Penske Automotive 10Q 2000 Q3 Quarterly report

________________________________________________________________________________

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


[X		]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 OR
[ ]		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-12297

UNITED AUTO GROUP, INC.

(Exact name of registrant as specified in its charter)






DELAWARE (State or other jurisdiction of incorporation or organization)		22-3086739 (I.R.S. Employer Identification No.)




13400 Outer Drive West, Detroit, Michigan (Address of principal executive offices)		48239 (Zip Code)

Registrant’s telephone number, including area code(313) 592-7311

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

As of November 13, 2000, there were 19,850,331 shares of voting common stock outstanding.

TABLE OF CONTENTS


CONSOLIDATED CONDENSED BALANCE SHEETS
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
PART II
SIGNATURES
First Amendment Stock Option Plan
Fourth Amendment to Credit Agreement
General Motors Dealer Sales and Service Agreement
Financial Data Schedule
Risk Factors

TABLE OF CONTENTS


		Page





PART I
1. Financial Statements and Supplementary Data




	Consolidated Condensed Balance Sheets as of September 30, 2000 and December 31, 1999		1




	Consolidated Condensed Statements of Income for the three and nine months ended September 30, 2000 and 1999		2




	Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2000 and 1999		3




	Notes to Consolidated Condensed Financial Statements		4




2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			7




PART II




1. Legal Proceedings			14




6. Exhibits and Reports on Form 8-K			14




Signatures			15

UNITED AUTO GROUP, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(In Thousands)


		September 30,		December 31,
		2000		1999

		(Unaudited)




ASSETS




Cash and cash equivalents		$	13,976	$	19,847




Accounts receivable, net			189,422		140,473




Inventories			592,737		508,289




Other current assets			11,740		10,723

	Total current assets		807,875		679,332




Property and equipment, net			93,366		68,232




Intangible assets, net			586,569		494,957




Net assets of discontinued operations			12,457		13,747




Other assets			23,361		23,069

	Total Assets	$	1,523,628	$	1,279,337

LIABILITIES AND STOCKHOLDERS’ EQUITY




Liabilities




Floor plan notes payable		$	532,125	$	478,460




Accounts payable			57,425		47,113




Accrued expenses			61,570		46,328




Current portion of long-term debt			13,464		10,389

	Total current liabilities		664,584		582,290




Long-term debt			390,904		218,535




Other long-term liabilities			45,687		47,647

	Total liabilities		1,101,175		848,472




Stockholders’ Equity			422,453		430,865

	Total Liabilities and Stockholders’ Equity	$	1,523,628	$	1,279,337

See Notes to Consolidated Condensed Financial Statements

UNITED AUTO GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(In Thousands, Except per Share Amounts)

(Unaudited)



		Three Months Ended						Nine Months Ended
		September 30,						September 30,

		2000			1999			2000			1999

New vehicle sales		$	818,112		$	660,562		$	2,208,984		$	1,818,590




Used vehicle sales			329,484			274,708			934,861			792,195




Finance and insurance			53,373			45,679			145,077			125,678




Service and parts			130,204			104,417			357,167			297,233

	Total revenues		1,331,173			1,085,366			3,646,089			3,033,696




Cost of sales			1,148,560			938,882			3,144,583			2,620,622

	Gross profit		182,613			146,484			501,506			413,074




Selling, general and administrative expenses			142,453			117,323			396,209			332,359

	Operating income		40,160			29,161			105,297			80,715




Floor plan interest expense			(11,226	)		(6,999	)		(31,683	)		(20,723	)




Other interest expense			(8,681	)		(7,255	)		(22,974	)		(23,510	)




Other income (expense), net			—			874			—			2,270

	Income from continuing operations before minority interests and income taxes		20,253			15,781			50,640			38,752




Minority interests			(162	)		(181	)		(475	)		(542	)




Income taxes			(8,912	)		(6,631	)		(22,282	)		(16,923	)

	Income from continuing operations		11,179			8,969			27,883			21,287




Income from discontinued operations, net of tax			—			28			—			28

	Income before extraordinary item		11,179			8,997			27,883			21,315




Extraordinary item, net of tax			—			320			(3,969	)		320

	Net income	$	11,179		$	9,317		$	23,914		$	21,635

Basic income from continuing operations per common share			$0.52		$	0.41		$	1.19		$	0.97

Basic net income per common share			$0.52		$	0.42		$	1.00		$	0.99

Income from continuing operations per diluted common share			$0.40		$	0.31		$	0.95		$	0.84

Net income per diluted common share			$0.40		$	0.32		$	0.82		$	0.86

Shares used in computing basic per share data			19,014			22,000			20,251			21,934

Shares used in computing diluted per share data			28,080			29,048			29,325			25,207

