

EX-99.1

Exhibit 99.1

 

LOGO

LARRY H. MILLER DEALERSHIPS

Combined Financial Statements

December 31, 2020 and 2019

(With Independent Auditors’ Report Thereon)


LARRY H. MILLER DEALERSHIPS

Table of Contents

 

     Page(s)  

Independent Auditors’ Report

     1  

Combined Balance Sheets

     2  

Combined Statements of Income

     3  

Combined Statements of Equity

     4  

Combined Statements of Cash Flows

     5  

Notes to Combined Financial Statements

     6–24  


LOGO   
  

KPMG LLP

Suite 1500

15 W. South Temple

Salt Lake City, UT 84101

Independent Auditors’ Report

To the Board of Directors

Larry H. Miller Dealerships:

We have audited the accompanying combined financial statements of Larry H. Miller Dealerships (collectively referred to as the Company), which comprise the combined balance sheets as of December 31, 2020 and

2019, and the related combined statements of income, equity, and cash flows for the years then ended, and the related notes to the combined financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these combined financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of combined financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the combined financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Larry H. Miller Dealerships as of December 31, 2020 and 2019, and the results of their operations and their cash flows for the years then ended in accordance with U.S. generally accepted accounting principles.

 

LOGO

Salt Lake City, Utah

April 23, 2021

KPMG LLP, a Delaware limited liability partnership and a member firm of

the KPMG global organization of independent member firms affiliated with

KPMG International Limited, a private English company limited by guarantee.


LARRY H. MILLER DEALERSHIPS

Combined Balance Sheets

December 31, 2020 and 2019

(In thousands)

 

     2020     2019  

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 46,150       17,733  

Accounts receivable, net

     206,620       214,914  

Inventories

     677,578       841,660  

Other current assets

     6,716       7,781  
  

 

 

   

 

 

 

Total current assets

     937,064       1,082,088  

Property and equipment, net

     33,510       36,980  

Goodwill

     86,350       70,350  

Franchise value

     174,694       158,194  

Other long term assets, net

     —         6,051  
  

 

 

   

 

 

 

Total assets

   $ 1,231,618       1,353,663  
  

 

 

   

 

 

 

Liabilities and Equity

    

Current liabilities:

    

Floorplan notes payable – trade

   $ 45,843       52,178  

Floorplan notes payable – nontrade

     381,358       440,930  

Trade payables

     66,231       54,784  

Accrued liabilities

     81,838       76,319  

Incentive bonus plan

     19,427       16,976  

Due to related parties

     163,217       276,534  

Notes payable to related parties, current portion

     8,709       17,275  

Note payable to owners

           768  
  

 

 

   

 

 

 

Total current liabilities

     766,623       935,764  

Other liabilities

     28,829       26,400  

Notes payable to related parties

     5,249       8,666  
  

 

 

   

 

 

 

Total liabilities

     800,701       970,830  
  

 

 

   

 

 

 

Equity:

    

Common stock

     2,517       2,517  

Additional paid-in capital

     430,294       382,210  

Treasury stock

     (1,894     (1,894
  

 

 

   

 

 

 

Total equity

     430,917       382,833  
  

 

 

   

 

 

 

Total liabilities and equity

   $ 1,231,618       1,353,663  
  

 

 

   

 

 

 

See accompanying notes to combined financial statements.

 

2


LARRY H. MILLER DEALERSHIPS

Combined Statements of Income

Years ended December 31, 2020 and 2019

(In thousands)

 

     2020     2019  

Revenues:

    

New vehicle

   $ 2,481,520       2,390,776  

Used vehicle retail

     1,118,568       1,112,816  

Used vehicle wholesale

     385,311       466,083  

Service, body and parts

     622,238       620,302  

Fleet

     119,212       144,243  

Finance and insurance, net

     206,809       196,867  

Other

     884       823  
  

 

 

   

 

 

 

Total revenues

     4,934,542       4,931,910  
  

 

 

   

 

 

 

Cost of sales:

    

New vehicle

     2,297,070       2,242,588  

Used vehicle retail

     950,161       953,573  

Used vehicle wholesale

     374,830       460,678  

Service, body and parts

     353,267       350,643  

Fleet

     114,420       138,986  
  

 

 

   

 

 

 

Total cost of sales

     4,089,748       4,146,468  
  

 

 

   

 

 

 

Gross profit

     844,794       785,442  

Selling, general and administrative

     662,432       662,686  

Depreciation and amortization

     9,128       9,166  

Impairment loss

     7,400       26,000  
  

 

 

   

 

 

 

Operating income

     165,834       87,590  

Floorplan interest expense

     (12,110     (28,597

Other income, net

     343       1,011  
  

 

 

   

 

 

 

Net income

   $ 154,067       60,004  
  

 

 

   

 

 

 

See accompanying notes to combined financial statements.

 

   3        


LARRY H. MILLER DEALERSHIPS

Combined Statements of Equity

Years ended December 31, 2020 and 2019

(In thousands)

 

     Common
stock
     Additional
paid-in

capital
    Treasury
stock
    Retained
earnings

and owners’
earnings
    Total
equity
 

Balance at December 31, 2018

   $ 2,517        368,308       (1,894     —         368,931  

Net income

     —          —         —         60,004       60,004  

Capital contributions

     —          56,327       —         1,048       57,375  

Dividends

     —          (42,425     —         (61,052     (103,477
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2019

     2,517        382,210       (1,894     —         382,833  

Net income

     —          —         —         154,067       154,067  

Capital contributions

     —          60,429       —         1,230       61,659  

Dividends

     —          (12,345     —         (155,297     (167,642
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2020

   $ 2,517        430,294       (1,894     —         430,917  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to combined financial statements.

 

   4        


LARRY H. MILLER DEALERSHIPS

Combined Statements of Cash Flows

Years ended December 31, 2020 and 2019

(In thousands)

 

     2020     2019  

Cash flows from operating activities:

    

Net income

   $ 154,067       60,004  

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

    

Depreciation and amortization

     9,128       9,166  

Impairment loss

     7,400       26,000  

Net loss on asset sales and dispositions and sale of dealerships

     5,575       12,534  

(Increase) decrease in assets, net of acquisitions and dispositions:

    

Accounts receivable, net

     8,294       (11,962

Inventories

     182,169       34,965  

Other current assets

     1,058       2,361  

Increase (decrease) in liabilities, net of acquisitions and dispositions:

    

Floorplan notes payable – trade

     (6,335     (21,140

Trade payables

     11,385       (2,543

Accrued and other liabilities

     7,263       7,931  

Incentive bonus plan

     2,451       (395
  

 

 

   

 

 

 

Net cash provided by operating activities

     382,455       116,921  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Capital expenditures

     (4,328     (7,199

Proceeds from asset sales and dispositions

     674       618  

Proceeds from sale of dealership

     1,151       —    

Cash paid for purchase of dealerships

     (46,974     (40,246
  

 

 

   

 

 

 

Net cash used in investing activities

     (49,477     (46,827
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net repayment on floorplan notes payable – nontrade, net of acquisitions and dispositions

     (72,510     (96,403

Net change in due to related parties

     (113,317     95,181  

Principal payments on notes payable to related parties

     (13,087     (16,664

Principal payments on note payable to owners

     (768     —    

Proceeds from issuance of notes payable to related parties

     1,104       2,392  

Capital contributions

     61,659       57,375  

Dividends paid

     (167,642     (103,477
  

 

 

   

 

 

 

Net cash used in financing activities

     (304,561     (61,596
  

 

 

   

 

 

 

Change in cash and cash equivalents

     28,417       8,498  

Cash and cash equivalents at beginning of year

     17,733       9,235  
  

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 46,150       17,733  
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid for interest

   $ 13,754       28,878  

See accompanying notes to combined financial statements.

 

   5        


LARRY H. MILLER DEALERSHIPS

Notes to Combined Financial Statements

December 31, 2020 and 2019

 

(1)

Organization and Summary of Significant Accounting Policies

 

  (a)

Business Overview

The Larry H. Miller Dealerships (collectively, the Company) is engaged in the retail automotive industry with dealership operations in Utah, Arizona, New Mexico, Colorado, Idaho, California and Washington. The Company operates 55 new car dealerships under franchise agreements with a number of automotive manufacturers. In accordance with individual franchise agreements, each dealership is subject to certain rights and restrictions typical of the industry. The manufacturers have a significant influence on the operations of the Company.

The Company’s dealerships sell new and used vehicles, vehicle maintenance and repair services, vehicle parts, extended service contracts, vehicle protection products and aftermarket products. The Company also operates seven used car dealerships, 11 collision centers, and a used vehicle wholesale business. The Company also provides management services to other new vehicle franchised dealers. The management fees earned from these services are included as other revenues in the combined statements of income.

 

  (b)

Basis of Presentation

The accompanying combined financial statements reflect the results of operations, the financial position and the cash flows for all dealership related entities owned by the Larry H. Miller Family (the Miller Family or Owners). All intercompany balances and transactions have been eliminated in combination. These combined financial statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP).

 

  (c)

Cash and Cash Equivalents

Cash is defined as cash on hand and cash in bank accounts without restrictions. With the exception of contracts in transit, which are classified as a component of accounts receivable, the Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.

 

  (d)

Accounts Receivable

Accounts receivable includes contracts in transit, vehicle receivables, amounts due from companies and customers for vehicles, service and parts sold and amounts due from manufacturers for factory rebates, dealer incentives, warranty reimbursement and other credits for vehicles sold.

Accounts receivable are recorded at the invoiced amount and do not bear interest until such time as they are 60 days past due. An allowance for doubtful accounts is estimated based on historical write-off experience and is reviewed on a monthly basis. Account balances are charged off against the allowance after all appropriate means of collection have been exhausted and the potential for recovery is considered remote.

 

   6    (Continued)


LARRY H. MILLER DEALERSHIPS

Notes to Combined Financial Statements

December 31, 2020 and 2019

 

  (e)

Inventories

Most of the vehicle inventories are valued at the lower of cost or net realizable value using a specific identification method. Thirty-one of the Company’s dealerships account for their new vehicle and demonstrator vehicle inventory at cost, as determined by the last-in, first-out (LIFO) method. The cost of new and used vehicle inventories includes acquisition, reconditioning, dealer installed accessories and transportation expense.

Most manufacturers provide financial assistance and reimbursement for holdback, floorplan interest and advertising credits, which are reflected as a reduction in the carrying value of each vehicle purchased by the Company. The Company recognizes holdback, floorplan interest, advertising and other rebates and incentives received from the manufacturers as a reduction to cost of sales as the related vehicles are sold.

As the net realizable value of vehicle inventory typically declines over time, especially with respect to used vehicles, the Company establishes a new cost basis for used vehicles based on its historical loss experience and management’s considerations of current market trends. The related write downs are charged to cost of sales and reduce the carrying value of vehicle inventory on hand. Used vehicles are complex to value as there is no standardized source for determining the exact values of each vehicle and each market in which the Company operates is unique. As a result, the value of each used vehicle taken at trade-in, or purchased at auction, is determined based on industry data, primarily accessed via the Company’s used vehicle management software and the industry expertise of the responsible used vehicle manager. Valuation risk is partially mitigated by the speed at which the Company turns this inventory.

Parts inventories are valued by the Company at lower of cost or net realizable value, which approximates cost on a first-in, first-out (FIFO) basis. Parts purchase discounts received from the manufacturer are reflected as a reduction in the carrying value of the parts purchased from the manufacturer and are recognized as a reduction to cost of sales as the related inventory is sold.

 

  (f)

Property and Equipment

Property and equipment are recorded at cost. Leasehold improvements made at the inception of the lease or during the term of the lease are amortized on a straight-line basis over the shorter of the useful life of the improvement or the remaining term of the lease. Expenditures for major additions and improvements are capitalized, while minor additions, maintenance and repairs are charged to expense as incurred. Depreciation expense is computed using the straight-line method.

The range of estimated useful lives is as follows:

 

Leasehold improvements

     5 to 10 years  

Service and parts equipment

     5 to 15 years  

Furniture, signs and fixtures

     3 to 10 years  

Company vehicles

     4 to 10 years  

 

   7    (Continued)


LARRY H. MILLER DEALERSHIPS

Notes to Combined Financial Statements

December 31, 2020 and 2019

 

When an asset is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss is credited or charged to income from operations. Long-lived assets held and used by the Company are reviewed for impairment whenever events or circumstances indicate that the carrying amount of assets may not be recoverable. The Company considers several factors when evaluating whether there are indications of potential impairment related to long-lived assets, including store profitability, macroeconomic factors and the impact of the Company’s strategic management decisions. If recoverability testing is performed, the Company evaluates assets to be held and used by comparing the carrying amount of an asset to future net undiscounted cash flows associated with the asset, including its disposition. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.

 

  (g)

Goodwill

Goodwill represents the excess purchase price over the fair value of net assets acquired which is not allocable to separately identifiable intangible assets. Other identifiable intangible assets, such as franchise value, are separately recognized if the intangible asset is obtained through contractual or other legal right or if the intangible asset can be sold, transferred, licensed or exchanged.

Goodwill is not amortized but is tested for impairment at least annually, or more frequently if events or circumstances indicate its carrying value may exceed fair value. Goodwill is tested for impairment at the reporting unit level. The Company’s reporting units are individual stores as this is the level at which discrete financial information is available and for which operating results are regularly reviewed by our chief operating decision maker to allocate resources and assess performance. The Company reviews goodwill during the fourth calendar quarter of each year. Goodwill is initially evaluated based on qualitative factors such as macroeconomic conditions, industry conditions, overall financial performance and other relevant factors to determine if it is more likely than not that the fair value of a reporting unit exceeds its carrying amount. If it is deemed that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then a quantitative analysis to measure the impairment is required.

The quantitative analysis involves estimating the fair value of a reporting unit using widely accepted valuation methodologies including the income and market approaches, which requires the use of estimates and assumptions. If the fair value of the reporting unit is less than its carrying amount, an impairment loss is recognized in an amount equal to the excess of the carrying amount over the fair value of the reporting unit, not to exceed the carrying amount of the goodwill. The annual goodwill impairment analysis resulted in no impairment in 2020 and $19.1 million in 2019.

 

  (h)

Franchise Value

The Company enters into agreements (Franchise Agreements) with automobile manufacturers. Franchise value represents a right received under Franchise Agreements with manufacturers and is identified on an individual store basis.

The Company evaluated the useful lives of Franchise Agreements based on the following factors:

 

   

certain of the Company’s Franchise Agreements continue indefinitely by their terms;

 

   

certain of the Company’s Franchise Agreements have limited terms, but are routinely renewed without substantial cost;

 

   8    (Continued)


LARRY H. MILLER DEALERSHIPS

Notes to Combined Financial Statements

December 31, 2020 and 2019

 

   

other than franchise terminations related to the unprecedented reorganizations of Chrysler and General Motors, and allowed by bankruptcy law, the Company is not aware of manufacturers terminating Franchise Agreements against the wishes of the franchise owners under the ordinary course of business. A manufacturer may pressure a franchise owner to sell a franchise when they are in breach of the franchise agreement over an extended period of time;

 

   

state dealership franchise laws typically limit the rights of the manufacturer to terminate or not renew a franchise;

 

   

the Company is not aware of any legislation or other factors that would materially change the retail automotive franchise system; and

 

   

as evidenced by the Company’s acquisition and disposition history, there is an active market for most automotive dealership franchises within the United States. The Company attributes value to the Franchise Agreements acquired with the dealerships they purchase based on the understanding and industry practice that the Franchise Agreements will be renewed indefinitely by the manufacturer.

