AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 22, 1996
REGISTRATION NO. 333-09429
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
UNITED AUTO GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 5511 22-3086739
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification
organization) No.)
--------------------------
375 PARK AVENUE
NEW YORK, NEW YORK 10152
(212) 223-3300
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
--------------------------
CARL SPIELVOGEL
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
UNITED AUTO GROUP, INC.
375 PARK AVENUE
NEW YORK, NEW YORK 10152
(212) 223-3300
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
--------------------------
COPIES TO:
Laurence D. Weltman, Esq. Gerald S. Tanenbaum, Esq.
Willkie Farr & Gallagher Cahill Gordon & Reindel
One Citicorp Center 80 Pine Street
153 East 53rd Street New York, New York 10005
New York, New York 10022 (212) 701-3000
(212) 821-8000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED OFFERING PRICE (1) FEE (2)
Common Stock, par value $0.0001 per share................................... $187,500,000 $4,546
(1) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457(c) under the Securities Act of 1933.
(2) $59,483 in registration fees has been previously paid.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY
SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE
WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES
LAWS OF ANY STATE.Information contained herein is subject to completion or
amendment. A registration statement relating to these securities has been filed
with the Securities and Exchange Commission. These securities may not be sold
nor may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any
sale of these securities in any State in which such offer, solicitation or sale
would be unlawful prior to registration or qualification under the securities
laws of any State.
Prospectus Subject to Completion
Dated October 22, 1996
5,500,000 SHARES
[LOGO]
COMMON STOCK
(PAR VALUE $0.0001 PER SHARE)
All of the shares of Voting Common Stock, par value $0.0001 per share (the
"Common Stock"), offered hereby is being offered by United Auto Group, Inc., a
Delaware corporation (the "Company").
Prior to this offering (the "Offering"), there has been no public market for the
Common Stock. It is currently anticipated that the initial public offering price
will be between $29.00 and $30.00 per share. See "Underwriting" for information
relating to the factors to be considered in determining the initial public
offering price of the Common Stock.
The Common Stock has been approved for listing on the New York Stock Exchange
("NYSE") under the symbol "UAG," subject to official notice of issuance.
SEE "RISK FACTORS" COMMENCING ON PAGE 8 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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Price to Underwriting Proceeds to
Public Discount (1) Company (2)
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Per Share $ $ $
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Total(3) $ $ $
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended
(the "Securities Act"). See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
at $2,625,000.
(3) The Company has granted the Underwriters an option, exercisable within 30
days after the date of this Prospectus, to purchase up to an additional 750,000
shares of Common Stock on the same terms as set forth above, solely to cover
over-allotments, if any. If such option is exercised in full, the total Price to
Public, Underwriting Discount and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
The shares of Common Stock being offered by this Prospectus are offered by the
Underwriters, subject to prior sale, when, as and if delivered to and accepted
by the Underwriters, and subject to approval of certain legal matters by Cahill
Gordon & Reindel, counsel for the Underwriters. It is expected that delivery of
the shares of Common Stock offered hereby will be made against payment therefor
on or about , 1996 at the offices of J.P. Morgan Securities Inc., 60
Wall Street, New York, New York.
J.P. Morgan & Co.
Montgomery Securities
, 1996 Smith Barney Inc.
[Artwork]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
No person has been authorized to give any information or to make any
representations not contained in this Prospectus and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company or any Underwriter. This Prospectus does not constitute an offer
to sell, or a solicitation of an offer to buy, the Common Stock in any
jurisdiction to any person to whom it is unlawful to make such offer or
solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall under any circumstances create any implication that there has
been no change in the affairs of the Company subsequent to the date hereof.
Table of Contents
Page
Prospectus Summary.............................. 4
Risk Factors.................................... 8
The Company..................................... 14
Use of Proceeds................................. 16
Dividend Policy................................. 16
Capitalization.................................. 17
Dilution........................................ 18
Pro Forma Condensed Consolidated Financial
Statements.................................. 19
Selected Consolidated Financial Data............ 26
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................. 27
Page
Business........................................ 35
Management...................................... 49
Certain Relationships and Related Transactions.. 56
Principal Stockholders.......................... 57
Description of Capital Stock.................... 58
Shares Eligible for Future Sale................. 61
Underwriting.................................... 63
Legal Matters................................... 64
Experts......................................... 64
Additional Information.......................... 65
Index to Financial Statements................... F-1
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
The Company intends to furnish stockholders with annual reports containing
financial statements audited by its certified public accountants and with
quarterly reports containing unaudited financial statements for each of the
first three quarters of each fiscal year.
This Prospectus includes statistical data regarding the automotive retailing
industry. Unless otherwise indicated, such data is taken or derived from
information published by the Industry Analysis Division of the National
Automobile Dealers Association ("NADA") in its NADA DATA 1996, Crain
Communications Inc. in its AUTOMOTIVE NEWS 100-YEAR ALMANAC AND 1996 MARKET DATA
BOOK and ADT Automotive, Inc. in its 1996 USED CAR MARKET REPORT or provided to
the Company by CNW Marketing Research.
No Manufacturer (as defined in this Prospectus) has been involved, directly or
indirectly, in the preparation of this Prospectus or in the Offering being made
hereby. No Manufacturer has made any statements or representations in connection
with the Offering or has provided any information or materials that were used in
connection with the Offering, and no Manufacturer has any responsibility for the
accuracy or completeness of this Prospectus.
3
Prospectus Summary
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND HISTORICAL AND PRO FORMA
FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT
OTHERWISE REQUIRES, REFERENCES HEREIN TO THE "COMPANY" OR "UAG" INCLUDE UNITED
AUTO GROUP, INC. AND ITS SUBSIDIARIES, AND REFERENCES HEREIN TO "COMMON STOCK"
REFERS TO THE COMPANY'S VOTING COMMON STOCK, PAR VALUE $0.0001 PER SHARE. UNLESS
OTHERWISE INDICATED, ALL INFORMATION PRESENTED IN THIS PROSPECTUS ASSUMES THAT
(I) THE CONTEMPORANEOUS ACQUISITIONS (AS DEFINED HEREIN) HAVE BEEN CONSUMMATED,
(II) THE EXCHANGE OF THE MINORITY INTERESTS IN CERTAIN OF THE COMPANY'S
SUBSIDIARIES FOR AN AGGREGATE OF 1,113,841 SHARES OF COMMON STOCK PLUS CERTAIN
OTHER CONSIDERATION (THE "MINORITY EXCHANGE") HAS BEEN EFFECTED, (III) THE
CONVERSION OF THE COMPANY'S CLASS A PREFERRED STOCK INTO COMMON STOCK AT THE
RATE OF ONE SHARE OF COMMON STOCK FOR EACH SHARE OF CLASS A PREFERRED STOCK (THE
"PREFERRED STOCK CONVERSION") HAS BEEN EFFECTED, (IV) AN AMENDMENT OF THE
COMPANY'S CERTIFICATE OF INCORPORATION RELATING TO THE COMPANY'S CAPITALIZATION
HAS BEEN EFFECTED AND (V) THE UNDERWRITERS' OVER-ALLOTMENT OPTION HAS NOT BEEN
EXERCISED. THE CLOSINGS OF THE CONTEMPORANEOUS ACQUISITIONS WILL OCCUR
CONTEMPORANEOUSLY WITH THE CLOSING OF THE OFFERING AND ARE A CONDITION TO THE
CLOSING OF THE OFFERING. IN ADDITION, UNLESS OTHERWISE INDICATED, ALL PRO FORMA
FINANCIAL INFORMATION ASSUMES THAT ALL ACQUISITIONS CONSUMMATED SUBSEQUENT TO
JANUARY 1, 1995, INCLUDING THE CONTEMPORANEOUS ACQUISITIONS, WERE CONSUMMATED ON
JANUARY 1, 1995.
The Company
UAG is a leading acquirer, consolidator and operator of franchised automobile
and light truck dealerships and related businesses. The Company believes that,
after giving effect to the Contemporaneous Acquisitions, it will be the fourth
largest retailer of new motor vehicles in the United States, operating 37
franchises located in Arizona, Arkansas, Connecticut, Georgia, New Jersey, New
York and Tennessee and representing 22 American, Asian and European brands. As
an integral part of its dealership operations, UAG sells used vehicles. In
addition, the Company operates six stand-alone used car retail centers. All of
UAG's dealerships include integrated service and parts operations, which are an
important source of recurring revenues. The Company also owns Atlantic Auto
Finance Corporation ("Atlantic Finance"), an automobile finance company engaged
in the purchase, sale and servicing of prime credit quality automobile loans
originated by both UAG and third-party dealerships. For 1995, on a pro forma
basis, UAG had revenues of approximately $1.35 billion and sold 37,358 new and
22,060 used vehicles.
The Company was formed to capitalize on consolidation opportunities within the
highly fragmented $660 billion automotive retailing industry. In 1995,
approximately 22,000 dealerships representing more than 48,000 franchises sold
14.8 million new vehicles and 15.7 million used vehicles for sales of $290
billion and $180 billion, respectively. Yet, the Company estimates that the
largest 100 dealership groups generated less than 10% of these total revenues
and control less than 5% of all franchised dealerships. As capital requirements
to operate dealerships continue to increase and many owners who were granted
franchises in the 1950s and 1960s approach retirement age, many individual
dealers are seeking exit opportunities. These conditions present attractive
consolidation opportunities for larger automobile retailers such as UAG. Since
its initial acquisition in 1992, the Company has completed 13 additional
acquisitions, including the Contemporaneous Acquisitions. Management believes
that UAG is well-positioned to continue capitalizing on the consolidation trend
in the automotive retailing industry due to its proven acquisition history,
diverse geographic presence, substantial size and financial resources.
The Company believes that it enjoys significant competitive advantages. The
Company's diverse product portfolio reduces the risks associated with changes in
consumer preferences and dependence on any single brand or market segment.
Geographic diversity mitigates the Company's exposure to regional economic and
weather conditions. In addition, the Company's large size allows it to
centralize certain administrative functions and negotiate favorable pricing on
certain automotive parts, aftermarket products, supplies and advertising.
Furthermore, the Company benefits from superior access to capital as compared to
smaller dealerships.
Growth Strategy
UAG seeks to lead the consolidation of the automotive retailing industry and
increase stockholder value through a growth strategy focused on (i) acquiring
profitable dealership operations, (ii) leveraging its new car franchises to grow
higher-margin businesses and (iii) generating incremental revenue from its
automobile finance business.
4
ACQUIRE PROFITABLE DEALERSHIP OPERATIONS. UAG seeks to capitalize on continuing
consolidation in the U.S. automotive retailing industry by selectively acquiring
profitable dealerships. The Company targets dealerships or dealership groups
with established records of profitability and customer satisfaction as well as
experienced management willing to remain in place. The Company focuses on
opportunities in geographic markets with above-average projected population and
job growth. Of the approximately 22,000 dealerships in the United States, the
Company believes that at least 2,000 dealerships, some of which are members of
dealership groups, meet its acquisition criteria. The Company has received
commitments from Morgan Guaranty Trust Company of New York ("Morgan Guaranty")
and The Bank of Nova Scotia for a loan facility in the amount of $50 million for
the purpose of financing acquisitions (the "Acquisition Facility").
GROW HIGHER-MARGIN BUSINESSES. UAG is leveraging its new car franchises and
applying its financial resources to grow higher-margin businesses such as the
retail sale of used vehicles, aftermarket products and service and parts. UAG
receives a steady supply of used cars through trade-ins, vehicles coming off
lease ("off-lease vehicles") and used car auctions open only to new car dealers.
In addition, only new car dealers are able to sell used cars certified by
Manufacturers. Through these programs, UAG is able to provide customers
Manufacturer-backed extended warranties and attractive lease financing on their
used car purchases. UAG also has the opportunity on each new or used vehicle
sold to generate incremental revenue from the sale of aftermarket products,
including accessories such as radios, cellular phones and alarms as well as
agency services such as extended service contracts, credit insurance policies
and financing and lease contracts. Finally, each UAG new car dealership offers
an integrated service and parts department, which provides an important
recurring revenue stream to the Company's dealerships. The Company has
initiatives in place designed to grow each of these higher-margin businesses.
GENERATE INCREMENTAL REVENUE FROM AUTOMOBILE FINANCE BUSINESS. To further
increase the incremental profit achievable through its auto sales, the Company
established Atlantic Finance, an automobile finance company engaged in the
purchase, sale and servicing of prime credit quality automobile loans originated
by both UAG and third-party dealerships. Atlantic Finance's strategy is to grow
by (i) increasing its business with existing UAG dealerships, including those
with which it has yet to commence financing activities, (ii) commencing
financing activities with dealerships acquired by UAG in the future and (iii)
using its presence in its local operating markets to cultivate relationships
with additional unaffiliated dealerships.
Operating Strategy
The Company's operating strategy is designed to provide a high level of customer
service and professional management. Central to UAG's overall philosophy is
customer-oriented service designed to meet the needs of an increasingly
sophisticated and demanding automotive consumer. The Company strives to
cultivate lasting relationships with its customers, which it believes enhance
its reputation in the community and create the opportunity for significant
repeat and referral business. In addition, the Company employs professional
management practices throughout its business organization primarily through
implementing "best practices" as well as investing in sophisticated operational
controls.
Recent Acquisitions
UAG has completed the following dealership acquisitions in 1996 to date (the
"Recent Acquisitions"). See "The Company -- Acquisition History."
Effective January 1, 1996, the Company acquired Atlanta Toyota, Inc. ("Atlanta
Toyota"), located in Duluth, Georgia, for a purchase price consisting of $9.1
million in cash and $2.4 million in notes. In 1995, Atlanta Toyota had $112.2
million in sales.
On May 1, 1996, the Company acquired United Nissan, Inc. ("United Nissan")
(formerly Steve Rayman Nissan, Inc.), located in Morrow, Georgia, for a purchase
price of $11.5 million in cash. In 1995, United Nissan had $62.7 million in
sales.
Effective July 1, 1996, the Company acquired Peachtree Nissan, Inc. ("Peachtree
Nissan") (formerly Hickman Nissan, Inc.), located in Chamblee, Georgia, for a
purchase price consisting of $11.0 million in cash and a $2.0 million note. In
1995, Peachtree Nissan had $85.8 million in sales.
5
Contemporaneous Acquisitions
The following dealerships will be acquired contemporaneously with the
consummation of the Offering with a portion of the proceeds of the Offering (the
"Contemporaneous Acquisitions"). The Contemporaneous Acquisitions are a
condition to the consummation of the Offering.
Pursuant to a stock purchase agreement dated as of June 6, 1996, the Company
will acquire substantially all of the Sun Automotive Group (the "Sun Group"),
located in Phoenix and Scottsdale, Arizona, for a purchase price of
approximately $30.5 million in cash. The Sun Group holds franchises for Acura,
Audi, BMW, Land Rover, Lexus and Porsche and, in 1995, had $154.5 million in
sales (including $17.0 million in sales from one Jaguar franchise, which the
Company will not acquire contemporaneously with the Offering).
Pursuant to two stock purchase agreements dated August 5, 1996, the Company will
acquire the Evans Automotive Group (the "Evans Group"), located in Duluth and
Conyers, Georgia, for an aggregate purchase price of $12.0 million in cash. The
Evans Group holds franchises for BMW and Nissan and, in 1995, had $81.7 million
in sales.
Pursuant to a stock purchase agreement dated September 5, 1996, the Company will
acquire Standefer Motor Sales, Inc. ("Standefer Motor"), located in Chattanooga,
Tennessee, for a purchase price of $18.2 million in cash. Standefer Motor holds
one Nissan franchise and, in 1995, had $65.8 million in sales.
Risk Factors
An investment in the Common Stock also involves certain risks associated with
the Company's business and the automotive retailing industry, including the
following: (i) the Company is subject to the influence of the various
Manufacturers whose franchises it holds; (ii) many of the Company's franchise
agreements impose restrictions upon the transferability of the Common Stock;
(iii) the Company's growth depends in large part on its ability to manage
expansion, control costs in its operations and consolidate dealership
acquisitions; (iv) the Company will require substantial additional capital to
acquire automobile dealerships and purchase inventory; (v) unit sales of motor
vehicles historically have been cyclical; (vi) the automotive retailing industry
is a mature industry; (vii) the Company's success depends to a significant
extent on key members of its personnel; (viii) the Company's business is
seasonal; and (ix) the automotive retailing industry is highly competitive. For
a fuller discussion of these and other risk factors, see "Risk Factors."
The Offering
Common Stock Offered........................ 5,500,000 shares
Common Stock Outstanding after the Offering 15,528,684 shares
(1)........................................
Use of Proceeds............................. The net proceeds from the Offering are
estimated to be $148.3 million, of which
approximately $62.1 million will be used to
pay the consideration and related transaction
costs for the Contemporaneous Acquisitions,
approximately $43.6 million to repay
outstanding indebtedness and approximately
$15.0 million to fund the expansion of its
automobile finance business. The balance will
be used for working capital and general
corporate purposes, including other potential
acquisitions. See "-- Contemporaneous
Acquisitions" and "Use of Proceeds."
Dividend Policy............................. The Company anticipates that it will not pay
dividends on the Common Stock for the
foreseeable future. See "Dividend Policy."
NYSE Symbol................................. "UAG"
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(1) Does not include 873,000 and, assuming an initial public offering price of
$29.50 per share, 250,847 shares of Common Stock issuable at an exercise price
per share of $10.00 and the public offering price set forth on the cover page of
this Prospectus, respectively, upon the exercise of outstanding stock options or
1,016,099 shares issuable at a nominal exercise price upon the exercise of
outstanding warrants. See "Management -- Spielvogel Employment Agreement,"
"Management -- Stock Option Plan," "Description of Capital Stock -- Warrants"
and "Shares Eligible for Future Sale."
6
Summary Historical and Pro Forma Financial Data
The following table presents (i) summary historical consolidated financial and
other data of the Company as of the dates and for the periods indicated,
including the results of operations of Landers Auto (as defined herein), Atlanta
Toyota and Steve Rayman Nissan from August 1, 1995, January 1, 1996 and May 1,
1996, respectively, the dates of their acquisition, and (ii) summary pro forma
financial and other data of the Company as of the date and for the periods
indicated giving effect to the events described in the Pro Forma Condensed
Consolidated Financial Statements included elsewhere in this Prospectus as
though they had occurred on the dates indicated therein. The summary pro forma
data are not necessarily indicative of operating results or financial position
that would have been achieved had these events been consummated on the date
indicated and should not be construed as representative of future operating
results or financial position. The summary historical and pro forma financial
data should be read in conjunction with the financial statements and related
notes thereto of UAG, Landers Auto, Atlanta Toyota, Steve Rayman Nissan, Hickman
Nissan, Sun Automotive Group, Evans Automotive Group and Standefer Motor, with
the Pro Forma Condensed Consolidated Financial Statements and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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Six Months Ended
Years Ended December 31, June 30,
---------------------------------------- -----------------------------
Pro Forma Pro Forma
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA 1993 1994 1995 1995 1995 1996 1996
-------- -------- -------- ---------- -------- -------- ---------
Statements of Operations Data:
Auto Dealerships
Total revenues $606,091 $731,629 $805,621 $1,352,770 $352,739 $$597,939 $ 800,630
Gross profit 68,403 83,986 85,277 155,570 36,214 66,379 92,350
Operating income (loss) 1,493 3,571 (5,309) 19,425 (5,727) 9,404 17,289
Auto Finance
Loss before income taxes -- (616) (1,382) (1,382) (701) (349) (349)
Total Company
Income (loss) before minority interests and
provision for income taxes 260 (804) (5,921) 16,152 (5,819) 8,629 16,121
Net income (loss) 96 (1,691) (3,466) 9,112 (4,902) 3,898 9,185
Net income (loss) per common share $ .05 $ (.44) $ (.63) $ .53 $ (1.05) $ .46 $ .54
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As of June 30,
As of December 31, -----------------------------
---------------------------- Pro Forma
DOLLARS IN THOUSANDS 1993 1994 1995 1995 1996 1996
-------- -------- -------- -------- -------- ---------
Balance Sheet Data:
Auto Dealerships
Current assets $120,061 $118,534 $141,649 $119,909 $186,980 $ 274,250
Current liabilities 117,494 125,825 139,447 128,027 181,317 226,111
Property and equipment, net 8,845 12,072 12,146 11,814 14,609 28,375
Intangible assets, net 22,832 23,018 48,774 22,700 66,131 153,814
Long-term debt 4,122 6,735 24,073 6,556 38,694 12,422
Auto Finance
Net assets -- 291 3,501 3,714 12,549 27,549
Total Company
Total assets 154,218 170,342 236,027 176,945 311,104 497,841
Minority interests subject to repurchase 7,338 7,962 13,608 6,555 15,299 --
Stock purchase warrants -- -- 1,020 -- 1,597 --
Total stockholders' equity 25,264 28,785 49,240 33,599 66,709 250,606
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Years Ended December 31, Six Months Ended June 30,
---------------------------------------- -----------------------------
Pro Forma Pro Forma
1993 1994 1995 1995 1995 1996 1996
-------- -------- -------- ---------- -------- -------- ---------
Other Auto Dealerships Data:
Gross profit margin 11.3% 11.5% 10.6% 11.5% 10.3% 11.1% 11.5%
Operating margin 0.2% 0.5% (0.7)% 1.4% (1.6)% 1.6% 2.2%
New cars sold at retail 18,608 22,464 25,138 37,358 11,088 17,509 21,180
Used cars sold at retail 7,891 8,340 8,953 22,060 3,674 8,542 11,192
7
Risk Factors
Prospective investors should consider carefully the principal risk factors set
forth below as well as the other information set forth in this Prospectus in
evaluating the Company and its business before purchasing the shares of Common
Stock offered hereby.
Influence of Automobile Manufacturers
Each of the Company's dealerships operates pursuant to a franchise agreement
between the applicable automobile manufacturer (or authorized distributor
thereof, referred to herein as the "Manufacturer") and the subsidiary of the
Company that operates such dealership, and the Company is dependent to a
significant extent on its relationship with such Manufacturers. Manufacturers
exercise a great degree of control over dealerships, and the franchise agreement
provides for termination or non-renewal for a variety of causes. The Company
from time to time has been in non-compliance with certain provisions of certain
of its franchise agreements, such as the obligation to obtain prior Manufacturer
approval of changes in dealership management. Actions taken by Manufacturers to
exploit their superior bargaining position could have a material adverse effect
on the Company. For example, Saturn Corporation's refusal to grant its approval
for the Offering and its assertion of an alleged right of first refusal with
respect to one franchise necessitated the Company's transfer of the two Saturn
franchises in its DiFeo Group to an affiliated holding company. See "-- Stock
Ownership/Issuance Limits" and "Business -- Franchise Agreements." Furthermore,
prior Manufacturer approval is required with respect to acquisitions of
automobile dealerships, and a Manufacturer may deny the Company's application to
make an acquisition or seek to impose further restrictions on the Company as a
condition to granting approval of an acquisition. See "-- Risks Associated with
Acquisitions."
Many Manufacturers attempt to measure customers' satisfaction with their sales
and warranty service experiences through systems, which vary from Manufacturer
to Manufacturer, generally known as the consumer satisfaction index ("CSI").
These Manufacturers may use a dealership's CSI scores as a factor in evaluating
applications for additional dealership acquisitions and other matters. Certain
dealerships of the Company have had difficulty from time to time meeting their
Manufacturers' CSI standards. The components of CSI have been modified from time
to time in the past, and there is no assurance that such components will not be
further modified or replaced by different systems in the future. Failure of the
Company's dealerships to comply with the standards imposed by Manufacturers at
any given time may have a material adverse effect on the Company.
The success of each of the Company's franchises is, in large part, dependent
upon the overall success of the applicable Manufacturer. Accordingly, the
success of the Company is linked to the financial condition, management,
marketing, production and distribution capabilities of the Manufacturers of
which the Company is a franchisee. Accordingly, events, such as labor strikes,
that may adversely affect a Manufacturer may also adversely affect the Company.
For example, a strike of the independent truckers who distribute Chrysler
Corporation ("Chrysler") motor vehicles adversely affected the Company in the
second half of 1995. Similarly, the delivery of vehicles from Manufacturers
later than scheduled, which may occur particularly during periods of new product
introductions, can lead to reduced sales during such periods. This has been
experienced at certain of the Company' dealerships from time to time, including
in the third quarter of 1996. Moreover, any event that causes adverse publicity
involving such Manufacturers may have an adverse effect on the Company
regardless of whether such event involves any of the Company's dealerships.
Stock Ownership/Issuance Limits
Standard automobile franchise agreements prohibit transfers of any ownership
interests of the dealership and its parent, such as UAG, and, therefore, often
do not by their terms accommodate public trading of the capital stock of the
dealership or its parent. While all of the relevant Manufacturers of which the
Company will be a franchisee at the time of consummation of the Offering have
agreed to permit the Offering and trading in the Common Stock, a number of
Manufacturers continue to impose restrictions upon the transferability of the
Common Stock. The most prohibitive restrictions, imposed by American Honda Motor
Co., Inc. ("Honda"), provide that, under certain circumstances, the Company may
be forced to sell or lose its Honda and Acura franchises if a person or entity
acquires a 5% ownership interest in the Company if Honda objects to such
acquisition within 180 days except that, so long as control of the Company is
held by its current non-public stockholders, any bank, mutual fund, insurance
company or pension fund may acquire up to a 10% ownership interest (15%
ownership interest in the case of any entity in its capacity as investment
advisor, trustee or custodian for the benefit of third parties) in the Company
without such consent but only if such bank, mutual fund, insurance company or
pension fund is not owned or
8
controlled by or owns 15% or more of, or controls, any entity (other than an
automobile dealership) that competes with Honda or its affiliates in
manufacturing, marketing or selling automotive products or services. Similarly,
several Manufacturers have the right to approve the acquisition of 20% ownership
interests in the Company.