See Notes to Consolidated Condensed Financial Statements

UNITED AUTO GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)



			Nine Months Ended
			September 30,

			2000			1999

Operating activities:




Net income			$	23,914		$	21,635




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




	Depreciation and amortization			17,347			14,180




	Extraordinary item			5,613			577




	Non-cash compensation expense			—			2,250




	Minority interests			475			542
Changes in operating assets and liabilities




	Accounts receivable			(32,057	)		(7,852	)




	Inventories			20,764			13,594




	Floor plan notes payable			(42,459	)		(20,457	)




	Accounts payable and accrued expenses			9,168			14,538




	Other			3,724			(715	)

		Net cash provided by operating activities		6,489			38,292

Investing activities:




Purchase of equipment and improvements				(23,282	)		(10,632	)




Dealership acquisitions				(131,035	)		(22,008	)

	Net cash used in investing activities			(154,317	)		(32,640	)

Financing activities:




Proceeds from borrowings of long-term debt				322,713			—




Repurchase of 11% Senior Subordinated Notes				(148,824	)		—




Repurchase of common stock				(26,620	)		—




Payments of long-term debt and capital leases				(6,562	)		(84,813	)




Issuance of preferred stock and warrants				—			77,000

	Net cash provided by (used in) financing activities			140,707			(7,813	)

Net cash provided by discontinued operations				1,250			7,750

	Net increase (decrease) in cash and cash equivalents			(5,871	)		5,589




Cash and cash equivalents, beginning of period				19,847			38,538

Cash and cash equivalents, end of period			$	13,976		$	44,127

See Notes to Consolidated Condensed Financial Statements

UNITED AUTO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In Thousands, Except Per Share Amounts)

(Unaudited)

1. Basis of Presentation

The information presented as of September 30, 2000 and 1999 and for the three and nine month periods then ended is unaudited, but includes all adjustments (consisting only of normal recurring accruals) which the management of United Auto Group, Inc. (the “Company”) believes to be necessary for the fair presentation of results for the periods presented. The results for the interim periods are not necessarily indicative of results to be expected for the year. These consolidated condensed financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 1999, which were included as part of the Company’s Annual Report on Form 10-K. In order to maintain consistency and comparability of financial information between periods presented, certain reclassifications have been made to the Company’s prior year condensed financial statements to conform to the current year presentation.

2. Inventories

Inventories consisted of the following:


		September 30,		December 31,
		2000		1999

New vehicles		$	426,348	$	378,311




Used vehicles			133,489		102,332




Parts, accessories and other			32,900		27,646

	Total inventories	$	592,737	$	508,289

3. Business Combinations

During 2000 and 1999, the Company completed a number of acquisitions. Each of these acquisitions has been accounted for using the purchase method of accounting. As a result, the Company’s financial statements include the results of operations of the acquired dealerships only from the date of acquisition. The acquisitions closed during the nine month periods ended September 30, 2000 and 1999 were not significant individually or in the aggregate. Cash consideration for acquisitions completed during the nine month periods ended September 30, 2000 and 1999 amounted to $131,035 and $22,008, respectively.

4. Managed Dealerships

In prior years, the Company entered into management agreements at certain dealerships for which the closing of the acquisition of such dealerships awaited final manufacturer approval. Pursuant to such management agreements, the Company was paid a monthly fee for managing all aspects of the operations of such dealerships. During 1999, the Company completed the acquisition of all dealerships operated pursuant to management agreements. Management fee income amounting to $874 and $2,270 for the three and nine month periods ended September 30, 1999 has been included in other income (expense), net in the accompanying consolidated condensed statements of income.

5. Discontinued Operations

In December 1998, the Company discontinued the auto finance business of its wholly-owned subsidiary United Auto Finance, Inc. (“UAF”). As a result, UAF is reported as a discontinued operation in the accompanying consolidated condensed statements of income. In addition, the remaining assets and liabilities of UAF have been presented as a non-current asset in the consolidated condensed balance sheets.

UNITED AUTO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Per Share Amounts)

(Unaudited)

Summarized financial information of discontinued operations follows:



	?Three Months				?Nine Months
	Ended?				Ended?
	September 30,				September 30,

	2000		1999		2000		1999

Revenues	$	559	$	690	$	1,429	$	3,025




Income from operations, net of taxes of $16 for the three and nine months ended September 30, 1999		—		28		—		28