Accordingly, the Company has determined that their Franchise Agreements will continue to contribute to their cash flows indefinitely and, therefore, have indefinite lives.

As an indefinite lived intangible asset, franchise value is tested for impairment at least annually, or more frequently if events or circumstances indicate the carrying value may exceed fair value. Indefinite lived intangibles are initially evaluated based on qualitative factors such as macroeconomic conditions, industry conditions, overall financial performance and other relevant factors to determine if it is more likely than not that an indefinite lived asset is impaired. If it is deemed that it is more likely than not that the fair value of the indefinite lived intangible asset is less than its carrying value, an impairment test is required. The impairment test for indefinite lived intangible assets requires the comparison of estimated fair value to carrying value, and an impairment charge is recorded to the extent the fair value is less than the carrying value. The Company has determined the appropriate unit of accounting for testing franchise value for impairment is on an individual store basis.

The Company performs impairment tests in the fourth calendar quarter of each year first by analyzing qualitative factors and then, if necessary, using a market or income based approach to estimate the fair value of franchises. Our impairment testing of franchise value resulted in $7.4 million in 2020 and $6.9 million in 2019.

 

  (i)

Other Long-Term Assets

Other long-term assets consisted principally of museum grade automobiles and are stated at the lower of cost or net realizable value and amortized over the life of the automobiles.

 

  (j)

Advertising

The Company expenses production and other costs of advertising as incurred as a component of selling, general and administrative expense. Additionally, advertising credits that are not tied to specific vehicles, that are earned from the manufacturer when submitted for reimbursement of qualifying advertising expenditures are recognized as a reduction of advertising expense upon manufacturer confirmation that the submitted expenditures qualify for such credits.

 

   9    (Continued)


LARRY H. MILLER DEALERSHIPS

Notes to Combined Financial Statements

December 31, 2020 and 2019

 

Advertising expense, net of manufacturer cooperative advertising credits, was $39.1 million and $50.6 million during the years ended December 31, 2020 and 2019, respectively.

 

  (k)

Income and Other Taxes

All of the entities included in these combined financial statements are S Corporations (Subchapter S corporation), QSUBs (Qualified Subchapter S Subsidiary), or partnerships under provisions of the Internal Revenue Code and state law. The taxable income or loss of these entities flows through to the income tax returns of the owners. Accordingly, no provision for federal or state income taxes is made for these entities.

The Company evaluates the tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are more likely than not of being sustained by the applicable tax authority. The Company has determined that there is no tax liability resulting from unrecognized tax benefits related to uncertain income tax positions taken or expected to be taken on the tax return for the years ended December 31, 2020 and 2019. Tax years subject to examination include 2013 and 2014 for one taxpayer currently under examination and 2017 forward for all tax returns.

 

  (l)

Concentrations of Risk and Uncertainties

The Company enters into Franchise Agreements with the manufacturers. The Franchise Agreements generally limit the location of the dealership and provide the auto manufacturer approval rights over changes in dealership management and ownership. The auto manufacturers are also entitled to terminate the Franchise Agreements if the dealership is in material breach of the terms. The Company’s ability to expand operations depends, in part, on obtaining consents of the manufacturers for the acquisition of additional dealerships.

The Company is subject to a concentration of risk in the event of financial distress, including potential reorganization or bankruptcy, of a major vehicle manufacturer. The Company purchases substantially all new vehicles from various manufacturers or distributors at the prevailing prices available to all franchised dealers. The Company’s sales volume could be materially adversely impacted by the manufacturers’ or distributors’ inability to supply the stores with an adequate supply of vehicles. The largest vehicle manufacturers represented by the Company are FCA US LLC (Chrysler) and Toyota Motor Sales, USA (Toyota). The Company’s Chrysler and Toyota stores represented 34.8% and 28.2% and 32.3% and 31.2% of new vehicle unit sales for 2020 and 2019, respectively. The Company’s Chrysler, General Motors (GM) and Ford (collectively, the Domestic Manufacturers) stores represented 47.7% and 44.0% of new vehicle unit sales for 2020 and 2019, respectively.

The Company receives incentives and rebates from manufacturers, including cash allowances, financing programs, discounts, holdbacks and other incentives. These incentives are recorded as receivables on the combined balance sheets until payment is received. The Company’s financial condition could be materially adversely impacted by the manufacturers’ or distributors’ inability to continue to offer these incentives and rebates at substantially similar terms, or to pay outstanding receivables. Total receivables from manufacturers were $24.4 million and $25.1 million as of December 31, 2020 and 2019, respectively.

 

   10    (Continued)


LARRY H. MILLER DEALERSHIPS

Notes to Combined Financial Statements

December 31, 2020 and 2019

 

  (m)

Financial Instruments, Fair Value and Market Risks

The carrying amounts of floorplan notes payable – trade and nontrade, due to related parties and note payable to owners approximate fair value because of the short-term nature and current market rates of these instruments. The carrying amount of notes payable to related parties approximate fair value as the terms are comparable to current terms for similar instruments.

Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

The Company had variable rate floorplan notes payable that subject the Company to market risk exposure. At December 31, 2020 and 2019, the Company had $427.2 million and $493.1 million, respectively, outstanding under such facilities, at interest rates ranging from 1.40% to 2.89% per annum. An increase or decrease in the interest rates would affect interest expense for the period accordingly. We estimate the fair value of the assets acquired and liabilities assumed in a business combination using various assumptions. The most significant assumptions used relate to determining the fair value of franchise rights.

We estimate the fair value of our franchise rights primarily using the Multi-Period Excess Earnings (MPEE) model. The forecasted cash flows used in the MPEE model contain inherent uncertainties, including significant estimates and assumptions related to growth rates, margins, general operating expenses, and cost of capital. We use primarily internally-developed forecasts and business plans to estimate the future cash flows that each franchise will generate. We have determined that only certain cash flows of the store are directly attributable to the franchise rights. We estimate the appropriate interest rate to discount future cash flows to their present value equivalent taking into consideration factors such as a risk-free rate, a peer group average beta, an equity risk premium and a small stock risk premium. Additionally, we also may use a market approach to determine the fair value of our franchise rights. These market data points include our acquisition and divestiture experience and third-party broker estimates.

 

  (n)

Use of Estimates

The preparation of combined financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the combined financial statements and related notes to combined financial statements. Changes in such estimates may affect amounts reported in future periods.

Estimates are used in the calculation of certain reserves maintained for charge-backs on estimated cancellations of service contracts; guaranteed asset protection (GAP) contracts; and finance fees from customer financing contracts. The Company also uses estimates in the calculation of various expenses, accruals and reserves, including anticipated workers’ compensation premium expenses related to a retrospective cost policy, anticipated losses related to self-insurance components of their property and casualty insurance and discretionary employee bonuses. The Company also makes certain estimates regarding the assessment of the recoverability of goodwill, long-lived assets and indefinite lived intangible assets.

 

   11    (Continued)


LARRY H. MILLER DEALERSHIPS

Notes to Combined Financial Statements

December 31, 2020 and 2019

 

  (o)

Revenue Recognition

Revenue is recorded when vehicles are delivered to customers, when service work is performed and when parts are delivered. Conditions for completing a sale include having an agreement with the customer, which includes pricing, and a sales price that is probable of being collected.

Revenue from the sale of a vehicle is recognized at a point in time, as all performance obligations are satisfied when a contract is signed by the customer, financing has been arranged or collectability is probable and the control of the vehicle is transferred to the customer. The transaction price for a vehicle sale is determined with the customer at the time of the sale. Customers often trade in their own vehicle to apply toward the purchase of a retail new or used vehicle. The trade-in vehicle is a type of noncash consideration measured at fair value, based on external and internal market data for the specified vehicle, and applied as payment to the contract price for the purchased vehicle. The Company does not allow the return of new or used vehicles, except where mandated by state law.

Revenue from parts and service is recognized at a point in time upon delivery of the parts to the customer or when the service is performed. Each automotive repair and maintenance service is a single performance obligation that includes both parts and labor. Payment for the service is typically due upon completion of the service, which is generally completed within a short period of time from contract inception. The transaction price is based on the parts used, the number of labor hours applied, and the hourly labor rate.

The transaction price for counter parts sales is determined at the time of sale and based on the quantity and price of each product purchased. Payment is typically due at time of sale, or within a short period following the sale. The Company allows for customer returns on sales of parts inventory up to 30 days after the sale. Most parts returns generally occur within one to two weeks from the time of sale, and are not significant.

Revenue from finance and insurance sales is recognized, net of estimated cancellations or charge-backs, at the time of the sale of the related vehicle. We arrange financing for customers through various financial institutions and receive a commission from the financial institution. We also receive commission from selling extended service contracts, maintenance programs, guaranteed auto protection, tire and wheel protection and theft protection products with both related and third party companies. The Company acts as an agent in these arrangements.

Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from revenues in the combined statements of income.

 

  (p)

Recently Adopted Accounting Pronouncements

In March 2020, the FASB issued ASU 2020-4, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This guidance provides temporary optional expedients to reduce the costs and complexity associated with the high volume of contractual modifications expected in the transition away from LIBOR as the benchmark rate in contracts. These optional expedients allow entities to negate many of the accounting impacts of modifying contracts necessitated by reference rate reform, allowing them to generally maintain the accounting as if a change had not occurred. This standard is effective as of March 12, 2020. The Company adopted this standard during 2020 and elected the practical expedients relative to the Company’s contracts that will

 

   12    (Continued)


LARRY H. MILLER DEALERSHIPS

Notes to Combined Financial Statements

December 31, 2020 and 2019

 

be modified as a result of reference rate reform through December 31, 2022. The application of these practical expedients did not have a material impact on the Company’s business, financial position, results of operations, or disclosures in 2020 and the Company will continue to monitor the impact of this standard through 2022.

 

  (q)

Legal Costs

The Company accrues a liability for loss contingencies related to litigation, claims, assessments, and other legal matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.

 

(2)

Accounts Receivable, Net

Accounts receivable, net consisted of the following (in thousands):

 

     2020      2019  

Contracts in transit

   $ 108,612        116,091  

Vehicle receivables

     43,422        46,998  

Manufacturer receivables

     24,363        25,073  

Trade receivables

     30,318        26,480  

Other

     411        895  
  

 

 

    

 

 

 
     207,126        215,537  

Less allowance for doubtful accounts

     (506      (623
  

 

 

    

 

 

 
   $ 206,620        214,914  
  

 

 

    

 

 

 

Contracts in transit are receivables from various lenders for the financing of vehicles that the Company has arranged on behalf of the customer and are typically received within ten days of selling a vehicle. Vehicle receivables primarily represent amounts due from other franchised vehicle dealers and from vehicle wholesalers for vehicles sold on a wholesale basis. Manufacturer receivables include amounts due from manufacturers including holdbacks, rebates, incentives and warranty claims. Trade receivables comprise amounts due from customers and lenders for the commissions earned on financing and for commissions earned on service, GAP, and VTR contracts. Other accounts receivable primarily comprises trade receivables due from customers of the Company’s advertising and management companies and employee loans.

 

   13    (Continued)


LARRY H. MILLER DEALERSHIPS

Notes to Combined Financial Statements

December 31, 2020 and 2019

 

(3)

Inventories

Inventories consisted of the following (in thousands):

 

     2020      2019  

LIFO valued inventories:

     

New vehicles

   $ 341,349        418,002  

Excess of cost over LIFO valued inventories

     (21,044      (16,427
  

 

 

    

 

 

 

Total LIFO valued inventories

     320,305        401,575  

New vehicles

     176,651        253,281  

Used vehicles

     110,106        113,958  

Program and rental vehicles

     26,743        30,316  

Parts, accessories and other

     43,773        42,530  
  

 

 

    

 

 

 

Total inventories

   $ 677,578        841,660  
  

 

 

    

 

 

 

New vehicle inventory cost is generally reduced by manufacturer holdbacks and incentives, while the related floorplan notes payable are reflective of the gross cost of the vehicle, as measured by manufacturer invoice. As of December 31, 2020 and 2019, the carrying value of new vehicle inventory had been reduced by $4.4 million and $5.2 million, respectively, for assistance received from manufacturers.

 

(4)

Property and Equipment, Net

Property and equipment, net consisted of the following (in thousands):

 

     2020      2019  

Furniture, signs and fixtures

   $ 38,611        36,694  

Service and parts equipment

     33,476        32,078  

Company vehicles

     6,293        6,537  

Leasehold improvements

     5,193        4,008  

Construction in progress

     482        642  
  

 

 

    

 

 

 
     84,055        79,959  

Less accumulated depreciation and amortization

     (50,545      (42,979
  

 

 

    

 

 

 
   $ 33,510        36,980  
  

 

 

    

 

 

 

Total depreciation and amortization for the years ended December 31, 2020 and 2019 was $8.8 million and $8.5 million, respectively.

 

   14    (Continued)


LARRY H. MILLER DEALERSHIPS

Notes to Combined Financial Statements

December 31, 2020 and 2019

 

(5)

Goodwill and Franchise Value

The resulting changes to goodwill and franchise value are as follows (in thousands):

 

     Goodwill  

Balance as of December 31, 2018

   $ 80,819  

Acquisition

     8,631  

Impairment

     (19,100
  

 

 

 

Balance as of December 31, 2019

     70,350  

Acquisition

     16,000  
  

 

 

 

Balance as of December 31, 2020

   $ 86,350  
  

 

 

 
     Franchise
value
 

Balance as of December 31, 2018

   $ 143,725  

Acquisition

     21,369  

Impairment

     (6,900
  

 

 

 

Balance as of December 31, 2019

     158,194  

Acquisition

     24,000  

Disposition

     (100

Impairment

     (7,400
  

 

 

 

Balance as of December 31, 2020

   $ 174,694  
  

 

 

 

 

(6)

Floorplan Notes Payable

The Company currently has relationships with a number of banks and manufacturer affiliated finance companies. These companies provide new and used vehicle floorplan financing.

The floorplan notes payable bear interest, payable monthly on the outstanding balance, at a rate of interest that varies by provider. The vehicle floorplan notes are payable on demand and are typically paid upon the sale of the related vehicle. As such, these floorplan notes payable are shown as current liabilities in the accompanying combined balance sheets. Vehicles financed by lenders not directly associated with the manufacturer are classified as floorplan notes payable – nontrade and are included as a financing activity in the accompanying combined statements of cash flows. Vehicles financed by lenders directly associated with the manufacturer are classified as floorplan notes payable – trade and are included as an operating activity in the accompanying combined statements of cash flows.

The weighted average interest rate on the floorplan facilities was 1.48% and 3.09% at December 31, 2020 and 2019, respectively.

 

   15    (Continued)


LARRY H. MILLER DEALERSHIPS

Notes to Combined Financial Statements

December 31, 2020 and 2019

 

Floorplan notes payable are generally guaranteed by each dealership that borrows from each bank or finance company. Floorplan notes payable are secured by new vehicle inventory, used vehicle and parts inventory, equipment, deposit accounts, contracts in transit, vehicle receivables and accounts receivable. The flooring agreements provide for events of default that include nonpayment, breach of covenants, a change of control and certain financial measurements. In the event of a default, the flooring agreements provide that the lenders may declare the entire principal balance immediately due, foreclose on collateral and increase the applicable interest rate to the revolving loan rate plus up to 4% per annum, among other remedies.