In addition, under the Company's agreement with Honda, no more than 40% of the
Company's capital stock (on a fully diluted basis) may be freely tradable and
unrestricted at any time. Upon consummation of the Offering, 33.9% of the Common
Stock (on a fully diluted basis and assuming full exercise of the Underwriters'
over-allotment option) will be freely tradable and unrestricted. The Company has
contractual obligations with its existing equity holders to register their
shares of Common Stock under the Securities Act under certain circumstances and
a number of such shares are, and more will become with time, eligible for sale
pursuant to the terms of Rule 144 under the Securities Act. See "Shares Eligible
for Future Sale." Only the Company's three largest stockholders may not sell any
of their shares without Honda's consent. See "Principal Stockholders."
Similarly, a number of Manufacturers, including Chrysler, continue to prohibit
transactions that may affect management control of the Company. Chrysler has
agreed that it will not consider the issuance of up to 40% of the Common Stock
(on a fully diluted basis) in the Offering to be a change of control. However,
acquisitions or sales of substantial amounts of shares in the market may, after
the Offering, affect management control. Violations by its stockholders or
prospective stockholders of any of the above restrictions are generally outside
the control of the Company, and if the Company is unable to renegotiate such
restrictions when necessary, it may be forced to terminate or sell one or more
franchises, which could have a material adverse effect on the Company. Such
restrictions also may prevent or deter prospective acquirers from acquiring
control of the Company and, therefore, may adversely impact the value of the
Common Stock. Finally, Honda has the right to approve any future public
offerings of capital stock, and the consent of other Manufacturers may be
needed, as well. This may impede the Company's ability to raise required
capital. See "-- Capital Requirements."
Risks Associated with Acquisitions
The Company's growth will depend in large part on its ability to manage
expansion, control costs in its operations and consolidate dealership
acquisitions, including the Recent Acquisitions and the Contemporaneous
Acquisitions, into existing operations. This strategy will entail reviewing and
potentially reorganizing acquired dealership operations, corporate
infrastructure and systems and financial controls. Unforeseen expenses,
difficulties, complications and delays frequently encountered in connection with
the rapid expansion of operations could inhibit the Company's growth.
There can be no assurance that the Company will identify acquisition candidates
that would result in the most successful combinations or that acquisitions will
be able to be consummated on acceptable terms. The magnitude, timing and nature
of future acquisitions will depend upon various factors, including the
availability of suitable acquisition candidates, the negotiation of acceptable
terms, the Company's financial capabilities, the availability of skilled
employees to manage the acquired companies and general economic and business
conditions.
In addition, the Company's future growth via acquisition of automobile
dealerships will depend on its ability to obtain the requisite Manufacturer
approvals. There can be no assurance that Manufacturers will grant such
approvals. Management believes that certain Manufacturers, such as Ford Motor
Company ("Ford"), which represents approximately 25% of the U.S. automotive
retailing industry, would not now approve acquisitions by the Company because
they have expressed opposition to diffuse corporate ownership of their
dealerships. For example, Ford's subsidiary Jaguar Cars Ltd. refused to grant
its approval for the Company's acquisition of the Jaguar franchise in the Sun
Group. It is also possible that one or more Manufacturers might object to
ownership by one company of many of its franchises. For example, it is currently
the policy of Toyota Motor Sales ("Toyota") to restrict any company from holding
more than seven Toyota or more than three Lexus franchises and restrict the
number of franchises held within certain geographic areas. Similarly, it is
currently the policy of Honda to restrict any company from holding more than
seven Honda or more than three Acura franchises and restrict the number of
franchises held within certain geographic areas. After giving effect to the
Contemporaneous Acquisitions, the Company will hold 37 franchises, including six
Chrysler franchises, six Toyota franchises (of which two are Lexus), five
General Motors Corporation ("GM") franchises, five Nissan franchises and two
Honda franchises (of which one is Acura). The Company is among the largest
Chrysler, Toyota and Nissan dealers in the United States. See "-- Influence of
Automobile Manufacturers."
Alternatively, in connection with acquisitions by the Company, one or more
Manufacturers may seek to impose further restrictions on the Company in
connection with their approval of an acquisition. For example, each of GM and
Chrysler conditioned its approval of the acquisition of Landers Auto upon the
Company's agreement to implement certain measures at its existing GM and
Chrysler dealerships, respectively, to provide certain additional training to
the employees at such dealerships and to achieve and maintain higher CSI scores.
If such goals are not attained, the Company may be precluded from acquiring,
whether directly from GM or Chrysler or through acquisitions, additional
9
GM or Chrysler franchises and it may lead GM or Chrysler to conclude that it has
a basis pursuant to which it may seek to terminate or refuse to renew the
Company's existing GM or Chrysler franchises. In addition, Nissan Motor
Corporation U.S. A. ("Nissan") has conditioned the Company's acquisitions of the
Nissan franchises held by the Evans Group and Standefer Motor upon the Company's
agreeing to grant to Nissan an option to acquire the Evans Group's Nissan
franchise. Moreover, factors outside the Company's control may cause a
Manufacturer to reject the Company's application to make acquisitions. See "--
Influence of Automobile Manufacturers."
Capital Requirements
The Company will require substantial additional capital in order to continue to
acquire automobile dealerships. Such capital might be raised through additional
public or private financings, as well as borrowings and other sources. Other
than the Acquisition Facility, the Company does not have any commitments with
respect to acquisition financing, and there can be no assurance that additional
or sufficient financing will be available, or, if available, that it will be
available on acceptable terms. Moreover, the Company may be impeded by certain
Manufacturers from accessing the public equity markets. See "-- Stock
Ownership/Issuance Limits." If additional funds are raised by issuing equity
securities of the Company, dilution to then existing stockholders may result. If
adequate funds are not available, the Company may be required to significantly
curtail its acquisition program.
In addition, the Company is dependent to a significant extent on its ability to
finance the purchase of inventory, which in the automotive retail industry
involves significant sums of money in the form of floor plan financing. As of
June 30, 1996, the Company had approximately $129.0 million of floor plan
indebtedness. Substantially all the assets of the Company's dealerships are
pledged to secure such indebtedness, which may impede the Company's ability to
borrow from other sources. The Company currently has floor plan facilities with
General Motors Acceptance Corporation, Chrysler Credit Corporation, World Omni
Financial Corp. and Nissan Motor Acceptance Corporation. Each of these lenders
is associated with a Manufacturer with whom the Company has franchise
agreements. Consequently, deterioration of the Company's relationship with a
Manufacturer could adversely affect its relationship with the affiliated floor
plan lender and vice versa. See "-- Influence of Automobile Manufacturers."
The operations of Atlantic Finance also require substantial borrowings. See "--
Risks Associated with Auto Finance Subsidiary -- Capital Requirements; Interest
Rate Fluctuations."
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. There can be no assurance that the industry will not
experience sustained periods of decline in vehicle sales in the future, and that
such decline would not have a material adverse effect on the Company.
Mature Industry
The automotive retailing industry is a mature industry in which minimal growth
in unit sales of new vehicles is expected. Accordingly, growth in the Company's
revenues and earnings will depend significantly on the Company's ability to
acquire and consolidate profitable dealerships, to grow its higher-margin
businesses and to expand its automobile finance business. See "Business --
Growth Strategy."
Dependence on Key Personnel
The Company believes that its success will depend to a significant extent upon
the efforts and abilities of the executive management of the Company and its
subsidiaries. The loss of the services of one or more of these key employees
could have a material adverse effect on the Company. The Company's business will
also be dependent upon its ability to continue to attract and retain qualified
personnel, including key management in connection with future acquisitions.
Seasonality
The Company's business is seasonal, with a disproportionate amount of sales
occurring in the second or third fiscal quarters. The DiFeo Group (as defined
herein), which is located in the New York metropolitan area, is the division of
the Company most affected by seasonality.
Competition
The automotive retailing industry is highly competitive with respect to price,
service, location and selection. The Company competes with numerous automobile
dealerships in each of its market segments, many of which are large
10
and have significant financial and marketing resources. The Company also
competes with private market buyers and sellers of used cars, used car dealers,
other franchised dealers, service center chains and independent shops for
service and repair business. In recent years, automobile dealers have also faced
increased competition in the sale of vehicles from automobile rental agencies,
independent leasing companies and used-car "superstores," some of which employ
sales techniques such as "haggle-free" pricing. Some of these recent market
entrants are capable of operating on smaller gross margins than those on which
the Company is capable of operating because they have lower overhead and sales
costs. See "Business -- Competition."
Imported Products
Certain motor vehicles retailed by the Company, as well as certain major
components of vehicles retailed by the Company, are of foreign origin.
Accordingly, the Company is subject to the import and export restrictions of
various jurisdictions and is dependent to some extent upon general economic
conditions in and political relations with a number of foreign countries,
including Japan, Germany, South Korea and the United Kingdom.
Risks Associated with Automobile Finance Subsidiary
CAPITAL REQUIREMENTS; INTEREST RATE FLUCTUATIONS
Atlantic Finance, a wholly owned subsidiary of the Company, requires substantial
borrowings to fund the purchase of retail installment contracts from automobile
dealerships. Consequently, Atlantic Finance's profitability is affected by the
difference, or "spread," between the rate of interest paid on the funds it
borrows and the rate of interest charged on the installment contracts it
purchases, which rate in most states is limited by law. In addition, since the
interest rate at which Atlantic Finance borrows is variable and the interest
rate at which Atlantic Finance purchases the retail installment contracts is
fixed, Atlantic Finance assumes the risk of interest rate increases prior to the
time contracts are sold. There can be no assurance that Atlantic Finance will be
able to extend its present revolving credit facility or enter into new warehouse
financing facilities on reasonable terms in the future or that interest rate
increases will not adversely affect its ability to maintain profitability with
respect to the retail installment contracts it holds.
DEPENDENCE ON SECURITIZATION TRANSACTIONS
Atlantic Finance relies on a strategy of periodically selling retail installment
receivables on a securitized basis. The securitization proceeds are utilized to
repay borrowings under its revolving credit facility, thereby making such
facility available to acquire additional retail installment contract
receivables. The terms of any securitization transaction are affected by a
number of factors, some of which are beyond Atlantic Finance's control and any
of which could cause substantial delays. These factors include, among other
things, conditions in the securities markets in general, conditions in the
asset-backed securitization market and approval by all parties to the terms of
the transaction. Gains from the sale of receivables in securitized transactions
generate a significant portion of Atlantic Finance's revenues. If Atlantic
Finance were unable to securitize loans in a given financial reporting period,
Atlantic Finance could incur a significant decline in total revenues and
profitability for such period.
CREDIT RISK
Payments by consumers on a number of the retail installment contracts purchased
by Atlantic Finance become delinquent from time to time and some end up in
default. See "Business -- Atlantic Finance" for detailed information on Atlantic
Finance's delinquency and default rates. There can be no assurance that the
credit performance of Atlantic Finance's customers will be maintained or that
general economic conditions will not worsen and lead to higher rates of
delinquency and default. In addition, Atlantic Finance commenced operations in
the first quarter of 1995, and there can be no assurance that the rates of
future delinquency and defaults will be consistent with prior experience or at
levels that will allow Atlantic Finance to maintain overall profitability.
REGULATION
Atlantic Finance is subject to regulation under various federal, state and local
laws and in some jurisdictions is required to be licensed by the state banking
authority. Most states in which Atlantic Finance operates limit the interest
rate, fees and other charges that may be imposed by, or prescribe certain other
terms of, the contracts that Atlantic Finance purchases and restrict its right
to repossess and sell collateral. An adverse change in those laws or regulations
could have a material adverse effect on Atlantic Finance's profitability by,
among other things, limiting the states in which Atlantic Finance may operate or
the interest rate that may be charged on retail installment contracts or
restricting Atlantic Finance's ability to realize the value of the collateral
securing the contracts.
Reliance by Company on Dividends and Other Payments From Operating Subsidiaries
The Company is a holding company, the principal assets of which are the shares
of the capital stock of its subsidiaries. As a holding company without
independent means of generating operating revenues, the Company
11
depends on dividends and other payments, including payments of management fees
and pursuant to tax sharing arrangements, from its subsidiaries to fund its
obligations and meet its cash needs. Certain subsidiaries of the Company are
subject to restrictions on the payment of dividends, which are described in
"Dividend Policy." Such restrictions limit the Company's ability to apply
profits generated from one subsidiary for use in other subsidiaries. Expenses of
the Company include salaries of its executive officers, insurance, professional
fees and service of certain indebtedness that may be outstanding from time to
time. See "Management -- Summary Compensation Table."
Environmental Matters
The Company is subject to federal, state and local laws, ordinances and
regulations which establish various health and environmental quality standards,
and liability related thereto, and provide penalties for violations of those
standards. Under certain laws and regulations, a current or previous owner or
operator of real property may be liable for the costs of removal and remediation
of hazardous or toxic substances or wastes on, under, in or emanating from such
property. Such laws typically impose liability whether or not the owner or
operator knew of, or was responsible for, the presence of such hazardous or
toxic substances or wastes. Certain laws, ordinances and regulations may impose
liability on an owner or operator of real property where onsite contamination
discharges into waters of the state, including groundwater. Under certain other
laws, generators of hazardous or toxic substances or wastes that send such
substances or wastes to disposal, recycling or treatment facilities may be
liable for remediation of contamination at such facilities. Other laws,
ordinances and regulations govern the generation, handling, storage,
transportation and disposal of hazardous and toxic substances or wastes, the
operation and removal of underground storage tanks, the discharge of pollutants
into surface waters and sewers, emissions of certain potentially harmful
substances into the air and employee health and safety.
Past and present business operations of the Company subject to such laws,
ordinances and regulations include the use, handling and contracting for
recycling or disposal of hazardous or toxic substances or wastes, including
environmentally sensitive materials such as motor oil, waste motor oil and
filters, transmission fluid, antifreeze, freon, waste paint and lacquer thinner,
batteries, solvents, lubricants, degreasing agents, gasoline and diesel fuels.
The Company is subject to other laws, ordinances and regulations as the result
of the past or present existence of underground storage tanks at many of the
Company's properties. In addition, soil and groundwater contamination has been
known to exist at certain properties leased by the Company and there can be no
assurance that other properties have not been contaminated by any leakage from
such tanks or any spillage of hazardous or toxic substances or wastes.
Certain laws and regulations, including those governing air emissions and
underground storage tanks, have been amended so as to require compliance with
new or more stringent standards as of future dates. The Company cannot predict
what other environmental legislation or regulations will be enacted in the
future, how existing or future laws or regulations will be administered or
interpreted or what environmental conditions may be found to exist in the
future. Compliance with new or more stringent laws or regulations, stricter
interpretation of existing laws or the future discovery of environmental
conditions may require additional expenditures by the Company, some of which may
be material. See "Business -- Environmental Matters."
Control by Principal Stockholders; Anti-takeover Provisions
Upon consummation of the Offering, Trace International Holdings, Inc. ("Trace"),
Aeneas Venture Corporation ("Aeneas"), an affiliate of Harvard Private Capital
Group, Inc. ("Harvard Private Capital"), and AIF II, L.P. ("AIF"), an affiliate
of Apollo Advisors, L.P. ("Apollo"), will own 22.7%, 18.3% and 11.9% of the
outstanding Common Stock, respectively. As a result, such persons will have the
ability to control the Company and direct its affairs and business. Moreover, if
the Company elects to use its Class C Common Stock for future public offerings,
which carries one-tenth of the voting power of the Common Stock, such persons
will be able, to a great extent, to retain such control of the Company. Such
concentration of ownership, as well as certain provisions of the Company's
franchise agreements, its Certificate of Incorporation and the Delaware General
Corporation Law (the "DGCL"), could have the effect of delaying or preventing a
change in control of the Company. These provisions include the stock ownership
limits imposed by various Manufacturers, the classified structure of the
Company's Board of Directors, the Company's ability to issue "blank check"
preferred stock and the "interested stockholder" provisions of Section 203 of
the DGCL. In addition, such concentration of ownership and such provisions may
adversely affect the ability of stockholders to realize a premium on the sale of
their shares of Common Stock in a takeover of the Company. See "-- Stock
Ownership/Issuance Limits" and "Description of Capital Stock."
12
Shares Eligible for Future Sale
Upon consummation of the Offering, the Company will have outstanding 15,528,684
shares of Common Stock. All of the 5,500,000 shares of Common Stock to be sold
in the Offering will be eligible for immediate sale in the public market without
restriction unless held by affiliates of the Company. Of the remaining
10,028,684 outstanding shares of Common Stock, including the 1,113,841 shares to
be issued in the Minority Exchange (the "Restricted Shares"), 4,254,208 shares
will be available for resale beginning 180 days after the date of this
Prospectus upon expiration of the applicable lock-up agreements described below
and subject to compliance with Rule 144 under the Securities Act and 5,774,476
shares, including the 1,113,841 shares to be issued in the Minority Exchange,
will become eligible for sale under Rule 144 at various dates thereafter as the
holding provisions of Rule 144 are satisfied; provided, however, that all of the
Restricted Shares are entitled to certain registration rights. Further, upon
consummation of the Offering, 873,000 and 250,847 shares of Common Stock will be
issuable at a price per share of $10.00 and the public offering price set forth
on the cover page of this Prospectus, respectively, upon the exercise of
outstanding stock options, 278,900 of which are immediately exercisable, and
1,016,099 shares of Common Stock will be issuable at a nominal exercise price
upon the exercise of outstanding warrants, all of which are immediately
exercisable and entitled to certain registration rights. The Company intends to
file a registration statement on Form S-8 as soon as practicable after the
consummation of the Offering with respect to the shares of Common Stock issuable
upon exercise of all such options. See "Management -- Spielvogel Employment
Agreement," "Management -- Stock Option Plan," "Description of Capital Stock --
Warrants" and "Shares Eligible for Future Sale."
Sales of substantial amounts of Common Stock, or the perception that such sales
could occur, could adversely affect prevailing market prices of the Common
Stock. The Company has agreed not to sell any shares of its capital stock (or
any rights, options or warrants to purchase, or any securities convertible or
exchangeable into or exercisable for, capital stock), with certain limited
exceptions, for a period of 180 days following the date of this Prospectus
without the prior written consent of J.P. Morgan Securities Inc. In addition,
the holders of all the Restricted Shares (representing approximately 64.6% of
the Common Stock outstanding after giving effect to the Offering) have agreed
not to sell, directly or indirectly, any of their shares, with certain limited
exceptions, for a period of 180 days following the date of this Prospectus.
Further, certain holders of options and the holders of the Warrants have agreed
to similar restrictions with respect to the shares of Common Stock issuable upon
exercise of such options and Warrants for a period of 180 days following the
date of this Prospectus. See "Underwriting."
No Prior Market for the Common Stock
There is presently no established public market for securities of companies that
own and operate automobile dealerships, and, prior to the Offering, there has
been no public market for the Company's Common Stock. There can be no assurance
that an active public market for the Common Stock will develop or be sustained
after the Offering. The initial public offering price of the Common Stock will
be determined by negotiation between the Company and the representatives of the
Underwriters based on the factors described under "Underwriting." The price at
which the Common Stock will trade in the public market after the Offering may be
less than the initial public offering price. See "Underwriting."
Dilution to New Investors
Purchasers of Common Stock in the Offering will experience immediate and
substantial dilution in the amount of $23.65 per share in net tangible book
value per share. See "Dilution."
13
The Company
General
UAG is a leading acquirer, consolidator and operator of franchised automobile
and light truck dealerships and related businesses. The Company believes that,
after giving effect to the Contemporaneous Acquisitions, it will be the fourth
largest retailer of new motor vehicles in the United States, operating 37
franchises located in Arizona, Arkansas, Connecticut, Georgia, New Jersey, New
York and Tennessee and representing 22 American, Asian and European brands. As
an integral part of its dealership operations, UAG sells used vehicles. In
addition, the Company operates six stand-alone used car retail centers. All of
UAG's dealerships include integrated service and parts operations, which are an
important source of recurring revenues. The Company also owns Atlantic Finance,
an automobile finance company engaged in the purchase, sale and servicing of
prime credit quality automobile loans originated by both UAG and third-party
dealerships. For 1995, on a pro forma basis, UAG had revenues of approximately
$1.35 billion and sold 37,358 new and 22,060 used vehicles.
The Company was incorporated in the State of Delaware in December 1990 and
commenced dealership operations in October 1992. The Company's executive offices
are located at 375 Park Avenue, New York, New York 10152, and its telephone
number is (212) 223-3300.
Acquisition History
Trace established the Company to acquire, consolidate and operate large
automobile retailers and related businesses. A history of automotive experience
enabled Trace to be among the first to recognize and capitalize on the
opportunities created by the industry's rapid consolidation. This consolidation
offered UAG a means to quickly establish significant market presence and realize
economies of scale through professional operation of dealerships.
The following table sets forth information with respect to each dealership that
will be owned at the time of consummation of the Offering:
-------------------------------------------------------------------------------
Date
Acquiree Acquired Locations Franchises Presently Held
- ---------------------- ----------- -------------- --------------------------------------------------
DiFeo Group
DiFeo Automotive 10/92 Danbury, CT Chevrolet-Geo, Hyundai, Isuzu, Suzuki
Group
Bound Brook, Lexus
NJ
Jersey City, Hyundai, Jeep-Eagle, Oldsmobile, Toyota
NJ
Tenafly, NJ BMW
Nyack, NY Mitsubishi, Toyota
DiFeo Nissan 11/92 Jersey City, Nissan
NJ
DiFeo Chrysler- 12/92 Jersey City, Chrysler-Plymouth
Plymouth NJ
DiFeo Chevrolet-Geo 12/92 Jersey City, Chevrolet-Geo
NJ
Fair Honda 1/93 Danbury, CT Honda
Fair Dodge 2/93 Danbury, CT Dodge
Gateway 8/93 Toms River, NJ Mitsubishi, Toyota
Landers Auto 8/95 Benton, AK Chrysler-Plymouth, Dodge, GMC Truck, Jeep-Eagle,
Oldsmobile
Atlanta Toyota 1/96 Duluth, GA Toyota
United Nissan 5/96 Morrow, GA Nissan
Peachtree Nissan 7/96 Chamblee, GA Nissan
Sun Group (1) Phoenix, AZ BMW, Land Rover
Scottsdale, AZ Acura, Audi, Land Rover, Lexus, Porsche
Evans Group (1) Duluth, GA BMW
Conyers, GA Nissan
Standefer Motor (1) Chattanooga, Nissan
TN
- ------------------------------
(1) To be acquired contemporaneously with the consummation of the Offering.
14
On October 1, 1992, the Company acquired a 70% interest in the DiFeo Automotive
Group (the "DiFeo Group") for a purchase price of $16.0 million in cash. At the
time, the DiFeo Group was comprised of 29 franchises. Since then, the Company
has added nine franchises in the division's primary marketing area through
acquisition or expansion and has eliminated a total of 17 unprofitable
franchises by voluntarily terminating 12 franchises and effectively ceasing to
be the controlling or majority owner of five additional franchises. In 1995, the
DiFeo Group had sales of $689.2 million (including $52.3 million in sales from
two Saturn franchises, which the Company will transfer to an affiliated holding
company prior to the consummation of the Offering). Operating 19 franchises
(which excludes the two Saturn franchises) from six locations in the New York
metropolitan area, the DiFeo Group is one of the largest automobile dealership
groups in the Northeast in terms of sales and number of franchises. Among its
dealerships is the sixth largest Toyota franchise in the United States.
Immediately prior to the consummation of the Offering, the Company will acquire
the 30% minority interest in the DiFeo Group in the Minority Exchange. See
"Certain Relationships and Related Transactions."
Effective August 1, 1995, the Company acquired an 80% interest in Landers Auto
Sales, Inc. ("Landers Auto"), located in Benton, Arkansas, for a purchase price
consisting of $20.0 million in cash and $4.0 million in notes. The acquisition
agreement provides for additional contingent purchase price payments to the
sellers based on the future profitability of the acquired dealerships. In 1995,
Landers Auto, the largest full-line Chrysler dealer in the United States, had
$280.8 million in sales. Immediately prior to the consummation of the Offering,
the Company will acquire the 20% minority interest in Landers Auto in the
Minority Exchange. See "Certain Relationships and Related Transactions."
Effective January 1, 1996, the Company acquired a 100% interest in Atlanta
Toyota, located in Duluth, Georgia, for a purchase price consisting of $9.1
million in cash and $2.4 million in notes. In 1995, Atlanta Toyota had $112.2
million in sales, making it the largest Toyota dealer in the Atlanta
metropolitan area and the seventh largest in the United States. Pursuant to an
agreement, 5% of the capital stock of Atlanta Toyota was purchased by its
general manager for a $300,000 note. Immediately prior to the consummation of
the Offering, the Company will reacquire such capital stock in the Minority
Exchange. See "Certain Relationships and Related Transactions."
On May 1, 1996, the Company acquired a 100% interest in United Nissan, located
in Morrow, Georgia, for a purchase price of $11.5 million in cash. In 1995,
United Nissan had $62.7 million in sales.
Effective July 1, 1996, the Company acquired a 100% interest in Peachtree
Nissan, located in Chamblee, Georgia, for a purchase price consisting of $11.0
million in cash and a $2.0 million note. In 1995, Peachtree Nissan had $85.8
million in sales.
