October 26, 2005
Michael Moran, Esq.
Branch Chief
Securities and Exchange Commission
Washington, D. C. 20549
Branch Chief
Securities and Exchange Commission
Washington, D. C. 20549
Re: | United Auto Group, Inc. | |
File No. 1 – 12297 | ||
Form 10-K for the year ended December 31, 2004 |
Dear Mr. Moran:
Pursuant to your request, we have prepared the accompanying balance sheet and cash flow data of United Auto Group, Inc. The information presents (1) the historical balance sheet as of December 31, 2004, as reported and as reclassified to present floor plan payables to lenders unaffiliated with vehicle manufacturers as floor plan payables non-trade, (2) the historical balance sheet as of June 30, 2005, as reported and as reclassified to present floor plan payables to lenders unaffiliated with vehicle manufacturers as floor plan payables non-trade, (3) the historical statement of cash flows for the year ended December 31, 2004, as reported and as reclassified to present floor plan payables to lenders unaffiliated with vehicle manufacturers as floor plan payables non-trade within financing activities, (4) the historical statement of cash flows for the six months ended June 30, 2005, as reported and as reclassified to present floor plan payables to lenders unaffiliated with vehicle manufacturers as floor plan payables non-trade within financing activities. The reclassified statements of cash flows have been presented on a net change basis as provided for in paragraph 13 of SFAS No. 95 due to the fact that floor plan balances are payable on demand or within specified periods of time and the volume of floor plan transactions is high. In addition, outstanding floor plan notes payable balances are typically repaid within 60 days.
While the Company believes it had a reasonable basis for its historical presentation, it is our intention to present the balance sheet and cash flows in our September 30, 2005 Form 10-Q and all prospective filings in the fashion outlined on the accompanying exhibits, with consistent reclassification for all prior periods. The Company does not believe retroactive restatement is required, and requests that the staff not require it to amend and restate previously filed financial statements. In addition to the views expressed in our letter of August 23, 2005, the Company considered the following factors in reaching its conclusions:
a. | From the time of United Auto Group, Inc.’s initial public offering in 1996 to the present, prevailing industry practice in the retail automotive business has been to treat all floor plan transactions as operating in nature. | ||
b. | The operating versus financing classification of these transactions was questioned during the Staff’s review of the Company’s initial registration statement in 1996, and the Company provided an explanation of its basis for such presentation. At that time, the Staff did not object to the Company’s presentation of cash flows and the registration statement was declared effective. For reference, following is the content of the Staff’s comment and related response from our September 13, 1996 letter: |
Staff Comment No. 32. Supplementally advise the staff why the floor plan notes payable activity is considered an operating activity rather than a financing activity on the statement of cash flows.
Company Response. Substantially all of the Company’s automobile inventory is financed under floor plan arrangements. Under these floor plan arrangements, the Company purchases its inventory from the Manufacturer, which purchases are financed through a finance subsidiary of the Manufacturer or another lender. Cash is not disbursed by the dealer until the automobile is sold. Paragraph 23(a) of SFAS 95 states that cash payments to acquire goods for resale, including principal payments on short and long-term notes payable to those suppliers for those goods, should be classified as an operating cash flow. This treatment is consistent with a Technical Practice Aid for auto dealerships issued by the AICPA Technical Information Services Division. In certain cases the floor plan lender is not an affiliate of the Manufacturer, but in substance the transaction is the same.
c. | The Company and its peer group have historically reported floor plan transactions consistently in accordance with prevailing industry practice in all periods prior to September 30, 2005. It is the Company’s belief that industry practice has been considered an acceptable application within the hierarchy of generally accepted accounting principles. | ||
d. | There is no change in reported income statements. | ||
e. | The proposed reclassification of cash flows has no effect on the Company’s compliance with any loan covenants or other contractual requirements. |
In connection with the change in prospective reporting and related reclassification of historical financial statements outlined above, the Company proposes to include language consistent with the following in the notes to its financial statements:
Cash Flow Reclassifications
Certain information in the Statement of Consolidated Cash Flows has been reclassified for all periods presented. This reclassification is related to concerns raised by the staff of the U.S. Securities and Exchange Commission. Previously, the Company reported all cash flow information relating to floor plan notes payable as operating cash flows. Cash flows relating to floor plan notes payable to a party other than the manufacturer of the particular vehicle, including all floor plan notes payable relating to pre-owned vehicles, has been reclassified from operating activities to financing activities.