The Company maintains cash management deposit relationships with certain floorplan providers. As of December 31, 2020 and 2019, $211.0 million and $321.5 million, respectively, is on deposit in these cash management accounts, which is recorded as a reduction to the floorplan notes payable in the accompanying combined balance sheets.

 

(7)

Related Party Transactions

 

  (a)

Note Payable to Owners

The Company held a note payable to owners. The amounts owed to, and the terms of the note payable to, owners are summarized in the following table (in thousands):

 

     2020      2019  

Unsecured demand note to owners. Bears interest at a variable rate (2.49% at December 31, 2019)

   $ —          768  

 

  (b)

Due to Related Parties

The Company borrows various amounts from related parties. Interest expense recorded related to due to related parties was $1.4 million and $5.7 million for the years ended December 31, 2020 and 2019, respectively. The amounts owed to, and the terms of the borrowings from, these related parties are summarized in the following table (in thousands):

 

     2020      2019  

Unsecured cash management demand borrowings to related parties. Bears interest at a variable rate (0.64% and 2.49% at December 31, 2020 and 2019, respectively)

   $ 163,217        276,534  

 

   16    (Continued)


LARRY H. MILLER DEALERSHIPS

Notes to Combined Financial Statements

December 31, 2020 and 2019

 

  (c)

Notes Payable to Related Parties

The Company holds notes payable to related parties. Interest expense recorded related to notes payable to related parties was $0.5 million and $0.7 million for the years ended December 31, 2020 and 2019, respectively. The amounts and terms of notes payable to related parties are summarized in the following table (in thousands):

 

     2020      2019  

Unsecured demand note payable from a dealership to a minority shareholder. Bears interest at the dealership flooring rate (2.64% and 4.26% at December 31, 2020 and 2019, respectively)

   $ 300        300  

Unsecured demand note payable to Landcar Agency. Bears interest at a rate of 1.0% annum

     4,032        12,032  

Demand notes payable to Miller Management Company. Bears interest at a variable rate (1.44% and 2.99% at December 31, 2020 and 2019, respectively)

     444        517  

Notes payable from Miller Automotive Operations to Miller Management Company bears interest at variable rates (ranging from 2.13% and 4.78%, at December 31, 2020 and 2019)

     9,182        13,092  
  

 

 

    

 

 

 

Total notes payable to related parties

     13,958        25,941  

Less current portion

     (8,709      (17,275
  

 

 

    

 

 

 

Noncurrent notes payable to related parties

   $ 5,249        8,666  
  

 

 

    

 

 

 

Future contractual maturities of the related party notes payable are as follows as of December 31, 2020 (in thousands):

 

Year ending December 31:       

2021

   $ 8,709  

2022

     3,260  

2023

     1,550  

2024

     295  

2025

     144  
  

 

 

 
   $ 13,958  
  

 

 

 

 

   17    (Continued)


LARRY H. MILLER DEALERSHIPS

Notes to Combined Financial Statements

December 31, 2020 and 2019

 

  (d)

Incentive Bonus Plan

Certain of the general managers of dealerships owned by the Company participate in an incentive bonus plan. Under the terms of this arrangement, these general managers will pay an amount to the Company as determined by management. This amount paid represents the general manager buy-in to the performance of the dealership and enables the general manager to earn 10% of the earnings of the dealership based on a specified formula. These amounts paid to the Company do not increase or decrease in value and are payable to the general manager in the event of termination of their position with the Company. While the Company does not currently expect these amounts to be repaid in the year ending December 31, 2020, due to the nature of this liability, the Company has reflected the amount as a current obligation on the accompanying combined balance sheets. The amount owing to general managers participating in this incentive bonus plan was $19.4 million and $17.0 million at December 31, 2020 and 2019, respectively. Amounts earned by the general managers under this plan are included as a component of selling, general and administrative expenses in the accompanying combined statements of income and totaled $13.5 million and $8.4 million during the years ended December 31, 2020 and 2019, respectively.

 

  (e)

Real Estate Leases with Affiliated Real Estate Companies

The Company leases the majority of its facilities under noncancelable operating leases from Miller Family Real Estate, Jordan Commons, and Larry H. Miller Corporation – Boise. These entities are all owned and controlled by the Miller Family. These leases expire between March 1, 2021 and December 31, 2034. These lease commitments are subject to escalation clauses of an amount equal to the change in the consumer price index.

The minimum future lease payments for noncancelable operating leases with related parties as of December 31, 2020 are as follows (in thousands):

 

Year ending December 31:       

2021

   $ 55,857  

2022

     47,383  

2023

     34,677  

2024

     27,685  

2025

     22,067  

Thereafter

     7,945  
  

 

 

 
   $ 195,614  
  

 

 

 

Rental expense for these operating leases with related parties was $60.1 million and $57.5 million during the years ended December 31, 2020 and 2019, respectively. This amount is included as a component of selling, general and administrative expenses in the accompanying combined statements of income.

 

   18    (Continued)


LARRY H. MILLER DEALERSHIPS

Notes to Combined Financial Statements

December 31, 2020 and 2019

 

  (f)

Furniture, Fixture and Equipment Leases with Affiliated Real Estate Companies

The Company leases a portion of its furniture, fixtures and equipment under annual operating leases from Miller Family Real Estate. These leases renew annually unless terminated by either party with written notice delivered 30 days prior to the end of the current fiscal year.

Rental expense for all furniture, fixtures and equipment leases was $1.1 million and $1.6 million during the years ended December 31, 2020 and 2019, respectively. These amounts are included as a component of selling, general and administrative expenses in the accompanying combined statements of income. During the year ending December 31, 2021 the Company expects to make rental payments of $0.3 million.

 

  (g)

Transactions with Affiliated Insurance and Service Contract Companies

The Company sells extended service, maintenance and vehicle theft reduction contracts for automobiles underwritten by Landcar Agency, Inc. (dba Total Care Auto), an affiliated entity owned and controlled by the Miller Family. During the years ended December 31, 2020 and 2019, respectively, the Company earned commissions of $89.8 million and $84.6 million selling service contracts, commissions of $8.6 million and $9.2 million selling guaranteed auto protection and commissions of $18.0 million and $15.2 million selling vehicle theft reduction products.

The Company sells vehicle protection warranty contracts and products for automobiles. These contracts are underwritten by Landcar Century, Inc. During the years ended December 31, 2020 and 2019, the Company earned commissions of $28.7 million and $28.2 million, respectively, selling these products.

 

  (h)

Advertising Services

Saxton-Horne Advertising, an affiliate owned by the Miller Family, provided advertising services to the Company. The Company incurred expenses of $26.0 million and $20.5 million for these services during the years ended December 31, 2020 and 2019, respectively.

 

  (i)

Management Services

The Company paid management services fees to Miller Management Company, Inc. (MMC), an affiliate management company owned by the Miller Family. During the years ended December 31, 2020 and 2019, the Company paid MMC $38.4 million and $3.0 million for the management services provided.

 

  (j)

Owners Salary and Bonus

The Company paid management services fees to MMC, an affiliate management company owned by the Miller Family. During the year ended December 31, 2020, the Company did not pay any owner salary and bonus. During the year ended December 31, 2019 the Company paid an owner salary of $2.8 million and an owner bonus of $18.9 million, respectively.

 

   19    (Continued)


LARRY H. MILLER DEALERSHIPS

Notes to Combined Financial Statements

December 31, 2020 and 2019

 

(8)

Commitments and Contingencies

 

  (a)

Leases

The Company leases certain of their facilities under noncancelable operating leases with unrelated parties. These leases expire at various dates through February 1, 2029. Certain lease commitments contain fixed payment increases at predetermined intervals over the life of the lease, while other lease commitments are subject to escalation clauses of an amount equal to the change in the consumer price index. Lease expense is recognized on a straight-line basis over the life of the lease.

The minimum future lease payments under these operating leases as of December 31, 2020 are as follows (in thousands):

 

2021

   $ 6,213  

2022

     6,181  

2023

     3,182  

2024

     2,223  

2025

     2,020  

Thereafter

     4,427  
  

 

 

 
   $ 24,246  
  

 

 

 

Rental expense for all operating leases with unrelated parties was $6.4 million and $6.3 million during the years ended December 31, 2020 and 2019, respectively. This amount is included as a component of selling, general and administrative expenses in the accompanying combined statements of income.

(b) Other Liabilities

The Company has recorded a reserve of $28.0 million for estimated contractual obligations related to potential charge-backs for vehicle service contracts and other various insurance contracts that are terminated early by the customer. These amounts are included in other liabilities in the accompanying combined balance sheets. The Company estimates that the charge-backs will be paid out as follows (in thousands):

 

Year ending December 31:       

2021

   $  16,400  

2022

     7,500  

2023

     2,900  

2024

     950  

2025

     200  

Thereafter

     50  
  

 

 

 
   $ 28,000  
  

 

 

 

 

   20    (Continued)


LARRY H. MILLER DEALERSHIPS

Notes to Combined Financial Statements

December 31, 2020 and 2019

 

  (c)

Regulatory Compliance

The Company is subject to numerous state and federal regulations common in the automotive sector that cover retail transactions with customers and employment and trade practices. The Company does not anticipate that compliance with these regulations will have an adverse effect on their business, combined results of operations, financial condition or cash flows, although such outcome is possible given the nature of our operations and the legal and regulatory environment affecting our business.

 

  (d)

Litigation

The Company is party to legal proceedings arising in the normal course of business. In the opinion of management, the resolution of legal proceedings arising in the normal course of business will not have a material adverse effect on their combined business, results of operations, financial condition, or cash flows.

 

  (e)

Environmental Matters

The Company monitors for the presence of hazardous or toxic substances. Management is not aware of any environmental liability with respect to the Company that would have a material adverse effect on the Company’s combined business, assets, or results of operations; however, there can be no assurance that such a material environmental liability does not exist. The existence of any such environmental liability could have an adverse effect on the Company’s combined financial position, results of operations, or cash flows.

 

  (f)

Self-Insurance

The Company partially self-insures against certain general liability claims. Specifically, the Company carries a $250,000 deductible on general liability claims. The Company carries aggregate stop-loss insurance that limits total losses at certain pre-defined levels. Additionally, the Company is subject to claims lag resulting from timing differences between the occurrence of a claim and the time that the claim is reported and paid. Accordingly, the Company has accrued $3.6 million and $4.4 million for losses incurred under these self-insured programs as of December 31, 2020 and 2019, respectively.

 

   21    (Continued)


LARRY H. MILLER DEALERSHIPS

Notes to Combined Financial Statements

December 31, 2020 and 2019

 

(9)

Common Stock

The following table outlines the common stock of each of the entities included in these accompanying combined financial statements:

 

            (Shares not in thousands)                       
     Par value      Number
of shares
authorized
     Shares
issued/
outstanding
     Shares
held in
treasury
     Common
Stock
     Treasury      Ownership  

Larry H. Miller American Toyota Albuquerque

   $ no par        1,000        1,000        —        $ 10        —          100

Larry H. Miller Casa Chevrolet

     no par        1,000        1,000        —          —          —          100  

Larry H. Miller Casa Chrysler Jeep

     no par        1,000        1,000        —          —          —          100  

Larry H. Miller Chevrolet Murray

     no par        1,000        1,000        —          —          —          100  

Larry H. Miller Chevrolet Provo

     no par        1,000        1,000        —          —          —          100  

Larry H. Miller Chrysler Jeep Avondale

     no par        1,000        1,000        —          —          —          100  

Larry H. Miller Chrysler Jeep Dodge Bountiful

     no par        —          —          —          —          —          100  

Larry H. Miller Chrysler Jeep Dodge Ram Albuquerque

     no par        1,000        1,000        —          —          —          100  

Larry H. Miller Chrysler Jeep Dodge Ram Boise

     100        2,500        1,528        —          171        —          100  

Larry H. Miller Chrysler Jeep Dodge Ram Provo

     no par        1,000        1,000        —          —          —          100  

Larry H. Miller Chrysler Jeep Dodge Ram Riverdale

     no par        1,000        1,000        —          —          —          100  

Larry H. Miller Chrysler Jeep Dodge Ram Sandy

     no par        2,000        2,000        —          54        —          100  

Larry H. Miller Chrysler Jeep Dodge Ram Surprise

     no par        1,000        1,000        —          —          —          100  

Larry H. Miller Chrysler Jeep Dodge Thornton

     no par        1,000        1,000        —          —          —          100  

Larry H. Miller Chrysler Jeep Tucson

     no par        1,000        1,000        —          —          —          100  

Larry H. Miller Collision Center Colorado Springs

     no par        1,000        1,000        —          —          —          100  

Larry H. Miller Collision Center Orem

     no par        1,000        1,000        —          —          —          100  

Larry H. Miller Colorado Chrysler Jeep

     no par        1,000        1,000        —          —          —          100  

Larry H. Miller Dodge Ram Avondale

     no par        1,000        1,000        —          —          —          100  

Larry H. Miller Dodge Ram Cherry Creek

     no par        1,000        1,000        —          —          —          100  

Larry H. Miller Dodge Ram Peoria

     no par        1,000        1,000        —          10        —          100  

Larry H. Miller Dodge Ram Tucson

     no par        1,000        1,000        —          —          —          100  

Larry H. Miller Fiat Tucson

     no par        1,000        1,000        —          —          —          100  

Larry H. Miller Fleet Lease

     no par        1,000        1,000        —          10        —          100  

Larry H. Miller Ford Lakew ood

     no par        1,000        1,000        —          —          —          100  

Larry H. Miller Ford Lincoln Provo

     no par        1,000        1,000        —          —          —          100  

Larry H. Miller Ford Lincoln Sandy

     no par        1,000        1,000        —          —          —          100  

Larry H. Miller Ford Mesa

     no par        1,000        1,000        —          —          —          100  

Larry H. Miller Ford Salt Lake City

     no par        1,000        1,000        —          1        —          100  

Larry H. Miller Honda Boise

     no par        750,000        260,000        —          250        —          100  

Larry H. Miller Honda Murray

     1        50,000        10,000        —          10        —          100  

Larry H. Miller Honda Spokane

     no par        1,000        1,000        —          —          —          100  

Larry H. Miller Hyundai Albuquerque

     no par        10,000        1,000        —          1        —          100  

Larry H. Miller Hyundai Peoria

     no par        1,000        1,000        —          —          —          100  

Larry H. Miller Lexus Murray/Lindon

     no par        1,000        1,000        —          1        —          100  

Larry H. Miller Lexus Spokane

     no par        1,000        1,000        —          —          —          100  

 

   22    (Continued)


LARRY H. MILLER DEALERSHIPS

Notes to Combined Financial Statements

December 31, 2020 and 2019

 

            (Shares not in thousands)                      
     Par value      Number
of shares
authorized
     Shares
issued/
outstanding
     Shares
held in
treasury
     Common
Stock
     Treasury     Ownership  

Larry H. Miller Liberty Toyota Colorado Springs

     no par        1,000        1,000        —        $ 1        —         100

Larry H. Miller Management

     no par        —          —          —          —          —         100  

Larry H. Miller Mercedes-Benz of Lindon

     no par        1,000        1,000        —          950        —         100  

Larry H. Miller Nissan Arapahoe

     no par        1,000        1,000        —          —          —         100  

Larry H. Miller Nissan Corona

     no par        1,000        1,000        —          —          —         100  

Larry H. Miller Nissan Denver

     no par        1,000        1,000        —          —          —         100  

Larry H. Miller Nissan Highlands Ranch

     no par        1,000        1,000        —          1        —         100  

Larry H. Miller Nissan Mesa

     no par        1,000        1,000        —          1        —         100  

Larry H. Miller Nissan San Bernadino

     no par        1,000        1,000        —          —          —         100  

Larry H. Miller Southw est Hyundai Albuquerque

     no par        1,000        1,000        —          1        —         100  

Larry H. Miller Subaru Boise

     25        5,000        2,188        —          559        —         100  

Larry H. Miller Toyota Albuquerque

     no par        1,000        1,000        —          10        —         100  

Larry H. Miller Toyota Boulder

     no par        50,000        1,000        510        275        (1,894     100  

Larry H. Miller Toyota Colorado Springs

     no par        1,000        1,000        —          1        —         100  

Larry H. Miller Toyota Corona

     no par        1,000        1,000        —          —          —         100  

Larry H. Miller Toyota Lemon Grove

     no par        1,000        1,000        —          —          —         100  

Larry H. Miller Toyota Spokane

     no par        1,000        1,000        —          —          —         100  

Larry H. Miller Toyota Murray

     no par        1,000        1,000        —          —          —         100  

Larry H. Miller Toyota Scion Peoria

     no par        10,000        1,000        —          —          —         100  

Larry H. Miller Used Car Supermarket Boise

     no par        1,000        1,000        —          —          —         100  

Larry H. Miller Used Car Supermarket 90th

     no par        1,000        1,000        —          —          —         100  

Larry H. Miller Used Car Supermarket Orem

     no par        1,000        1,000        —          —          —         100  

Larry H. Miller Used Car Supermarket Sandy/Murray/Riverdale

     no par        1,000        1,000        —          200        —         100  

Larry H. Miller Volksw agen Avondale

     no par        1,000        1,000        —          —          —         100  

Larry H. Miller Volksw agen Lakew ood

     no par        —          —          —          —          —         50  

Larry H. Miller Volksw agen Tucson

     no par        1,000        1,000        —          —          —         100  
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   
        930,500        329,716        510      $ 2,517        (1,894  
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

The minority ownership in one partnership is deemed by the Company to be immaterial and is, therefore, not separately stated in these accompanying combined financial statements.