Contemporaneously with the consummation of the Offering, pursuant to a stock
purchase agreement dated as of June 6, 1996, the Company will acquire
substantially all of the Sun Group, located in Phoenix and Scottsdale, Arizona,
for approximately $30.5 million in cash. The acquisition agreement provides for
additional contingent purchase price payments to the sellers based on the future
profitability of the acquired dealerships and also provides for contingent
payments to indemnify the sellers against certain tax liabilities. The Sun Group
holds franchises for Acura, Audi, BMW, Land Rover, Lexus and Porsche and, in
1995, had $154.5 million in sales (including $17.0 million in sales from one
Jaguar franchise, which the Company will not acquire contemporaneously with the
Offering). In connection with such acquisition, the Company will also acquire
ownership of three parcels of real property with third-party financing in the
amount of $10.4 million. The Company expects to designate an unaffiliated third
party to purchase such property and simultaneously enter into long-term leases
with the Company.
Contemporaneously with the consummation of the Offering, pursuant to two stock
purchase agreements dated August 5, 1996, the Company will acquire a 100%
interest in the Evans Group, located in Duluth and Conyers, Georgia, for a
purchase price of $12.0 million in cash. The Evans Group holds one BMW and one
Nissan franchise and, in 1995, had $81.7 million in sales.
Contemporaneously with the consummation of the Offering, pursuant to a stock
purchase agreement dated September 5, 1996, the Company will acquire a 100%
interest in Standefer Motor, located in Chattanooga, Tennessee, for a purchase
price of $18.2 million in cash. In connection with such acquisition, the sellers
will receive $6.2 million out of the proceeds of third-party financing pursuant
to provisions of the acquisition agreement permitting the withdrawal of certain
retained earnings. Standefer Motor holds one Nissan franchise and, in 1995, had
$65.8 million in sales.
15
Use of Proceeds
The net proceeds to the Company from the sale of the Common Stock offered hereby
are estimated to be approximately $148.3 million ($168.8 million if the
Underwriters' over-allotment option is exercised in full) after deducting
underwriting discounts and estimated offering expenses and assuming an initial
public offering price of $29.50 per share. Of such net proceeds, (i)
approximately $62.1 million will be used to pay the consideration for the
Contemporaneous Acquisitions and related transaction costs, (ii) approximately
$38.6 million will be used to repay all the Company's outstanding Senior Notes
($3.6 million of which represents a required prepayment premium, which will be
reflected in the Company's financial statements as a charge against earnings in
the quarter in which such prepayment occurs), (iii) approximately $5.0 million
will be used to repay all the loans under the Company's revolving credit
agreement, (iv) approximately $15.0 million will be used to fund the expansion
of the Company's automobile finance business and (v) the balance of
approximately $27.6 million will be used for working capital and other general
corporate purposes, including other potential acquisitions. At present, the
Company has not identified any probable acquisitions. Pending such uses, the net
proceeds will be invested in short-term, investment grade securities or used to
temporarily reduce floor plan indebtedness.
The Senior Notes were issued in several series pursuant to Securities Purchase
Agreements, dated as of September 22, 1995, between the Company and the
investors named therein (the "Securities Purchase Agreements"). They bear
interest at a weighted average interest rate of 11.94% and mature on September
15, 2003. The proceeds of the Senior Notes were used primarily to finance
acquisitions and for investments in Atlantic Finance. The revolving loans were
made under the Credit Agreement, dated February 28, 1996, between the Company
and Morgan Guaranty, as amended (the "Credit Agreement"). They bear interest at
the higher of the prime rate plus 2.0% or the federal funds rate plus 2.5% (an
effective rate of 10.25% at July 15, 1996) and mature on November 1, 1996. The
holder of a majority of the Senior Notes and Morgan Guaranty are affiliates of
J.P. Morgan Securities Inc.
Dividend Policy
The Company has never declared or paid dividends on its Common Stock. The
Company intends to retain future earnings, if any, to finance the development
and expansion of its business and, therefore, does not anticipate paying any
cash dividends on its Common Stock in the foreseeable future. The decision
whether to pay dividends will be made by the Board of Directors of the Company
in light of conditions then existing, including the Company's results of
operations, financial condition and requirements, business conditions and other
factors.
Pursuant to support agreements by the Company in favor of subsidiaries of
Atlantic Finance entered into in connection with securitization transactions or
sales of automobile loan receivables, the Company is prohibited from paying
dividends in excess of 50% of its cumulative net income measured over specified
periods.
Pursuant to financing agreements with floor plan lenders, many of the Company's
dealerships are required to maintain a certain minimum working capital and a
certain aggregate net worth and/or are prohibited from making substantial
disbursements outside the ordinary course of business. In addition, pursuant to
the automobile franchise agreements to which the Company's dealerships are
subject, all dealerships are required to maintain a certain minimum working
capital, and some dealerships are also required to maintain a certain minimum
net worth. These requirements may restrict the ability of the Company's
operating subsidiaries to make dividend payments, which in turn may restrict the
Company's ability to make dividend payments.
16
Capitalization
The following table sets forth the short-term debt and consolidated
capitalization of the Company as of June 30, 1996, and pro forma to give effect
to the Preferred Stock Conversion, the Minority Exchange, the acquisition of
Peachtree Nissan, the private placement of additional equity and repayment of
$4.0 million of short-term debt on July 10, 1996, the Contemporaneous
Acquisitions and the Offering. This table should be read in conjunction with the
consolidated historical and pro forma financial statements of the Company and
the notes thereto appearing elsewhere in this Prospectus.
----------------------
As of
June 30, 1996
IN THOUSANDS, EXCEPT PER SHARE DATA Actual Pro Forma
--------- -----------
Short-term debt, excluding floor plan (1) $ 17,585 $ 18,985
Current portion of long-term debt 2,463 2,825
--------- -----------
Total short-term debt $ 20,048 $ 21,810
--------- -----------
--------- -----------
Long-term debt (excluding current portion):
Senior Notes (2) $ 27,988 $ --
Other 10,706 12,422
--------- -----------
Total long-term debt 38,694 12,422
--------- -----------
Minority interests subject to repurchase 15,299 --
--------- -----------
Stock purchase warrants 1,597 --
--------- -----------
Stockholders' equity:
Class A convertible preferred stock, $0.0001 par value; 4,911 shares
authorized, 4,491 shares issued and outstanding, actual; no shares
authorized, issued or outstanding, as adjusted 1 --
Preferred stock, $0.0001 par value; no shares authorized, actual; 100
shares authorized, no shares issued and outstanding, as adjusted -- --
Voting common stock, $0.0001 par value; 15,100 shares authorized,
3,300 shares issued and outstanding, actual; 40,000 shares
authorized, 15,529 shares issued and outstanding, as adjusted (3) 1 2
Non-voting common stock, $0.0001 par value; 1,025 shares authorized,
no shares issued and outstanding, actual; 1,125 shares authorized, no
shares issued and outstanding, as adjusted -- --
Class C Common Stock, $0.0001 par value; no shares authorized, actual;
20,000 shares authorized, no shares issued and outstanding, as
adjusted -- --
Additional paid-in capital 68,319 259,541
Accumulated deficit (1,612) (8,937)
--------- -----------
Total stockholders' equity 250,621 250,606
--------- -----------
Total capitalization $ 122,299 $ 263,028
--------- -----------
--------- -----------
- ------------------------
(1) As of June 30, 1996, an aggregate of $129.0 million was outstanding under
the Company's floor plan facilities.
(2) As of August 31, 1996, there were Senior Notes outstanding in the aggregate
principal amount of $33.3 million, net of unamortized discount of $1.7 million.
(3) Does not include 873,000 and 250,847 shares of Common Stock issuable at an
exercise price per share of $10.00 and the public offering price set forth on
the cover page of this Prospectus, respectively, upon the exercise of
outstanding stock options or 1,016,099 shares issuable at a nominal exercise
price upon the exercise of outstanding warrants. See "Management -- Spielvogel
Employment Agreement," "Management -- Stock Option Plan," "Description of
Capital Stock -- Warrants" and "Shares Eligible for Future Sale."
17
Dilution
As of June 30, 1996, the pro forma net tangible book value (deficit) of the
Common Stock, after giving effect to the Preferred Stock Conversion, the
Minority Exchange, the acquisition of Peachtree Nissan, the assumed exercise of
the Warrants (as defined herein) and the issuance and exercise of the Additional
Warrants (as defined herein), was approximately $(1.9) million, or approximately
$(.17) per share. Net tangible book value (deficit) per share represents the
amount of total tangible assets less total liabilities, divided by the number of
shares of Common Stock outstanding. After giving effect to the Offering
(assuming an initial public offering price of $29.50 per share and after
deducting estimated offering expenses), the Contemporaneous Acquisitions, the
senior debt repayment and dealerships transferred where Manufacturer approval
was not received, the pro forma net tangible book value of the Company at June
30, 1996 would have been approximately $96.8 million, or approximately $5.85 per
share. This represents an immediate dilution of approximately $23.65 per share
to stockholders purchasing shares at the initial public offering price. The
following table illustrates this per share dilution:
Assumed initial public offering price per share $ 29.50
---------
Pro forma net tangible book value (deficit) per share at June 30, 1996
after giving effect to the Preferred Stock Conversion, the Minority
Exchange, the acquisition of Peachtree Nissan, the assumed exercise of
the Warrants and the issuance and exercise of the Additional Warrants $ (.17)
---------
Increase in pro forma net tangible book value per share attributable to
new investors in the Offering 6.02
---------
Pro forma net tangible book value per share as further adjusted for the
Offering, the Contemporaneous Acquisitions, the senior debt repayment
and dealerships transferred where Manufacturer approval was not received 5.85
---------
Dilution per share to new investors in the Offering $ 23.65
---------
---------
The following table sets forth on a pro forma basis at June 30, 1996 the
difference between the existing holders of Common Stock (including the shares of
Common Stock issued pursuant to the Minority Exchange and upon the assumed
exercise of the Warrants and the issuance and exercise of the Additional
Warrants) and the new investors in the Offering with respect to the number of
shares of Common Stock purchased (assuming an initial public offering price of
$29.50 per share), the total consideration paid and the average price per share
paid:
------------------------------------------------------------------
Shares Total
Purchased (1) Consideration (2) Average
------------------------ --------------------------- Price
Number Percent Amount Percent Per Share
----------- ----------- -------------- ----------- -----------
Existing stockholders 11,044,783 66.8% $ 116,658,379 41.8% $ 10.56
New investors in the Offering 5,500,000 33.2 162,250,000 58.2 29.50
----------- --- -------------- ---
Total 16,544,783 100% $ 278,908,379 100%
----------- --- -------------- ---
----------- --- -------------- ---
- ------------------------------
(1) Does not include 873,000 and, assuming an initial offering price of $29.50
per share, 250,847 shares of Common Stock issuable at an exercise price per
share of $10.00 and the public offering price set forth on the cover page of
this Prospectus, respectively, upon the exercise of outstanding stock options.
(2) The shares of Common Stock issuable upon the exercise of the Warrants to
purchase 1,016,099 shares and the Additional Warrants to purchase 93,747 shares
(as such terms are defined herein) are deemed to have a purchase price,
including a nominal exercise price, of $1.81 and $10.00 per share, respectively.
See "Description of Capital Stock -- Warrants."
18
Pro Forma Condensed Consolidated Financial Statements
The following unaudited pro forma condensed consolidated financial statements
give effect to the following: (i) the acquisitions of 80% of Landers Auto
(August 1, 1995), 100% of each of Atlanta Toyota (January 1, 1996), Steve Rayman
Nissan (May 1, 1996), Hickman Nissan (July 1, 1996) and, in the Contemporaneous
Acquisitions, substantially all of Sun Automotive Group and 100% of each of
Evans Automotive Group and Standefer Motor; (ii) the DiFeo Restructuring (as
defined herein); (iii) the purchase of a 5% equity interest in Atlanta Toyota by
its current general manager in exchange for a note; (iv) the acquisition of the
minority interest in each of the DiFeo Group, Landers Auto and Atlanta Toyota in
exchange for Common Stock plus certain other consideration in the Minority
Exchange; (v) the Offering; (vi) the repayment of $35.0 million aggregate
principal amount of Senior Notes, plus a related $3.6 million prepayment
premium, and $5.0 million of loans outstanding under the Credit Agreement; (vii)
the Preferred Stock Conversion; (viii) the reclassification of the common stock
warrants to stockholders' equity; (ix) the private placement of additional
equity and repayment of $4.0 million of short-term debt on July 10, 1996; and
(x) the increase in rental expense under amended leases relating to facilities
in the DiFeo Group.
The pro forma condensed consolidated statements of operations assume these
events occurred on January 1, 1995, and the pro forma condensed consolidated
balance sheet assumes these events, except for the Landers Auto, Atlanta Toyota
and Steve Rayman Nissan acquisitions, which are included in the historical
balance sheet, occurred on June 30, 1996.
The pro forma condensed consolidated financial statements are not necessarily
indicative of operating results or financial position that would have been
achieved had these events been consummated on the dates indicated and should not
be construed as representative of future operating results or financial
position.
These pro forma condensed consolidated financial statements should be read in
conjunction with the historical financial statements and related notes thereto
included in this Prospectus.
19
United Auto Group, Inc.
Pro Forma Condensed Consolidated Statement of Operations
For the Year Ended December 31, 1995
(In thousands except per share data)
Steve Sun Evans
Landers Atlanta Rayman Hickman Automotive Automotive Standefer
UAG Auto(1) Toyota(1) Nissan(1) Nissan(1) Group(1) Group(1) Motor(1)
--------- ---------- --------- --------- --------- ---------- ---------- ---------
Auto Dealerships
Total revenues $805,621 $164,368 $112,162 $62,672 $85,822 $154,502 $81,669 $65,793
Cost of sales 720,344 147,566 98,969 52,570 77,256 133,980 72,459 58,284
--------- ---------- --------- --------- --------- ---------- ---------- ---------
Gross profit 85,277 16,802 13,193 10,102 8,566 20,522 9,210 7,509
Selling, general and
administrative expenses 90,586 10,132 11,182 8,989 7,619 17,319 7,842 5,192
--------- ---------- --------- --------- --------- ---------- ---------- ---------
Operating income (loss) (5,309) 6,670 2,011 1,113 947 3,203 1,368 2,317
Related party interest
income 3,039
Other income (expense), net (1,438) 242 17 1 21 (1,181) (34) 183
Equity in (loss) of
uncombined investees (831) -- -- -- -- -- -- --
--------- ---------- --------- --------- --------- ---------- ---------- ---------
Income (loss) before income
taxes -- Auto Dealerships (4,539) 6,912 2,028 1,114 968 2,022 1,334 2,500
Auto Finance
Loss before income taxes --
Auto Finance (1,382) -- -- -- -- -- -- --
--------- ---------- --------- --------- --------- ---------- ---------- ---------
Total Company
Income (loss) before minority
interests and provision for
income taxes (5,921) 6,912 2,028 1,114 968 2,022 1,334 2,500
Minority interests 366
Benefit (provision) for income
taxes 2,089 (449) -- -- -- -- (457) (147)
--------- ---------- --------- --------- --------- ---------- ---------- ---------
Net income (loss) $(3,466) $6,463 $2,028 $1,114 $968 $2,022 $877 $2,353
--------- ---------- --------- --------- --------- ---------- ---------- ---------
--------- ---------- --------- --------- --------- ---------- ---------- ---------
Net income (loss) per common
share $(.63)
---------
---------
Shares used in computing net
income (loss) per common
share 5,482
---------
---------
Pro Forma
Adjustments Pro Forma
-------------- ---------
Auto Dealerships
Total revenues $(100,086) (2) $1,352,770
(79,753) (3)
Cost of sales (95,893) (2) 1,197,200
(68,335) (3)
---------
Gross profit 155,570
Selling, general and
administrative expenses (11,286) (2) 136,145
(9,877) (3)
867 (4)
(127) (5)
(1,763) (6)
2,016 (7)
(3,121) (8)
575 (9)
---------
Operating income (loss) 19,425
Related party interest
income (3,039) (4) --
Other income (expense), net (1,050) (10) (1,891)
1,248 (11)
100 (12)
Equity in (loss) of
uncombined investees 831 (4) --
---------
Income (loss) before income
taxes -- Auto Dealerships 17,534
Auto Finance
Loss before income taxes --
Auto Finance (1,382)
---------
Total Company
Income (loss) before minority
interests and provision for
income taxes 16,152
Minority interests (366) (4) --
Benefit (provision) for income
taxes (8,076)(13) (7,040)
---------
Net income (loss) $ 9,112
---------
---------
Net income (loss) per common
share $ .53
---------
---------
Shares used in computing net
income (loss) per common
share 11,640(14) 17,122
---------
---------
See footnotes on following pages
20
United Auto Group, Inc.
Pro Forma Condensed Consolidated Statement of Operations
For the Six Months Ended June 30, 1996
(In thousands except per share data)
Steve
Rayman Hickman Sun Evans
Nissan Nissan Automotive Automotive Standefer Pro Forma
UAG (1) (1) Group (1) Group (1) Motor (1) Adjustments
--------- --------- --------- ---------- ---------- --------- -----------
Auto Dealerships
Total revenues $597,939 $ 19,892 $ 41,320 $ 93,823 $ 46,369 $ 34,994 $ (33,707)
Cost of sales 531,560 16,503 36,581 80,389 40,497 31,018 (28,268)
--------- --------- --------- ---------- ---------- ---------
Gross profit 66,379 3,389 4,739 13,434 5,872 3,976
Selling, general and administrative (450)
expenses 56,975 2,481 4,072 9,661 4,664 2,187
(4,837)
433
18
(1,195)
764
288
--------- --------- --------- ---------- ---------- ---------
Operating income 9,404 908 667 3,773 1,208 1,789
Related party interest income 1,548 -- -- -- -- -- (1,548)
Other income (expense), net (2,049) -- 19 (717) 13 30 (340)
2,025
200
Equity in income of uncombined investees 75 -- -- -- -- -- (75)
--------- --------- --------- ---------- ---------- ---------
Income before income taxes -- Auto
Dealerships 8,978 908 686 3,056 1,221 1,819
Auto Finance
Loss before income taxes -- Auto Finance (349) -- -- -- -- --
--------- --------- --------- ---------- ---------- ---------
Total Company
Income before minority interests and
provision for income taxes 8,629 908 686 3,056 1,221 1,819
Minority interests (1,734) -- -- -- -- -- 1,734
Provision for income taxes (2,997) -- -- -- (365) (133) (3,441)
--------- --------- --------- ---------- ---------- ---------
Net income $3,898 $908 $686 $3,056 $856 $1,686
--------- --------- --------- ---------- ---------- ---------
--------- --------- --------- ---------- ---------- ---------
Net income per common share $.46
---------
---------
Shares used in computing net income
(loss) per common share 8,500 8,622
---------
---------
Total
---------
Auto Dealerships
Total revenues (3) $800,630
Cost of sales (3) 708,280
---------
Gross profit 92,350
Selling, general and administrative (2) 75,061
expenses
(3)
(4)
(5)
(6)
(7)
(9)
---------
Operating income 17,289
Related party interest income (4) --
Other income (expense), net (10) (819)
(11)
(12)
Equity in income of uncombined investees (4) --
---------
Income before income taxes -- Auto 16,470
Dealerships
Auto Finance
Loss before income taxes -- Auto Finance (349)
---------
Total Company
Income before minority interests and
provision for income taxes 16,121
Minority interests (4) --
Provision for income taxes (13) (6,936)
Net income $9,185
---------
---------
Net income per common share $.54
---------
---------
Shares used in computing net income
(loss) per common share (14) 17,122
---------
---------
See footnotes on following pages
21
Footnotes to Pro Forma Condensed Consolidated Statements of Operations
(1) Represents the results of operations of such entities prior to their
respective dates of acquisition by UAG.
(2) Represents adjustments related to the DiFeo Restructuring (as defined
herein). Of the $11,286 reduction in selling, general and administrative
expenses for the year ended December 31, 1995, $8,122 was directly related to 17
unprofitable franchises which were eliminated and $3,164 was related to the
elimination of a level of senior management and a reduction of personnel at the
continuing franchises of the DiFeo Group. The DiFeo Restructuring increased pro
forma net income by $4,256 for the year ended December 31, 1995 and $270 for the
six months ended June 30, 1996.
(3) Represents adjustments to eliminate the results of operations of dealerships
not acquired (Buick, Saab and Jaguar) or dealerships transferred due to failure
to obtain Manufacturer approval (Saturn). The adjustments are as follows:
Selling, General
and
Year ended Cost of Administrative
December 31, 1995: Revenues Sales Expenses
- -------------------------------------------------------------------------------------- --------- --------- -----------------
Atlanta Toyota -- Buick $ 8,211 $ 7,388 $ 580
Sun Automotive Group -- Saab, Jaguar 19,244 16,155 2,637
DiFeo Group -- Saturn 52,298 44,792 6,660
--------- --------- -----------------
Total $ 79,753 $ 68,335 $ 9,877
--------- --------- -----------------
--------- --------- -----------------
Six months ended
June 30, 1996:
- --------------------------------------------------------------------------------------
Sun Automotive Group -- Saab, Jaguar $ 9,911 $ 8,311 $ 1,600
DiFeo Group -- Saturn 23,796 19,957 3,237
--------- --------- -----------------
Total $ 33,707 $ 28,268 $ 4,837
--------- --------- -----------------
--------- --------- -----------------
(4) Represents adjustments that give effect to the proposed acquisition of the
minority interest in each of the DiFeo Group, Landers Auto and Atlanta Toyota in
exchange for Common Stock plus certain other consideration in the Minority
Exchange. These adjustments include amortization expense for the excess of cost
over net assets acquired, the elimination of related party interest income on
assets to be exchanged, the elimination of equity in operations of assets to be
exchanged and the elimination of minority interest in results of operations
acquired. The proposed acquisition of the minority interests decreased pro forma
net income by $1,611 for the year ended December 31, 1995 and $136 for the six
months ended June 30, 1996.
(5) Represents change in facility expenses at acquired dealerships due to
revised or terminated lease agreements upon acquisition.
(6) Represents reduction in compensation expense at acquired dealerships related
to former owners and employees to contractual amounts.
(7) Represents amortization of excess of cost over net assets acquired for the
acquired dealerships.
(8) Represents reduction for management fees paid to owners of acquired
dealerships.
(9) Represents adjustment for increase in rental expense under amended leases
relating to facilities in the DiFeo Group.
(10)Represents additional interest expense from the issuance of notes payable to
sellers as part of the acquisitions.
(11)Represents reduction in historical interest expense due to the repayment of
the Senior Notes and loans under the Credit Agreement with a portion of the net
proceeds from the Offering.
(12)Represents net increase in interest expense at acquired dealerships due to
the increase in short-term debt offset in part by repayment of long-term debt in
connection with the acquisition of Sun Automotive Group.
(13)Represents tax impact of pro forma adjustments at the statutory rate
adjusted for non-deductible items of $3,123 for the year ended December 31, 1995
and $2,085 for the six months ended June 30, 1996, the impact of the conversion
of certain acquired entities from an S corporation to a C corporation for tax
purposes of $5,698 for the year ended December 31, 1995 and $1,356 for the six
months ended June 30, 1996 and the elimination of the decrease in the valuation
allowance of $745 for the year ended December 31, 1995 since a deferred tax
asset valuation allowance would not have existed at January 1, 1995 if the pro
forma transactions detailed above occurred at that date.
(14)Represents shares issued in connection with the Offering, the Minority
Exchange, the acquisition of Hickman Nissan and the Preferred Stock Conversion.
22
United Auto Group, Inc.
Pro Forma Condensed Consolidated Balance Sheet
As of June 30, 1996
(Dollars in thousands)
Sun Evans
Hickman Automotive Automotive Standefer Pro Forma
UAG Nissan Group Group Motor Adjustments
--------- --------- ---------- ---------- --------- ----------------------
ASSETS
Auto Dealerships
Cash and cash equivalents $9,301 $211 $121 $701 $232 $148,268 (1)
11,531 (2)
(11,350) (2)
(31,150) (3)
(13,350) (4)
(18,550) (5)
(38,600) (6)
(5,000) (7)
(15,000) (8)
4,000 (9)
(4,000) (9)
(1,312) (10)
(908) (11)
Accounts receivable 48,209 4,442 6,907 5,812 1,431 (1,740) (11)
Inventories 121,289 6,272 15,968 8,927 8,430 2,351 (2)
948 (3)
1,926 (4)
3,322 (5)
(7,292) (11)
Deferred income taxes 5,333 -- -- -- -- 3,216 (6)
125 (10)
110 (12)
Other current assets 2,848 264 53 81 -- (227) (11)
100 (12)
--------- --------- ---------- ---------- ---------
Total current assets 186,980 11,189 23,049 15,521 10,093
Property and equipment, net 14,609 543 11,128 335 226 2,186 (3)
(652) (11)
Intangible assets, net 66,131 -- 1,137 -- -- 9,832 (2)
19,399 (3)
7,482 (4)
14,625 (5)
600 (10)
(67) (11)
34,675 (13)
Due from related parties 15,727 -- -- 699 -- (15,727) (13)
Other assets 11,090 64 843 32 150 3,017 (3)
(2,608) (6)
(198) (9)
(137) (11)
200 (12)
(3,317) (13)
--------- --------- ---------- ---------- ---------
Total Auto Dealership assets 294,537 11,796 36,157 16,587 10,469
--------- --------- ---------- ---------- ---------
Auto Finance
Cash and cash equivalents 1,530 -- -- -- -- 15,000 (8)
Finance assets, net 775 -- -- -- --
Other assets 14,262 -- -- -- --
--------- --------- ---------- ---------- ---------
Total Auto Finance assets 16,567 -- -- -- --
--------- --------- ---------- ---------- ---------
Total assets $ 311,104 $11,796 $36,157 $16,587 $10,469
--------- --------- ---------- ---------- ---------
--------- --------- ---------- ---------- ---------
Pro Forma
----------
ASSETS
Auto Dealerships
Cash and cash equivalents $35,145
Accounts receivable 65,061
Inventories 162,141
Deferred income taxes 8,784
Other current assets 3,119
----------
Total current assets 274,250
Property and equipment, net 28,375
Intangible assets, net 153,814
Due from related parties 699
Other assets 9,136
----------
Total Auto Dealership assets 466,274
----------
Auto Finance
Cash and cash equivalents 16,530
Finance assets, net 775
Other assets 14,262
----------
Total Auto Finance assets 31,567
----------
Total assets $497,841
----------
----------
23
United Auto Group, Inc.