Net income		—		28		—		28




Net income per diluted common share		—		—		—		—


	As of		As of
	September 30,		December 31,
	2000		1999

Cash and cash equivalents	$	3,754	$	2,852




Restricted cash		—		4




Finance assets, net		10,848		12,883




Other assets		720		429




Accrued liabilities and other liabilities		2,865		2,421

6. Earnings Per Share

Income available to common shareholders used in the calculation of basic earnings per share data was computed based on income from continuing operations and net income, each as adjusted to reflect accrued dividends relating to outstanding convertible preferred stock. Basic earnings per share data was computed based on the weighted average number of common shares outstanding. Diluted earnings per share data was calculated based on the weighted average number of shares of common stock outstanding, adjusted for the dilutive effect of stock options, convertible preferred stock and warrants. A reconciliation of the number of shares used in the calculation of basic and dilutive earnings per share for the three and nine month periods ended September 30, 2000 and 1999 follows:



	Three Months				Nine Months
	Ended				Ended
	September 30,				September 30,

	2000		1999		2000		1999

Weighted average number of common shares outstanding		19,014		22,000		20,251		21,934




Effect of convertible preferred stock, stock options and warrants		9,066		7,048		9,074		3,273

Weighted average number of common shares outstanding, including effect of dilutive securities		28,080		29,048		29,325		25,207

UNITED AUTO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Per Share Amounts)

(Unaudited)

7. Supplemental Cash Flow Information

The following table presents certain supplementary information to the consolidated condensed statements of cash flows:



	Nine Months
	Ended
	September 30,

	2000		1999

Cash paid for interest	$	56,496	$	50,675




Cash paid for income taxes		7,277		5,623




Dealership acquisition costs financed with seller notes		8,000		1,500

8. New Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 133 “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). This standard was amended by Statement of Financial Accounting Standards No. 137 “Accounting for Derivative Instruments and Hedging Activities — Deferral of the Effective Date of FASB Statement No. 133”, which changed the effective date for SFAS 133 to fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities” (“SFAS 138”). Pursuant to SFAS 133 and SFAS 138, changes in the fair value of the instruments hedging the variability of cash flow related to the Company’s variable interest rate liabilities will be reported in other comprehensive income, with any ineffectiveness between the hedged item and the hedge being recognized currently in earnings. The gains and losses on the derivative instrument that are reported in other comprehensive income will be recognized in earnings in the periods in which earnings are impacted by the variability of the cash flows of the hedged item. The Company will adopt SFAS 133 and SFAS 138 in the first quarter of 2001 and does not expect them to have a material effect on the Company’s financial position or cash flows. The Company is evaluating the impact, if any, of the effect of SFAS 133 and SFAS 138 on operations.


Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

As an integral part of its dealership operations, the Company retails new and used automobiles and light trucks, operates service and parts departments, operates collision repair centers and sells various aftermarket products, including finance, warranty, extended service and insurance contracts.

New vehicle revenues include sales to retail and fleet customers and to leasing companies providing consumer automobile leasing. Used vehicle revenues include amounts received for used vehicles sold to retail customers, leasing companies providing consumer leasing, other dealers and wholesalers. Finance and insurance revenues are generated from sales of accessories, warranty policies, extended service contracts and credit insurance policies, as well as fees for placing finance and lease contracts. Service, parts and collision repair revenues include the sale of repair and maintenance services, replacement parts and body shop repairs.

The Company’s selling expenses consist of advertising and compensation for sales department personnel, including commissions and related bonuses. General and administrative expenses include compensation for administration, finance, legal, and general management personnel, depreciation, amortization, rent, insurance, utilities and other outside services. Other interest expense consists of interest charges on all of the Company’s interest-bearing debt, other than interest relating to floor plan inventory financing which is included in floor plan interest expense.

The Company made a number of dealership acquisitions in 2000 and 1999. Each of these acquisitions has been accounted for using the purchase method of accounting and, as a result, the Company’s financial statements include the results of operations of the acquired dealerships only from the date of acquisition.

Results of Operations

Three Months Ended September 30, 2000 Compared to Three Months Ended September 30, 1999

Revenues. Retail revenues, which exclude revenues relating to fleet and wholesale transactions, increased by $245.6 million, or 25.3%, from $972.5 million to $1.2 billion. The overall increase in revenues is due primarily to: (i) an aggregate $54.4 million, or 6.2%, increase in retail revenues at dealerships owned prior to July 1, 1999 and (ii) dealership acquisitions made subsequent to July 1, 1999; partially offset by a decrease in revenues resulting from the divestiture of certain dealerships. The overall increase in retail revenues at dealerships owned prior to July 1, 1999 reflects 5.5%, 7.4%, 7.8% and 7.3% increases in new retail vehicle, used retail vehicle, finance and insurance and service and parts revenues, respectively. Revenues from fleet and wholesale transactions decreased $0.2 million versus the comparable prior year period.