 

(10)

Retirement Plan

The Company participates in the Larry H. Miller Employees’ Retirement Plan and Trust (the Plan), filed under Section 401(k) of the Internal Revenue Code. This plan covers eligible employees who complete one year of continuous service, work more than 1,000 hours, and have attained the age of 21. The Plan allows each participant to contribute up to 50% of the participant’s total annual salary, or the maximum amount allowed by the Internal Revenue Code, whichever is less.

The Company has agreed to match 50% of each participant’s contribution, up to 6% of each participant’s total annual salary, with a total salary limit of $0.29 million and $0.28 million for the years ended December 31, 2020 and 2019, respectively. Contributions are vested 20% each year based on each participant’s hire date with the Company. The Company has the right under the Plan to discontinue matching the salary deferral at any time or to terminate its participation in the Plan. In the event of the termination of the Plan, the net assets of the Plan are available for payment of benefits to the participants.

 

   23    (Continued)


LARRY H. MILLER DEALERSHIPS

Notes to Combined Financial Statements

December 31, 2020 and 2019

 

The Company incurred expenses for matching contributions in the amount of $5.1 million during the years ended December 31, 2020 and 2019. Amounts payable to the Plan were $0.4 million and $0.8 million at December 31, 2020 and 2019, respectively.

 

(11)

Acquisitions and Dispositions

On February 3, 2020, the Company acquired a Chevrolet dealership and Chrysler Jeep dealership in Albuquerque, New Mexico. The purchase price of the acquisitions was $47.0 million, which was paid in cash. The primary purpose for the acquisitions was to increase the Company’s dealership presence in the New Mexico market and diversify the Company’s dealership mix.

On March 1, 2019, the Company acquired a Ford dealership in Mesa, Arizona. The purchase price of the acquisition was $40.2 million, which was paid in cash. The primary purpose for the acquisitions was to increase the Company’s dealership presence in the Arizona market and diversify the Company’s dealership mix.

The results of operations of the acquired stores have been included in the combined financial statements since the date of acquisition. The following table summarizes the consideration paid and estimated fair values of the assets acquired and liabilities assumed at the acquisition date (in thousands):

 

     2020      2019  

Inventory

   $ 21,723        38,386  

Goodwill

     16,000        8,631  

Franchise value

     24,000        21,369  

Property and equipment

     2,053        910  

Trade payables and accrued liabilities

     (706      (872

Floorplan note payable – nontrade

     (16,096      (28,178
  

 

 

    

 

 

 

Total

   $ 46,974        40,246  
  

 

 

    

 

 

 

On October 20, 2020, the Company sold the assets of a Nissan dealership in San Bernardino, California. The Company received $1.2 million in cash for the sale of $1.2 million of assets, net of outstanding balances under the floorplan notes payable.

 

(12)

Subsequent Events

The Company has evaluated subsequent events through April 23, 2021, which is the date these combined financial statements were available to be issued.

On January 21, 2021, the Company sold the assets of a Nissan dealership in Corona, California. The Company received $1.0 million in cash for the sale of $1.0 million of assets, net of outstanding balances under the floorplan notes payable.

 

   24   
EX-99.2

Exhibit 99.2

 

LOGO

LARRY H. MILLER AUTOMOTIVE REAL ESTATE PROPERTIES

Combined Financial Statements

December 31, 2020 and 2019

(With Independent Auditors’ Report Thereon)


LARRY H. MILLER AUTOMOTIVE REAL ESTATE PROPERTIES

Table of Contents

 

     Page  

Independent Auditors’ Report

     1  

Combined Balance Sheets

     2  

Combined Statements of Income

     3  

Combined Statements of Changes in Parent’s Net Investment

     4  

Combined Statements of Cash Flows

     5  

Notes to Combined Financial Statements

     6  


LOGO

  KPMG LLP
 

Suite 1500

15 W. South Temple

  Salt Lake City, UT 84101

Independent Auditors’ Report

The Board of Directors

Larry H. Miller Automotive Real Estate Properties:

We have audited the accompanying combined financial statements of Larry H. Miller Automotive Real Estate Properties (collectively referred to as the Company), which comprise the combined balance sheets as of December 31, 2020 and 2019, and the related combined statements of income, parent’s net investment, and cash flows for the years then ended, and the related notes to the combined financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these combined financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of combined financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the combined financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Larry H. Miller Automotive Real Estate Properties as of December 31, 2020 and 2019, and the results of their operations and their cash flows for the years then ended in accordance with U.S. generally accepted accounting principles.

Emphasis of Matter

We draw attention to Note 1 to the combined financial statements, which describes the Company’s carve-out basis of presentation used in preparing the combined financial statements. Our opinion is not modified with respect to this matter.

 

LOGO

Salt Lake City, Utah

October 25, 2021

 

KPMG LLP, a Delaware limited liability partnership and a member firm of

the KPMG global organization of independent member firms affiliated with

KPMG International Limited, a private English company limited by guarantee.


LARRY H. MILLER AUTOMOTIVE REAL ESTATE PROPERTIES

Combined Balance Sheets

December 31, 2020 and 2019 `

(In thousands)

 

     2020     2019  
Assets     

Real estate:

    

Land

   $ 189,890       186,433  

Buildings and leasehold improvements

     409,906       410,167  

Furniture, fixtures, and equipment

     42,820       42,835  

Construction and equipment in progress

     9,440       6,943  

Less accumulated depreciation and amortization

     (162,419     (147,673
  

 

 

   

 

 

 

Real estate, net

     489,637       498,705  

Due from related parties

     132       13  

Prepaid expenses and other assets

     6,376       428  
  

 

 

   

 

 

 

Total assets

   $ 496,145       499,146  
  

 

 

   

 

 

 
Liabilities and Parent’s Net Investment     

Liabilities:

    

Mortgage notes payable, net

   $ 147,724       156,622  

Notes payable to related party

     47,581       54,187  

Due to related party

     155,001       157,193  

Accounts payable and accrued liabilities

     1,662       2,538  

Other liabilities

     6,601       3,889  
  

 

 

   

 

 

 

Total liabilities

     358,569       374,429  
  

 

 

   

 

 

 

Parent’s net investment:

    

Parent’s net investment

     137,576       124,717  
  

 

 

   

 

 

 

Total parent’s net investment

     137,576       124,717  
  

 

 

   

 

 

 

Total liabilities and parent’s net investment

   $ 496,145       499,146  
  

 

 

   

 

 

 

See accompanying notes to combined financial statements.

 

2


LARRY H. MILLER AUTOMOTIVE REAL ESTATE PROPERTIES

Combined Statements of Income

Years ended December 31, 2020 and 2019

(In thousands)

 

     2020     2019  

Rental revenues, primarily related party

   $ 62,297       59,489  
  

 

 

   

 

 

 

Total revenues

     62,297       59,489  
  

 

 

   

 

 

 

Operating expenses:

    

General and administrative

     10,888       7,752  

Repairs and maintenance

     143       226  

Depreciation and amortization

     15,433       15,667  

Loss on disposal of assets

     13       302  
  

 

 

   

 

 

 

Total operating expenses

     26,477       23,947  
  

 

 

   

 

 

 

Income from operations

     35,820       35,542  
  

 

 

   

 

 

 

Other income (expense):

    

Interest, investment, and other income

     512       655  

Interest expense

     (16,094     (16,701

Unrealized loss on fair value of derivative instruments

     (7,030     (8,000
  

 

 

   

 

 

 

Total other expense, net

     (22,612     (24,046
  

 

 

   

 

 

 

Net income

   $ 13,208       11,496  
  

 

 

   

 

 

 

See accompanying notes to combined financial statements.

 

3


LARRY H. MILLER REAL ESTATE ENTITIES PROPERTIES

Combined Statements of Changes in Parent’s Net Investment

Years ended December 31, 2020 and 2019

(In thousands)

 

Balance, December 31, 2018

   $ 118,010  

Change in parent’s net investment

     (4,789

Net income

     11,496  
  

 

 

 

Balance, December 31, 2019

     124,717  

Change in parent’s net investment

     (349

Net income

     13,208  
  

 

 

 

Balance, December 31, 2020

   $ 137,576  
  

 

 

 

See accompanying notes to combined financial statements.

 

4


LARRY H. MILLER AUTOMOTIVE REAL ESTATE PROPERTIES

Combined Statements of Cash Flows

Years ended December 31, 2020 and 2019

(In thousands)

 

     2020     2019  

Cash flows from operating activities:

    

Net income

   $ 13,208       11,496  

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

    

Depreciation and amortization

     15,433       15,667  

Loss on disposal of assets

     13       302  

Unrealized loss on fair value of derivative instruments

     7,030       8,000  

Amortization of deferred financing costs

     95       100  

Changes in operating assets and liabilities:

    

Accounts receivable, net

     (119     538  

Prepaid expenses and other assets

     (5,949     1,010  

Accounts payable and accrued liabilities

     (77     (254

Other liabilities

     13       (840
  

 

 

   

 

 

 

Net cash provided by operating activities

     29,647       36,019  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Capital expenditures

     (16,015     (47,570

Proceeds from sale of properties, furniture, fixtures, and equipment

     8,839       7,150  
  

 

 

   

 

 

 

Net cash used in investing activities

     (7,176     (40,420
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Principal payments on mortgage notes payable

     (8,823     (9,274

Proceeds from issuance of mortgage notes payable

     169       21,828  

Payments for loan origination costs

     (339     (47

Principal payments on related party notes payable

     (6,606     (5,472

Proceeds from issuance of related party notes payable

     —         25,500  

Net change in due to related party

     (6,523     (23,345

Change in parent’s net investment

     (349     (4,789
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (22,471     4,401  
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     —         —    

Cash and cash equivalents, beginning of year

     —         —    
  

 

 

   

 

 

 

Cash and cash equivalents, end of year

   $ —         —    
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid for interest

   $ 16,173       16,607  

Supplemental noncash investing and financing activities:

    

Accrued purchases of properties, furniture, fixtures, and equipment

     18       817  

See accompanying notes to combined financial statements.

 

5


LARRY H. MILLER AUTOMOTIVE REAL ESTATE PROPERTIES

Notes to Combined Financial Statements

December 31, 2020 and 2019

 

(1)

Nature of Business and Basis of Presentation

 

  (a)

Nature of Business

We have prepared the accompanying combined financial statements of real property related to the Larry H. Miller Dealership operations (Larry H. Miller Automotive Real Estate Properties or Company). The real property related to the Larry H. Miller Dealerships has historically operated as part of the Larry H. Miller Real Estate Entities (Parent) and not as a standalone company. The accompanying combined financial statements comprise the combined balance sheets as of December 31, 2020, and 2019, and the related combined statements of income, changes in Parent’s net investment, and cash flows for the years then ended.

 

  (b)

Basis of Presentation

The combined financial statements of the Parent include the accounts of Miller Family Real Estate LLC (MFRE) and Larry H. Miller Corporation – Boise (Boise), all of which are principally owned by the Larry H. Miller Family (the Miller Family). MFRE is a limited liability company and is treated as a partnership for federal income tax purposes. Boise is a Subchapter S corporation and is taxed as a flow-through entity for federal income tax purposes.

The accompanying combined financial statements representing the historical operations of the Parent’s automotive real estate business have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). The combined financial statements have been derived from the combined financial statements and accounting records of the Parent using the historical results of operations and historical cost basis of the assets and liabilities that comprise the Company to demonstrate the Company’s combined historical financial position, results of operations, and cash flows on a carve-out basis. All intercompany balances and transactions within the Company’s combined financial statements have been eliminated. Transactions and balances between the Company and the Parent that are not included in these combined financial statements are reflected as related party balances and transactions within these financial statements. Transactions between the Company and the Parent are reflected as change in Parent’s net investment.

The combined financial statements include the assets, liabilities, revenues, and expenses that are specifically identifiable to the Company. As part of Parent, the Company is dependent upon Parent for all of its working capital and financing requirements as Parent uses a centralized approach to cash management and financing of its operations. Financial transactions relating to the Company are accounted for through the Parent’s net investment account and due to related parties account. Accordingly, none of Parent’s cash or cash equivalents at the corporate level have been allocated to the Company in the combined financial statements. Debt balances that are directly related to the Company’s financing have been included in the combined financial statements. Parent’s net investment represents Parent’s interest in the recorded net assets of the Company. The combined financial statements also include allocations of certain administrative, accounting, legal, human resources and information technology expenses from the Parent based on the percentage of revenue recognized by the Company divided by total revenue recognized by the Parent. These allocated costs are primarily related to corporate general and administrative expenses and employee related costs for corporate and shared employees. Nevertheless, the combined financial statements may not include all of the actual expenses that would have been incurred had the Company operated as a standalone company during the periods presented and may not reflect the combined results of operation, financial

 

   6    (Continued)


LARRY H. MILLER AUTOMOTIVE REAL ESTATE PROPERTIES

Notes to Combined Financial Statements

December 31, 2020 and 2019

 

position and cash flows had the Company operated as a standalone business during the periods presented. Actual costs that would have been incurred if the Company had operated as a standalone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including information technology and infrastructure. The Company also may incur additional costs associated with being a standalone company that were not included in the expense allocations and therefore would result in additional costs that are not reflected in the combined historical results of operations, financial position, and cash flows. Consequently, future results of operations should the Company operate separately from the Parent could include costs and expenses that may be materially different than the Company’s historical results of operations, financial position, and cash flows. Accordingly, the combined financial statements for the periods presented may not be indicative of the Company’s future results of operations, financial position, and cash flows.