Pro Forma Condensed Consolidated Balance Sheet
As of June 30, 1996 (continued)
(Dollars in thousands)
Sun Evans
Hickman Automotive Automotive Standefer Pro Forma
UAG Nissan Group Group Motor Adjustments
--------- --------- ---------- ---------- --------- ----------------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Auto Dealerships
Floor plan notes payable $ 129,009 $8,978 $14,263 $9,808 $2,326 $6,001 (5)
(6,421) (11)
Short-term debt 15,069 -- -- -- -- 10,400 (3)
(5,000) (7)
(4,000) (9)
Accounts payable 20,626 916 1,357 1,977 741 (1,094) (11)
Accrued expenses 14,150 646 2,946 766 798 (400) (10)
(576) (11)
Current portion of long-term debt 2,463 33 1,329 -- -- (1,000) (3)
--------- --------- ---------- ---------- ---------
Total current liabilities 181,317 10,573 19,895 12,551 3,865
Long-term debt 38,694 56 12,960 89 -- 2,000 (2)
5,480 (2)
(12,905) (3)
(33,167) (6)
(785) (11)
Due to related party 1,191 -- -- -- --
Deferred income taxes 2,279 -- -- 6 -- 1,208 (3)
--------- --------- ---------- ---------- ---------
Total Auto Dealership liabilities 223,481 10,629 32,855 12,646 3,865
--------- --------- ---------- ---------- ---------
Auto Finance
Short-term debt 2,516 -- -- -- --
Accounts payable and other liabilities 1,502 -- -- -- --
--------- --------- ---------- ---------- ---------
Total Auto Finance liabilities 4,018 -- -- -- --
--------- --------- ---------- ---------- ---------
Minority interests subject to repurchase 15,299 -- -- -- -- (15,299) (13)
--------- --------- ---------- ---------- ---------
Stock purchase warrants 1,597 -- -- -- -- (1,597) (14)
--------- --------- ---------- ---------- ---------
Commitments and contingent liabilities
Stockholders' equity
Convertible Preferred Stock 1 -- -- -- -- (1) (15)
Common Stock 1 50 7,228 2 1 1 (1)
(50) (2)
(7,228) (3)
(2) (4)
(1) (5)
Non-voting Common Stock -- -- -- -- 9 (9) (5)
Class C Common Stock -- -- -- -- --
Additional paid-in capital 68,319 1 -- 897 -- 148,267 (1)
(1) (2)
6,051 (2)
(897) (4)
3,802 (9)
575 (12)
30,929 (13)
1,597 (14)
1 (15)
Retained earnings (accumulated (1,116) (2)
deficit) (1,612) 1,116 (3,926) 3,042 6,594
3,926 (3)
(3,042) (4)
(6,594) (5)
(4,825) (6)
(187) (10)
(2,148) (11)
(165) (12)
--------- --------- ---------- ---------- ---------
Total stockholders' equity 66,709 1,167 3,302 3,941 6,604
--------- --------- ---------- ---------- ---------
Total liabilities, minority interests
subject to repurchase, stock
purchase warrants and stockholders'
equity $ 311,104 $11,796 $36,157 $16,587 $10,469
--------- --------- ---------- ---------- ---------
--------- --------- ---------- ---------- ---------
Pro Forma
----------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Auto Dealerships
Floor plan notes payable $163,964
Short-term debt 16,469
Accounts payable 24,523
Accrued expenses 18,330
Current portion of long-term debt 2,825
----------
Total current liabilities 226,111
Long-term debt 12,422
Due to related party 1,191
Deferred income taxes 3,493
----------
Total Auto Dealership liabilities 243,217
----------
Auto Finance
Short-term debt 2,516
Accounts payable and other liabilities 1,502
----------
Total Auto Finance liabilities 4,018
----------
Minority interests subject to repurchase --
Stock purchase warrants --
Commitments and contingent liabilities
Stockholders' equity
Convertible Preferred Stock --
Common Stock 2
Non-voting Common Stock --
Class C Common Stock --
Additional paid-in capital 259,541
Retained earnings (accumulated (8,937)
deficit)
----------
Total stockholders' equity 250,606
----------
Total liabilities, minority interests
subject to repurchase, stock
purchase warrants and stockholders'
equity $497,841
----------
----------
24
Footnotes to Pro Forma Condensed Consolidated Balance Sheet
(1) Represents the net proceeds from the Offering.
(2) Represents the acquisition of Hickman Nissan for cash and debt, including
expenses of $350, the related preliminary purchase price allocations to
inventories and excess of cost over net assets acquired and the elimination of
historical equity accounts. Also reflects the issuance of debt and equity to
finance the acquisition and working capital.
(3) Represents the acquisition of Sun Automotive Group for cash, including
estimated expenses of $650, and the related preliminary purchase price
allocations to inventories, property and equipment, other assets and excess of
cost over net assets acquired, repayments of long-term debt, incurrence of
short-term debt and the elimination of historical equity accounts.
(4) Represents the acquisition of Evans Group for cash, including estimated
expenses of $350, and the related preliminary purchase price allocations to
inventories, property and equipment and excess of cost over net assets acquired,
payments of long-term debt and the elimination of historical equity accounts.
(5) Represents the acquisition of Standefer Motor for cash, including estimated
expenses of $350, and the related preliminary price allocation to
inventories, property and equipment and excess of costs over net assets
acquired, payments of long-term debt and the elimination of historical equity
accounts.
(6) Represents the repayment of Senior Notes, the related prepayment penalty
and writeoff of deferred costs charged to retained earnings and related
deferred tax effect.
(7) Represents the repayment of loans under the Credit Agreement.
(8) Represents contribution of a portion of the net proceeds from the Offering
to Atlantic Finance to finance expansion.
(9) Represents the issuance of additional equity, the reclassification of
deferred issuance costs and the repayment of short-term debt in July 1996.
(10) Represents adjustment for retroactive increase in rental expense under
amended leases relating to facilities in the DiFeo Group.
(11) Represents adjustment to eliminate the impact of dealerships transferred or
not acquired because Manufacturer approval was not received.
(12) Represents the purchase of a 5% equity interest in Atlanta Toyota by its
current general manager in exchange for a note.
(13) Represents adjustments to give effect to the proposed acquisition of the
minority interest in each of the DiFeo Group, Landers Auto and Atlanta
Toyota in exchange for Common Stock plus certain other consideration in the
Minority Exchange.
(14) Represents a reclassification of the stock purchase warrants to
stockholders' equity since, following the Offering, the stock purchase
warrants will no longer be convertible into contingent value obligations.
(15) Represents the Preferred Stock Conversion.
25
Selected Consolidated Financial Data
The following table sets forth selected consolidated financial and other data of
the Company for the three months ended December 31, 1992, each of the three
years in the period ended December 31, 1995 and the six months ended June 30,
1995 and June 30, 1996 and the Predecessor Company financial data as of December
31, 1991 and for the year ended December 31, 1991 and the nine months ended
September 30, 1992. The balance sheet data as of December 31, 1993, 1994 and
1995 and the statements of operations data for the years ended December 31,
1993, 1994 and 1995 have been derived from the financial statements of the
Company which have been audited by Coopers & Lybrand L.L.P., the Company's
independent accountants. The selected consolidated financial data set forth
below for the Predecessor Company and the Company for the three months ended
December 31, 1992, June 30, 1995 and June 30, 1996 are unaudited but have been
prepared on the same basis as the audited consolidated financial statements and
contain all adjustments, consisting of only normal recurring accruals, that the
Company considers necessary for a fair presentation of the financial position
and results of operations for the periods presented. Operating results for the
six months ended June 30, 1996 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1996. The selected
financial data should be read in conjunction with the consolidated financial
statements and related notes and Pro Forma Condensed Consolidated Financial
Statements of the Company.
------------------------------------------------------------------------------------------------
Predecessor Company(1) The Company
--------------------------- -------------------------------------------------------------------
Year Nine Months Three Months
Ended Ended Ended Six Months Ended
DOLLARS IN THOUSANDS, December 31, September 30, December 31, Years Ended December 31, June 30,
EXCEPT PER SHARE DATA 1991 1992 1992 1993 1994 1995(2) 1995 1996(3)
------------ ------------- ------------ --------- --------- --------- --------- ---------
Statements of Operations
Data:
Auto Dealerships
Total revenues $404,319 $297,010 $98,040 $ 606,091 $ 731,629 $ 805,621 $ 352,739 $ 597,939
Cost of sales, including
floor plan interest 361,961 257,845 85,712 537,688 647,643 720,344 316,525 531,560
Gross profit 42,358 39,165 12,328 68,403 83,986 85,277 36,214 66,379
Selling, general and
administrative expenses 45,120 40,873 12,929 66,910 80,415 90,586 41,941 56,975
Operating income (loss) (2,762) (1,708) (601) 1,493 3,571 (5,309) (5,727) 9,404
Other interest expense -- -- -- 1,233 860 1,438 402 2,049
Auto Finance
Loss before income taxes -- -- -- -- (616) (1,382) (701) (349)
Total Company
Minority interests -- -- 152 (117) (887) 366 917 (1,734)
Benefit (provision) for
income taxes (337) (197) -- (47) -- 2,089 -- (2,997)
Net income (loss) (3,099) (1,905) (449) 96 (1,691) (3,466) (4,902) 3,898
Net income (loss) per
common share -- -- -- $ .05 $ (.44) $ (.63) $ (1.05) $ .46
-------------------------------------------------------------------------------------
The Company
Predecessor Company ----------------------------------------------------------------
-------------------
As of As of December 31, As of June 30,
DOLLARS IN THOUSANDS December 31, 1991 1992 1993 1994 1995 1995 1996
------------------- --------- --------- --------- --------- --------- ---------
Balance Sheet Data:
Auto Dealerships
Current assets $53,579 $ 72,045 $ 120,061 $ 118,534 $ 141,649 $ 119,909 $ 186,980
Current liabilities 60,568 75,127 117,494 125,825 139,447 128,027 181,317
Property and equipment, net 4,121 5,598 8,845 12,072 12,146 11,814 14,609
Intangible assets, net 667 20,665 22,832 23,018 48,774 22,700 66,131
Long-term debt 3,801 3,092 4,122 6,735 24,073 6,556 38,694
Auto Finance
Net assets -- -- -- 291 3,501 3,714 12,549
Total Company
Total assets 58,487 100,794 154,218 170,342 236,027 176,945 311,104
Minority interests subject to
repurchase -- 7,024 7,338 7,962 13,608 6,555 15,299
Stock purchase warrants -- -- -- -- 1,020 -- 1,597
Total stockholders' equity (6,316) 15,551 25,264 28,785 49,240 33,599 66,709
----------------------------------------------------------------------------------------------------
Predecessor Company The Company
--------------------------- -----------------------------------------------------------------------
Year Nine Months Three Months
Ended Ended Ended Six Months Ended
December 31, September 30, December 31, Years Ended December 31, June 30,
1991 1992 1992 1993 1994 1995(2) 1995 1996(3)
------------ ------------- ------------ --------- --------- ----------- --------- -----------
Other Auto Dealerships
Data:
Gross profit margin 10.5% 13.2% 12.6% 11.3% 11.5% 10.6% 10.3% 11.1%
Operating margin (0.7)% (0.6)% (0.6)% 0.2% 0.5% (0.7 )% (1.6)% 1.6%
New cars sold at retail 14,597 11,677 4,150 18,608 22,464 25,138 11,088 17,509
Used cars sold at
retail 5,195 3,335 1,535 7,891 8,340 8,953 3,674 8,542
- ------------------------------
(1) Predecessor Company represents the combined historical results of the
DiFeo Group acquired by the Company on October 1, 1992.
(2) Includes the results of Landers Auto from August 1, 1995.
(3) Includes results of Atlanta Toyota from January 1, 1996 and of Steve
Rayman Nissan from May 1, 1996.
26
Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
UAG is a leading acquirer, consolidator and operator of franchised automobile
and light truck dealerships and related businesses. The Company believes that,
after giving effect to the Contemporaneous Acquisitions, it will be the fourth
largest retailer of new motor vehicles in the United States, operating 37
franchises located in Arizona, Arkansas, Connecticut, Georgia, New Jersey, New
York and Tennessee and representing 22 American, Asian and European brands. As
an integral part of its dealership operations, UAG sells used vehicles. In
addition, the Company operates six stand-alone used car retail centers. All of
UAG's dealerships include integrated service and parts operations, which are an
important source of recurring revenues. The Company also owns Atlantic Finance,
an automobile finance company that purchases prime credit quality automotive
loans originated by both UAG and third-party dealerships.
The Company's principal source of growth has come, and is expected to continue
to come, from acquisitions of automobile dealerships. Therefore, the Company's
period to period results of operations vary depending on the dates of such
acquisitions. In addition, results of operations fluctuate due the cyclicality
of unit sales of motor vehicles, particularly new vehicles. Such fluctuation is
generally influenced by general economic conditions. See "-- Cyclicality."
New vehicle revenues include sales to retail customers and to leasing companies
providing consumer 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 come from
sales of accessories such as radios, cellular phones, alarms, custom wheels,
paint sealants and fabric protectors, as well as amounts received as fees for
placing extended service contracts, credit insurance policies, financing and
lease contracts. In the case of arranging financing, the Company receives a fee
from the lender for originating the loan but is assessed a chargeback by the
lender if the contract terminates, in certain cases before its scheduled
maturity, and in other cases within 90 days of the making of the loan, which in
either case can result from early repayment because of refinancing the loan,
selling or trading in the vehicle or default on the loan. The Company
establishes a reserve based on historical chargeback experience to anticipate
future chargebacks. Revenues from finance and insurance products contribute a
disproportionate share of operating profits. Service and parts revenues include
fees paid by consumers for repair and maintenance service and the sale of
replacement parts. In addition, through its automobile finance subsidiary,
Atlantic Finance, the Company derives revenues from the purchase, sale and
servicing of motor vehicle installment contracts originated by both UAG and
third-party dealerships. Generally, finance receivables are accumulated by the
Company until they attain a value in excess of $5.0 million, at which time they
are sold into a commercial paper conduit (loan warehouse facility). An allowance
for financing losses on receivables is provided for the period from the date of
purchase to the date of sale. This allowance is shown as a reduction in
receivables held for sale. Revenue is recognized upon sale to the conduit.
Interest is received and credited to interest income based on the daily
principal balance of the receivables outstanding. Loan servicing fees on
receivables sold to the conduit are recognized as collected.
The Company's selling expenses consist of compensation for sales department
personnel, including commissions and related bonuses. General and administrative
expenses include compensation for administration, finance and general management
personnel, rent, insurance and utilities. Interest expense consists of interest
charges on all of the Company's interest-bearing debt other than floor plan
inventory financing. Interest expense on floor plan debt is included in cost of
sales.
The Company has accounted for each of its acquisitions by the purchase method of
accounting and, as a result, the Company's financial statements include only the
results of operations of the acquired dealerships from the effective date of
acquisition. The financial information included in this Prospectus may not
necessarily reflect the results of operations, financial position and cash flows
of the Company in the future or what the results of operations, financial
position and cash flows would have been had the acquisitions and Offering
occurred during the period presented in the financial statements.
27
Results of Operations
The following table sets forth, for the periods indicated, the percentage of
applicable revenues represented by certain items contained in the Company's
consolidated historical statements of operations:
-----------------------------------------------------
Six Months Ended
Year Ended December 31, June 30,
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
Auto Dealerships:
Vehicle sales 87.2% 88.1% 88.9% 88.0% 89.5%
Finance and insurance 4.1 3.8 3.7 4.1 3.7
Service and parts 8.7 8.1 7.4 7.9 6.8
--------- --------- --------- --------- ---------
Total revenues 100.0 100.0 100.0 100.0 100.0
Cost of sales, including floor plan
interest 88.7 88.5 89.4 89.7 88.9
--------- --------- --------- --------- ---------
Gross profit 11.3 11.5 10.6 10.3 11.1
Selling, general and administrative
expenses 11.0 11.0 11.2 11.9 9.5
--------- --------- --------- --------- ---------
Operating income (loss) 0.2 0.5 (0.7) (1.6) 1.6
Related party interest income 0.0 0.0 0.4 0.4 0.3
Other interest expense (0.2) (0.1) (0.2) (0.1) (0.4)
Equity in income (loss) of uncombined
investees 0.0 (0.4) (0.1) (0.1) 0.0
--------- --------- --------- --------- ---------
Income (loss) before income taxes 0.0 0.0 (0.6) (1.4) 1.5
Auto Finance:
Revenues -- 100.0 100.0 100.0 100.0
Interest expense -- -- (32.8) * (17.1)
Operating and other expenses -- * (327.9) * (116.8)
--------- --------- --------- --------- ---------
Loss before income taxes -- * (260.8) * (33.9)
Total Company:
Income (loss) before minority interests and
provision for income taxes 0.0 (0.1) (0.7) (1.6) 1.4
Minority interests 0.0 (0.1) 0.0 0.3 (0.3)
Benefit (provision) for income taxes 0.0 0.0 0.3 0.0 (0.5)
--------- --------- --------- --------- ---------
Net income (loss) 0.0% (0.2)% (0.4)% (1.3)% 0.6%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
- ------------------------
* Not meaningful due to early stage of operations.
The following discussion and analysis includes the Company's consolidated
historical results of operations for 1993, 1994 and 1995 and for the six months
ended June 30, 1995 and 1996.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
AUTO DEALERSHIPS
DIFEO RESTRUCTURING. In an effort to increase profitability of the DiFeo Group,
the Company commenced a broad restructuring program in the first quarter of 1995
( the "DiFeo Restructuring"), which was substantially completed by the fourth
quarter of 1995. First, the Company eliminated a total of 17 unprofitable
franchises, or 45% of the DiFeo Group's total number of franchises, by
voluntarily terminating 12 franchises and effectively ceasing to be the
controlling or majority owner of five additional franchises. Second, the Company
eliminated a level of senior management and shifted greater authority and
responsibility to the general manager of each dealership. Third, the Company
reduced personnel by approximately 250 employees (including senior management
who were eliminated) and implemented pay plans linked to net profits and
customer satisfaction. Fourth, the Company liquidated outdated inventory in
order to lower inventory carrying costs and improve the utilization of space.
Costs associated with the DiFeo Restructuring were approximately $0.7 million
and $0.5 million for the year ended December 31, 1995 and the six months ended
June 30, 1996, respectively, primarily related to severance.
28
REVENUES. Revenues increased by $245.2 million, or 69.5%, from $352.7 million
to $597.9 million due primarily to the acquisitions of Landers Auto in August
1995, which contributed $160.4 million, Atlanta Toyota in January 1996, which
contributed $85.7 million, and United Nissan in May 1996, which contributed $9.8
million. While revenues at the continuing franchises of the DiFeo Group
increased by $47.9 million, or 16.3%, from $294.1 million to $342.0 million,
such increase was more than offset by a decrease of $58.6 million in revenues
due to the elimination of unprofitable franchises as part of the DiFeo
Restructuring.
Sales of new and used vehicles increased by $225.0 million, or 72.5%, from
$310.2 million to $535.2 million. The acquisition of Landers Auto contributed
$149.7 million, the acquisition of Atlanta Toyota contributed $79.0 million and
the acquisition of United Nissan contributed $8.6 million. While sales at the
continuing franchises of the DiFeo Group increased by $38.5 million, or 14.8%,
from $259.4 million to $297.9 million, such increase was more than offset by a
decrease of $50.8 million due to the elimination of unprofitable franchises as
part of the DiFeo Restructuring. Unit sales of new and used vehicles increased
by 57.9% and 132.5%, respectively, due to the acquisitions of Landers Auto,
Atlanta Toyota and United Nissan and increased sales volume at the continuing
franchises of the DiFeo Group, which increased by 8.3% and 24.6%, respectively.
During the six months ended June 30, 1996, the Company sold 17,509 new vehicles
(67.2% of total vehicle sales) and 8,542 used vehicles (32.8% of total vehicle
sales). During the six months ended June 30, 1995, the Company sold 11,088 new
vehicles (75.1% of total vehicle sales) and 3,674 used vehicles (24.9% of total
vehicle sales). The increase in the relative proportion of used vehicle sales to
new vehicle sales was due principally to the expansion of existing used car
facilities and the establishment of two additional stand-alone used car retail
centers in response to the increased popularity of used cars. New vehicle
selling prices increased approximately 3.3% due primarily to changes in
Manufacturer pricing and the mix of new vehicles sold. Used vehicle selling
prices increased approximately 23.8% due to changes in market demand which
resulted in a change in the mix of used vehicles sold.
Sales of finance and insurance products increased by $7.8 million, or 53.8%,
from $14.5 million to $22.3 million, principally as a result of the acquisitions
of Landers Auto, Atlanta Toyota and United Nissan. Sales of such products at the
continuing franchises of the DiFeo Group increased by $4.0 million, or 31.0%,
from $12.9 million to $16.9 million.
Service and parts revenues increased by $12.4 million, or 44.3%, from $28.0
million to $40.4 million due principally to the acquisitions of Landers Auto,
Atlanta Toyota and United Nissan. While revenues at the continuing franchises of
the DiFeo Group increased by $5.5 million, or 25.3%, from $21.7 million to $27.2
million, such increase was more than offset by the elimination of unprofitable
franchises as part of the DiFeo Restructuring.
GROSS PROFIT. Gross profit increased by $30.2 million, or 83.4%, from $36.2
million to $66.4 million due principally to the acquisitions of Landers Auto,
Atlanta Toyota and United Nissan. Gross profit at the continuing franchises of
the DiFeo Group increased by $9.1 million, or 28.4%, from $32.0 million to $41.1
million. Gross profit as a percentage of revenues increased from 10.3% to 11.1%
reflecting higher margins resulting from improved inventory controls, enhanced
training of sales personnel and a change in marketing philosophy from a price
strategy to a customer service strategy. Included in the above gross profit
figures is gross profit from finance and insurance activities, which increased
by $5.4 million, or 50.5%, from $10.7 million to $16.1 million due principally
to the acquisitions of Landers Auto, Atlanta Toyota and United Nissan. Gross
profit from finance and insurance activities at the continuing franchises of the
DiFeo Group increased by $1.2 million, or 12.5%, from $9.6 million to $10.8
million. Gross profit from finance and insurance activities consists principally
of fees for placing financing contracts with consumer finance companies and also
includes fees for placing extended service contracts and amounts earned on the
sale of accessories such as radios, cellular phones and alarms.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $15.1 million, or 36.0%, from $41.9 million
to $57.0 million due principally to the acquisitions of Landers Auto, Atlanta
Toyota and United Nissan. Such expenses at the continuing franchises of the
DiFeo Group increased by $3.9 million, or 11.2%, from $34.7 million to $38.6
million, and such expenses as a percentage of revenues decreased overall by
20.2% from 11.9% to 9.5% due principally to the DiFeo Restructuring.
29
RELATED PARTY INTEREST INCOME. Related party interest income remained unchanged
at $1.5 million. Such income is related to certain amounts owed the Company from
minority partners and certain of their related entities on which the Company is
contractually permitted to charge interest. The amounts owed arose from advances
for certain business acquisitions and working capital advances for dealerships
in which the Company has no interest.
OTHER INTEREST EXPENSE. Interest expense other than floor plan increased by
$1.6 million from $0.4 million to $2.0 million as a result of increased
borrowings to finance the acquisitions of Landers Auto, Atlanta Toyota and
United Nissan as well as the issuance of certain promissory notes as part of the
consideration paid for Landers Auto and Atlanta Toyota.
EQUITY IN INCOME (LOSS) OF UNCOMBINED INVESTEE. During the six months ended
June 30, 1995, equity in loss of uncombined investee was $0.5 million, as
compared to income of $0.1 million during the six months ended June 30, 1996.
This item represents a minority interest in a group of dealerships located in
Jersey City, New Jersey.
INCOME (LOSS) BEFORE INCOME TAXES. Pretax income from dealership operations
increased by $14.1 million from a loss of $5.1 million to a profit of $9.0
million as a result of the factors described above, including the DiFeo
Restructuring.
AUTO FINANCE
LOSS BEFORE INCOME TAXES. The pretax loss from operations at Atlantic Finance
decreased by $0.4 million from $0.7 million to $0.3 million. Atlantic Finance
was formed in the first quarter of 1994 and commenced loan operations in January
1995.
TOTAL COMPANY
MINORITY INTERESTS. Minority interests changed by $2.6 million from a charge of
$0.9 million to a credit of $1.7 million as a result of the factors described
above.