Retail sales of new vehicles, which exclude fleet sale transactions, increased by $167.4 million, or 27.0%, from $619.8 million to $787.2 million. The increase is due primarily to: (i) a $30.8 million, or 5.5%, increase at dealerships owned prior to July 1, 1999 and (ii) acquisitions made subsequent to July 1, 1999; partially offset by a decrease resulting from the divestiture of certain dealerships. The increase at dealerships owned prior to July 1, 1999 is due primarily to a 4.0% increase in new retail unit sales and an increase in the comparative average selling price per vehicle. Aggregate retail unit sales of new vehicles increased by 22.8%, due principally to: (i) the net increase at dealerships owned prior to July 1, 1999 and (ii) acquisitions made subsequent to July 1, 1999; partially offset by the decrease due to divested dealerships. The Company retailed 32,000 new vehicles (66.9% of total retail vehicle sales) during the three months ended September 30, 2000, compared with 26,060 new vehicles (64.9% of total retail vehicle sales) during the three months ended September 30, 1999. Fleet sales decreased $9.8 million, or 24.1%, versus the comparable prior year period due primarily to a 27.0% decrease in fleet unit sales.

Retail sales of used vehicles, which exclude wholesale transactions, increased by $44.7 million, or 22.1%, from $202.6 million to $247.3 million. The increase is due primarily to: (i) a $14.0 million, or 7.4%, increase at dealerships owned prior to July 1, 1999 and (ii) acquisitions made subsequent to July 1, 1999; partially offset by a decrease resulting from the divestiture of certain dealerships. The increase at dealerships owned prior to July 1, 1999 is due primarily to a 0.4% increase in used retail unit sales and an increase in the comparative

average selling price per vehicle. Aggregate retail unit sales of used vehicles increased by 12.3%, due principally to: (i) the net increase at dealerships owned prior to July 1, 1999 and (ii) acquisitions made subsequent to July 1, 1999; partially offset by the decrease due to divested dealerships. The Company retailed 15,845 used vehicles (33.1% of total retail vehicle sales) during the three months ended September 30, 2000 compared with 14,106 used vehicles (35.1% of total retail vehicle sales) during the three months ended September 30, 1999. Wholesale revenues increased $10.0 million, or 13.9%, versus the comparable prior year period. The increase in wholesale revenues is due primarily to acquisitions made subsequent to July 1, 1999, offset in part by (i) a $6.1 million, or 9.5%, decrease at dealerships owned prior to July 1, 1999 and (ii) a decrease resulting from the divestiture of certain dealerships.

Finance and insurance revenues increased by $7.7 million, or 16.8%, from $45.7 million to $53.4 million. The increase is due primarily to: (i) a $2.7 million, or 7.8%, increase at dealerships owned prior to July 1, 1999 and (ii) acquisitions made subsequent to July 1, 1999; partially offset by a decrease resulting from the divestiture of certain dealerships.

Service and parts revenues increased by $25.8 million, or 24.7%, from $104.4 million to $130.2 million. The increase is due primarily to: (i) a $6.9 million, or 7.3%, increase at dealerships owned prior to July 1, 1999 and (ii) acquisitions made subsequent to July 1, 1999; partially offset by a decrease resulting from the divestiture of certain dealerships.

Gross Profit.Retail gross profit, which excludes gross profit on fleet and wholesale transactions, increased $35.2 million, or 24.0%, from $146.7 million to $182.0 million. The increase in gross profit is due to: (i) an $8.1 million, or 6.3%, increase in retail gross profit at stores owned prior to July 1, 1999 and (ii) acquisitions made subsequent to July 1, 1999; partially offset by a decrease resulting from the divestiture of certain dealerships. Gross profit as a percentage of revenues on retail transactions decreased from 15.1% to 14.9%. Gross profit as a percentage of revenues for new vehicle retail, used vehicle retail, finance and insurance and service and parts revenues was 8.4%, 10.8%, 60.6%, and 43.6%, respectively, compared with 8.4%, 11.1%, 59.6% and 43.2% in the comparable prior year period. The decrease in gross profit as a percentage of revenues on retail transactions is primarily attributable to: (i) an increase in the relative proportion of lower margin new vehicle sales revenues to total revenues during 2000 and (ii) a decrease in gross profit margins on used retail vehicle sales revenues; partially offset by increases in gross profit margins on service and parts revenues. Aggregate gross profit on fleet and wholesale transactions increased $0.9 million to $0.6 million.

Selling, General and Administrative Expenses.Selling, general and administrative expenses increased by $25.1 million, or 21.4%, from $117.3 million to $142.5 million. Such expenses as a percentage of revenue decreased from 10.8% to 10.7%, and as a percentage of gross profit from 80.1% to 78.0%. The aggregate increase in selling, general and administrative expenses is due principally to: (i) a $8.0 million, or 8.2%, increase at stores owned prior to July 1, 1999 and (ii) acquisitions made subsequent to July 1, 1999; partially offset by a decrease resulting from the divestiture of certain dealerships. The increase in selling, general and administrative expense at stores owned prior to July 1, 1999 is due in large part to increased selling expenses, including increased variable compensation, as a result of the 6.3% increase in retail gross profit over the prior year.