 

(2)

Summary of Significant Accounting Principles

These combined financial statements are prepared in accordance with U.S. GAAP, and the accounting policies generally accepted by the industry in which the Company operates.

 

  (a)

Real Estate

Real estate is recorded at cost and consists of land, buildings, leasehold improvements, furniture, fixtures, and equipment. Significant expenditures that improve or extend the life of an asset are capitalized, while minor replacements, maintenance, and repairs that do not increase the useful life of an asset are expensed as incurred.

Depreciation is calculated using the straight-line method over the useful lives of the assets. Leasehold and tenant improvements are amortized using the straight-line method over the shorter of the useful lives or the term of the lease.

The range of estimated useful lives is as follows:

 

Buildings and leasehold improvements

     25 to 39 years  

Furniture, fixtures, and equipment

     5 to 10 years  

When an asset is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss is credited or debited to income from operations. The Company recorded $15.4 million and $15.7 million in depreciation expense for 2020 and 2019, respectively.

 

  (b)

Accounts Receivable

Accounts receivable include amounts due from tenants and miscellaneous receivables generated in the ordinary course of business. The Company determines an allowance for doubtful accounts based on historical write-off experience, current market and industry conditions, aging of the accounts receivable, and the nature of the receivable. No allowance for doubtful accounts has been recorded as of December 31, 2020 and 2019.

 

   7    (Continued)


LARRY H. MILLER AUTOMOTIVE REAL ESTATE PROPERTIES

Notes to Combined Financial Statements

December 31, 2020 and 2019

 

  (c)

Prepaid Expenses and Other Assets

Other assets primarily consist of pre-paid real estate commissions, funds held in escrow for 1031 exchanges and development bonds relating to projects under construction and refundable by the applicable city once the project is complete.

 

  (d)

Fair Value of Financial Instruments

Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

 

  (e)

Management Estimates

The preparation of the combined financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at December 31, 2020 and 2019, and revenues and expenses reported for the years then ended. The actual outcome could differ from the estimates made in the preparation of these combined financial statements.

Estimates are used in the calculation of various expenses, accruals, and reserves, including the assessment of the recoverability of long-lived assets.

 

  (f)

Impairment of Long-Lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Impairment is recognized when estimated future cash flows (undiscounted and without interest charges) are less than the carrying amount of the asset. The estimation of future net cash flows is inherently uncertain and relies to a considerable extent on assumptions regarding current and future economic and market conditions and the availability of capital. If, in future periods, there are changes in the estimates or assumptions incorporated into the impairment review analysis, the changes could result in an adjustment to the carrying amount of the long-lived assets. To the extent that an impairment has occurred, the excess of the carrying amount of the asset over its estimated fair value is charged to income from operations.

 

  (g)

Derivative Instruments

The Company’s derivative instruments consist of interest rate swap agreements to manage the Company’s exposure to interest rate volatility. The interest rate swap agreements mitigate the cash flow effects of interest rate fluctuations on interest expense for variable-rate debt instruments.

All derivatives are recognized at their current fair value. Changes in the fair value of derivative financial instruments are recorded in the combined statements of income unless specific hedge accounting criteria are met. If such criteria are met for cash flow hedges, the effective portion of the change in the fair value is recorded directly to accumulated other comprehensive income, a component of equity, until the hedged transaction occurs. The ineffective portion of the change in fair value is recorded in the combined statements of income. The Company’s derivative instruments did not qualify as a hedge, and accordingly, the Company has recorded the gains and losses from the interest rate swaps in the combined statements of income.

 

   8    (Continued)


LARRY H. MILLER AUTOMOTIVE REAL ESTATE PROPERTIES

Notes to Combined Financial Statements

December 31, 2020 and 2019

 

  (h)

Revenue Recognition

The Company’s primary source of revenue is derived from tenant rents. The majority of the Company’s revenue contracts are classified as leases and accounted for in accordance with ASC 840 – Leases. The Company leases its property with lease terms of generally five to fifteen years. Rental revenue is recognized monthly as earned. Rent received in advance is deferred and recognized in income when earned. Rent concessions and escalating payments are recognized on a straight-line basis as an offset to revenues over the term of the underlying lease.

The Company recognizes revenue on professional services in accordance with Topic 606 when the performance obligation is satisfied which typically occurs over time when the services are rendered. Revenue is recognized based on contractual rates and payment is typically due in full within thirty days of delivery.

 

  (i)

Income Taxes

The income of the Parent flows directly to its owners. Accordingly, there are no liabilities or provisions for income taxes recorded in the Parent’s combined financial statements; therefore, there are no liabilities or provisions for income taxes recorded in the accompanying combined financial statements.

The Parent evaluates the tax positions taken or expected to be taken in the course of preparing the Parent’s tax returns to determine whether the tax positions are more likely than not of being sustained by the applicable tax authority. The Parent has determined that there is no tax liability resulting from unrecognized tax benefits related to uncertain income tax positions taken or expected to be taken on the tax return for the years ended December 31, 2020 and 2019. There are no tax returns that are currently under examination. Tax years that remain subject to examination are years 2017 and forward.

 

  (j)

Legal Matters

The Company recognizes a liability for loss contingencies related to litigation, claims, assessments, and other legal matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.

 

   9    (Continued)


LARRY H. MILLER AUTOMOTIVE REAL ESTATE PROPERTIES

Notes to Combined Financial Statements

December 31, 2020 and 2019

 

(3)

Mortgage Notes Payable

Mortgage notes payable consisted of the following at December 31, 2020 and 2019 (in thousands):

 

Description*

   Rate     Monthly
payment
     Maturity
date
    

Collateral

   2020     2019  

MLIBOR + 2%

     3.00     prin + int        6/5/2024      Secured by Land and Buildings    $ 23,840       25,334  

MLIBOR + 1.6%

     1.75     prin + int        6/1/2022      Secured by Land and Buildings      19,280       20,192  

DLIBOR + 2.15%

     2.90     prin + int        10/31/2022      Secured by Land and Buildings      25,992       26,959  

Fixed

     4.46     prin + int        12/1/2027      Secured by Land and Buildings      7,842       8,117  

MLIBOR + 1.75%

     1.89     prin + int        1/1/2031      Secured by Buildings      6,162       6,689  

5 yr LIBOR + 1.75%

     4.42     prin + int        3/28/2038      Secured by Land and Buildings      8,908       9,368  

MLIBOR + 1.9%

     2.05     prin + int        3/31/2025      Secured by Land and Buildings      7,944       8,283  

MLIBOR + 1.95%

     2.10     prin + int        6/1/2025      Secured by Land and Buildings      14,315       16,481  

MLIBOR + 1.6%

     1.75     prin + int        9/5/2023      Secured by Land and Buildings      13,716       14,415  

MLIBOR + 1.7%

     1.85     prin + int        3/31/2026      Secured by Land and Buildings      20,308       21,122  
             

 

 

   

 

 

 
                148,307       156,960  

Less unamortized debt issuance costs

 

             (583     (338
             

 

 

   

 

 

 

Mortgage notes payable, net

 

           $ 147,724       156,622  
             

 

 

   

 

 

 

 

*

MLIBOR equals 30-day LIBOR

*

DLIBOR equals daily LIBOR

The mortgage notes payable agreements contain covenants including debt service coverage ratios, lease sufficiency ratios, loan-to-value ratios, and minimum average liquidity requirements.

As of December 31, 2020, the expected principal payments are scheduled to be paid as follows (in thousands):

 

Year:

  

2021

   $ 8,134  

2022

     48,481  

2023

     17,319  

2024

     23,114  

2025

     20,328  

Thereafter

     30,931  
  

 

 

 
   $ 148,307  
  

 

 

 

 

(4)

Related Party Transactions

 

  (a)

Rental Revenues

The Company’s rental revenue is generated from lease agreements with related entities owned by the Miller Family. Revenue recognized by the Company during the years ended December 31, 2020 and 2019 from related entities totaled $60.8 million and $58.8 million, respectively.

 

   10    (Continued)


LARRY H. MILLER AUTOMOTIVE REAL ESTATE PROPERTIES

Notes to Combined Financial Statements

December 31, 2020 and 2019

 

  (b)

Notes Payable to Related Party

The Company has secured notes payable to Larry H. Miller Management Corporation (MMC). Interest expense recorded on notes payable to related parties was $2.5 million and $2.4 million for the years ended December 31, 2020 and 2019, respectively. Notes payable to related party consisted of the following at December 31, 2020 and 2019 (in thousands):

 

     2020      2019  

A note payable bearing interest at 3.28%. Secured by furniture, fixtures, and equipment. Monthly payments of principal and interest of $18. Matures June 2020.

     —          42  

A note payable bearing interest at 3.43%. Secured by real property. Monthly payments of principal and interest of $163. Matures April 2030.

     15,427        16,833  

A note payable bearing interest at 3.18%. Secured by furniture, fixtures, and equipment. Monthly payments of principal and interest of $3. Matures May 2020.

     —          13  

A note payable bearing interest at 3.43%. Secured by real property. Monthly payments of principal and interest of $15. Matures August 2031.

     1,617        1,744  

A note payable bearing interest at 4.29%. Secured by real property. Monthly payments of principal and interest of $34. Matures December 2032.

     3,815        4,053  

A note payable bearing interest at 4.76%. Secured by real property. Monthly payments of principal and interest of $53. Matures August 2033.

     3,006        3,793  

A note payable bearing interest at 4.42%. Secured by real property. Monthly payments of principal and interest of $68. Matures April 2034.

     8,266        8,711  

A note payable bearing interest at 4.32%. Secured by real property. Monthly payments of principal and interest of $123. Matures April 2029.

     10,341        11,351  

A note payable bearing interest at 4.32%. Secured by real property. Monthly payments of principal and interest of $32. Matures November 2034.

     4,249        4,480  

A note payable bearing interest at 4.69%. Secured by real property. Monthly payments of principal and interest of $167. Matures December 2027.

     860        3,167  
  

 

 

    

 

 

 
   $ 47,581        54,187  
  

 

 

    

 

 

 

 

   11    (Continued)


LARRY H. MILLER AUTOMOTIVE REAL ESTATE PROPERTIES

Notes to Combined Financial Statements

December 31, 2020 and 2019

 

As of December 31, 2020, the principal payments are scheduled to be paid as follows (in thousands):

 

Year:

  

2021

   $ 4,694  

2022

     3,988  

2023

     4,148  

2024

     4,315  

2025

     4,489  

Thereafter

     25,947  
  

 

 

 
   $ 47,581  
  

 

 

 

 

  (c)

Due to Related Party

The Company has a net payable due to related parties of $155.0 million and $157.2 million as of December 31, 2020 and 2019, respectively. Included in these amounts are a net payable due to MMC for loans from MMC of $9.0 million and $5.1 million as of December 31, 2020 and 2019, respectively, which is due on demand.

Also included in these amounts are a net payable due to the Parent for financing provided by the Parent. The Company has debt under credit agreements to which it is the legal obligor as described in Note (3) Mortgage Notes Payable and Note (4) Notes Payable to Related Party. In addition, although the Company is not the obligor, the Parent has mortgage notes payable that are secured by the assets of the Company of $137.7 million and $148.1 million as of December 31, 2020 and 2019, respectively. The Parent’s mortgage notes payable includes a line of credit with a borrowing capacity of $50 million bearing interest at LIBOR + 1.7% and had no amounts outstanding as of the end of each period presented.

As of December 31, 2020, the expected principal payments to the Parent are scheduled to be paid as follows (in thousands):

 

Year:

  

2021

   $ 11,450  

2022

     11,450  

2023

     11,450  

2024

     104,313  
  

 

 

 
   $ 138,663  
  

 

 

 

In addition, as of December 31, 2020 and 2019, the net payable due to the Parent included a net payable due to the Parent of $8.3 million and $4.0 million, respectively, for the Parent’s interest rate swap derivatives related to the Parent’s mortgage notes payable.

The Parent’s mortgage notes payable include debt service coverage ratios, lease sufficiency ratios, loan-to-value ratios, and minimum average liquidity requirements. The mortgage notes payable mature June 2024. In the event of a change in control, the Company would be required to repay the outstanding balance to the Parent.

 

   12    (Continued)


LARRY H. MILLER AUTOMOTIVE REAL ESTATE PROPERTIES

Notes to Combined Financial Statements

December 31, 2020 and 2019

 

  (d)

Management Services

The Company paid management services fees to MMC. The Company paid MMC $0.6 million for the affiliate management services provided during the years ended December 31, 2020 and 2019. The expenses are included as a component of general and administrative expense in the accompanying combined statements of income.

 

(5)

Lease Commitments

The Company is a party to several lease agreements expiring on various dates through 2034. Lease terms generally include combined initial and option terms of 15 to 30 years. The option terms are typically in five-year increments. Rental payments include minimum rentals. Rental expense for operating leases during the years ended December 31, 2020 and 2019 totaled $6.4 million and $4.7 million, respectively.

Future minimum lease payments under operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 2020 are as follows (in thousands):

 

Year ending December 31:

  

2021

   $ 6,370  

2022

     6,080  

2023

     5,840  

2024

     4,409  

2025

     3,439  

Thereafter

     7,481  
  

 

 

 
   $ 33,619  
  

 

 

 

 

(6)

Commitments and Contingencies

 

  (a)

Legal Matters

The Company is party to certain legal matters arising in the ordinary course of business. In the opinion of management, the resolution of legal proceedings arising in the normal course of business will not have a material adverse effect on its combined business, results of operations, financial condition, or cash flows.

 

  (b)

Environmental Matters

The Company monitors for the presence of hazardous or toxic substances. Management is not aware of any environmental liability with respect to the Company that would have a material adverse effect on the Company’s combined business, assets, or results of operations; however, there can be no assurance that such a material environmental liability does not exist. The existence of any such environmental liability could have an adverse effect on the Company’s combined financial position, results of operations, or cash flows.

 

   13    (Continued)


LARRY H. MILLER AUTOMOTIVE REAL ESTATE PROPERTIES

Notes to Combined Financial Statements

December 31, 2020 and 2019

 

  (c)

General Uninsured Losses

The Company carries comprehensive liability, fire, flood, environmental, extended coverage, and rental loss insurance with policy specifications, limits, and deductibles that management believes are adequate and appropriate under the circumstances given the relative risk of loss, the cost of such coverage, and industry practice. There are, however, certain types of losses that may be either uninsurable or not economically insurable. Should an uninsured loss occur, it could have an adverse effect on the Company’s combined financial position, results of operations, or cash flows.

 

  (d)

Future Construction Projects

As of December 31, 2020, the Company did not have any commitments for construction projects. Due to the COVID-19 pandemic, all projects planned for 2020 were discontinued and existing contracts were terminated by right of owner convenience.