INCOME TAXES. The Company has provided for federal and state income taxes on
its period earnings at appropriate rates. The 1996 effective tax rate exceeds
the statutory rate due to the non-deductibility of the amortization of the
excess of cost over net assets acquired. No benefit was recorded for losses in
1995 since realization was deemed less likely than not at that time.
NET INCOME (LOSS). Net income increased by $8.8 million from a loss of $4.9
million to a profit of $3.9 million due to the factors described above.
1995 COMPARED TO 1994
AUTO DEALERSHIPS
REVENUES. Revenues increased by $74.0 million, or 10.1%, from $731.6 million to
$805.6 million due to the acquisition of Landers Auto in August 1995. Revenues
at Landers Auto contributed $116.3 million. Revenues at the continuing
franchises of the DiFeo Group increased by $6.2 million, or 1.0%, from $592.5
million to $598.7 million. Such increase was more than offset by a decrease of
$48.5 million in revenues due to the elimination of unprofitable franchises as
part of the DiFeo Restructuring.
Sales of new and used vehicles increased by $72.0 million, or 11.2%, from $644.4
million to $716.4 million. The acquisition of Landers Auto contributed $109.2
million of such increase. While revenues at the continuing franchises of the
DiFeo Group increased by $5.0 million, or 0.9%, from $524.0 million to $529.0
million, such increase was more than offset by a decrease of $42.3 million in
sales due to the elimination of unprofitable franchises as part of the DiFeo
Restructuring. Unit sales of new and used vehicles increased by 11.9% and 7.4%,
respectively, due principally to the acquisition of Landers Auto. Sales of new
vehicles increased by 5.6% and sales of used vehicles decreased by 10.3% at the
continuing franchises of the DiFeo Group, offset by the elimination of
unprofitable franchises as part of the DiFeo Restructuring. During 1995, the
Company sold 25,138 new vehicles (73.7% of total vehicle sales) and 8,953 used
vehicles (26.3% of total vehicle sales). During 1994, the Company sold 22,464
new vehicles (72.9% of total vehicle sales) and 8,340 used vehicles (27.1% of
total vehicle sales). The decrease in the relative proportion of used vehicle
sales to new vehicle sales was due principally to stronger demand for new
vehicles
30
as opposed to used vehicles at the DiFeo Group operations offset by the
acquisition of Landers Auto, which sells a higher proportion of used vehicles to
new vehicles than the DiFeo Group. New vehicle selling prices increased by 4.4%
due primarily to changes in Manufacturer pricing. Used vehicle selling prices
increased by 17.2% due to changes in market conditions which resulted in a
change in the mix of used vehicles sold.
Sales of finance and insurance products increased by $2.3 million, or 8.3%, from
$27.5 million to $29.8 million due to the acquisition of Landers Auto. Sales of
such products increased by $2.5 million, or 10.8%, from $23.2 million to $25.7
million at the continuing franchises of the DiFeo Group, offsetting in part the
$2.3 million decrease in sales due to the elimination of unprofitable franchises
as part of the DiFeo Restructuring.
Service and parts revenues decreased by $0.3 million, or 0.5%, from $59.7
million to $59.4 million due to the DiFeo Restructuring, offset by increased
service and parts revenues attributable to Landers Auto.
GROSS PROFIT. Gross profit increased by $1.3 million, or 1.5%, from $84.0
million to $85.3 million. The acquisition of Landers Auto added $10.6 million
during the five months the Company owned it. Gross profit at the continuing
franchises of the DiFeo Group decreased by $3.3 million, or 4.7%, from $70.2
million to $66.9 million. Gross profit as a percentage of revenues decreased
7.8% from 11.5% to 10.6% as the Company implemented the DiFeo Restructuring.
Included in the above gross profit figures is gross profit from finance and
insurance activities, which decreased by $1.1 million, or 4.5%, from $24.5
million to $23.4 million due principally to the DiFeo Restructuring offset by
the acquisition of Landers Auto. Gross profit from finance and insurance
activities at the continuing franchises of the DiFeo Group decreased by $0.9
million, or 4.2%, from $21.4 million to $20.5 million.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $10.2 million, or 12.7%, from $80.4 million
to $90.6 million due principally to the acquisition of Landers Auto. Such
expenses as a percentage of revenues increased from 11.0% to 11.2% of revenues.
Selling, general and administrative expenses at the continuing franchises of the
DiFeo Group increased by $3.9 million from $66.1 million to $70.0 million.
RELATED PARTY INTEREST INCOME. Related party interest income was $3.0 million
in 1995. There was no such income in 1994.
OTHER INTEREST EXPENSE. Interest expense other than floor plan increased by
$0.5 million, or 55.6%, from $0.9 million to $1.4 million as a result of
increased borrowings to finance the acquisitions of Landers Auto and Atlanta
Toyota and the issuance of certain promissory notes as part of the consideration
paid for Landers Auto, offset in part by a reduction in other interest-bearing
debt.
EQUITY IN LOSS OF UNCOMBINED INVESTEES. Equity in loss of uncombined investees
decreased by $2.1 million, or 72.4%, from $2.9 million to $0.8 million due to
improved performance of certain dealerships in which the Company retains a
minority interest.
LOSS BEFORE INCOME TAXES. The pretax loss from dealership operations increased
from $0.2 million to $4.5 million, including the costs incurred in connection
with the DiFeo Restructuring. The deterioration in the performance of the DiFeo
Group during the first quarter of 1995 led management to undertake the DiFeo
Restructuring.
AUTO FINANCE
LOSS BEFORE INCOME TAXES. The pretax loss from operations at Atlantic Finance
increased by $0.8 million from $0.6 million to $1.4 million, reflecting the
early stage of its operations. Atlantic Finance was formed in the first quarter
of 1994.
TOTAL COMPANY
MINORITY INTERESTS. Minority interests changed by $1.3 million from a charge of
$0.9 million to a credit of $0.4 million as a result of the factors described
above.
PROVISION FOR INCOME TAXES. An income tax credit of $2.1 million was recorded
in 1995. The credit was taken as the Company determined in the fourth quarter
that it was more likely than not that, due to the DiFeo Restructuring, future
taxable income from operations would be sufficient to fully recognize a net
deferred tax asset at December 31, 1995. Such net deferred tax asset was
provided as a result of tax basis operating losses sustained in 1994 and 1995.
31
NET INCOME (LOSS). Net income decreased by $1.8 million from a loss of $1.7
million to a loss of $3.5 million due to the factors described above.
1994 COMPARED TO 1993
AUTO DEALERSHIPS
REVENUES. Revenues increased by $125.5 million, or 20.7%, from $606.1 million
to $731.6 million. This increase was due to the full-year contributions of
dealerships acquired during 1993 by the DiFeo Group that were located within its
trading area and volume increases at the existing locations.
Sales of new and used vehicles increased by $115.9 million, or 21.9%, from
$528.5 million to $644.4 million. Unit sales of new and used vehicles increased
by 20.7% and 5.7%, respectively, due to the factors listed above. During 1994,
the Company sold 22,464 new vehicles (72.9% of total vehicle sales) and 8,340
used vehicles (27.1% of total vehicle sales). During 1993, the Company sold
18,608 new vehicles (70.2% of total vehicle sales) and 7,891 used vehicles
(29.8% of total vehicle sales). The decline in the relative proportion of used
vehicle sales to new vehicle sales was due to stronger new vehicle demand. New
vehicle prices increased by 4.0% due primarily to changes in Manufacturer
pricing. Used vehicle prices increased by 17.1% due to changes in market
conditions which resulted in a change in the mix of used vehicles sold.
Sales of finance and insurance products increased by $2.8 million, or 11.3%,
from $24.7 million to $27.5 million due principally to the Company's successful
effort to increase the sale of such products.
Service and parts revenues increased by $6.8 million, or 12.8%, from $52.9
million to $59.7 million reflecting both the additional dealerships acquired by
the DiFeo Group and an increase in service and parts activity at its existing
franchises.
GROSS PROFIT. Gross profit increased by $15.6 million, or 22.8%, from $68.4
million to $84.0 million due to the full-year contributions of dealerships
acquired during 1993 and a significant increase in gross profit from finance and
insurance products and, to a lesser extent, service and parts operations. Gross
profit as a percentage of revenues increased from 11.3% to 11.5% due to an
increase in the sale of finance and insurance products offset by a decline in
vehicle profitability. Included in the above gross profit figures is gross
profit from finance and insurance activities, which increased by $7.1 million,
or 40.8%, from $17.4 million to $24.5 million due to the full-year contributions
of dealerships acquired during 1993 and a significant increase in the
profitability of the finance and insurance products sold.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $13.5 million, or 20.2%, from $66.9 million
to $80.4 million due to the full-year contributions of dealerships acquired
during 1993 and additions to overhead, principally personnel. Such expenses as a
percentage of revenues remained constant at 11.0%.
OTHER INTEREST EXPENSE. Interest expense other than floor plan declined by $0.3
million, or 25.0%, from $1.2 million to $0.9 million due to a decrease in
outstanding indebtedness resulting from the placement of shares of Class A
Preferred Stock for an aggregate price of $15.7 million and of shares of Common
Stock for an aggregate price of $0.5 million at the end of December 1993.
EQUITY IN LOSS OF UNCOMBINED INVESTEES. Equity in loss of uncombined investees
was $2.9 million in 1994.
INCOME (LOSS) BEFORE INCOME TAXES. Pretax income from dealership operations
declined from a profit of $0.3 million to a loss of $0.2 million due the factors
described above.
AUTO FINANCE
LOSS BEFORE INCOME TAXES. During the first quarter of 1994, the Company formed
a wholly owned automobile finance subsidiary, Atlantic Finance, located in
Rochester, New York. Losses from its early stage operations totaled $0.6 million
in 1994.
TOTAL COMPANY
MINORITY INTERESTS. Minority interests charge changed by $0.8 million from $0.1
million to $0.9 million due to the factors described above.
INCOME TAXES. The provision for income taxes was reduced from $0.1 million to
$0.0 in 1994.
32
NET INCOME (LOSS). Net income decreased by $1.8 million from $0.1 million to a
loss of $1.7 million due to the factors described above.
Liquidity and Capital Resources
The cash requirements of the Company are primarily for acquisition of new
dealerships, working capital, including inventory, and expansion of existing
facilities. Historically, these cash requirements have been met through
issuances of equity under the Equity Facility (as defined herein) and issuances
of Senior Notes (with Warrants) under the Securities Purchase Agreements,
neither of which currently has any availability, borrowings under the Credit
Agreement, which will have terminated prior to or upon consummation of the
Offering, floor plan facilities and warehouse facilities at Atlantic Finance.
At June 30, 1996, the Company had working capital of $5.7 million, including
accounts receivable of $48.2 million and inventory of $121.3 million, offset by
$34.8 million in accounts payable and accrued expenses and $129.0 million in
revolving floor plan financing arrangements. The Company's floor plan lenders
limit the aggregate amount of such borrowings by formulas based on the cost of
vehicles in inventory.
During the first half of 1996, operating activities resulted in net cash
provided by operations of $8.1 million, principally from income generated by
operations and an increase in trade credit.
For the first half of 1996, the Company used $23.9 million in investing
activities, principally for the acquisitions of Atlanta Toyota and United Nissan
and capital expenditures.
Net cash provided by financing activities during the first half of 1996 totaled
$21.5 million, principally from the issuance of capital stock under the Equity
Facility for an aggregate price of $16.0 million and the issuance of additional
Senior Notes (with Warrants) in the aggregate principal amount of $13.2 million,
net of the repayment of certain short-term debt, principally floor plan. During
such period, the Company sought and obtained waivers of non-compliance with, and
amendments to, certain covenants under its Securities Purchase Agreements and
Credit Agreement, including covenants regarding fixed charge coverage ratios and
delivery of certain collateral to secure the indebtedness thereunder.
For 1995, operating activities for the automobile dealerships provided cash of
$0.7 million. This was due principally to significantly lower inventories due to
the implementation of certain controls and procedures designed to maximize
inventory turnover, offset by a reduction in floor plan lending available for
used car financing. Net cash used by Atlantic Finance operating activities was
$8.0 million during 1995 due principally to the origination and warehousing of
automobile loans.
During 1995, the Company used $25.8 million in investing activities, principally
in the acquisition of Landers Auto, the cash cost of which was $20.0 million,
and capital expenditures of $1.7 million.
Net cash provided by financing activities in 1995 totaled $37.6 million
resulting principally from the issuance of capital stock under the Equity
Facility for an aggregate price of $25.2 million, the issuance of Senior Notes
(with Warrants) in the aggregate principal amount of $16.3 million and a
borrowing in the amount of $8.0 million under a short-term credit facility with
Morgan Guaranty, net of a reduction in floor plan borrowings of $11.9 million,
net borrowings of $4.2 million on the warehouse credit line at Atlantic Finance
and certain other costs associated with the issuance of debt and equity
securities.
In September 1995, the Company entered into the Securities Purchase Agreements
providing for the issuance and sale of up to $35 million aggregate principal
amount of Senior Notes due 2003 and Warrants to purchase Common Stock. See "Use
of Proceeds" and "Description of Capital Stock -- Warrants." The permitted uses
of proceeds from the sale of the Senior Notes are to finance acquisitions, to
make capital contributions to Atlantic Finance, to make capital expenditures and
to provide working capital. As of December 31, 1995 and June 30, 1996, $16.3
million and $29.5 million aggregate principal amount of Senior Notes,
respectively, were outstanding.
In December 1993, the Company entered into the Equity Facility providing for the
issuance and sale of Class A Preferred Stock and Common Stock for an aggregate
price of $77.8 million. The initial closing under the Equity Facility occurred
in December 1993 and provided aggregate net proceeds of $15.2 million. In
addition, in connection with the initial closing under the Equity Facility,
shares of then outstanding common stock were converted into shares
33
of Common Stock valued at $10.3 million. Proceeds from subsequent closings under
the Equity Facility during 1994, 1995 and 1996 equaled $5.5 million, $25.2
million and $22.5 million, respectively. In addition, proceeds from additional
offerings of equity and the Additional Warrants (as defined herein) during July
1996 equaled $4.1 million.
The Company finances substantially all of its new and used vehicle inventory
under revolving floor plan financing arrangements with General Motors Acceptance
Corporation, Chrysler Credit Corporation, World Omni Financial Corp. and Nissan
Motor Acceptance Corporation. The floor plan lenders pay the Manufacturer
directly with respect to new vehicles. The Company makes monthly interest
payments on the amount financed but is not required to make loan principal
repayments prior to the sale of new and used vehicles. Substantially all of the
assets of the Company's dealerships are subject to security interests granted to
their floor plan lending sources.
The Company believes that its existing capital resources, including the net
proceeds of the Offering, will be sufficient to meet anticipated cash
requirements, including those relating to the Contemporaneous Acquisitions,
through at least the end of 1997. To the extent the Company pursues other
significant acquisitions, it will need to raise additional capital either
through the issuance of equity or debt securities or through borrowings. The
Company has received commitments from Morgan Guaranty and The Bank of Nova
Scotia for an Acquisition Facility in the amount of $50 million. There can be no
assurance that the Acquisition Facility will be successfully consummated or that
required additional capital will be available on reasonable terms, if at all, at
such times as required by the Company.
Cyclicality
The Company's business, as well as the entire automotive retailing industry, is
dependent on a number of factors relating to general economic conditions,
including the price and availability of fuel, interest rate fluctuations,
economic recessions and consumer business cycles. The Company believes its
geographic diversity, expansion into automobile financial services and emphasis
on service and repair operations help to reduce the overall impact of these
general economic factors on the Company. The Company's business, however, may be
materially adversely affected by severe adverse economic conditions.
Seasonality
The Company's combined business is modestly seasonal overall. The greatest
seasonalities exist in the DiFeo Group, which operates in the New York
metropolitan area. At the DiFeo Group, the second and third quarters are the
strongest with the fourth and first quarters the weakest with respect to sales
and profits relating to vehicle sales. The service and parts business at all
dealerships experiences relatively modest seasonal fluctuations. At the
Company's other dealerships, seasonality in all business sectors is modest.
Effects of Inflation
The Company believes that the relatively moderate rates of inflation over the
last few years have not had a significant impact on revenue or profitability.
The Company does not expect inflation to have any near-term material effects on
the sale of its products and services. However, there can be no assurance that
there will be no such effect in the future.
The Company finances substantially all of its inventory through various
revolving floor plan arrangements with interest rates which vary based on the
prime rate or LIBOR. Such rates have historically increased during periods of
increasing inflation. The Company does not believe that it would be at a
competitive disadvantage should interest rates increase due to increased
inflation since most other automobile dealers have similar floating rate
borrowing arrangements.
Recent Accounting Pronouncements
In October 1995, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation
("SFAS 123"). SFAS 123 establishes financial and reporting standards for stock
based compensation plans. The Company anticipates adopting the disclosure only
provisions of this standard during 1996.
In June 1996, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities" ("SFAS 125"). SFAS 125
establishes financial and reporting standards for derecognition of certain
liabilities. The Company is currently assessing the impact that this standard
may have on its financial position and results of operations.
34
Business
Overview
UAG is a leading acquirer, consolidator and operator of franchised automobile
and light truck dealerships and related businesses. The Company believes that,
after giving effect to the Contemporaneous Acquisitions, it will be the fourth
largest retailer of new motor vehicles in the United States, operating 37
franchises located in Arizona, Arkansas, Connecticut, Georgia, New Jersey, New
York and Tennessee and representing 22 American, Asian and European brands. As
an integral part of its dealership operations, UAG sells used vehicles. In
addition, the Company operates six stand-alone used car retail centers. All of
UAG's dealerships include integrated service and parts operations, which are an
important source of recurring revenues. The Company also owns Atlantic Finance,
an automobile finance company engaged in the purchase, sale and servicing of
prime credit quality automobile loans originated by both UAG and third-party
dealerships. For 1995, on a pro forma basis, UAG had revenues of approximately
$1.35 billion and sold 37,358 new and 22,060 used vehicles.
The Company was formed to capitalize on consolidation opportunities within the
highly fragmented $660 billion automotive retailing industry. In 1995,
approximately 22,000 dealerships representing more than 48,000 franchises sold
14.8 million new vehicles and 15.7 million used vehicles for sales of $290
billion and $180 billion, respectively. Yet, the Company estimates that the
largest 100 dealership groups generated less than 10% of these total revenues
and control less than 5% of all franchised dealerships. As capital requirements
to operate dealerships continue to increase and many owners who were granted
franchises in the 1950s and 1960s approach retirement age, many individual
dealers are seeking exit opportunities. These conditions present attractive
consolidation opportunities for larger automobile retailers such as UAG. Since
its initial acquisition in 1992, the Company has completed 13 additional
acquisitions, including the Contemporaneous Acquisitions. Management believes
that UAG is well-positioned to continue capitalizing on the consolidation trend
in the automotive retailing industry due to its proven acquisition history,
diverse geographic presence, substantial size and financial resources.
The Company believes that it enjoys significant competitive advantages. The
Company's diverse product portfolio reduces the risks associated with changes in
consumer preferences and dependence on any single brand or market segment.
Geographic diversity mitigates the Company's exposure to regional economic and
weather conditions. In addition, the Company's large size allows it to
centralize certain administrative functions and negotiate favorable pricing on
certain automotive parts, aftermarket products, supplies and advertising.
Furthermore, the Company benefits from superior access to capital as compared to
smaller dealerships.
Growth Strategy
UAG seeks to lead the consolidation of the automotive retailing industry and
increase stockholder value through a growth strategy focused on (i) acquiring
profitable dealership operations, (ii) leveraging its new car franchises to grow
higher-margin businesses and (iii) generating incremental revenue from its
automobile finance business.
ACQUIRE PROFITABLE DEALERSHIP OPERATIONS
UAG seeks to capitalize on continuing consolidation in the U.S. automotive
retailing industry by selectively acquiring profitable dealerships. The Company
targets dealerships or dealership groups with established records of
profitability and customer satisfaction as well as experienced management
willing to remain in place. The Company focuses on opportunities in geographic
markets with above-average projected population and job growth. Of the
approximately 22,000 dealerships in the United States, the Company believes that
at least 2,000 dealerships, some of which are members of dealership groups, meet
its acquisition criteria. The Company has received commitments from Morgan
Guaranty and The Bank of Nova Scotia for an Acquisition Facility in the amount
of $50 million.
The Company's acquisition program has been specifically tailored to address
dealers' desire to retain a management role in their businesses while achieving
personal liquidity. Owners of acquired dealerships typically continue in their
role as dealership manager and some also participate in overall Company
operations through their roles on UAG's Operating Committee. The Company
believes it provides dealership managers additional management tools as its
economies of scale, marketing expertise and corporate resources act as a
catalyst for continual dealership growth. In addition, the owner may retain an
equity interest in the business through the ownership of capital stock and/or
stock options of UAG.
35
GROW HIGHER-MARGIN BUSINESSES
UAG is leveraging its new car franchises and applying its financial resources to
grow higher-margin businesses such as the retail sale of used vehicles,
aftermarket products and service and parts.
USED VEHICLES. Used vehicle sales by franchised dealers, with average prices
approximately 58% of new vehicle prices, typically generate higher gross margins
than new cars because of limited comparability among them and the somewhat
subjective nature of their valuation. Consumer acceptance of used vehicle
purchasing has grown due principally to the following factors: (i) the
availability of late-model, low-mileage used automobiles has increased due to
the large supply of cars coming off short-term leases and from rental company
fleets; (ii) the quality of motor vehicles has generally improved; and (iii) the
prices of new cars have risen. The Company has taken advantage of this trend by
recently opening four stand-alone used vehicle operations.
UAG believes that by virtue of its new vehicle franchises it enjoys significant
advantages over both independent and chain used-car companies in sourcing used
vehicles. Specifically, the Company has access to (i) a steady supply of used
cars accepted as trade-ins for new vehicle purchases, (ii) off-lease vehicles
that were originally leased through the new vehicle franchise and (iii) used car
auctions open only to new car dealers. In addition, only new car franchises are
able to sell used cars certified by the Manufacturer under newly introduced
programs in which the Manufacturer supports specific high-quality used cars with
extended warranties and attractive financing options.
AFTERMARKET PRODUCTS. Each sale of a new or used vehicle provides the
opportunity for the Company to sell aftermarket products. A substantial portion
of the gross profit on the sale of a vehicle generally is earned from the sale
of aftermarket products. Aftermarket products include accessories such as
radios, cellular phones, alarms, custom wheels, paint sealants and fabric
protectors, as well as agency services such as extended service contracts and
credit insurance policies. In addition, the Company receives fees for placing
financing and lease contracts. In order to meet customers' needs and help create
a "one-stop" shopping experience, management continues to expand aftermarket
product offerings.
SERVICE AND PARTS. Each of UAG's dealerships offers a fully integrated service
and parts department. The service and parts business provides an important
recurring revenue stream to the Company's dealerships, which may help to
mitigate the effects of downturns in the automobile sales cycle. Unlike
independent service shops or used car dealerships with service operations, UAG
is qualified to perform work covered by Manufacturer warranty. Since warranty
service work is paid for by the Manufacturer, consumers are motivated to service
their vehicles at a dealership for the warranty period. In recent years,
Manufacturers have generally lengthened standard warranty coverage on new cars
to three years/36,000 miles and introduced warranty coverage on used cars,
further enhancing customer retention opportunities in the service area. To grow
their service and parts businesses, UAG dealerships have implemented programs to
track maintenance records of customers and contact them regarding dealer
promotions and maintenance schedules. In addition, the Company is actively
marketing warranty-covered services to potential customers such as
municipalities and corporations with large fleets of automobiles located near
certain of its dealerships. The Company is able to offer repair services to such
customers on a more efficient and less costly basis than such customers
generally can perform themselves. The Company believes that its market share
will grow at the expense of independent mechanics' shops, which may be unable to
address the increased mechanical and electronic sophistication of today's motor
vehicles and the increased expenses of compliance with more stringent
environmental regulations.
GENERATE INCREMENTAL REVENUE FROM AUTOMOBILE FINANCE BUSINESS
In 1995, industry wide, approximately 72% of new and 73% of used automobile
retail purchases (exclusive of private sales) were financed. To capitalize on
this market, the Company established Atlantic Finance, its own automobile
finance subsidiary. Atlantic Finance purchases, sells and services prime credit
quality automobile loans originated by both UAG and third-party dealerships.
Based in Rochester, New York, Atlantic Finance commenced loan operations in
January 1995 and currently serves approximately 127 dealerships in Connecticut,
New Jersey and New York. Atlantic Finance provides the Company with another
opportunity to earn incremental revenue on its vehicle sales.
Atlantic Finance's strategy is to grow by (i) increasing its business with
existing UAG dealerships, including those with which it has yet to commence
financing activities, (ii) commencing financing activities with dealerships
acquired by
36
UAG in the future and (iii) using its presence in its local operating markets to
cultivate relationships with additional unaffiliated dealerships. Atlantic
Finance's goal is to ultimately purchase up to 50% of its finance contracts from
non-UAG dealers.
Operating Strategy
EMPHASIZE CUSTOMER SERVICE
Central to UAG's overall philosophy is customer-oriented service designed to
meet the needs of an increasingly sophisticated and demanding automotive
consumer. The Company seeks to provide its customers with a satisfying, pleasant
and informative retailing experience, which entails "one-stop" shopping
convenience, competitive pricing and a sales staff that is knowledgeable about
product offerings and responsive to a customer's particular needs. The Company's
goal is to establish lasting relationships with its customers, which it believes
enhance its reputation in the community and create the opportunity for
significant repeat and referral business.