Floor Plan Interest Expense.Floor plan interest expense increased by $4.2 million, or 60.4%, from $7.0 million to $11.2 million. The increase in floor plan interest expense is due to: (i) an aggregate $1.9 million, or 30.5%, increase at stores owned prior to July 1, 1999, (ii) acquisitions made subsequent to July 1, 1999 and (iii) interest expense relating to the Company’s interest rate swaps hedging floorplan interest rates; partially offset by a decrease resulting from the divestiture of certain dealerships. The increase at stores owned prior to July 1, 1999 is due primarily to an increase in inventory levels compared to 1999.

Other Interest Expense.Other interest expense increased by $1.4 million, or 19.7%, from $7.3 million to $8.7 million. The increase is due primarily to an increase in the Company’s acquisition related indebtedness; offset in part by (i) the effect of refinancing the Company’s $200.0 million 11% Senior Subordinated Notes due 2007 (the “Notes”) and certain other indebtedness with lower interest borrowings under the Company’s

Credit Agreement, dated as of August 3, 1999, as amended (the “Credit Agreement”) and (ii) the paydown of indebtedness with proceeds from equity offerings during 1999.

Income Taxes.Income taxes increased by $2.3 million, or 34.4%, from $6.6 million to $8.9 million. The increase is due to an increase in pre-tax income compared with 1999, coupled with an increase in the Company’s estimated annual effective income tax rate. The increase in the comparative effective rate is due to the effect of certain non-recurring transactions during the third quarter of 1999.

Extraordinary Item.The $0.3 million extraordinary item in 1999 represents the after tax gain arising from the retirement of $12.0 million of Notes, offset in part by the write-off of a portion of the deferred financing costs relating to the Notes.

Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30, 1999

Revenues.Retail revenues, which exclude revenues relating to fleet and wholesale transactions, increased by $612.2 million, or 22.7%, from $2.7 billion to $3.3 billion. The overall increase in revenues is due primarily to: (i) a $179.4 million, or 7.5%, increase in retail revenues at dealerships owned prior to January 1, 1999 and (ii) dealership acquisitions made subsequent to January 1, 1999; partially offset by a decrease in revenues resulting from the divestiture of certain dealerships. The overall increase in retail revenues at dealerships owned prior to January 1, 1999 reflects 7.7%, 6.9%, 8.7% and 7.5% increases in new retail vehicle, used retail vehicle, finance and insurance and service and parts revenues, respectively. Revenues from fleet and wholesale transactions increased $0.2 million versus the comparable prior year period.

Retail sales of new vehicles, which exclude fleet sale transactions, increased by $421.2 million, or 25.0%, from $1.7 billion to $2.1 billion. The increase is due primarily to: (i) a $115.1 million, or 7.7%, increase at dealerships owned prior to January 1, 1999 and (ii) acquisitions made subsequent to January 1, 1999; partially offset by a decrease resulting from the divestiture of certain dealerships. The increase at dealerships owned prior to January 1, 1999 is due primarily to a 5.7% increase in new retail unit sales and an increase in the comparative average selling price per vehicle. Aggregate retail unit sales of new vehicles increased by 20.6%, due principally to: (i) the net increase at dealerships owned prior to January 1, 1999 and (ii) acquisitions made subsequent to January 1, 1999; partially offset by the decrease due to divested dealerships. The Company retailed 84,793 new vehicles (65.4% of total retail vehicle sales) during the nine months ended September 30, 2000, compared with 70,318 new vehicles (63.6% of total retail vehicle sales) during the nine months ended September 30, 1999. Fleet sales decreased $30.8 million, or 22.5%, versus the comparable prior year period due primarily to a 31.2% decrease in fleet unit sales.

Retail sales of used vehicles, which exclude wholesale transactions, increased by $111.7 million, or 19.0%, from $587.0 million to $698.6 million. The increase is due primarily to: (i) a $37.0 million, or 6.9%, increase at dealerships owned prior to January 1, 1999 and (ii) acquisitions made subsequent to January 1, 1999; partially offset by a decrease resulting from the divestiture of certain dealerships. The increase at dealerships owned prior to January 1, 1999 is due primarily to a 2.0% increase in used retail unit sales and an increase in the comparative average selling price per vehicle. Aggregate retail unit sales of used vehicles increased by 11.5%, due principally to: (i) the net increase at dealerships owned prior to January 1, 1999 and (ii) acquisitions made subsequent to January 1, 1999; partially offset by the decrease due to divested dealerships. The Company retailed 44,816 used vehicles (34.6% of total retail vehicle sales) during the nine months ended September 30, 2000 compared with 40,192 used vehicles (36.4% of total retail vehicle sales) during the nine months ended September 30, 1999. Wholesale revenues increased $31.0 million, or 15.1%, versus the comparable prior year period. The increase in wholesale revenues is due primarily to: acquisitions made subsequent to January 1, 1999, offset in part by (i) a $8.0 million, or 4.5%, decrease at dealerships owned prior to January 1, 1999 and (ii) a decrease resulting from the divestiture of certain dealerships.