 

(7)

Rentals Receivable under Operating Leases

The following is a schedule by years of minimum future rental income on noncancelable operating leases as of December 31, 2020 (in thousands):

 

Year ending December 31:

  

2021

   $ 56,782  

2022

     48,834  

2023

     35,887  

2024

     28,847  

2025

     22,894  

Thereafter

     8,661  
  

 

 

 
   $ 201,905  
  

 

 

 

 

(8)

Retirement Plan Expenses

The Parent participates in the Larry H. Miller Employees’ Retirement Plan and Trust (the Plan), filed under Section 401(k) of the Internal Revenue Code. This plan covers eligible employees who complete one year of continuous service, work more than 1,000 hours, and have attained the age of 21. The Plan allows each participant to contribute up to 50% of the participant’s total annual salary, or the maximum amount allowed by the Internal Revenue Code, whichever is less.

The Parent has agreed to match 50% of each participant’s contribution, up to 6% of each participant’s total annual salary, with a total salary limit of $0.3 million for the years ended December 31, 2020 and 2019. Contributions are vested 20% each year based on each participant’s hire date with the Parent. The Parent has the right under the Plan to discontinue matching the salary deferral at any time or to terminate their participation in the plan. In the event of the termination of the plan, the net assets of the Plan are available for payment of benefits to the participants.

The Company incurred an insignificant amount of expenses for matching contributions during the years ended December 31, 2020 and 2019.

 

   14    (Continued)


LARRY H. MILLER AUTOMOTIVE REAL ESTATE PROPERTIES

Notes to Combined Financial Statements

December 31, 2020 and 2019

 

(9)

Fair Value of Financial Instruments

GAAP establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are based on market pricing data obtained from sources independent of the Company. Unobservable inputs reflect management’s judgment about the assumptions market participants would use in pricing the asset or liability.

 

Level 1    inputs are quoted prices in active markets as of the measurement date for identical assets or liabilities that Company had the ability to access.
Level 2    inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability.
Level 3    inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.

The following table presents the Company’s fair value hierarchy for the above assets and liabilities measured at fair value on a recurring basis as of December 31, 2020 and 2019 (in thousands):

 

     Quoted
market prices
in active
markets
(Level 1)
     Other
observable
inputs
(Level 2)
     Unobservable
inputs

(Level 3)
 

2020:

        

Financial liabilities:

        

Derivatives

   $ —          6,532        —    

2019:

        

Financial liabilities:

        

Derivatives

     —          3,834        —    

Interest rate swaps that are in an asset position are recorded as a component of prepaid expenses and other assets, and interest rate swaps that are in a liability position are recorded as a component of other liabilities.

 

(10)

Subsequent Events

The Company has evaluated subsequent events through October 25, 2021, which is the date these combined financial statements were available to be issued.

On September 29, 2021, it was announced that the Asbury Automotive Group entered into a definitive agreement to acquire the Company from the Miller Family as part of a broader transaction for the Larry H. Miller automotive business.

 

   15   
EX-99.3

Exhibit 99.3

Total Care Auto,

Powered by Landcar

COMBINED FINANCIAL STATEMENTS AND INDEPENDENT AUDITOR’S REPORT

For the Years Ended December 31, 2020 and 2019

 

LOGO


TOTAL CARE AUTO, POWERED BY LANDCAR

C O N T E N T S

 

     Page  

Independent Auditor’s Report

     2-3  

Combined Financial Statements:

  

Balance Sheets

     4-5  

Statements of Income

     6  

Statements of Comprehensive Income

     7  

Statements of Changes in Stockholders’ Equity

     8  

Statements of Cash Flows

     9-10  

Notes to Combined Financial Statements

     11-32  

Supplementary Information:

  

Independent Auditor’s Report on Supplementary Information

     34  

Landcar Agency, Inc. Balance Sheets

     35  

Landcar Agency, Inc. Statements of Income

     36  

Landcar Casualty Company Balance Sheets

     37  

Landcar Casualty Company Statements of Income

     38  


LOGO

Independent Auditor’s Report

To the Board of Directors of

Total Care Auto, Powered by Landcar

Opinion

We have audited the accompanying combined financial statements of Total Care Auto, Powered by Landcar which comprise the combined balance sheets as of December 31, 2020 and 2019, and the related combined statements of income, comprehensive income, stockholders’ equity, and cash flows for the years then ended, and the related notes to the combined financial statements.

In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Total Care Auto, Powered by Landcar as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.

Basis for Opinion

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of Total Care Auto, Powered by Landcar and to meet our other ethical responsibilities in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Required Supplementary Information

Accounting principles generally accepted in the United States of America require that the incurred and paid claims development information, and the historical claims duration information on pages 25 to 27 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Financial Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance.

Responsibilities of Management for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

 

LOGO   LOGO


In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about Total Care Auto, Powered by Landcar’s ability to continue as a going concern within one year after the date that the financial statements are available to be issued.

Auditor’s Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with generally accepted auditing standards will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements, including omissions, are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.

In performing an audit in accordance with generally accepted auditing standards, we:

 

   

Exercise professional judgment and maintain professional skepticism throughout the audit.

 

   

Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

 

   

Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Total Care Auto, Powered by Landcar ’s internal control. Accordingly, no such opinion is expressed.

 

   

Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements.

 

   

Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about Total Care Auto, Powered by Landcar ’s ability to continue as a going concern for a reasonable period of time.

We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control related matters that we identified during the audit.

 

LOGO

Salt Lake City, Utah

April 14, 2021


TOTAL CARE AUTO, POWERED BY LANDCAR

Combined Balance Sheets

As of December 31, 2020 and 2019

 

 

     Combined
2020
     Combined
2019
(As Restated)
 

ASSETS

     

Current assets:

     

Cash and cash equivalents, at estimated fair value

   $ 74,708,047      $ 51,031,396  

Short-term investments, at estimated fair value

     201,310        2,047,247  

Premiums receivables

     13,577,564        9,048,296  

Reinsurance recoverable

     1,339        4,088  

Other receivable

     13,012        8,000,000  

Accrued investment income

     473,707        656,924  

Notes receivable, current portion

     —          20,000,000  

Prepaid expenses

     106,156        155,549  

Mortgage loans, at amortized, current portion, net of the uncollectible allowance of $0

     86,971        177,506  

Deferred acquisition costs, current portion

     102,916,570        90,519,088  

Related party receivable

     —          5,877  
  

 

 

    

 

 

 

Total current assets

     192,084,676        181,645,971  
  

 

 

    

 

 

 

Investments

     

Bonds, available for sale, at estimated fair value (amortized cost: $12,363,757 and $11,517,211)

     12,673,890        11,681,105  

Bonds, held-to-maturity, amortized cost

     33,363,406        29,141,953  

Preferred stock, available-for-sale, at estimated fair value

     3,445,191        3,984,895  

Common stock, available-for-sale, at estimated fair value

     35,642,082        28,624,422  

Mortgage loans, amortized cost, long-term portion

     2,363,317        3,790,450  

Alternative investments

     197,241        458,432  

Related party notes receivable

     91,680,000        39,755,061  

Notes receivable, non-current portion

     —          53,000,000  

Deferred acquisition costs, long-term portion

     293,521,236        245,330,422  

Deferred income tax asset

     310,824        645,562  

Property and equipment, net of accumulated depreciation of $2,629,659 and $1,731,938

     2,167,006        2,908,084  
  

 

 

    

 

 

 

Total noncurrent assets

     475,364,193        419,320,386  
  

 

 

    

 

 

 

Total assets

   $ 667,448,869      $ 600,966,357  
  

 

 

    

 

 

 

 

The accompanying notes are an integral part of these combined financial statements

4


TOTAL CARE AUTO, POWERED BY LANDCAR

Combined Balance Sheets (Continued)

As of December 31, 2020 and 2019

 

 

     Combined
2020
     Combined
2019
(As Restated)
 

LIABILITIES AND STOCKHOLDERS’ EQUITY

     

Current liabilities:

     

Accounts payable and accrued expenses

   $ 9,806,397      $ 14,700,811  

Securities payable

     —          108,987  

Taxes, licenses, and fees, excluding income taxes

     103,536        87,462  

Claims payable

     1,100,319        944,236  

Interest payable

     20,652        —    

Unearned premiums, current portion

     179,481,064        153,085,550  

Line of credit

     14,000,000        —    

Income taxes payable

     21,239        334,234  
  

 

 

    

 

 

 

Total current liabilities

     204,533,207        169,261,280  
  

 

 

    

 

 

 

Other liabilities:

     

Unpaid losses and loss adjustment expenses

     2,424,159        2,321,556  
  

 

 

    

 

 

 

Total other liabilities

     2,424,159        2,321,556  
  

 

 

    

 

 

 

Noncurrent liabilities:

     

Unearned premiums, long-term portion

     421,345,772        401,882,654  
  

 

 

    

 

 

 

Total noncurrent liabilities

     421,345,772        401,882,654  
  

 

 

    

 

 

 

Total liabilities

     628,303,138        573,465,490  
  

 

 

    

 

 

 

Stockholders’ equity:

     

Common stock

     2,501,000        2,501,000  

Additional paid-in capital

     85,125,956        85,125,956  

Retained earnings

     (48,791,357)        (60,289,983)  

Accumulated other comprehensive income (loss), net

     310,133        163,894  
  

 

 

    

 

 

 

Total stockholders’ equity

     39,145,732        27,500,867  
  

 

 

    

 

 

 

Total liabilities and stockholders’ equity

   $ 667,448,869      $ 600,966,357  
  

 

 

    

 

 

 

 

The accompanying notes are an integral part of these combined financial statements

5


TOTAL CARE AUTO, POWERED BY LANDCAR

Combined Statements of Income

For the Years Ended December 31, 2020 and 2019

 

     Combined
2020
     Combined
2019
(As Restated)
 

Premium and administrative fee income

   $ 190,896,847        187,810,450  

Service and licensing fee income

     37,600,000        —    
  

 

 

    

 

 

 

Cost of sales:

     

Claims expense incurred

     42,542,890        44,036,107  

Other cost of sales

     500,563        289,620  

Amortization of deferred acquisition costs

     97,928,967        99,721,890  
  

 

 

    

 

 

 

Total cost of sales

     140,972,420        144,047,617  
  

 

 

    

 

 

 

Gross profit

     87,524,428        43,762,833  
  

 

 

    

 

 

 

Operating expenses:

     

Salaries and benefits

     3,838,243        4,203,057  

Rent

     238,982        232,237  

Depreciation

     897,721        586,662  

Professional fees

     1,003,123        1,182,145  

Advertising

     —          27,910  

Other general and administrative

     1,501,661        1,160,461  
  

 

 

    

 

 

 

Total expenses

     7,479,730        7,392,472  
  

 

 

    

 

 

 

Gain from operations

     80,044,698        36,370,361  

Net investment income

     7,588,260        8,530,553  

Net realized gains

     859,376        736,259  

Other income

     2,173,226        2,279,431  
  

 

 

    

 

 

 

Net income before provision for income taxes

     90,665,560        47,916,604  

Provision for income taxes

     1,559,434        1,516,644  
  

 

 

    

 

 

 

Net income

   $ 89,106,126      $ 46,399,960  
  

 

 

    

 

 

 

 

The accompanying notes are an integral part of these combined financial statements

6


TOTAL CARE AUTO, POWERED BY LANDCAR

Combined Statements of Comprehensive Income

For the Years Ended December 31, 2020 and 2019

 

     Combined
2020
    Combined
2019
(As Restated)
 

Net income

   $ 89,106,126     $ 46,399,960  
  

 

 

   

 

 

 

Other comprehensive income (loss):

    

Unrealized investment gain (loss) arising during the period

     233,879       218,997  

Reclassification adjustment for (gains) losses included in net income

     (87,640     (17,793
  

 

 

   

 

 

 

Other comprehensive income (loss):

     146,239       201,204  

Income tax expense related to items of other comprehensive income (loss)

     —         —    
  

 

 

   

 

 

 

Other comprehensive income (loss), net of income tax

     146,239       201,204  
  

 

 

   

 

 

 

Total comprehensive income

   $ 89,252,365     $ 46,601,164  
  

 

 

   

 

 

 

 

The accompanying notes are an integral part of these combined financial statements

7


TOTAL CARE AUTO, POWERED BY LANDCAR

Combined Statements of Changes in Stockholders’ Equity

For the Years Ended December 31, 2020 and 2019

 

     Common
Stock
     Additional
Paid-in Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income
    Total  

Combined

           

Balance at January 1, 2019

   $ 2,501,000      $ 12,325,956     $ 33,381,880     $ (37,310   $ 48,171,526  

Change in accounting principles

     —          —         (87,621,823       (87,621,823

Capital contribution

     —          73,000,000       —         —         73,000,000  

Dissolution of MPA

     —          (200,000     —         —         (200,000

Net income

     —          —         46,399,960       —         46,399,960  

Dividends paid

     —          —         (52,450,000     —         (52,450,000

Comprehensive income, net

     —          —         —         201,204       201,204  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2019 (As Restated)

     2,501,000        85,125,956       (60,289,983     163,894       27,500,867  

Net income

     —          —         89,106,126       —         89,106,126  

Dividends paid

     —          —         (77,607,500     —         (77,607,500

Comprehensive income, net

     —          —         —         146,239       146,239  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2020

   $ 2,501,000      $ 85,125,956     $ (48,791,357   $ 310,133     $ 39,145,732  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

The accompanying notes are an integral part of these combined financial statements

8


TOTAL CARE AUTO, POWERED BY LANDCAR

Combined Statements of Cash Flows

For the Years Ended December 31, 2020 and 2019

 

     Combined
2020
    Combined
2019
(As Restated)
 

Reconciliation of net income to net cash provided by operating activities:

    

Net income

   $ 89,106,126     $ 46,399,960  

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

    

Realized gain on investments

     (859,376     (736,259

Unrealized (gain) loss on investments

     (3,738,782     (2,580,188

Amortization (accretion) of bonds

     660,352       513,530  

Change in accounting principle

     —         8,922,590  

Depreciation

     897,721       586,662  

Change in:

    

Premiums receivables

     (4,529,268     (1,111,537

Reinsurance recoverable

     2,749       (4,088

Accrued investment income

     183,217       7,276  

Prepaid expenses

     49,393       4,212  

Deferred acquisition costs

     (60,588,296     (38,301,209

Deferred income tax asset/liability

     (123,925     428,093  

Related party receivable

     5,877       (52

Income tax recoverable/payable

     (312,995     213,552  

Unpaid losses and loss adjustment expenses

     102,603       274,656  

Claims payable

     156,083       64,728  

Interest payable

     20,652       —    

Accounts payable and accrued expenses

     3,092,573       492,501  

Securities payable

     (108,987     108,987  

Taxes, licenses, and fees

     16,074       (76,486

Unearned premiums

     45,858,632       69,068,693  

Allowance for cancellations

     —         (11,987,376
  

 

 

   

 

 

 

Net cash provided by operating activities

     69,890,423       72,288,245  
  

 

 

   

 

 

 

 

The accompanying notes are an integral part of these combined financial statements

9


TOTAL CARE AUTO, POWERED BY LANDCAR

Combined Statements of Cash Flows (Continued)

For the Years Ended December 31, 2020 and 2019

 

     Combined
2020
    Combined
2019
(As Restated)
 

Cash flows from investing activities:

    

Proceeds from short—term investments

   $ 1,845,937     $ (155,010

Proceeds from sale of property and equipment

     —         449,380  

Proceeds from bonds

     36,592,084       22,099,284  

Proceeds from stocks

     4,809,599       18,913,029  

Proceeds from mortgage loan principal collections

     1,517,668       1,177,417  

Proceeds from other invested assets

     261,191       —    

Purchase of property and equipment

     (156,643     (1,788,379

Purchase of bonds

     (22,451,292     (25,316,996

Purchase of stocks

     (26,095,376     (23,125,524

Mis cellaneous applications

     (8,331     (209,583
  

 

 

   

 

 

 

Net cash used by investing activities

     (3,685,163     (7,956,382
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Return of capital

     —         (200,000

Capital contributions

     —         73,000,000  

Proceeds from line of credit

     14,000,000       —    

Related party notes receivable funded

     (51,924,939     (100,000,000

Proceeds from related party notes receivable

     73,000,000       28,401,894  

Dividends paid

     (77,607,500     (52,450,000

Other cash used

     3,830       (35,716
  

 

 

   

 

 

 

Net cash used by financing activities

     (42,528,609     (51,283,822
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     23,676,651       13,048,041  

Cash and cash equivalents at beginning of year

     51,031,396       37,983,355  
  

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 74,708,047     $ 51,031,396  
  

 

 

   

 

 

 

Supplemental Disclosures of Cash Flow Information:

    

Interest paid

   $ —       $ —    
  

 

 

   

 

 

 

Taxes paid

   $ 1,537,691     $ 2,685,000  
  

 

 

   

 

 

 

 

The accompanying notes are an integral part of these combined financial statements

10


TOTAL CARE AUTO, POWERED BY LANDCAR

Notes to Combined Financial Statements

For the Years Ended December 31, 2020 and 2019

 

1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Description of the Company

Total Care Auto, Powered by Landcar (“TCA”) is made up of two different entities: Landcar Agency, Inc. (“LCA”), and Landcar Casualty Company (“LCC”).