The quality of customer service provided by dealerships' sales and service
departments are measured by CSI scores, which are derived from data accumulated
by Manufacturers through individual customer surveys. UAG relies on this data to
improve dealership operations and uses it as a factor in determining the
compensation of general managers and sales and service personnel in all its
dealerships. CSI coordinators are responsible for ensuring top quality customer
service at the Company's dealerships. Training of the sales force focuses on
providing skills that improve its interaction with the customer. Additional
training is provided by organizations with superior reputations for customer
service, which the Company has engaged in its ongoing effort to refine the
automobile purchasing experience. The Company's most recent CSI scores indicate
that a majority of its dealerships' CSI scores were at or above the average CSI
scores for the applicable regions.
EMPLOY PROFESSIONAL MANAGEMENT TO IMPROVE OPERATIONS
The Company implements professional management practices throughout its business
operations. To ensure "best practices" are promoted throughout the organization,
the Company has established an Operating Committee comprised of the Company's
Chairman and Chief Executive Officer and select dealership managers, which meets
monthly to share business experiences and ideas. See "Management -- Operating
Committee."
The Company believes it applies financial controls which exceed those required
by Manufacturers and those customarily found at the typical dealership.
Currently, the Company's dealerships' management information systems collect
operational data such as customer records, invoicing, payroll and inventory, as
well as routine accounting information. The dealerships also maintain customer
data bases that track information such as showroom traffic, aftermarket product
purchases and service and parts usage, which are utilized in pursuing follow-on
sales opportunities.
Industry Overview
With more than $660 billion in 1995 sales, automotive retailing is the third
largest domestic industry group in the United States. The industry is highly
fragmented and largely privately held with approximately 22,000 automobile
dealerships representing more than 48,000 franchises. In 1995, U.S. franchised
automobile dealers sold 14.8 million new vehicles and 15.7 million used vehicles
for sales of approximately $290 billion and $180 billion, respectively.
Manufacturers originally established franchised dealer networks for the
distribution of their vehicles as single-dealership, single-owner operations. In
return for exclusive distribution rights within specified territories,
Manufacturers exerted significant influence over such matters as a dealer's
location, inventory size and composition and merchandising programs, as well as
the identity of owners and managers. This strict control contributed to the
proliferation of small dealerships, which at their peak in the late 1940s
numbered in excess of 49,000. Several Manufacturers went out of business in the
1950s, and the number of dealerships decreased to 36,000 by 1960.
Significant industry changes took place in the 1970s when the oil embargo forced
dramatic increases in gasoline prices and foreign Manufacturers increased their
penetration of the U.S. market with fuel-efficient, low-cost vehicles. These
competitive pressures offered dealers a platform for stronger negotiating
positions with Manufacturers thereby fostering a change in the traditional
distribution system. Dealers began to add foreign franchises and the phenomenon
of the multi-franchise automobile dealer, or "megadealer," emerged, prompting
both significant acquisition activity
37
and the consolidation activities of the 1980s. The easing of restrictions
against megadealers combined with continual competitive pressures upon
undercapitalized dealerships has led to further consolidation of the industry.
Since 1960, the number of dealerships has declined 39% to the current 22,000
level.
As the industry has evolved, so has the dealership profile. Over the past three
decades, there has been a trend toward fewer, but larger, dealerships. In 1995,
each of the largest 100 dealer groups had more than $140 million in revenues.
Although significant consolidation has taken place since its inception, the
industry today remains highly fragmented, with the largest 100 dealer groups
generating less than 10% of total revenues and controlling less than 5% of all
franchised dealerships.
Dealership Operations
The Company's management structure is designed to support and encourage
entrepreneurial drive and individual responsibility. Each dealership is operated
as a distinct profit center, where dealership managers are given a high degree
of autonomy. The Company believes that its dealership managers, as long-time
members of the local community, are best able to judge how to conduct day-to-day
operations in a manner consistent with the established character and needs of
the local community. A general manager oversees the operations, personnel and
financial performance of the dealership, which is typically staffed by a sales
manager, a parts manager, a service manager, sales representatives, technicians
and parts employees. The sales staff of each UAG dealership is compensated
primarily on a commission basis, while the general manager, service manager and
parts manager receive a combination of salary and performance bonus.
General managers prepare monthly forecasts based on historical information and
projected trends, and a component of each general manager's compensation is
determined by meeting or exceeding these operating plans. During the year,
general managers regularly review their dealerships' progress with senior
management and make appropriate adjustments as needed. To promote communication
and efficiency in operating standards, general managers and members of senior
management attend several Company-wide strategy sessions each year. In addition,
management attends various industry-sponsored leadership and management seminars
and receive continuing education in product, marketing strategies and management
information systems.
The Company's dealerships engage in a number of interrelated businesses: new
vehicle sales; used vehicle sales; sales of aftermarket products; and service
and parts operations.
38
NEW VEHICLES
On a pro forma basis, in 1995, UAG sold at retail 37,358 new vehicles and new
vehicle operations (including fleet sales) generated $841.7 million in revenues,
or 62.2% of total auto dealership revenues.
The Company sells 22 American, Asian and European brands ranging from economy
cars to luxury cars and sport utility vehicles. The following table sets forth,
on a pro forma basis for 1995, certain information relating to new vehicles sold
at retail by the Company:
------------------------------------
Number of New % of New
Vehicles Sold at Vehicles Sold at
Manufacturer Retail Retail (1)
- ---------------------------------- ---------------- ------------------
Toyota 11,456 30.7%
Nissan 7,777 20.8
Chrysler 7,661 20.5
General Motors 4,204 11.3
BMW 1,900 5.1
Honda 1,661 4.4
Mitsubishi 1,087 2.9
Hyundai 862 2.3
Land Rover 378 1.0
Isuzu 159 0.4
Audi 81 0.2
Porsche 75 0.2
Suzuki 57 0.2
---------------- ------------------
Total 37,358 100.0%
---------------- ------------------
---------------- ------------------
- ------------------------
(1) Amounts may not add due to rounding.
UAG purchases substantially all of its new car inventory directly from
Manufacturers. Manufacturers allocate inventory based on the size and location
of dealerships, but actual shipments result from negotiations with individual
dealers. From time to time, UAG will exchange new vehicles with other
dealerships to accommodate customer demand and balance inventory. The Company
believes that larger dealers such as UAG are better positioned to secure
favorable inventory shipments and optimize Manufacturers' allocations through
its retail network. UAG finances its inventory purchases through revolving
credit arrangements known in the industry as floor plan facilities. As a result
of its size, UAG is able to secure floor plan financing on terms more favorable
than those generally available to smaller dealers.
As required by law, UAG posts the Manufacturer's suggested retail price, or
"MSRP," on every new vehicle. However, as is customary in the industry, the
final sales price is generally a negotiated price. The Company continues to
evaluate changing consumer preferences for vehicle purchasing. For example,
certain dealerships have implemented "value pricing," where the dealer is given
less flexibility to negotiate between the MSRP and wholesale price.
New vehicle retail sales are made to individual customers and to leasing
companies providing consumer leasing. Industry wide, the percentage of new
vehicle retail sales that are leasing transactions has increased from 13.5% in
1990 to 31.5% in 1995. Manufacturers have encouraged this trend through their
captive finance companies by supporting residual values in such a way so as to
reduce consumers' monthly lease payments, particularly for shorter-term leases.
This method has attracted consumers to shorter-term leases, which has the effect
of bringing the consumer back to the market sooner than if the purchase were
debt financed and providing new car dealerships with a steady source of
late-model, off-lease vehicles for their used car inventory. In addition,
because the vehicle usually remains under factory warranty for the term of the
lease, the dealership has the opportunity to provide repair service to the
lessee.
39
USED VEHICLES
On a pro forma basis, in 1995, UAG sold at retail approximately 22,060 used
vehicles and used vehicle operations (including sales at wholesale) generated
$368.8 million in revenues, or 27.3% of total auto dealership revenues.
The used car department is becoming an increasingly significant profit center of
a franchised dealership. Used vehicles typically generate higher gross margins
than new vehicles because of their limited comparability and the somewhat
subjective nature of their valuation. Profits from used cars sales are dependent
primarily on the ability to source a low-cost, high-quality supply and
effectively manage inventory. UAG's dealerships acquire their used cars through
trade-ins, lease expirations and auctions. Off-lease vehicles are regarded as
the highest quality in their age class due to their low mileage and good
condition relative to fleet and rental vehicles. When a leasing customer
declines to purchase the vehicle upon expiration of the lease, industry practice
is to offer it to the dealer that originated the transaction before it is
offered to other dealers or sold at auction. In addition, UAG purchases a
significant portion of its used car inventory at "closed" auctions, which offer
off-lease, rental and fleet vehicles. Such auctions can be attended only by new
car dealers. The balance of its used car inventory is purchased at "open"
auctions, which offer repossessed cars and cars sold by other dealers. The
Company has specialized used car managers who attend auctions several times a
week and can buy for an entire division.
The Company sells used vehicles at its franchised dealerships as well as at six
stand-alone used vehicle operations. At its multi-brand dealerships, trade-ins
obtained at one location are generally transferred to the location that sells
that particular brand of new vehicles, where customer interest for that brand is
likely to be stronger and the salespersons' knowledge of that brand is typically
greater. A well-stocked used vehicle inventory allows the Company's salespersons
to offer high-quality used vehicles not only to customers shopping for a used
vehicle, but also to customers who come to the dealership to buy a new vehicle
and then realize that they cannot afford one. In order to capitalize further on
the increased popularity of used cars, the Company has opened six stand-alone
used car centers. Two operate in the DiFeo Group, three operate as part of the
Landers Auto division and one operates at Peachtree Nissan. As a result of these
and other initiatives, the Company expects its used car sales to increase as a
percentage of total vehicle sales in the future.
The Company has developed a systematic approach to managing its used car
inventory. Poor-quality trade-ins and used cars that have remained unsold for a
specific period of time varying generally from 60 to 75 days are sold at
auction. In the past, the volume of used cars that UAG has sold to certain
auctions has afforded it seller's fee discounts and favorable display locations
and times, which tend to maximize the vehicle's sale price.
The Company has taken several initiatives to enhance customer confidence in used
cars, including offering extended warranties, stocking higher-quality,
late-model used cars and participating in Manufacturer certification programs.
Under such certification programs, which are available exclusively to new car
dealers, Manufacturers support used vehicles with extended factory warranties
and attractive financing options. The Company performs the rigorous inspections
and reconditioning required for certification. Management believes that its size
is an advantage over smaller new car dealers, who may not receive a sufficient
supply to justify dedicating resources to the certification process.
The Company believes that its status as a franchised new car dealer provides it
a distinct competitive advantage over independent used car sellers and
superstores in terms of access to the highest-quality and lowest-cost supply of
used vehicles. Vehicles traded in for used cars are generally older, of poorer
quality and out-of-warranty compared to trade-ins received at a new car
franchise. New car dealers generally have the first opportunity to purchase the
desirable off-lease vehicles, while independents must bid for the remaining
vehicles and subsequently may incur brokerage fees and costs of transporting
them to their stores. Auctions of off-lease and fleet vehicles and rental cars
with guaranteed Manufacturer buyback are open only to franchised new car
dealers. In addition to advantages in sourcing used cars, management believes
that its affiliation with Manufacturers and ability to offer certified used cars
with factory warranties raises the consumer's level of trust and ultimately
their inclination to buy used cars from franchised rather than independent
sellers.
40
AFTERMARKET PRODUCTS
On a pro forma basis, in 1995, UAG's sales of aftermarket products generated
$40.0 million in revenues, or 2.9% of total auto dealership revenues. The
reporting of sales of certain products in this category varies among UAG's
dealerships with certain dealerships treating the sale of products such as
radios and alarms as part of the sale of the vehicle itself.
UAG earns a significant portion of the gross profit on the sale of new and used
vehicles on the sale of aftermarket products. Aftermarket products include
accessories such as radios, cellular phones, alarms, custom wheels, paint
sealants and fabric protectors, as well as agency services such as extended
service contracts and credit insurance policies. In addition, the Company
receives fees for placing financing and lease contracts. The Company believes
that working closely with its customers to identify suitable financing products
enhances the Company's overall profitability by increasing the percentage of
vehicle purchases financed through its dealerships and by reducing the
subsequent default rate on such financing contracts.
Approximately 80% of customers who purchase or lease new and used vehicles from
or through the Company originate financing or lease contracts through the
dealership. UAG earns a fee from the finance provider in its diverse network of
finance companies and leasing companies that accepts and funds the transaction
without recourse to the dealership on the contract principal amount. The Company
is, however, typically assessed a chargeback against a portion of the finance
fee if the contract is terminated prior to its scheduled maturity for any
reason, such as early repayment or default. UAG has relationships with financing
sources across the credit quality spectrum. As a result, the Company is able to
service practically any customer who requires financing.
At the time of a new vehicle sale, the Company offers extended service contracts
to supplement warranties offered by Manufacturers. UAG also sells extended
service contracts with respect to used vehicles. Currently, the Company sells
third-party extended service contracts and recognizes the associated revenue at
the time of the vehicle sale. On a pro forma basis, in 1995, the Company sold
extended service contracts on 25% and 40% of its new and used vehicle sales,
respectively. The Company also offers certain types of credit insurance to
customers who finance their vehicle purchases through the Company. Such policies
generally provide for repayment of the vehicle loan if the obligor dies before
the loan is fully repaid. The Company also sells accident and health insurance
policies which provide payment of the monthly loan obligations during any period
in which the obligor is disabled. The Company receives a commission upon the
sale of a policy and a bonus based on whether payments are made under the
policy.
SERVICE AND PARTS
On a pro forma basis, in 1995, UAG's service and parts operations generated
$102.3 million in revenues, or 7.6% of total auto dealership revenues. The
Company considers its service and parts business integral to its objective of
providing customers with a satisfying and informative dealership experience,
thereby creating an opportunity to strengthen customer loyalty.
The service and parts business is relatively stable and provides an important
recurring revenue stream to the Company's dealerships, which may help to
mitigate the effects of downturns in the automobile sales cycle. UAG measures
the performance of each dealership's service and parts operations in terms of
"absorption rate," which measures the percentage of the dealership's overall
fixed costs covered by service and parts gross profit. For the six months ended
June 30, 1996, the average absorption rate at the Company's dealerships (not on
a pro forma basis) was approximately 49.0%. The Company currently targets an
absorption rate of between 60% and 70%.
The Company has a total of 552 service bays and 70 paint bays throughout its
network. The Company's service and body shop facilities are equipped with
technologically advanced tools and diagnostic equipment and staffed by
Manufacturer-trained and certified service technicians. The Company's service
technicians perform full-service repairs on all brands of vehicles UAG sells.
UAG dealerships feature various combinations of fully equipped service and body
shop facilities capable of handling almost any type of vehicle repair on
virtually any type of vehicle, from rebuilding entire engines to routine
maintenance functions, including tune-ups, oil changes, tire balancing,
front-end alignments and inspections. UAG dealerships offer such services in a
relaxed and accommodating atmosphere. Most UAG dealerships have lounges equipped
with televisions, recliners, sofas, phones and food and beverage machines to
allow customers to relax or conduct business while waiting for service to be
performed.
41
The Company performs both warranty and non-warranty service work, with the cost
of the warranty work being paid by the Manufacturer at retail consumer rates.
Manufacturers permit warranty work to be performed only at franchised
dealerships. Hence, unlike independent service shops or used car dealerships
with service operations, UAG is qualified to perform work covered by
Manufacturer warranties.
UAG's factory-certified service employees regularly attend
Manufacturer-sponsored training programs to remain abreast of current diagnostic
and repair and maintenance techniques. The Company employs a compensation
program for its service technicians designed to encourage the performance of
expedited and high-quality repair and maintenance services and ensure a high
degree of customer satisfaction. Rather than paying service technicians on an
hourly basis, each technician receives a flat rate for each service or repair
performed. If a service or repair is performed incorrectly, the technician
making the initial repair or service must correct the situation without
additional compensation. This compensation arrangement facilitates the retention
of efficient service technicians who can increase their compensation by
expeditiously and accurately completing service and repairs and also enhances
customer satisfaction for repair jobs that are completed correctly the first
time.
The Company's body shops, which include multiple paint bays, are fully equipped
to make virtually any type of body repair, from complete reconstruction of
vehicle frames damaged in accidents to repairs and replacements of hoods, body
panels and fenders. UAG dealerships' body shops are also used to refurbish
vehicles in need of updating due to changes in industry standards or to satisfy
regulatory guidelines.
The parts departments support the Company's sales and service functions. The
Company utilizes its parts department when performing its repair, maintenance
and body shop services, including all parts required to recondition used
vehicles for resale. In addition to supporting the Company's service and body
shop functions, the Company markets its parts and accessories at its dealerships
to those customers who prefer to perform maintenance and repair of vehicles on
their own.
An important goal of the Company is to retain or convert each purchaser of a
vehicle into a customer of the service department. To that end, UAG has
implemented a program which tracks maintenance records of customers and contacts
them regarding dealer promotions and maintenance schedules. After a repair or
service has been completed, the customer is called to determine whether he or
she is completely satisfied. In addition, the Company is actively marketing its
warranty-covered services business to potential higher-volume service customers
such as municipalities and corporations with large motor vehicle fleets located
near certain of its dealerships. The Company is able to offer repair services to
such customers on a more efficient and less costly basis than such customers
generally can perform themselves.
Atlantic Finance
Atlantic Finance is the Company's automotive finance subsidiary engaged in the
purchase, sale and servicing of motor vehicle installment contracts originated
by both UAG and third-party dealerships. Based in Rochester, New York, Atlantic
Finance commenced loan operations in January 1995 and currently serves
approximately 127 dealers in Connecticut, New Jersey and New York. Atlantic
Finance derives its revenues from three primary areas: finance charges on its
automobile contracts; gains in connection with the sale or securitization of
pools of automobile contract receivables; and service fees, late charges and
other related income.
Atlantic Finance's strategy is to grow by (i) increasing its business with
existing UAG dealerships, including those with which it has yet to commence
financing activities, (ii) commencing financing activities with dealerships
acquired by UAG in the future and (iii) using its presence in its local
operating markets to cultivate relationships with additional unaffiliated
dealerships. While as of June 30, 1996, 77% of its $50.5 million in finance
contracts were originated by UAG dealers, Atlantic Finance is not intended to be
a captive finance company. Rather, Atlantic Finance's goal is to ultimately
purchase up to 50% of its finance contracts from non-UAG dealers.
With over 70 years of collective experience in the consumer finance industry,
the three members of Atlantic Finance's senior management expect to expand
Atlantic Finance's business by demonstrating commitment to dealer service,
achieving cost efficiencies through a centralized operations structure, pursuing
cost-effective sources of capital for business growth and focusing on
high-quality credit, as described below.
DEALER SERVICE. Atlantic Finance's goal is to be a service-oriented and
reliable source for financing. Atlantic Finance sales representatives solicit
dealers who meet Atlantic Finance's standards and enter into a dealer agreement
that
42
outlines contract purchase terms. After a loan application is delivered, usually
by fax from the dealer, Atlantic Finance generally responds within two hours. If
an application is not initially acceptable, Atlantic Finance's loan officers
often suggest modifications to meet Atlantic Finance's standards, such as
increasing the down payment or reducing the term of the loan.
CENTRALIZED OPERATIONS. Atlantic Finance believes that it can effectively
service its dealers from a central site without the cost of duplicating
administrative and order processing functions in multiple locations. Atlantic
Finance employs local sales representatives who are responsible for different
geographic territories and constitute a flexible, cost efficient means for rapid
growth.
SOURCES OF CAPITAL. Atlantic Finance currently has available an aggregate of
$85.0 million under its revolving credit facilities, known in the industry as
warehousing programs, with Citibank, N.A. (and an affiliate thereof) and Morgan
Guaranty. Atlantic Finance uses automobile loans as collateral to borrow from
such banks. Once the warehoused amount reaches a specified level, Atlantic
Finance issues securities to investors at a fixed rate, collateralized by the
bundled loans, and continues to service the receivables for a fee. The net
proceeds of these securitizations are used by Atlantic Finance to repay
outstanding loans under its credit facilities, which enables Atlantic Finance to
redeploy its capital for further loans. Atlantic Finance benefits from its
affiliation with UAG by receiving favorable lending terms and access to capital
markets as a source of financing.
On July 19, 1996, Atlantic Finance, through a wholly owned, special-purpose
subsidiary, completed a private placement of $45.8 million aggregate principal
amount of 6.7% Asset Backed Certificates. Such certificates represent fractional
undivided interests in a trust consisting primarily of a pool of automobile loan
receivables. Atlantic Finance will service the receivables for an annual fee
equal to 1.0% of the principal amount of receivables plus certain supplemental
fees. Under certain conditions, Atlantic Finance is obligated to repurchase
receivables in the event of breach of certain representations and warranties
with respect to the receivables and in the event of breach of certain servicing
obligations and covenants of Atlantic Finance. On the basis of a credit
enhancement insurance policy issued by Financial Security Assurance Inc. for the
benefit of the holders of certificates, the certificates were rated "AAA" by
Standard & Poor's Rating Services and "Aaa" by Moody's Investors Service, Inc.
HIGH-QUALITY CREDIT. Atlantic Finance finances only prime credit quality loans
and believes its ability to effectively evaluate and monitor the
creditworthiness of the dealers' customers is a critical component to this
focus. To support its evaluation process, Atlantic Finance uses sophisticated
processing systems and controls that include an evaluation of multiple credit
bureau reports and a computerized scoring system. Every loan is ultimately
reviewed by an experienced loan officer for final approval. In addition to the
creditworthiness of the customer, pricing of a finance contract is based on
several criteria such as the age of the vehicle, the term of the loan,
prevailing interest rates and Atlantic Finance's cost of capital. Most states
have maximum chargeable interest rates that vary greatly from state to state.
Once the loan is approved, Atlantic Finance monitors customer accounts on a
regular basis. If an account is delinquent, Atlantic Finance works with
customers to resolve payment problems and bring accounts current at the earliest
possible stage of delinquency. In the event of an unremedied default, the
finance company will repossess the vehicle and sell it to a dealer, sometimes
UAG, or at public auction.
43
Set forth below are tables indicating delinquency experience of Atlantic Finance
(which commenced loan operations in January 1995) as of the end of each of the
past four fiscal quarters and its loss experience for such periods:
Historical Delinquency Experience (1)(2)
--------------------------------------------------------------------------------------
September 30, 1995 December 31, 1995 March 31, 1996 June 30, 1996
-------------------- -------------------- -------------------- --------------------
# of # of # of # of
DOLLARS IN THOUSANDS Loans Amount Loans Amount Loans Amount Loans Amount
--------- --------- --------- --------- --------- --------- --------- ---------
Portfolio outstanding at
period end 553 $ 6,623 1,240 $15,799 2,419 $32,079 3,820 $50,472
Percent delinquent
31-60 days(3) 0.36% 0.78% 1.13% 1.26% 1.08% 1.23% 1.81% 1.96%
61-90 days(3) -- -- -- -- 0.04% 0.07% 0.18% 0.26%
over 90 days(3) -- -- -- -- -- -- 0.11% 0.22%
Repossessions on hand(4) -- -- 0.24% 0.33% 0.50% 0.47% 0.39% 0.35%
--------- --------- --------- --------- --------- --------- --------- ---------
Total 0.36% 0.78% 1.37% 1.58% 1.61% 1.78% 2.49% 2.79%
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
- ------------------------
(1) The information in this table includes all loans outstanding and serviced
by Atlantic Finance.
(2) As all of the Atlantic Finance's loans are simple interest, the dollar
amount includes only the principal balance.
(3) The period of delinquency is based on the number of days payments are
contractually past due.
(4) Amounts represent the remaining balance of installment loans relating to
reposessed vehicles as a percentage of the total principal amount all loans
outstanding and serviced by Atlantic Finance.
Historical Loan Loss Experience
--------------------------------------------------------
September 30, December 31, March 31, June 30,
DOLLARS IN THOUSANDS 1995 1995 1996 1996
-------------- -------------- ------------ ----------
Average portfolio(1) $4,725 $11,211 $23,939 $41,276
Losses(2) -- -- 28.6 70.5
Recoveries(3) -- -- 0.5 2.3
Net losses -- -- 28.1 68.2
Net losses as a percentage of
average portfolio (annualized) -- -- 0.47% 0.66%
- ------------------------
(1) Represents the average of the beginning and ending balance for the period.
(2) Represents principal amounts charged off as uncollectible.
(3) Represents principal amounts recovered on accounts previously charged off.
Competition
AUTOMOBILE DEALERSHIPS
The automotive retailing industry is extremely competitive. In large
metropolitan areas, consumers have a number of choices in deciding where to
purchase a new or used vehicle and where to have such a vehicle serviced.
In the new vehicle area, the Company competes with other franchised dealers in
each of its marketing areas. The Company does not have any cost advantage in
purchasing new vehicles from the Manufacturer, and typically relies on
advertising and merchandising, sales expertise, service reputation and location
of its dealerships to sell new vehicles. In recent years, automobile dealers
have also faced increased competition in the sale of new vehicles from
independent leasing companies, on-line purchasing services and warehouse clubs.
Due to lower overhead and sales costs, these companies may be capable of
operating on smaller gross margins and offering lower sales prices than can
franchised dealers.