Finance and insurance revenues increased by $19.4 million, or 15.4%, from $125.7 million to $145.1 million. The increase is due primarily to: (i) a $7.9 million, or 8.7%, increase at dealerships owned prior to January 1, 1999 and (ii) acquisitions made subsequent to January 1, 1999; partially offset by a decrease resulting from the divestiture of certain dealerships.

Service and parts revenues increased by $59.9 million, or 20.2%, from $297.2 million to $357.2 million. The increase is due primarily to: (i) a $19.4 million, or 7.5%, increase at dealerships owned prior to January 1, 1999 and (ii) acquisitions made subsequent to January 1, 1999; partially offset by a decrease resulting from the divestiture of certain dealerships.

Gross Profit.Retail gross profit, which excludes gross profit on fleet and wholesale transactions, increased $85.9 million, or 20.8%, from $413.1 million to $499.0 million. The increase in gross profit is due to: (i) a $26.5 million, or 7.4%, increase in retail gross profit at stores owned prior to January 1, 1999 and (ii) acquisitions made subsequent to January 1, 1999; partially offset by a decrease resulting from the divestiture of certain dealerships. Gross profit as a percentage of revenues on retail transactions decreased from 15.3% to 15.1%. Gross profit as a percentage of revenues for new vehicle retail, used vehicle retail, finance and insurance and service and parts revenues was 8.6%, 10.8%, 59.4%, and 43.5%, respectively, compared with 8.5%, 11.2%, 59.7% and 43.3% in comparable prior year period. The decrease in gross profit as a percentage of revenues on retail transactions is primarily attributable to: (i) an increase in the relative proportion of lower margin new vehicle sales revenues to total revenues during 2000 and (ii) decreases in gross profit margins on used retail vehicle revenues; partially offset by increases in gross profit margins on new retail vehicle and service and parts revenues. Aggregate gross profit on fleet and wholesale transactions increased $2.6 million to $2.5 million.

Selling, General and Administrative Expenses.Selling, general and administrative expenses increased by $63.8 million, or 19.2%, from $332.4 million to $396.2 million. Such expenses as a percentage of revenue decreased from 11.0% to 10.9%, and as a percentage of gross profit from 80.5% to 79.0%. The aggregate increase in selling, general and administrative expenses is due principally to: (i) a $21.2 million, or 7.8%, increase at stores owned prior to January 1, 1999 and (ii) acquisitions made subsequent to January 1, 1999; partially offset by a decrease resulting from the divestiture of certain dealerships. The increase in selling, general and administrative expense at stores owned prior to January 1, 1999 is due in large part to increased selling expenses, including increased variable compensation, as a result of the 7.4% increase in retail gross profit over the prior year.

Floor Plan Interest Expense.Floor plan interest expense increased by $11.0 million, or 52.9%, from $20.7 million to $31.7 million. The increase in floor plan interest expense is due to: (i) a $4.3 million, or 23.8%, increase at stores owned prior to January 1, 1999, (ii) acquisitions made subsequent to January 1, 1999 and (iii) interest expense relating to the Company’s interest rate swaps hedging floorplan interest rates; partially offset by a decrease resulting from the divestiture of certain dealerships. The increase at stores owned prior to January 1, 1999 is due primarily to an increase in inventory levels compared to 1999, offset in part by a decrease in the Company’s weighted average borrowing rate during 2000.

Other Interest Expense.Other interest expense decreased by $0.5 million, or 2.3%, from $23.5 million to $23.0 million. The decrease is due primarily to: (i) the effect of refinancing the Notes and certain other indebtedness with lower interest borrowings under the Credit Agreement and (ii) the paydown of indebtedness with proceeds from equity offerings during 1999, offset in part by increased acquisition related indebtedness.

Income Taxes.Income taxes increased by $5.4 million from $16.9 million to $22.3 million. The increase is due to an increase in pre-tax income compared with 1999, coupled with an increase in the Company’s estimated annual effective income tax rate. The increase in the comparative effective rate is due to the effect of certain non-recurring transactions during the third quarter of 1999.