The combined financial statements presented herein contain the accounts of both of these entities. All significant intercompany balances and transactions have been eliminated in combination.

TCA offers extended vehicle service contracts, prepaid maintenance contracts, vehicle theft assistance contracts, key replacement contracts, guaranteed asset protection (“GAP”) contracts, paintless dent repair contracts, appearance protection contracts, tire and wheel, DrivePur, and lease wear and tear contracts. In addition, TCA provides the required contractual liability insurance if needed. The majority of these warranty contracts are sold through affiliated automobile dealerships.

Basis of Presentation

The accompanying combined financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”) using the accrual method of accounting. All income is recorded when earned and all expenses are recorded when incurred regardless of when such amounts are received or paid.

Use of Estimates

The preparation of combined financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the combined financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the reserve for unpaid losses and loss adjustment expenses, unearned premiums, collectability of the notes receivables and mortgage loans, and fair value of investments.

Cash and Cash Equivalents

Cash equivalents are highly liquid investments with a maturity date of three months or less at the time of purchase and are stated at cost, which approximates fair market value. TCA maintains cash balances in demand deposits and money market funds in which the carrying amount approximates fair value.

Short-term investments

Short-term investments are made up of bonds with a maturity date of more than three months, but less than 12 months. These holdings are stated at cost, which approximates fair market value.

 

11


TOTAL CARE AUTO, POWERED BY LANDCAR

Notes to Combined Financial Statements

For the Years Ended December 31, 2020 and 2019

 

1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Restricted Cash and Securities

TCA places securities on statutory deposit with certain state agencies to retain the right to do business in those states.

Premiums Receivable/Bad Debts

Receivables are recorded when invoices are issued and are presented in the balance sheet net of the allowance for doubtful accounts. Receivables are written off when they are determined to be uncollectible. TCA believes no allowance for doubtful accounts is necessary as of December 31, 2020 and 2019.

Investment Securities

Bonds and treasury instruments at December 31, 2020 and 2019 consist of held-to-maturity securities and available-for-sale securities.

Held-to-maturity securities are reported at cost, adjusted for amortization of premiums and accretion of discounts that are recognized in interest income using the interest method over the period to maturity. A portion of the bonds are classified as available-for-sale securities. Available-for-sale securities are reported at market value.

Declines in the fair value of individual held-to-maturity and available-for-sale securities below their cost that are other than temporary would result in write-downs of the individual securities to their fair value. The related write-downs would be included in earnings as realized losses. During the 2020 and 2019 fiscal years, no such write-downs were noted.

Equity securities are made up of preferred and common stock. These are reported at market value with the change in value being recognized in net income.

Cost Method Investments

During 2012, LCA invested in Mercato Partners Growth II GP, LLC and has accounted for it using the cost method in accordance with FASB Accounting Standards Codification (ASC - 323), Investments – Equity Method and Joint Ventures. The carrying value of this investment as of December 31, 2020 and 2019 was $197,241 and $458,432, respectively. Management performs an annual assessment of these investments for impairment. As of December 31, 2020, there were no identified events or changes in circumstances that had a significant adverse effect on the carrying value of this investment.

Mortgages and Notes Receivable

Mortgage loans and notes receivable are carried at the outstanding principal balances with an allowance for estimated uncollectible amounts, if any.

 

12


TOTAL CARE AUTO, POWERED BY LANDCAR

Notes to Combined Financial Statements

For the Years Ended December 31, 2020 and 2019

 

1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Deferred Acquisition Costs

Direct expenses paid for the acquisition of contracts on which revenue has been received but not yet earned have been deferred and are amortized over the related contract period.

Property and Equipment

Property and equipment is recorded at cost at the time of purchase and depreciated over the useful life of the assets using the straight-line depreciation method. Acquisitions of under $5,000 are expensed in the year purchased. The estimated useful lives for the various asset classes are as follows:

 

Asset Categories

  

Useful life

Furniture and equipment    10 years
Computer hardware    3 years
Computer software    5 years
Leasehold improvements    3-5 years

Property and equipment was made up of the following as of December 31:

 

     2020      2019  

Property and Equipment

     

Furniture and fixtures

   $ 413,894      $ 413,894  

Computer hardware and office equipment

     310,559        302,827  

Software

     4,069,479        3,923,301  

Work in progress

     2,733        —    
  

 

 

    

 

 

 

Total

     4,796,665        4,640,022  

Accumulated depreciation

     (2,629,659 )       (1,731,938
  

 

 

    

 

 

 

Net property and equipment

   $ 2,167,006      $ 2,908,084  
  

 

 

    

 

 

 

Depreciation expense for the years ended December 31, 2020 and 2019 amounted to $897,721 and $586,662, respectively.

Costs of software developed for internal use are capitalized in a work in progress account until the project has been placed in service. Depreciation begins once the project has been placed in service.

 

13


TOTAL CARE AUTO, POWERED BY LANDCAR

Notes to Combined Financial Statements

For the Years Ended December 31, 2020 and 2019

 

1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Unearned Premiums

Revenue is earned over the period of the related warranty contract. Accordingly, TCA records a deferred revenue reserve to ratably recognize revenue over the contract period.

Unpaid Losses and Loss Adjustment Expense Reserve

Losses and loss adjustment expense reserves represent management’s best estimate of the ultimate net cost of all reported and unreported losses incurred through December 31, 2020 and 2019. TCA does not discount liabilities for unpaid losses or unpaid loss adjustment expense reserves. The reserves for unpaid losses and loss adjustment expenses are estimated using individual case-basis valuations and statistical analysis. Those estimates are subject to the effects of trends in loss severity and frequency. Although considerable variability is inherent in such estimates, management believes the reserves for losses and loss adjustment expenses are adequate. The estimates are continually reviewed and adjusted as necessary as experience develops or new information becomes known; such adjustments are included in current operations.

Claims are counted when incidents that may result in a liability are reported and are based on policy coverage.

Revenue Recognition

Effective January 1, 2019, the Company adopted new FASB guidance contained in ASU 2014-09, Revenue Recognition (Topic 606): Revenue from Contracts with Customers, using the modified retrospective method applied to all active contracts. The modified retrospective method results in no changes to the December 31, 2018 balances presented in these financial statements, but instead results in adjustments to the January 1, 2019 balances. This standard revises the criteria for revenue recognition. Under the new guidance, the transaction price is attributed to the underlying performance obligations in the contract and revenue is deferred and recognized as income as the Company satisfies the performance obligations in the contract as the obligations under the contracts are performed. Under the new guidance, revenue is recognized more slowly as compared to the historic revenue recognition pattern. Incremental costs of obtaining a contract are capitalized and amortized to the extent the Company expects to recover those costs. The Company considers all revenue other than investment and interest income to be the result of contracts with customers. Each contract is considered to have one performance obligation which extends over the life of the contract. The method for recognizing revenue for the various types of contracts is described in the following paragraphs. Expenses are matched with earned premiums resulting in recognition of profits over the life of the contracts. This has resulted in contract costs that were expensed upon payment last year now being included in the amortization of deferred acquisition costs. Unearned premium reserves are established to cover the unexpired portion of premiums written.

 

14


TOTAL CARE AUTO, POWERED BY LANDCAR

Notes to Combined Financial Statements

For the Years Ended December 31, 2020 and 2019

 

1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Revenue Recognition (Continued)

Earnings methods are assigned based on contract type and expected claim patterns and consist of the pro-rata, rule of 78’s, and reverse rule of 78’s methods. GAP insurance unearned premium reserve is calculated by the rule of 78’s. The other contracts are earned ratably over the contract period.

Extended vehicle service contracts are earned ratably over the contract based on historical claims payment patterns for TCA.

The Company receives monthly retrospective commissions from third party vendors. These commissions are earned when received and are reported as other income on the statement of income and comprehensive income.

Revenue from service and licensing fees is earned monthly as it is received.

The timing of revenue recognition, billings and cash collections results in billed accounts receivables, contract assets (reported as deferred acquisition costs) and contract liabilities (reported as unearned premium) on the Company’s balance sheets. Balances as of December 31 were as follows:

 

     2020      2019  

Billed receivables

   $ 13,577,564      $ 9,048,296  

Contract assets

   $ 396,437,806      $ 335,849,510  

Contract liabilities

   $ 600,826,836      $ 554,968,204  

 

15


TOTAL CARE AUTO, POWERED BY LANDCAR

Notes to Combined Financial Statements

For the Years Ended December 31, 2020 and 2019

 

1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Revenue Recognition (Continued)

Premium and administrative fee income for the years ended December 31, 2020 and 2019 by product is as follows:

 

     2020      2019  

Company:

     

LCC:

     

Guaranteed asset protection contracts

   $ 7,756,644      $ 6,156,805  

Lease, wear and tear

     11,858        —    

LCA:

     

Service contracts

     93,868,951        91,637,134  

Maintenance

     29,765,812        31,179,829  

Vehicle theft assistance

     23,872,592        23,777,389  

Paintless dent repair and appearance protection

     22,333,895        21,822,613  

Guaranteed asset protection administrative fees

     4,078,713        5,468,870  

Key replacement

     5,542,943        4,053,854  

Tire and wheel

     1,434,348        1,429,905  

DrivePur

     2,273,601        1,386,357  

Lease, wear and tear

     (192,274      812,096  

Other

     149,764        85,598  
  

 

 

    

 

 

 

Total

   $ 190,896,847      $ 187,810,450  
  

 

 

    

 

 

 

Dividends

LCA pays monthly dividends to the shareholders that are based on the prior month’s earnings. Dividends are only accrued when they are formally declared by the board. If the board does not make a declaration, then dividends will be accounted for when paid.

 

16


TOTAL CARE AUTO, POWERED BY LANDCAR

Notes to Combined Financial Statements

For the Years Ended December 31, 2020 and 2019

 

1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Income Taxes

LCC accounts for income taxes in accordance with FASB ASC 740, Income Taxes. FASB ASC 740 is an asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the tax and financial reporting basis of certain assets and liabilities. LCC has deferred tax assets and liabilities principally from differences in the methods of accounting for reserves, unamortized acquisition costs and unrealized gain and losses on common and preferred stock.

LCA has elected under IRC Section 1362 to be an S-Corporation. In lieu of corporation income taxes, the stockholders of an S-Corporation are taxed on their proportionate share of LCA’s taxable income.

TCA accounts for uncertain tax positions in accordance with provisions of FASB ASC 740. Management has determined that TCA does not have any uncertain tax positions and associated unrecognized benefits that materially impact the financial statements or related disclosures. Since tax matters are subject to some degree of uncertainty, there can be no assurance that TCA’s tax returns will not be challenged by the taxing authorities and that TCA or their shareholders will not be subject to additional tax, penalties, and interest as a result of such challenge. Generally, LCA’s and LCC’s tax returns remain open for three years for federal and state income tax examination.

Concentration of Credit Risk

Financial instruments, which potentially subject TCA to concentrations of credit risk, consist of temporary cash investments, fixed maturity securities, mortgage loans, notes receivables and other investments.

TCA maintains interest bearing accounts at a financial institution. The accounts at this institution are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. TCA’s total cash exceeded the insurance limit as of December 31, 2020 and 2019. The Company has not experienced any losses in such accounts and does not believe it is exposed to any significant credit risks relating to its cash accounts.

TCA invests in money market funds that are not insured or guaranteed by the FDIC or any other government agency. Although a money market fund seeks to preserve the value of an investment at $1.00 per share, it is possible to lose money by investing in the fund. As of December 31, 2020 and 2019, TCA held $3,498,838 and $2,937,941 in money market funds, respectively.

 

17


TOTAL CARE AUTO, POWERED BY LANDCAR

Notes to Combined Financial Statements

For the Years Ended December 31, 2020 and 2019

 

1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Fair Value of Financial Instruments

TCA categorizes assets and liabilities measured at fair value into a three -level hierarchy based on the priority of the inputs to the valuation technique used to determine fair value in accordance with Financial Accounting Standards Board (“FASB”) Accounti ng Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Assets and liabilities valued at fair value are categorized based on the inputs to the valuation techniques as follows:

Level 1 – Inputs that utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that an entity has the ability to access.

Level 2 – Inputs that include quoted prices for similar assets and liabilities in active markets and inputs that are observable, either directly or indirectly, for substantially the full term of the financial instrument. Fair values for these instruments are estimated using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows.

Level 3 – Inputs that are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity.

Subsequent to initial recognition, TCA may remeasure the carrying value of assets and liabilities measured on a nonrecurring basis to fair value. Adjustments to fair value usually result when certain assets are impaired. Such assets are written down from their carrying amounts to their fair value.

Comprehensive Income

TCA presents comprehensive income in accordance with the standards established by the Comprehensive Income topic of FASB ASC 220. Comprehensive income consists of net income and net unrealized gains or losses on debt securities and is presented in the statement of changes in stockholders’ equity and statement of comprehensive income.

Restatement

Subsequent to initial issuance, there was a change in the entities included in the combined financials resulting in a restatement of the 2019 financial statements. The restatements resulted in decrease of $9,864,882 in net income and a decrease of $18,382 ,122 in stockholders’ equity.

 

18


TOTAL CARE AUTO, POWERED BY LANDCAR

Notes to Combined Financial Statements

For the Years Ended December 31, 2020 and 2019

 

1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

COVID-19 Uncertainties

The COVID-19 pandemic has not had a significant impact on the Company’s underwriting results and the Company does not expect it to going forward.

 

2.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In March of 2016, the FASB issued ASU 2016-02, Leases, which requires all leases that have a term of more than 12 months to be recognized as assets and liabilities on the balance sheet at inception. A lessee would recognize a lease liability to make lease payments owed to a lessor (liability) and a benefit for the right to use the leased asset (asset) for the lease term. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee would depend on whether the lessee is expected to consume more than an insignificant portion of the economic benefits embedded in the underlying asset. This new guidance is effective for fiscal years beginning after December 15, 2020. TCA does not anticipate a significant impact on TCA’s results of operations, financial position, or cash flows as a result of this new standard.