Certain information in the Statement of Consolidated Cash Flows has been reclassified for all periods presented. This reclassification is related to concerns raised by the staff of the U.S. Securities and Exchange Commission. Previously, the Company reported all cash flow information relating to floor plan notes payable as operating cash flows. Cash flows relating to floor plan notes payable to a party other than the manufacturer of the particular vehicle, including all floor plan notes payable relating to pre-owned vehicles, has been reclassified from operating activities to financing activities.
The Company will also include a reconciliation of amounts reported in previous filings to the reclassified amounts in each period presented, and will address the effect of the changes to consolidated cash flows in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Sincerely,
James R. Davidson
Executive Vice President — Finance
Executive Vice President — Finance
December 31, 2004 | ||||||||||||
As Reported | Reclassification | Reclassified | ||||||||||
ASSETS | ||||||||||||
Total Assets | $ | 3,532,801 | $ | 3,532,801 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||
Floor plan notes payable | $ | 1,266,656 | (337,894 | ) | $ | 928,762 | ||||||
Floor plan notes payable — non trade | — | 337,894 | 337,894 | |||||||||
Accounts payable | 221,206 | 221,206 | ||||||||||
Accrued expenses | 192,479 | 192,479 | ||||||||||
Current portion of long-term debt | 11,367 | 11,367 | ||||||||||
Total current liabilities | 1,691,708 | 1,691,708 | ||||||||||
Long-term debt | 574,970 | 574,970 | ||||||||||
Other long-term liabilities | 179,116 | 179,116 | ||||||||||
Liabilities of discontinued operations | 11,972 | 11,972 | ||||||||||
Total Liabilities | 2,457,766 | 2,457,766 | ||||||||||
Commitments and contingent liabilities | ||||||||||||
Stockholders’ Equity | ||||||||||||
Total Stockholders’ Equity | 1,075,035 | 1,075,035 | ||||||||||
Total Liabilities and Stockholders’ | $ | 3,532,801 | $ | 3,532,801 | ||||||||
June 30, 2005 | ||||||||||||
As Reported | Reclassification | Reclassified | ||||||||||
ASSETS | ||||||||||||
Total Assets | $ | 3,572,247 | $ | 3,572,247 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||
Floor plan notes payable | $ | 1,168,460 | (283,016 | ) | $ | 885,444 | ||||||
Floor plan notes payable — non trade | — | 283,016 | 283,016 | |||||||||
Accounts payable | 254,667 | 254,667 | ||||||||||
Accrued expenses | 206,693 | 206,693 | ||||||||||
Current portion of long-term debt | 3,561 | 3,561 | ||||||||||
Total current liabilities | 1,633,381 | 1,633,381 | ||||||||||
Long-term debt | 604,576 | 604,576 | ||||||||||
Other long-term liabilities | 182,363 | 182,363 | ||||||||||
Liabilities of discontinued operations | 53,459 | 53,459 | ||||||||||
Total Liabilities | 2,473,779 | 2,473,779 | ||||||||||
Commitments and contingent liabilities | ||||||||||||
Stockholders’ Equity | ||||||||||||
Total Stockholders’ Equity | 1,098,468 | 1,098,468 | ||||||||||
Total Liabilities and Stockholders’ | $ | 3,572,247 | $ | 3,572,247 | ||||||||
December 31, 2004 | ||||||||||||
As Reported | Reclassification | Reclassified | ||||||||||
Operating Activities: | ||||||||||||
Net income | $ | 111,687 | $ | 111,687 | ||||||||