Extraordinary Item.The $4.0 million extraordinary item in 2000 represents a loss resulting from the redemption premium paid for the Notes and the write-off of unamortized deferred financing costs relating to the Notes. The $0.3 million extraordinary item in 1999 represents the after tax gain arising from the retirement of $12.0 million of Notes, offset in part by the write-off of a portion of the deferred financing costs relating to the Notes.

Liquidity and Capital Resources

Cash and Liquidity Requirements

The cash requirements of the Company are primarily for the acquisition of new dealerships, working capital and the expansion or improvement of existing facilities. Historically, these cash requirements have been met through cash flow from operations and issuances of equity and debt instruments. As of September 30, 2000, the Company had working capital of $143.3 million.

The Company finances all of its new and a portion of its used vehicle inventory under revolving floor plan financing arrangements with various lenders. The Company makes monthly interest payments on the amount financed, but is not required to make loan principal repayments prior to the sale of the floored new and used vehicles. The vehicles and related sales proceeds are subject to security interests granted to the floor plan lending sources. Interest rates on the floor plan arrangements are variable and increase or decrease based on movements in prime or LIBOR interest rates. As of September 30, 2000, the Company’s outstanding borrowings under floor plan arrangements amounted to $532.1 million.

The Company’s Credit Agreement provides for up to $390.0 million in revolving loans to be used for acquisitions, working capital, the repurchase of common stock and general corporate purposes. In addition, the Credit Agreement provides for up to $186.0 million to be used to repurchase Notes. Borrowings under the Credit Agreement bear interest at LIBOR plus 2.00%, other than borrowings to repurchase Notes which bear interest at LIBOR plus 3.00%. The Credit Agreement is fully and unconditionally guaranteed on a joint and several basis by the Company’s auto dealership subsidiaries and contains a number of significant covenants that, among other things, restrict the ability of the Company to dispose of assets, incur additional indebtedness, repay other indebtedness, repurchase capital stock, create liens on assets, make investments or acquisitions and engage in mergers or consolidations. In addition, the Company is required to comply with specified ratios and tests, including debt to equity, debt service coverage and minimum working capital covenants. Certain ratios and tests in the Credit Agreement were amended during the third quarter of 2000. The Credit Agreement also contains typical events of default including change of control, material adverse change and non-payment of obligations. Further, substantially all of the assets of the Company’s dealerships not subject to security interests granted to floor plan lending sources are subject to security interests granted to lenders under the Credit Agreement. As of September 30, 2000, the Company’s outstanding borrowings under the Credit Agreement amounted to $377.7 million, $186.0 million of which was incurred in connection with the repurchase of Notes. The Company is currently involved in discussions to increase the revolving portion of its Credit Agreement by up to $250.0 million to be used primarily for acquisitions. Specific terms and conditions are being negotiated; however, the approval of increased borrowing capacity is conditioned upon an increase in the Company’s capital. The Company is negotiating with Penske Corporation, the Chairman and controlling stockholder of which is Roger S. Penske, the Company’s Chairman and Chief Executive Officer, to invest up to $23.0 million in the Company at a price of $10.75 per share, should the negotiations to increase the capacity of the Credit Agreement be successful. The Company’s Board of Directors has approved the issuance of 2,139,535 shares of voting common stock in exchange for such investment. The purchase by Penske Corporation would be subject to the completion of definitive documentation.

The indentures governing the Notes require the Company to comply with specified debt service coverage ratio levels in order to incur incremental indebtedness. Such indentures also limit the Company’s ability to pay dividends based on a formula which takes into account, among other things, the Company’s consolidated net income, and contain other covenants which restrict the Company’s ability to purchase capital stock, incur liens, sell assets and enter into other transactions. The Notes are fully and unconditionally guaranteed on a joint and several basis by the Company’s auto dealership subsidiaries.

The indentures governing the Notes also contain a provision which requires the Company to offer to purchase all of the then outstanding Notes at a purchase price in cash equal to 101% of their principal amount in the event of a change in control. A change in control is deemed to have occurred if a purchaser, as defined, beneficially obtains 40% of the voting power, as defined, of the voting stock of the Company. During 2000, the Company repurchased approximately three million shares of its common stock through open market purchases, negotiated transactions, or other means based upon market conditions. The repurchase of shares of

common stock by the Company increased the beneficial ownership interest of Penske Capital Partners and certain affiliated entities above 40% of the total ownership of the Company. As a result, the Company made an offer to purchase the outstanding Notes at a change of control redemption price of 101% of face value. In May 2000, the Company completed the tender for the then outstanding Notes, pursuant to which it repurchased $147.4 million face value of Notes. As of November 13, 2000, $3.6 million of Notes remain outstanding.