In used cars, the Company competes with other franchised dealers, independent
used car dealers, automobile rental agencies, private parties and used car
"superstores" for supply and resale of used vehicles. The Company believes that
it enjoys certain advantages over its competitors that sell only used cars. See
"-- Growth Strategy -- Grow Higher-Margin Businesses -- Used Vehicles."
The Company believes that the principal competitive factors in vehicle sales are
the marketing campaigns conducted by Manufacturers, the ability of dealerships
to offer a wide selection of the most popular vehicles, the location of
44
dealerships and the quality of customer service. Other competitive factors
include customer preference for particular brands of automobiles, pricing
(including Manufacturer rebates and other special offers) and warranties. The
Company believes that its dealerships are competitive in all of these areas.
The Company competes against franchised dealers to perform warranty repairs and
against other automobile dealers, franchised and unfranchised service center
chains and independent garages for non-warranty repair and routine maintenance
business. The Company competes with other automobile dealers, service stores and
auto parts retailers in its parts operations. The Company believes that the
principal competitive factors in parts and service sales are price, the use of
factory-approved replacement parts, the familiarity with a Manufacturer's brands
and models and the quality of customer service. A number of regional or national
chains offer selected parts and services at prices that may be lower than the
Company's prices.
ATLANTIC FINANCE
Atlantic Finance faces competition from a variety of lenders in the fragmented
auto finance market: captive finance companies, banking institutions and
independent finance companies. Captive finance companies such as General Motors
Acceptance Corporation, Ford Motor Credit Company and Chrysler Credit
Corporation primarily focus on increasing dealer sales volume by offering
low-yield rates when promoting certain products. In general, captive finance
companies provide standardized products and fixed market rates and are not as
flexible in the marketplace. Captive finance companies also provide automobile
dealers with floor plan financing. Independent auto finance companies focus on
unconventional segments of the market with some lending to lower credit
borrowers in exchange for higher yields. The market shares of these companies
are as follows: approximately 36% of the total auto loans outstanding are held
by captive and independent finance companies, another 46% are controlled by
commercial banks and the remaining 18% are held by savings and loan
institutions, savings banks, credit unions and specialty finance companies. The
Company believes that the principal competitive factors in offering financing
are convenience, interest rates and contract terms. While market shares shift
over time, the trend in the banking market share is toward fewer and larger
super-regional competitors, reflecting the ongoing consolidations in that
industry. As in the case of Atlantic Finance, some finance companies are
organized by large dealership groups as part of a vertical integration strategy.
Franchise Agreements
Each of the Company's dealerships operates pursuant to a franchise agreement
between the applicable Manufacturer and the subsidiary of the Company that
operates such dealership. The typical automotive franchise agreement specifies
the locations at which the dealer has the right and the obligation to sell motor
vehicles and related parts and products and to perform certain approved services
in order to serve a specified market area. The designation of such areas and the
allocation of new vehicles among dealerships are subject to the discretion of
the Manufacturer, which generally does not guarantee exclusivity within a
specified territory. A franchise agreement may impose requirements on the dealer
concerning such matters as the showrooms, the facilities and equipment for
servicing vehicles, the maintenance of inventories of vehicles and parts, the
maintenance of minimum net working capital and the training of personnel.
Compliance with these requirements is closely monitored by the Manufacturer. In
addition, Manufacturers require each dealership to submit a financial statement
of operations on a monthly and annual basis. The franchise agreement also grants
the dealer the non-exclusive right to use and display Manufacturer's trademarks,
service marks and designs in the form and manner approved by the Manufacturer.
Each franchise agreement sets forth the name of the person approved by the
Manufacturer to exercise full managerial authority over the dealership's
operations and the names and ownership percentages of the approved owners of the
dealership and contains provisions requiring the Manufacturer's prior approval
of changes in management or transfers of ownership of the dealership. Each of
UAG's dealerships is owned, directly or indirectly, by the Company at the
subsidiary level, and the Company has obtained the approval of each relevant
Manufacturer to conduct the Offering and for the Common Stock to be publicly
traded. A number of Manufacturers, however, continue to prohibit the acquisition
of a substantial ownership interest in the Company or transactions that may
affect management control of the Company, in each case without the approval of
the Manufacturer. See "Risk Factors -- Stock Ownership/Issuance Limits."
Most franchise agreements expire after a specified period of time, ranging from
one to five years, and the Company expects to renew any expiring agreements in
the ordinary course of business. The typical franchise agreement
45
provides for early termination or non-renewal by the Manufacturer under certain
circumstances such as change of management or ownership without Manufacturer
approval, insolvency or bankruptcy of the dealership, death or incapacity of the
dealer manager, conviction of a dealer manager or owner of certain crimes,
misrepresentation of certain information by the dealership or dealer manager or
owner to the Manufacturer, failure to adequately operate the dealership, failure
to maintain any license, permit or authorization required for the conduct of
business, or material breach of other provisions of the franchise agreement. The
dealership is typically entitled to terminate the franchise agreement at any
time without cause.
The automobile franchise relationship is also governed by various federal and
state laws established to protect dealerships from the general unequal
bargaining power between the parties. The state statutes generally provide that
it is a violation for a Manufacturer to terminate or fail to renew a franchise
without good cause. These statutes also provide that the Manufacturer is
prohibited from unreasonably withholding approval for a proposed change in
ownership of the dealership. Acceptable grounds for disapproval include material
reasons relating to the character, financial ability or business experience of
the proposed transferee. Accordingly, certain provisions of the franchise
agreements, particularly as they relate to a Manufacturer's rights to terminate
or fail to renew the franchise, have repeatedly been held invalid by state
courts and administrative agencies.
Facilities
Except for three facilities that the Company owns in Arizona, the Company
presently leases or subleases all its facilities and seeks to structure its
acquisitions in a way to avoid the ownership of real property. Set forth in the
table below is certain information relating to the Company's leases and
subleases.
---------------------------------------------------------------------
Occupant Location Use Expiration
- --------------------- --------------------- ---------------------- ----------------------
DiFeo Group
Fair Chevrolet-Geo 102 Federal Road New and used car September 30, 2010
Danbury, CT sales; general
office; service
Fair 100 Federal Road New and used car Month-to-month
Hyundai/Isuzu/Suzuki Danbury, CT sales; service
DiFeo Lexus 1550 Route 22 East New and used car September 30, 2010
Bound Brook, NJ sales; service
DiFeo Chevrolet-Geo 599 Route 440W New and used car September 30, 2010
and Jersey City, NJ sales; service
J&F Oldsmobile
DiFeo Hudson Mall on Route New and used car September 30, 2010
Chrysler-Plymouth/ 440 sales; service
Jeep-Eagle/Hyundai Jersey City, NJ
Hudson Toyota 585 Route 440W New and used car September 30, 2010
Jersey City, NJ sales; service;
general office
DiFeo BMW (a) 301 County Road New and used car sales January 5, 2002,
Tenafly, NJ renewable to 2012
(b) 64 North Summit Service July 1, 2016,
Street renewable to 2036
Tenafly, NJ
Rockland Mitsubishi 75 N. Highland Avenue New and used car September 30, 2010
Nyack, NY sales; service
Rockland Toyota 115 Route 59 New and used car September 30, 2002,
Nyack, NY sales; service renewable to 2012
DiFeo Nissan (a) 977 Communipaw New and used car sales September 30, 2010
Avenue
Jersey City, NJ
(b) 909-921 Service September 30, 2010
Communipaw Ave.
Jersey City, NJ
Fair Honda 102 Federal Road New and used car September 30, 2010
Danbury, CT sales; service
Fair Dodge 100B Federal Road New and used car March 27, 2000,
Danbury, CT sales; service renewable to 2008
Gateway Mitsubishi Route 37 & Batchelor New car sales; service September 30, 2010
St.
Toms River, NJ
Gateway Toyota Route 37 & Batchelor New and used car September 30, 2010
St. sales; service
Toms River, NJ
46
---------------------------------------------------------------------
Occupant Location Use Expiration
- --------------------- --------------------- ---------------------- ----------------------
Landers Auto
Landers (a) 7800 Alcoa Road New car sales; service August 31, 2016,
Jeep-Eagle/Chrysler- Benton, AR renewable to 2026
Plymouth/Dodge
(b) 7800 Alcoa Road Used car sales
Benton, AR
Landers 17821 I-30 New and used car August 31, 2016,
Oldsmobile-GMC Benton, AR sales; service renewable to 2026
Truck
Landers United 20570 I-30 Used car sales April 30, 2002,
AutoMart Benton, AR renewable to 2012
Landers West 1719 Merrell Drive Used car sales December 31, 1998,
Little Rock, AR renewable to 2001
Landers North 6055 Landers Road Used car sales May 31, 1999
North Little Rock, AR
Atlanta Toyota 2345 Pleasant Hill New and used car January 31, 2016
Road sales; service
Duluth, GA
United Nissan 6889 Jonesboro Road New and used car April 30, 2016,
Morrow, GA sales; service renewable to 2026
Peachtree Nissan (a) 5211 and 5214 New and used car June 30, 2016,
Peachtree sales; service renewable to 2026
Industrial Boulevard
Chamblee, GA
(b) 3393 Malone Drive Storage facility June 30, 2016,
Chamblee, GA renewable to 2026
Sun Group
Scottsdale Lexus 6905 E. McDowell New and used car December 31, 2005,
Scottsdale, AZ sales; service renewable to 2010(1)
Land Rover 6925 E. McDowell New and used car August 10, 2005,
Scottsdale Scottsdale, AZ sales; service renewable to 2025
Scottsdale Paint & 1111 N. Miller Auto painting; auto December 15, 1998,
Body Shop Scottsdale, AZ repairs renewable to 2013
Camelback BMW 1144 E. Camelback New and used car February 27, 2005
Scottsdale, AZ sales; service
Land Rover Phoenix 1127 E. Camelback New and used car June 30, 2005,
Phoenix, AZ sales; service renewable to 2010
Evans Group
Evans BMW 3624 Commerce Ave. New and used car April 28, 1998(2)
Duluth, GA sales; service
Evans Nissan 1420 Iris Drive New and used car April 28, 1998(3)
Conyers, GA sales; service
Standefer Motor 2121 Chapman Road New and used car October 31, 2016,
Chattanooga, TN sales; service renewable to 2026
UAG 375 Park Avenue Headquarters June 29, 2000
New York, NY
Atlantic Finance 800 Perinton Hills Offices August 31, 1999
Office Park
Fairport, NY
- ------------------------------
(1) The owner of the property has the right to require the tenant to purchase
the property at any time after December 31, 1997 at a purchase price equal to
one hundred times the monthly rental payment at the time of such purchase.
(2) The Company has entered into a purchase agreement to acquire the property
at any time prior to the expiration date for $7.5 million (with a discount if
purchased earlier). The Company expects to designate an unaffiliated third party
to purchase the property prior to such date and simultaneously enter into a
20-year lease with the Company.
(3) The Company has entered into a purchase agreement to acquire the property
prior to the expiration date for $2.9 million. The Company expects to designate
an unaffiliated third party to purchase the property prior to such date and
simultaneously enter into a 20-year lease with the Company.
Employees and Labor Relations
As of June 30, 1996, on a pro forma basis, UAG employed approximately 2,100
people, approximately 100 of whom are covered by collective bargaining
agreements with labor unions. Relations with employees are considered by the
Company to be satisfactory. The Company's policy is to motivate its key managers
through, among other things, grants of stock options. See "Management -- Stock
Option Plan."
47
Litigation
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.
Environmental Matters
As with automobile dealerships generally, and service parts and body shop
operations in particular, the Company's business involves the use, handling and
contracting for recycling or disposal of hazardous or toxic substances or
wastes, including environmentally sensitive materials such as motor oil, waste
motor oil and filters, transmission fluid, antifreeze, freon, waste paint and
lacquer thinner, batteries, solvents, lubricants, degreasing agents, gasoline
and diesel fuels. The Company's business also involves the past and current
operation and/or removal of aboveground and underground storage tanks containing
such substances or wastes. Accordingly, the Company is subject to regulation by
federal, state and local authorities establishing health and environmental
quality standards, and liability related thereto, and providing penalties for
violations of those standards. The Company is also subject to laws, ordinances
and regulations governing remediation of contamination at facilities it operates
or to which it sends hazardous or toxic substances or wastes for treatment,
recycling or disposal.
The Company believes that it does not have any material environmental
liabilities and that compliance with environmental laws, ordinances and
regulations will not, individually or in the aggregate, have a material adverse
effect on the Company's results of operations or financial condition. However,
soil and groundwater contamination has been known to exist at certain properties
leased by the Company. Furthermore, environmental laws and regulations are
complex and subject to frequent change. There can be no assurance that
compliance with amended, new or more stringent laws or regulations, stricter
interpretations of existing laws or the future discovery of environmental
conditions will not require additional expenditures by the Company, or that such
expenditures would not be material. See "Risk Factors -- Environmental Matters."
Insurance
The Company maintains general liability and property insurance and an umbrella
and excess liability policy in amounts it considers adequate and customary for
businesses of its kind. However, there can be no assurance that future claims
will not exceed insurance coverage.
48
Management
Executive Officers and Directors
The following information relates to the executive officers and directors of the
Company as of August 31, 1996.
Name Age Position
- ----------------------------------- ----- -----------------------------------
Carl Spielvogel 67 Chairman of the Board and Chief
Executive Officer
Marshall S. Cogan 59 Vice Chairman of the Board and
Chairman of the Executive and
Compensation Committees
Arthur J. Rawl 54 Executive Vice President and Chief
Financial Officer
George G. Lowrance 52 Executive Vice President --
Development and Industry Relations
Philip N. Smith, Jr. 54 Vice President, Secretary and
General Counsel
Robert W. Thompson 45 Vice President -- Finance
Robert H. Nelson 51 Director; Vice Chairman of Atlantic
Finance
Michael R. Eisenson 40 Director
John J. Hannan 43 Director
Jules B. Kroll 55 Director
John M. Sallay 40 Director
Richard Sinkfield 54 Director
The present principal occupation and employment background of each of the
executive officers and directors of the Company are set forth below.
Carl Spielvogel has served as Chairman and Chief Executive Officer of the
Company since October 1994. Mr. Spielvogel has had a 35-year career in
management and marketing. Prior to joining the Company, Mr. Spielvogel was
Chairman and Chief Executive Officer of Backer Spielvogel Bates Worldwide, Inc.,
one of the world's largest marketing, advertising and communications companies,
with 178 offices in 55 countries, where he worked from 1979 to 1994. During his
marketing career, he had extensive experience working with automobile
manufacturers and oversaw the introduction of the Hyundai line of motor vehicles
into the U.S. market. As part of this program, he worked with 450 automobile
dealers. Earlier, Mr. Spielvogel was Vice Chairman of the Interpublic Group of
Companies, which serves GM as one of its largest global clients; Interpublic was
among the first global marketing communications companies to become publicly
owned. He is also a director of Hasbro, Incorporated, Foamex International Inc.
and Data Broadcasting Corporation as well a former director of the International
Media Fund. Additionally, Mr. Spielvogel serves on the Board of Trustees of The
Metropolitan Museum of Art, The Mount Sinai Hospital and Medical Center, Lincoln
Center for the Performing Arts, Inc. and The Philharmonic-Symphony Society of
New York, Inc. He was appointed in 1996 by President Clinton to serve as a
member of the U.S. Broadcasting Board of Governors.
Marshall S. Cogan has served as a director of the Company since December 1990.
Since 1974, Mr. Cogan has been the principal stockholder, Chairman or
Co-Chairman of the Board of Directors and Chief Executive Officer or Co-Chief
Executive Officer of Trace. Trace has acquired many companies in various
consolidating industries and conceived the concept for UAG, which it founded in
December 1990. He has been the Chairman of the Board of Directors and Chairman
of the Executive Committee of Foamex International Inc. and its predecessor
company since September 1993 and Chief Executive Officer since January 1994. He
has also been a director of Recticel s.a. since February 1993. Mr. Cogan served
as Chairman and a director of other companies formerly owned by Trace, including
General Felt Industries, Inc., Knoll International, Inc. and Sheller-Globe
Corporation. Prior to forming Trace Holdings, he was a senior partner at Cogan,
Berlind, Weill & Levitt and subsequently CBWL-Hayden Stone, Inc., both
predecessor companies to Lehman Brothers Inc. Additionally, Mr. Cogan serves on
the Board of Trustees of The Museum of Modern Art, the Boston Latin School and
New York University Medical Center and the Board of Directors of the American
Friends of the Israel Museum. He also serves on several committees of Harvard
University.
Arthur J. Rawl has served as Executive Vice President and Chief Financial
Officer of the Company since 1994. Prior to joining the Company, Mr. Rawl was
Executive Vice President and Chief Financial Officer of Hanlin Group, Inc., a
chemical and PVC pipe products manufacturer. Mr. Rawl is a Certified Public
Accountant and a retired partner in the firm of Deloitte & Touche, where, in his
23-year tenure with the firm, his practice concentrated on the retail and
distribution industries.
49
George G. Lowrance served as Executive Vice President, Secretary and General
Counsel of the Company from January 1993 to June 1996 and has served as
Executive Vice President -- Development and Industry Relations since June 1996.
Prior to joining the Company, Mr. Lowrance was the general manager of Ed Hicks
Company, an automobile dealership group, which he joined in January 1991. Prior
thereto, he was a dealer principal for 13 years, representing Pontiac,
Chevrolet, Volvo, Nissan, Saab, Range Rover, Porsche, Audi, Volkswagen, Peugeot,
Rolls Royce and Maserati. He also co-authored the current dealer agreements for
Volkswagen and Porsche. Mr. Lowrance served as Chairman of the National Dealer
Council for Audi from 1984 to 1987 and served in the same role for Porsche from
1987 to 1990.
Philip N. Smith, Jr. has served as Vice President, Secretary and General Counsel
of the Company since June 1996. Mr. Smith has also served as Vice President or
Senior Vice President and as Secretary and General Counsel of Trace since
January 1988 and as Vice President, Secretary and General Counsel of Foamex
International Inc. since October 1993. Prior to joining such companies, he was
the sole stockholder of a professional corporation that was a partner of the law
firm of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
Robert W. Thompson has served as Vice President -- Finance of the Company since
August 1994. Prior to joining the Company, Mr. Thompson was Vice President and
Controller of Hanlin Group, Inc., where he worked for 11 years.
Robert H. Nelson has served as a director of the Company since January 1996. He
has served as Vice Chairman of Atlantic Finance since March 1996, Chief
Financial Officer and Treasurer of Trace since 1987 and Senior Vice President,
Chief Operating Officer and a director of Trace since 1994.
Michael R. Eisenson has served as a director of the Company since December 1993.
He is the President and Chief Executive Officer of Harvard Private Capital,
which he joined in 1986. Harvard Private Capital manages the private equity and
real estate portfolios of the Harvard University endowment fund. Mr. Eisenson is
also a director of Harken Energy Corporation, ImmunoGen, Inc., NHP Incorporated
and Somatix Therapy Corporation.
John J. Hannan has served as a director of the Company since December 1993. Mr.
Hannan is one of the founding principals of Apollo, which together with an
affiliate has acted since 1991 as managing general partner of Apollo Investment
Fund, L.P., AIF and Apollo Investment Fund III, L.P., private securities
investment funds, and of Apollo Real Estate Advisors, L.P., which since 1993 has
acted as managing general partner of the Apollo real estate investment funds,
and of Lion Advisors, L.P., which since 1991 has acted as financial advisor to
and representative for certain institutional investors with respect to
securities investments. Mr. Hannan is also a director of Aris Industries, Inc.,
Converse, Inc., The Florsheim Shoe Company, Inc. and Furniture Brands
International, Inc.
Jules B. Kroll has served as a director of the Company since December 1993. He
founded Kroll Associates, an international corporate investigation and
consulting firm, in 1972 and is presently its Chairman. Mr. Kroll is also a
director of Presidential Life Corporation.
John M. Sallay has served as a director of the Company since December 1993. He
is a Managing Director of Harvard Private Capital, which he joined in 1990. Mr.
Sallay is also a director of E-Z Serve Corporation.
Richard Sinkfield has served as a director of the Company since December 1993.
He is a Senior Partner with the law firm of Rogers & Hardin in Atlanta, Georgia,
which he joined in 1976. Mr. Sinkfield is also a director of Weyerhaeuser
Company.
Except for Mr. Spielvogel, who was elected pursuant to his employment agreement,
the directors were elected pursuant to the provisions of the Stockholders
Agreement, dated as of October 15, 1993 (the "Stockholders Agreement"), among
the Company and the Initial Stockholders (as defined herein). Pursuant to such
Stockholders Agreement, such provisions terminate upon consummation of the
Offering.
The Board of Directors is divided into three classes. The current terms of the
Class I directors, Class II directors and Class III directors expire at the
annual meetings of stockholders to be held in 1997, 1998 and 1999, respectively.
Messrs. Spielvogel, Cogan and Sallay are members of Class I, Messrs. Kroll,
Nelson and Sinkfield are members of Class II and Messrs. Eisenson and Hannan are
members of Class III. At each annual meeting of the stockholders, directors will
be elected for a three-year term to succeed the directors whose terms then
expire.
50
Committees of the Board of Directors
The Board of Directors of the Company has established Executive, Compensation,
Audit and Stock Option Committees, each of which reports to the Board. The
Executive Committee consists of Messrs. Cogan, Spielvogel, Eisenson and Hannan
and has the authority to oversee the general business and affairs of the
Company. The Compensation Committee consists of Messrs. Cogan, Eisenson, Hannan
and Nelson and has the authority to determine all matters relating to
compensation of the Company's executive officers and management employees. The
Audit Committee consists of Messrs. Hannan, Kroll and Sinkfield and is
responsible for meeting with the Company's independent accountants regarding,
among other issues, audits and adequacy of the Company's accounting and control
systems. The Stock Option Committee consists of Messrs. Eisenson and Hannan and
is responsible for administering the Company's Stock Option Plan and granting
options thereunder.
Compensation Committee Interlocks and Insider Participation
Mr. Cogan, Chairman of the Company's Compensation Committee, also serves as
Chairman of the Board and Chief Executive Officer of Foamex International Inc.,
on whose compensation committee Mr. Spielvogel serves.
Director Compensation
The Company has adopted a compensation plan (the "Non-employee Director
Compensation Plan") for directors of the Company who are not paid employees of
the Company. Pursuant to the Non-employee Director Compensation Plan, each such
director will receive an annual retainer of $15,000, $1,000 for each Board of
Directors meeting attended in person, $750 for each Board of Directors committee
meeting attended in person, and $500 for each such meeting participated in by
telephone. Such fees are payable at the option of the director in cash or in
Common Stock at the current market price. In addition, directors are reimbursed
for their reasonable out-of-pocket expenses incurred in attending meetings of
the Board of Directors and committees thereof. In accordance with the internal
policies of their employers, certain directors will assign their director
compensation to the organizations that employ them. Directors who are paid
employees of the Company will not receive any fees for serving on the Company's
Board of Directors or for committee service.
Operating Committee
The Chairman and Chief Executive Officer has established an Operating Committee
made up of key managers of the Company's dealerships. The Operating Committee,
which is chaired by Mr. Spielvogel, meets monthly to review and discuss the
prior month's operating performance. It also examines important trends in the
business and, where appropriate, recommends specific operating improvements.
Certain ex officio and rotating members will attend certain meetings depending
on the matters under discussion. It is anticipated that the Operating
Committee's membership will expand in line with the Company's acquisition
program.
In addition to Mr. Spielvogel, the members of the Operating Committee are:
SAMUEL X. DIFEO Mr. DiFeo serves as Executive Vice President of the operating
partnerships of the DiFeo Group. Between 1970 and 1992, he
co-managed the operations of the DiFeo Group with his father,
Sam C. DiFeo, and his brother, Joseph C. DiFeo.
BRUCE DUNKER Mr. Dunker serves as President of United Nissan, which he joined
in 1992. He began his career in the automotive retailing
industry in 1968.
JAMES EVANS Mr. Evans serves as chief financial officer and co-managing
director of the Danbury Autopark division of the DiFeo Group,
which he joined in 1994. He began his career in the automotive
retailing industry in 1985.
HARRY GLANTZ Mr. Glantz serves as director of finance and insurance of the
DiFeo Group and co-managing director of the Danbury Autopark
division of the DiFeo Group, which he joined in 1992. He began
his career in the automotive retailing industry in 1968.
RICHARD J. HARRISON Mr. Harrison serves as the President of Atlantic Finance. He
began his career as a credit analyst in 1969. In 1984, he joined
the Rochester Community Savings Bank for the purpose of forming
American Credit Services, Inc., a consumer finance company which
grew into a business of over $325 million in annual loan
purchases.
51
STEVEN KNAPPENBERGER Mr. Knappenberger serves as President and Chief Operating
Officer of the Sun Group, which he joined in 1980. He will
become a member of the Operating Committee upon consummation of
the Contemporaneous Acquisitions.
STEVE LANDERS Steve Landers serves as Chief Executive Officer and President of
Landers Auto. He began his career in the automotive retailing
industry in 1969. In 1972, Mr. Landers, with his father, Bob
Landers, opened a used car operation, which was the predecessor
to Landers Auto.
JOHN SMITH Mr. Smith serves as President of Atlanta Toyota, which he joined
in 1988. He began his career in the automotive retailing
industry in 1983.
Summary Compensation Table
The following Summary Compensation Table sets forth information concerning the
compensation for services paid to the officers named below (the "Named Executive
Officers") during fiscal years 1995, 1994 and 1993.