Adjustments to reconcile net income to net cash from operating activities: | ||||||||||||
Depreciation and amortization | 42,146 | 42,146 | ||||||||||
Amortization of unearned compensation | 2,828 | 2,828 | ||||||||||
Gain on sale of investment | (11,469 | ) | (11,469 | ) | ||||||||
Deferred income taxes | 21,419 | 21,419 | ||||||||||
Minority interests and other | 3,178 | 3,178 | ||||||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | (25,053 | ) | (25,053 | ) | ||||||||
Inventories | (94,513 | ) | (94,513 | ) | ||||||||
Floor plan notes payable | 108,661 | 54,708 | 163,369 | |||||||||
Accounts payable and accrued expenses | 79,647 | 79,647 | ||||||||||
Other | (50,700 | ) | (50,700 | ) | ||||||||
Net cash from operating activities | 187,831 | 54,708 | 242,539 | |||||||||
Investing Activities: | ||||||||||||
Net cash from investing activities | (237,747 | ) | — | (237,747 | ) | |||||||
Financing Activities: | ||||||||||||
Floor plan notes payable — Non trade | — | (54,708 | ) | (54,708 | ) | |||||||
Net borrowings (repayments) of long-term debt | (74,297 | ) | (74,297 | ) | ||||||||
Proceeds from issuance of common stock | 129,371 | 129,371 | ||||||||||
Dividends | (18,411 | ) | (18,411 | ) | ||||||||
Net cash from financing activities | 36,663 | (54,708 | ) | (18,045 | ) | |||||||
Net cash from discontinued operations | 11,238 | — | 11,238 | |||||||||
Net increase (decrease) in cash and cash equivalents | (2,015 | ) | (2,015 | ) | ||||||||
Cash and cash equivalents, beginning of year | 13,076 | 13,076 | ||||||||||
Cash and cash equivalents, end of year | $ | 11,061 | — | $ | 11,061 | |||||||
June 30, 2005 | ||||||||||||
As Reported | Reclassification | Reclassified | ||||||||||
Operating Activities: | ||||||||||||
Net income | $ | 56,088 | $ | 56,088 | ||||||||
Adjustments to reconcile net income to net cash from operating activities: | ||||||||||||
Depreciation and amortization | 20,677 | 20,677 | ||||||||||
Amortization of unearned compensation | 1,261 | 1,261 | ||||||||||
Equity Earnings | (1,251 | ) | (1,251 | ) | ||||||||
Minority interests | 764 | 764 | ||||||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | (40,256 | ) | (40,256 | ) | ||||||||
Inventories | 29,403 | 29,403 | ||||||||||
Floor plan notes payable | (71,714 | ) | 48,307 | (23,407 | ) | |||||||
Accounts payable and accrued expenses | 53,723 | 53,723 | ||||||||||
Other | 6,121 | 6,121 | ||||||||||
Net cash from operating activities | 54,816 | 48,307 | 103,123 | |||||||||
Investing Activities: | ||||||||||||
Net cash from investing activities | (96,306 | ) | — | (96,306 | ) | |||||||
Financing Activities: | ||||||||||||
Floor plan notes payable — Non trade | — | (48,307 | ) | (48,307 | ) | |||||||
Net borrowings (repayments) of long-term debt | 29,394 | 29,394 | ||||||||||
Proceeds from issuance of common stock | 2,181 | 2,181 | ||||||||||
Dividends | (10,157 | ) | (10,157 | ) | ||||||||
Net cash from financing activities | 21,418 | (48,307 | ) | (26,889 | ) | |||||||
Net cash from discontinued operations | 15,949 | — | 15,949 | |||||||||
Net increase (decrease) in cash and cash equivalents | (4,123 | ) | (4,123 | ) | ||||||||
Cash and cash equivalents, beginning of year | 15,187 | 15,187 | ||||||||||
Cash and cash equivalents, end of year | $ | 11,064 | — | $ | 11,064 | |||||||