Net cash provided by operations during the nine months ended September 30, 2000 totaled $6.5 million. Net cash used in investing activities, relating primarily to dealership acquisitions and capital expenditures, totaled $154.3 million. During the nine months ended September 30, 2000, the Company incurred net borrowings of $167.3 million and used $26.6 million to repurchase common stock.

As of September 30, 2000, the Company had approximately $14.0 million of cash available to fund operations, capital projects and future acquisitions. In addition, as of November 13, 2000, $121.5 million is available for borrowing under the Credit Agreement. The Company is a holding company whose assets consist primarily of the ownership of the capital stock of its operating subsidiaries. Consequently, the Company’s ability to pay dividends is dependent upon the earnings of its subsidiaries and their ability to distribute earnings to the Company and other advances and payments by such subsidiaries to the Company.

The Company’s principal source of growth has come from acquisitions of automobile dealerships. The Company believes that its existing capital resources will be sufficient to fund its current operations and commitments. To the extent the Company pursues additional significant acquisitions, it may need to raise additional capital either through the public or private issuance of equity or debt securities or through additional bank borrowings. A public equity offering would require the prior approval of certain automobile manufacturers.

New Accounting Pronouncements

Cyclicality

Unit sales of motor vehicles, particularly new vehicles, historically have been cyclical, fluctuating with general economic cycles. During economic downturns, the automotive retailing industry tends to experience similar periods of decline and recession as the general economy. The Company believes that the industry is influenced by general economic conditions and particularly by consumer confidence, the level of personal discretionary spending, interest rates and credit availability.

Seasonality

The Company’s business is modestly seasonal overall. The greatest seasonalities exist with the dealerships in the northeast United States, for which the second and third quarters are the strongest with respect to vehicle

related sales. The service and parts business at all dealerships experiences relatively modest seasonal fluctuations.

Forward Looking Statements

This form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statement of historical facts, included herein or incorporated herein by reference regarding the Company’s financial position and business strategy may constitute forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Company’s expectations include the following: (i) the Company is subject to the influence of various manufacturers whose franchises it holds; (ii) the Company is leveraged and subject to restrictions imposed by the terms of its indebtedness; (iii) the Company’s growth depends in large part on the Company’s ability to manage expansion, control costs in its operations and consummate and consolidate dealership acquisitions; (iv) many of the Company’s franchise agreements impose restrictions on the transferability of its common stock; (v) the Company will require substantial additional capital to acquire automobile dealerships and purchase inventory; (vi) unit sales of motor vehicles historically have been cyclical; (vii) the automotive retailing industry is highly competitive; (viii) the automotive retailing industry is a mature industry; (ix) the Company’s success depends to a significant extent on key members of its management; (x) the Company’s business is seasonal; and (xi) the other important risk factors identified in the reports and other documents filed by the Company with the Securities and Exchange Commission. In light of the foregoing, readers of this Form 10-Q are cautioned not to place undue reliance on the forward-looking statements contained herein.

PART II

Item 1 — Legal Proceedings

The Company and its subsidiaries are involved in litigation that has arisen in the ordinary course of business. None of these matters, either individually or in the aggregate, are expected to have a material adverse effect on the Company’s results of operations or financial condition.


Item 6 —	Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a) Exhibits


10.1.8.2		First Amended and Restated Stock Option Plan of the Company.
10.1.19.5		Fourth Amendment to Credit Agreement, dated as of July 31, 2000, among the Company, various financial institutions and Chrysler Financial Company, L.L.C., as Agent.
10.2.7		General Motors Dealer Sales and Service Agreement, including Standard Provisions.
27.1		Financial Data Schedule.
99.1		Risk Factors.

(b) Reports on Form 8-K.

The Company did not file any reports on Form 8-K during the three months ended September 30, 2000.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	UNITED AUTO GROUP, INC.


	By:	/s/ SAMUEL X. DIFEO



	Samuel X. DiFeo
	President and
	Chief Operating Officer

Date: November 14, 2000


	By:	/s/ JAMES R. DAVIDSON



	James R. Davidson
	Executive Vice President — Finance
	(Chief Accounting Officer)

Date: November 14, 2000

EXHIBIT INDEX


Exhibit No.		Description

	10.1.8.2	First Amended and Restated Stock Option Plan of the Company.
	10.1.19.5	Fourth Amendment to Credit Agreement, dated as of July 31, 2000, among the Company, various financial institutions and Chrysler Financial Company, L.L.C., as Agent.
	10.2.7	General Motors Dealer Sales and Service Agreement, including Standard Provisions.
	27.1	Financial Data Schedule.
	99.1	Risk Factors.

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	7th grade Avg

Penske Automotive (PAG) 10-Q2000 Q3 Quarterly report

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