In June of 2016, the FASB issued Accounting Standards Update 2016-13, Financial Instruments – Credit Losses, which requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. This requirement eliminates the probable initial recognition threshold in Current GAAP which has delayed recognition of credit losses until the loss was probable. Instead, the new treatment will better reflect an entity’s current estimate of all expected credit losses. In addition, the new guidance requires that any credit losses on available -for-sale debt securities to be presented as an allowance rather than as a write-down. Initial allowance for credit losses is added to the purchase price rather than reported as a credit loss expense. Subsequent changes in the allowance for credit losses are recorded in credit loss expense. This will allow entities to also record reversals of credit losses in current period net income, whereas the current GAAP prohibits reflecting these improvements in current period earnings. This guidance will become effective for the Company’s year ending on December 31, 2022. The Company does not expect a significant impact to the Company’s financials as a result of this guidance.

 

19


TOTAL CARE AUTO, POWERED BY LANDCAR

Notes to Combined Financial Statements

For the Years Ended December 31, 2020 and 2019

 

3.    INVESTMENTS

 

The carrying amounts of investment securities and their fair values as of December 31, 2020 and 2019 are as follows:

 

     2020  
   Cost/
Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  

Investments:

           

Common stock

   $ 26,034,522      $ 10,031,833      $ 424,273      $ 35,642,082  

Preferred stock

     3,223,872        221,319        —          3,445,191  

Bonds, available-for-sale

     12,363,757        311,534        1,401        12,673,890  

Bonds, held-to-maturity

     33,363,406        804,061        11,879        34,155,588  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

   $ 74,985,557      $  11,368,747      $ 437,553      $ 85,916,751  
  

 

 

    

 

 

    

 

 

    

 

 

 
     2019  
   Cost/
Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  

Investments:

           

Common stock

   $ 22,676,392      $ 6,420,199      $ 472,169      $ 28,624,422  

Preferred stock

     3,826,329        195,240        36,674        3,984,895  

Bonds, available-for-sale

     11,517,211        169,444        5,550        11,681,105  

Bonds, held-to-maturity

     29,141,953        460,804        6,797        29,595,960  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

   $ 67,161,885      $ 7,245,687      $ 521,190      $ 73,886,382  
  

 

 

    

 

 

    

 

 

    

 

 

 

A summary of amortized cost and fair value of TCA’s investment in bonds at December 31, 2020, is as follows:

 

     Amortized
Cost
     Fair Value  

2021

   $ 3,108,369      $ 3,122,449  

2022 through 2025

     32,994,981        33,851,489  

2026 through 2030

     2,969,602        3,102,855  

2031 through 2040

     4,764,364        4,808,954  

After 2041

     1,889,847        1,943,731  
  

 

 

    

 

 

 

Total by maturity

   $ 45,727,163      $ 46,829,478  
  

 

 

    

 

 

 

 

20


TOTAL CARE AUTO, POWERED BY LANDCAR

Notes to Combined Financial Statements

For the Years Ended December 31, 2020 and 2019

 

3.

INVESTMENTS (Continued)

 

On a regular basis, TCA reviews its investment portfolios for securities in an unrealized loss position for other-than-temporary impairment. This review for potential impairment is performed on a specific identification basis and requires significant management judgment related to a number of qualitative and quantitative factors including the severity of the impairment, the duration of the impairment, recent trends and expected market performance. Management considers all unrealized losses as of December 31, 2020 to be temporary. The securities summarized below were in an unrealized loss position for which other-than-temporary declines in value have not been recognized as of December 31, 2020.

 

Asset class:

   Less than 12 Months  
   Cost/
Amortized Cost
     Unrealized
Loss
     Market Value  

Bonds

   $ 4,287,599      $ (13,280    $ 4,274,319  

Common stocks

     7,021,225        (311,984      6,709,241  
  

 

 

    

 

 

    

 

 

 

Total

   $ 11,308,824      $ (325,264    $ 10,983,560  
  

 

 

    

 

 

    

 

 

 
     12 Months or More  
Asset class:    Cost/
Amortized Cost
     Unrealized
Loss
     Market Value  

Common stocks

   $ 2,436,874      $ (112,289    $ 2,324,585  
  

 

 

    

 

 

    

 

 

 

Total

   $ 2,436,874      $ (112,289    $ 2,324,585  
  

 

 

    

 

 

    

 

 

 
     Total  
Asset class:    Cost/
Amortized Cost
     Unrealized
Loss
     Market Value  

Bonds

   $ 4,287,599      $ (13,280    $ 4,274,319  

Common stocks

     9,458,099        (424,273      9,033,826  
  

 

 

    

 

 

    

 

 

 

Total

   $ 13,745,698      $ (437,553    $ 13,308,145  
  

 

 

    

 

 

    

 

 

 

 

21


TOTAL CARE AUTO, POWERED BY LANDCAR

Notes to Combined Financial Statements

For the Years Ended December 31, 2020 and 2019

 

3.

INVESTMENTS (Continued)

 

The securities summarized below were in an unrealized loss position for which other-than- temporary declines in value have not been recognized as of December 31, 2019.

 

     Less than 12 Months  
Asset class:    Cost/
Amortized Cost
     Unrealized
Loss
     Market Value  

Bonds

   $ 6,403,570      $ (11,517    $ 6,392,053  

Preferred stocks

     498,200        (2,729      495,471  

Common stocks

     148,961        (1,680      147,281  
  

 

 

    

 

 

    

 

 

 

Total

   $ 7,050,731      $ (15,926    $ 7,034,805  
  

 

 

    

 

 

    

 

 

 
     12 Months or More  
Asset class:    Cost/
Amortized Cost
     Unrealized
Loss
     Market Value  

Bonds

   $ 2,172,349      $ (830    $ 2,171,519  

Preferred stocks

     334,065        (33,945      300,120  

Common stocks

     9,114,100        (470,489      8,643,611  
  

 

 

    

 

 

    

 

 

 

Total

   $ 11,620,514      $ (505,264    $ 11,115,250  
  

 

 

    

 

 

    

 

 

 
     Total  
Asset class:    Cost/
Amortized Cost
     Unrealized
Loss
     Market Value  

Bonds

   $ 8,575,919      $ (12,347    $ 8,563,572  

Preferred stocks

     832,265        (36,674      795,591  

Common stocks

     9,263,061        (472,169      8,790,892  
  

 

 

    

 

 

    

 

 

 

Total

   $ 18,671,245      $ (521,190    $ 18,150,055  
  

 

 

    

 

 

    

 

 

 

 

22


TOTAL CARE AUTO, POWERED BY LANDCAR

Notes to Combined Financial Statements

For the Years Ended December 31, 2020 and 2019

 

3.

INVESTMENTS (Continued)

 

Assets measured at fair market value are as follows:

 

     Assets Measured at Fair Value  
     Fair Value      Level 1      Level 2      Level 3  

December 31, 2020

           

Bonds

   $ 12,673,890      $ 12,673,890      $ —        $ —    

Preferred stocks

     3,445,191        3,445,191        —          —    

Common stocks

     35,642,082        35,642,082        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 51,761,163      $ 51,761,163      $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2019

           

Bonds

   $ 11,681,105      $ 11,681,105      $ —        $ —    

Preferred stocks

     3,984,895        3,984,895        —          —    

Common stocks

     28,624,422        28,624,422        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 44,290,422      $ 44,290,422      $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Investments held in trust or on deposit with various state insurance departments and reinsurers on December 31, 2020 and 2019 are reported at statement values as follows:

 

     2020      2019  

Utah

   $ 2,098,757      $ 2,159,444  

Nevada

     214,711        218,660  

New Mexico

     225,012        225,021  

Georgia

     —          53,070  
  

 

 

    

 

 

 

Total

   $ 2,538,480      $ 2,656,195  
  

 

 

    

 

 

 

 

23


TOTAL CARE AUTO, POWERED BY LANDCAR

Notes to Combined Financial Statements

For the Years Ended December 31, 2020 and 2019

 

3.

INVESTMENTS (Continued)

Realized gains and losses by investment class for the years ended December 31, 2020 and 2019 are as follows:

 

     2020      2019  

Bonds:

     

Gross gains from sales

   $ 341,907      $ 111,082  

Gross losses from sales

     (42,458 )       (33,355

Preferred stock:

     

Gross gains from sales

     102,633        —    

Gross losses from sales

     (34,065 )       (5,883

Common stock:

     

Gross gains from sales

     1,392,085        813,530  

Gross losses from sales

     (903,229 )       (149,115

Short-term investments

     2,503        —    
  

 

 

    

 

 

 

Net capital gains

   $ 859,376      $ 736,259  
  

 

 

    

 

 

 

Mortgage Loans

Mortgage loans at December 31, 2020 and 2019 totaled $2,450,288 and $3,967,956, respectively. The maximum and minimum lending rates for mortgage loans during the year were 7.50% and 4.40%.

 

4.

UNAMORTIZED ACQUISITION COST S

Commissions paid for premiums received but not yet earned have been deferred. These deferred acquisition costs are being amortized over the contracts term. For the years ended December 31, 2020 and 2019, commissions and insurance capitalized were as follows:

 

     2020      2019  

Company:

     

LCC:

     

Guaranteed asset protection contracts

   $ 8,976,206      $ 8,877,895  

Lease, wear and tear

     604,879        —    

LCA:

     

Vehicle theft assistance contracts

     22,328,741        17,625,697  

Extended vehicle service contracts

     116,904,142        87,288,533  

Paintless dent repair and appearance protection

     20,207,398        17,454,861  

Key replacement contracts

     6,737,425        4,446,220  

Maintenance contracts

     2,370,527        2,496,901  

Tire and wheel

     388,039        415,360  

DrivePur

     1,357,528        273,418  

Lease, wear and tear

     296,193        —    

Other

     653,781        657734  

Guaranteed asset protection contracts admin

     7,416,748        1,066,769  
  

 

 

    

 

 

 

Total

   $ 188,241,607      $ 140,603,388  
  

 

 

    

 

 

 

Total amortization expense for the years ended December 31, 2020 and 2019 amounted to $97,358,258 and $99,721,890 respectively.

 

24


TOTAL CARE AUTO, POWERED BY LANDCAR

Notes to Combined Financial Statements

For the Years Ended December 31, 2020 and 2019

 

5.

UNEARNED PREMIUMS

Extended vehicle service, prepaid maintenance, vehicle theft assistance, key replacement, GAP, paintless dent repair, and appearance protection contract income received but not yet earned has been deferred. These unearned premiums are being amortized over the contract term of the related policies. For the years ended December 31, 2020 and 2019, premiums capitalized were as follows:

 

     2020      2019  

Company:

     

LCC:

     

Guaranteed asset protection contracts

   $ 9,377,303      $ 8,975,757  

Lease, wear and tear

     579,018        —    

LCA:

     

Vehicle theft assistance contracts

     25,709,523        24,701,205  

Extended vehicle service contracts

     145,127,956        136,965,743  

Paintless dent repair and appearance protection

     24,635,884        23,798,766  

Key replacement contracts

     8,842,696        8,234,377  

Maintenance contracts

     29,386,242        30,699,477  

Guaranteed asset protection contracts admin fee

     6,407,749        5,997,150  

Tire and wheel

     1,446,744        1,097,866  

DrivePur

     2,731,430        2,270,237  

Lease, wear and tear

     602,978        661,517  
  

 

 

    

 

 

 

Total

   $ 254,847,523      $ 243,402,095  
  

 

 

    

 

 

 

Total earned premiums for the years ended December 31, 2020 and 2019 amounted to $190,896,847 and $187,810,304, respectively.

 

6.

UNPAID CLAIMS, LOSSES AND LOSS ADJUSTMENT EXPENSES

Reserves for incurred losses and loss adjustment expenses attributable to insured events of prior years has increased (decreased) by approximately ($126,000) and ($57,000) as of December 31, 2020 and 2019, respectively, as a result of re-estimation of unpaid losses and loss adjustment expenses. This change is generally a result of on -going analysis of recent loss development trends. Original estimates change as additional information becomes known regarding individual claims.

 

     2020      2019  

(In thousands)

     

Balance at January 1

   $ 2,115      $ 2,047  
  

 

 

    

 

 

 

Incurred, related to:

     

Current year

     7,414        8,542  

Prior year

     (126      (57
  

 

 

    

 

 

 

Total incurred

     7,288        8,485  
  

 

 

    

 

 

 

Paid, related to:

     

Current year

     5,260        6,465  

Prior year

     1,942        1,952  
  

 

 

    

 

 

 

Total paid

     7,202        8,417  
  

 

 

    

 

 

 

Balance at December 31

   $ 2,201      $ 2,115  
  

 

 

    

 

 

 

 

25


TOTAL CARE AUTO, POWERED BY LANDCAR

Notes to Combined Financial Statements

For the Years Ended December 31, 2020 and 2019

 

6.

UNPAID CLAIMS, LOSSES AND LOSS ADJUSTMENT EXPENSES (Continued)

The following is information about incurred claims development as of December 31, 2020 as well as cumulative claim frequency and the total of incurred-but-not-reported liabilities plus expected development on reported claims included within the net incurred claims amounts.

The information about incurred claims development for the years ended December 31, 2011 to 2019, is presented as supplementary information and is unaudited.

 

     Incurred Claims and Allocated Claims Adjustment Expenses (000s)      As of December 31, 2020  
     For the Years Ended December 31,      Total of Incurred-
but-Not-Reported
Liabilities Plus
Expected
Development of
Reported Claims
     Cumulative
Number of
Reported Claims
 
Accident Year    2011      2012      2013      2014      2015      2016      2017      2018      2019      2020                

2011

     987        800        801        802        802        802        802        802        802        802        —          330  

2012

        848        936        936        936        936        936        936        936        936        —          373  

2013

           1,326        1,330        1,333        1,333        1,333        1,333        1,333        1,333        —          551  

2014

              2,413        2,671        2,680        2,681        2,681        2,681        2,681        —          916  

2015

                 4,389        4,489        4,502        4,501        4,501        4,501        —          1,510  

2016

                    6,978        7,202        7,224        7,226        7,226        —          2,057  

2017

                       10,045        9,186        9,165        9,163        —          2,412  

2018

                          8,502        8,471        8,478        4        2,526  

2019

                             8,502        8,304        37        2,487  

2020

                                7,288        1,321        1,692  
                             

 

 

       
                              $ 50,712        
Ultimate incurred

 

     Cumulative Paid Claims and Allocated Claims Adjustment Expenses (000s)                
     For the Years Ended December 31,                
Accident Year    2011      2012      2013      2014      2015      2016      2017      2018      2019      2020                

2011

     633        800        801        802        802        802        802        802        802        802        

2012

        649        936        936        936        936        936        936        935        935        

2013

           980        1,330        1,333        1,333        1,333        1,333        1,333        1,333        

2014

              1,879        2,670        2,680        2,681        2,681        2,681        2,681        

2015

                 3,211        4,474        4,501        4,501        4,501        4,501        

2016

                    5,105        7,172        7,222        7,226        7,226        

2017

                       7,388        9,145        9,163        9,163        

2018

                          6,528        8,437        8,473        

2019

                             6,528        8,261        

2020

                                5,166        
                             

 

 

       
                 Total cumulative paid           48,541        
                 All o/s liabilities before 2010        —          
                             

 

 

       
                
Liabilities for losses and LAE, net of
reinsurance
 
 
   $ 2,171