-----------------------------------------------
Long Term
Compensation
-------------
Annual Compensation Securities
Name and --------------------- Underlying
Principal Position Year Salary($) Bonus($) Options(#)
- ---------------------------------------- ------- --------- --------- -------------
Carl Spielvogel (1) 1995 750,000 250,000 --
Chairman of the Board 1994 155,946 -- 70,017(2)
and Chief Executive Officer
Ezra P. Mager (3) 1995 600,000 -- --
Executive Vice Chairman 1994 601,969 -- --
1993 703,952 -- --
Arthur J. Rawl (4) 1995 255,300 70,000 --
Executive Vice President 1994 160,000 60,000 --
and Chief Financial Officer
George G. Lowrance 1995 207,677 20,000 --
Executive Vice President -- 1994 172,244 5,000 --
Development and Industry Relations 1993 138,254 25,000 --
Robert W. Thompson (5) 1995 107,600 10,000 --
Vice President -- Finance 1994 42,619 -- --
- ------------------------------
(1) Mr. Spielvogel's employment commenced on October 18, 1994.
(2) Represents the number of shares of Common Stock subject to options on
October 18, 1994, the date of grant, which number was subject to increase from
time to time to a total of 170,095 shares upon the issuance of shares under the
Equity Facility. These options were canceled and replaced with new options on
April 3, 1996. See "--Stock Option Grants."
(3) Mr. Mager resigned from all his positions with the Company on January 18,
1996. In connection with such resignation, the Company agreed to make severance
payments to Mr. Mager in the aggregate amount of $500,000 in installments
through the end of 1997. In consideration therefor, Mr. Mager agreed to refrain
from (i) discussing acquisition transactions with certain specified dealerships
until March 1, 1998, (ii) soliciting the employment of UAG employees until March
1, 1998 and (iii) disclosing confidential information relating to the Company.
(4) Mr. Rawl's employment commenced on May 1, 1994.
(5) Mr. Thompson's employment commenced on August 1, 1994.
Spielvogel Employment Agreement
The Company has an Employment Agreement with Carl Spielvogel dated as of June
21, 1996 (the "Spielvogel Employment Agreement") which provides that Mr.
Spielvogel will serve as Chief Executive Officer and Chariman of the Board of
Directors of the Company until December 31, 2000, subject to automatic one-year
renewals unless either party delivers notice not to renew.
52
The Spielvogel Employment Agreement provides for a base salary of $750,000 for
1996 and, beginning January 1, 1997, of $1,000,000 per year. In addition, Mr.
Spielvogel is entitled to receive an annual bonus in an amount determined by the
Company's Compensation Committee. If the Company's established performance
targets are met, such bonus must equal at least 50% of Mr. Spielvogel's base
salary, but in no event may such bonus exceed his base salary.
Pursuant to an amendment to his initial employment agreement, Mr. Spielvogel
received options to purchase up to 400,000 shares of Common Stock at an exercise
price of $10.00 per share. Such options became exercisable with respect to
one-fourth of the option shares on October 18, 1995. The remainder will vest and
become exercisable in three equal installments on October 18th in each of 1996,
1997 and 1998.
Pursuant to the Spielvogel Employment Agreement, effective upon the effective
date of the Offering, Mr. Spielvogel will receive options under the Stock Option
Plan to purchase up to an additional 100,000 shares of Common Stock at an
exercise price equal to the public offering price set forth on the cover page of
this Prospectus, and effective on the first anniversary thereof, Mr. Spielvogel
will receive options under the Stock Option Plan to purchase up to 100,000
shares of Common Stock at an exercise price per share equal to the market price
per share of Common Stock on the date preceding the date of grant. Such options
will vest and become exercisable in four equal annual installments beginning on
the first anniversary of the date of grant. All such options are collectively
referred to herein as the "Spielvogel Options."
The Spielvogel Employment Agreement provides that Mr. Spielvogel's employment
may be terminated at any time by the Company or by Mr. Spielvogel. In the event
of termination of Mr. Spielvogel's employment by reason of death, by the Company
for "Cause" or by Mr. Spielvogel other than for "Good Reason," including a
"Change in Control" of the Company (as such terms are defined in the Spielvogel
Employment Agreement), or disability, the Spielvogel Options will be forfeited
to the extent not yet vested and exercisable. That portion already vested and
exercisable on the date of termination may be exercised as follows: (i) in the
event of termination by the Company for Cause, for a period of 90 days from the
date of termination and (ii) in the event of termination by reason of death, or
by Mr. Spielvogel other than for Good Reason or disability, for a period of one
year from the date of termination.
In the event of termination of Mr. Spielvogel's employment by the Company other
than for Cause or by Mr. Spielvogel for Good Reason, in addition to any base
salary and bonus earned but not yet received, Mr. Spielvogel is entitled to be
paid $83,333 per month for the remainder of the contract term. In the event of
termination of Mr. Spielvogel's employment by the Company other than for Cause,
by Mr. Spielvogel for Good Reason or by reason of disability, the Spielvogel
Options, to the extent not granted or not vested and exercisable on the date of
termination, will become immediately granted and vested and exercisable in full
for a period equal to the shorter of four years after the date of termination
and the remainder of the original term of the respective Spielvogel Options.
The Spielvogel Employment Agreement contains customary provisions relating to
exclusivity of services, non-competition and confidentiality. It also contains
general provisions relating to indemnification of Mr. Spielvogel in accordance
with the DGCL.
Stock Option Plan
The Company's Stock Option Plan (the "Stock Option Plan") has been adopted by
the Board of Directors and the stockholders of the Company. The Stock Option
Plan provides for the grant of non-qualified options ("NQOs") and incentive
stock options ("ISOs") as defined in Section 422 of the Internal Revenue Code of
1986 (the "Code"). The Stock Option Plan is administered by the Stock Option
Committee of the Board of Directors (the "Committee"). The Board believes that
the Stock Option Plan is important to provide an inducement to obtain and retain
the services of employees of the Company, its subsidiaries and affiliates, and
to increase their proprietary interest in the Company's success.
At present, all full-time employees of the Company and its subsidiaries, as well
as employees of its affiliates who perform services for the Company and its
subsidiaries, are eligible to participate in the Stock Option Plan. The
aggregate number of shares of Common Stock as to which stock options ("Options")
may be granted under the Stock Option Plan may not exceed 1,500,838, subject to
adjustment as provided in the Stock Option Plan. The
53
number of shares of Common Stock available for grant of Options at any time
under the Stock Option Plan shall be decreased by the sum of the number of
shares for which Options have been issued and have not yet lapsed or canceled
and the number of shares already issued upon exercise of Options.
Recipients of Options under the Stock Option Plan ("Optionees") are selected by
the Committee, which has sole authority (1) to determine the number of Options
to be granted to such recipient, (2) to prescribe the form or forms of the
Option agreements, (3) to adopt, amend or rescind rules and regulations for the
administration of the Stock Option Plan, (4) to construe and interpret the Stock
Option Plan, rules and regulations, (5) to determine the exercise price of
shares subject to Options, (6) to determine the dates on which Options become
exercisable, (7) to determine the expiration date of each Option (which shall be
a ten-year term from the date of grant) and (8) to cancel any Option held with
the express written consent of the Optionee to be affected. Options granted
under the Stock Option Plan will be evidenced by a written Option agreement
between each Optionee and the Company.
The exercise price of the shares of Common Stock subject to Options will be
fixed by the Committee, in its discretion, at the time Options are granted,
provided that the per share exercise price of an ISO may not be less than the
fair market value of a share of Common Stock on the date of grant. There are
presently NQOs outstanding under the Stock Option Plan to purchase an aggregate
of 473,000 shares, each of which is exercisable at a price of $10.00 per share
and vests in five equal annual installments beginning on the first anniversary
of the later of December 29, 1993 and the date of the Optionee's employment. In
addition, as of the effectiveness of the Offering, NQOs to purchase an
additional 100,000 shares of Common Stock will be granted to each of Mr.
Spielvogel and Mr. Cogan. Such Options will be exercisable at the public
offering price set forth on the cover page of this Prospectus and will vest in
four equal annual installments beginning on the first anniversary of the date of
grant.
Optionees will have no voting, dividend or other rights as shareholders with
respect to shares of Common Stock covered by Options prior to becoming the
holders of record of such shares. All Option grants will permit the exercise
price to be paid in cash or by certified check, bank draft or money order or by
"cashless" exercise. The number of shares covered by Options will be
appropriately adjusted in the event of any merger, recapitalization or similar
corporate event (a "Merger Event"). If the Company is the surviving corporation
of any Merger Event, the Optionee shall receive substitute Options to purchase
shares of the surviving corporation so as to preserve the value, rights and
benefits of any Option granted hereunder. If the Company is not the surviving or
resulting corporation of any Merger Event, the Committee may elect to pay in
cash the difference between the fair market value of the Common Stock on the
date of the Merger Event and the exercise price of such Options. If the
Committee does not elect to make a cash payment, the surviving corporation will
be required, as a condition to the Merger Event, to grant substitute Options to
purchase shares of the surviving or resulting corporation so as to preserve the
value, rights and benefits of any Option granted hereunder.
The Board of Directors may at any time terminate the Stock Option Plan or from
time to time make such modifications or amendments to the Stock Option Plan as
it may deem advisable, provided that the Board may not, without the consent of
the Optionee, take action which would have a material adverse effect on
outstanding Options or any unexercised rights under outstanding Options.
The following is a brief discussion of the federal income tax consequences of
transactions under the Stock Option Plan based on the Code. The Stock Option
Plan is not qualified under Section 401(a) of the Code.
No taxable income is realized by an Optionee upon the grant or exercise of an
ISO. If Common Stock is issued to an Optionee pursuant to the exercise of an
ISO, and if no disqualifying disposition of such shares is made by such Optionee
within two years after the date of grant or within one year after the transfer
of such shares to such Optionee, then (i) upon sale of such shares, any amount
realized in excess of the Option price will be taxed to such Optionee as a
long-term capital gain and any loss sustained will be a long-term capital loss
and (ii) no deduction will be allowed to the Optionee's employer for federal
income tax purposes.
If the Common Stock acquired upon the exercise of an ISO is disposed of prior to
the expiration of either holding period described above, generally (i) the
Optionee will realize ordinary income in the year of disposition in an amount
equal to the excess (if any) of the fair market value of such shares at exercise
(or, if less, the amount realized on the disposition of such shares) over the
Option price paid for such shares and (ii) the Company will be entitled to
54
deduct such amount for federal income tax purposes if the amount represents an
ordinary and necessary business expense. Any further gain (or loss) realized by
the Optionee will be taxed as short-term or long-term capital gain (or loss), as
the case may be, and will not result in any deduction by the Company.
With respect to NQOs, (i) no income is realized by an Optionee at the time the
Option is granted, (ii) generally, at exercise, ordinary income is realized by
the Optionee in an amount equal to the difference between the Option price paid
for the shares and the fair market value of the shares, if unrestricted, on the
date of exercise, and the Company is generally entitled to a tax deduction in
the same amount subject to applicable tax withholding requirements and (iii) at
sale, appreciation (or depreciation) after the date of exercise is treated as
either short-term or long-term capital gain (or loss) depending on how long the
shares have been held. Deductions for compensation attributable to NQOs (or
disqualified ISOs) granted to the Company's named executive officers may be
subject to the deduction limits of Section 162(m) of the Code, unless such
compensation qualifies as "performance-based" (as defined therein).
Stock Option Grants
The following table sets forth information concerning individual grants of
options to purchase Common Stock made to the Named Executive Officers during
1996.
----------------------------------------------------------------------
Potential Realizable
Value at
Assumed Annual Rates
of
Number of Percent of Stock Price
Securities Total Exercise Appreciation for
Underlying Options or Option Term(1)
Options Granted to Base Price Expiration ----------------------
Name Granted Employees ($/Share) Date 5%($) 10%($)
- --------------------------- ---------- ---------- ---------- ---------- ---------- ----------
Carl Spielvogel 400,000(2) 35.3% 10.00 10/18/04 2,067,595 5,027,210
100,000(3) 8.8 (3) (3) 1,855,239 4,701,540
Ezra P. Mager -- -- -- -- -- --
Arthur J. Rawl 34,000(4) 3.0 10.00 4/23/06 213,824 541,872
George G. Lowrance 34,000(5) 3.0 10.00 4/23/06 213,824 541,872
Robert W. Thompson 3,500(6) 0.3 10.00 4/23/06 22,011 55,781
- ------------------------------
(1) Amounts reflect certain assumed rates of appreciation set forth in the
Commission's executive compensation disclosure rules. Actual gains, if any, on
stock option exercises will depend on future performance of the Common Stock. No
assurance can be made that the amounts reflected in these columns will be
achieved. The values in these columns assume that the fair market value on the
date of grant of each option was equal to the exercise price thereof.
(2) Options were granted on April 3, 1996 in replacement of options granted on
October 18, 1994 and vest and become exercisable in four equal annual
installments beginning on October 18, 1995.
(3) Options were granted as of the date of this Prospectus at an exercise price
per share equal to the public offering price set forth on the cover page of this
Prospectus and vest and become exercisable in four equal annual installments
beginning on the first anniversary of the date of this Prospectus. Such options
terminate on the tenth anniversary of the date of grant.
(4) Options were granted on April 23, 1996 and vest and become exercisable in
five equal annual installments beginning on May 1, 1995.
(5) Options were granted on April 23, 1996 and vest and become exercisable in
five equal annual installments beginning on December 29, 1994. (6) Options were
granted on April 23, 1996 and vest and become exercisable in five equal annual
installments beginning on August 1, 1995.
55
Certain Relationships and Related Transactions
Jules B. Kroll, a director of the Company, is Chairman of Kroll Associates, a
corporate investigation and consulting firm which performs services for the
Company from time to time.
Richard Sinkfield, a director of the Company, is a member of the law firm of
Rogers & Hardin, which represents the Company in connection with various
business transactions.
Pursuant to Stock Purchase Agreements, dated October 15, 1993 (as amended, the
"Equity Facility"), among the Company and the investors named therein (the
"Initial Stockholders"), the Initial Stockholders purchased an aggregate of
8,504,750 shares of Common Stock in multiple closings and were granted
registration rights in respect of such shares. Such registration rights also
apply to an additional 306,346 shares of Common Stock subsequently purchased by
the Initial Stockholders and to 10,000 shares of Common Stock held by Richard
Sinkfield, a director of the Company. See "Shares Eligible for Future Sale."
Among the Initial Stockholders are Trace, Aeneas and AIF, each of which is a
significant stockholder of the Company, Carl Spielvogel, Chairman of the Board
and Chief Executive Officer of the Company, Ezra P. Mager, a former executive
officer of the Company, and Jules Kroll, a director of the Company. See
"Principal Stockholders." In addition, as of June 30, 1996, the Company owes
Trace approximately $1.2 million, which was incurred for working capital
purposes. Such indebtedness is subject to offset against a $2 million guaranty
by Trace of a third party's indebtedness to the Company.
The Company is the tenant under a number of lease agreements with employees of
the Company. All such leases are on terms no less favorable to the Company than
would be obtained in arm's-length negotiations with unaffiliated third parties.
For information regarding the Company's lease agreements, see "Business --
Facilities." In addition, the Company intends to enter into a Broker's Agreement
with an entity controlled by Steven Knappenberger, which provides for payment by
the Company of brokerage fees for assistance in acquiring or opening automobile
dealerships in Arizona, Colorado, New Mexico, Utah and certain counties in
California.
Pursuant to agreements with the holders of minority interests (the "Minority
Interests") in certain of the Company's subsidiaries, immediately prior to the
consummation of the Offering, such holders will exchange (the "Minority
Exchange") their Minority Interests for shares of Common Stock. The
consideration to be paid by the Company for the Minority Interest in the DiFeo
Group will also include (i) an option to purchase up to 50,847 shares of Common
Stock at the public offering price set forth on the cover page of this
Prospectus, (ii) the settlement of certain advances made by the Company for the
benefit of the holders of such Minority Interest for certain business
acquisitions and for working capital for dealerships owned solely by such
holders and (iii) the minority interests owned by the Company in a group of
dealerships in New Jersey. Upon consummation of the Minority Exchange, all of
the Company's subsidiaries subject thereto will be wholly owned, directly or
indirectly, by the Company. The following table sets forth certain information
with respect to each division of the Company whose Minority Interest will be
exchanged in the Minority Exchange:
----------------------------
Shares of
Common Stock
to be Issued in
Minority Minority
Division Interest Exchange
- --------------------------- ----------- ---------------
DiFeo Group 30% 216,079
Landers Auto 20% 750,808
Atlanta Toyota 5% 146,954
The Company has agreed to grant to the three senior officers of Atlantic Finance
options to purchase an aggregate of 5% of the outstanding common stock of
Atlantic Finance (as constituted immediately prior to the Offering) at an
aggregate exercise price of $500 per share, or $400,000 in the aggregate. Such
options will be immediately exercisable in full and will terminate on the
seventh anniversary of the date of grant. Upon the termination date (or upon the
termination of an option holder's employment, with respect to such holder's
options), the option holders will have the right to sell to the Company, and the
Company will have the right to purchase from the option holders, the options (or
any shares of common stock issued upon exercise thereof) at the then fair market
value thereof, payable in cash or Common Stock of the Company at the option of
the Company. In addition, the Company has agreed to grant such officers options
to purchase common stock of Atlantic Finance in such amounts as to enable them
to retain their percentage ownership of Atlantic Finance after the Company's
contribution out of the proceeds of
56
the Offering. Such options will vest and become exercisable in five equal annual
installments beginning on the first anniversary of the consummation of the
Offering at an exercise price increasing at a rate equal to $500 plus an amount
equal to 10% per year, compounded annually from the date of grant, on $500. The
Company has also agreed that up to an additional 5% of the common stock of
Atlantic Finance will be issuable to employees of Atlantic Finance under a stock
option plan, subject to the discretion of the Board of Directors of Atlantic
Finance.
Principal Stockholders
The table below sets forth the beneficial ownership of Common Stock as of August
31, 1996, after giving effect to the Preferred Stock Conversion, the Minority
Exchange, the exercise of the Additional Warrants and the Offering, by (i) all
persons who beneficially own 5% or more of the Common Stock, (ii) each of the
Named Executive Officers, (iii) each director of the Company and (iv) all
directors and Named Executive Officers as a group.
Shares
Beneficially
Owned
----------------
Beneficial Owner Number(1) Percent
- -------------------------------------------------- ------- -------
Trace International Holdings, Inc. ............... 3,531,156 22.7
375 Park Avenue
New York, New York 10152
Aeneas Venture Corporation........................ 2,843,656 18.3
(an affiliate of Harvard Private Capital)
600 Atlantic Avenue
Boston, Massachusetts 02210
AIF II, L.P....................................... 1,843,656 11.9
c/o Apollo Advisors, L.P.
Two Manhattanville Road
Purchase, New York 10577
Carl Spielvogel (2)............................... 226,118 1.4
Ezra P. Mager..................................... 163,240 1.1
Arthur J. Rawl (3)................................ 13,600 *
George G. Lowrance (3)............................ 13,600 *
Robert W. Thompson (3)............................ 1,400 *
Marshall S. Cogan (4)............................. 3,531,156 22.7
Michael R. Eisenson (5)........................... 2,843,656 18.3
John J. Hannan (6)................................ 1,843,656 11.9
Jules Kroll....................................... 104,474 *
Robert H. Nelson (7).............................. 3,544,756 22.8
John M. Sallay (8)................................ 2,843,656 18.3
Richard Sinkfield................................. 10,000 *
All directors and Named Executive Officers, 8,764,500 55.6
without duplication (12 persons).................
- ------------------------
* Less than 1%.
(1) Pursuant to the regulations of the Commission, shares are deemed to be
"beneficially owned" by a person if such person directly or indirectly has or
shares the power to vote or dispose of such shares, whether or not such person
has any pecuniary interest in such shares, or the right to acquire the power to
vote or dispose of such shares within 60 days, including any right to acquire
through the exercise of any option, warrant or right.
(2) Includes 200,000 shares issuable upon exercise of options granted under the
Spielvogel Employment Agreement that are vested and exercisable within 60 days.
(3) Represents the shares issuable upon exercise of options granted under the
Stock Option Plan that are vested and exercisable within 60 days.
(4) Represents the shares held by Trace, of which Mr. Cogan is the principal
stockholder, Chairman of the Board and Chief Executive Officer. Mr. Cogan
disclaims beneficial ownership of all shares held by Trace.
(5) Represents the shares held by Aeneas. Mr. Eisenson is the Managing
Director, President and Chief Executive Officer of Harvard Private Capital, the
investment advisor of Aeneas. Mr. Eisenson disclaims beneficial ownership of all
shares held by Aeneas.
(6) Represents the shares held by AIF. Mr. Hannan is a director of Apollo
Capital Management, Inc., which is the general partner of Apollo, which is the
managing general partner of AIF. Mr. Hannan disclaims beneficial ownership of
all shares held by AIF.
(7) Includes 3,531,156 shares held by Trace, of which Mr. Nelson is Senior Vice
President, Chief Operating Officer, Chief Financial Officer, Treasurer and a
director. Mr. Nelson disclaims beneficial ownership of all shares held by Trace.
Also includes 13,600 shares issuable upon exercise of options granted under the
Stock Option Plan that are vested and exercisable within 60 days.
(8) Represents the shares held by Aeneas. Mr. Sallay is a Managing Director of
Harvard Private Capital, the investment advisor of Aeneas. Mr. Sallay disclaims
beneficial ownership of all shares held by Aeneas.
57
Description of Capital Stock
General
Upon the consummation of the Offering, the authorized capital stock of the
Company will consist of 40,000,000 shares of Voting Common Stock, par value
$0.0001 per share, 1,125,000 shares of Non-voting Common Stock, par value
$0.0001 per share, 20,000,000 shares of Class C Common Stock, par value $0.0001
per share, and 100,000 shares of Preferred Stock, par value $0.0001 per share.
References herein to "Common Stock" refer to the Company's Voting Common Stock.
Common Stock
As of July 31, 1996, as adjusted to reflect the Preferred Stock Conversion,
there were 8,821,096 shares of Common Stock outstanding, owned of record by 16
stockholders. Holders of Common Stock have no pre-emptive, redemption,
conversion or sinking fund rights. Holders of Common Stock are entitled to one
vote per share on all matters submitted to a vote of stockholders and do not
have any cumulative voting rights. In the event of a liquidation, dissolution,
or winding-up of the Company, the holders of Common Stock are entitled to share
equally and ratably in the assets of the Company, if any, remaining after
provision for the payment of creditors and after payment of any liquidation
preference to holders of Preferred Stock. Upon completion of the Offering, all
outstanding shares of Common Stock will be validly issued, fully paid and
nonassessable. Holders of Common Stock will receive such dividends, if any, as
may be declared by the Board out of funds legally available for such purposes.
See "Dividend Policy."
Non-voting Common Stock
No shares of Non-voting Common Stock have been issued. The Company created the
class of Non-voting Common Stock in connection with the Securities Purchase
Agreements. The investors party to the Securities Purchase Agreements are
subject to various regulations that restrict their ability to own in excess of a
given percentage of the voting power of any company or that impose burdensome
requirements in respect of investments above a given threshold. Accordingly, the
Company granted such investors the right to convert, at any time and from time
to time, any number of shares of Voting Common Stock into an equal number of
shares of Non-voting Common Stock. Each holder of shares of Non-voting Common
Stock is entitled to convert, at any time and from time to time, any number of
such shares into an equal number of shares of Voting Common Stock, provided that
such holder, as a result of such conversion, would not own shares of the
Company's voting securities in excess of the applicable threshold. Holders of
Non-voting Common Stock are not entitled to vote on matters submitted to a vote
of stockholders, except that they are entitled to vote as a separate class on
any modification of the Certificate of Incorporation that adversely affects
their rights. Except with respect to such voting rights, the Voting Common Stock
and the Non-voting Common Stock are equivalent in every respect.
Class C Common Stock
No shares of Class C Common Stock have been issued. Holders of Class C Common
Stock would be entitled to one-tenth of one vote per share on all matters
submitted to a vote of stockholders, and they would be entitled to vote as a
separate class on any modification of the Certificate of Incorporation that
adversely affects their rights. Except with respect to such voting rights, the
Voting Common Stock and the Class C Common Stock are equivalent in every
respect.
Preferred Stock
Pursuant to the Preferred Stock Conversion, upon the date of this Prospectus,
all 5,227,346 shares of the Company's Class A Preferred Stock, par value $0.0001
per share, outstanding prior to the Offering will convert into an equal number
of shares of Common Stock, and such class of Preferred Stock will be retired.
Upon consummation of the Offering, the Company will be authorized to issue up to
100,000 shares of Preferred Stock. The Board of Directors will have the
authority to issue this Preferred Stock in one or more series and to fix the
rights, preferences, privileges and restrictions thereof, including dividend
rights, dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares constituting
any series or the designation of such series, without further vote or action by
the stockholders. The issuance of Preferred Stock may have the effect of
delaying, deferring or preventing a change in control of the Company without
further action by the stockholders and may adversely affect the voting and other
rights of the holders of Common Stock, including the loss of voting control to
others.
58
Warrants
In connection with the issuance and sale of Senior Notes from time to time
pursuant to the Securities Purchase Agreements, the Company issued warrants (the
"Warrants") to purchase up to 1,016,099 shares of Common Stock, as adjusted
through the date of this Prospectus and subject to further adjustment upon
certain events. The Warrants will become exercisable upon consummation of the
Offering at a nominal exercise price and expire on September 22, 2003. In
addition, the Company issued to the holders of the Warrants additional warrants
(the "Additional Warrants") to purchase up to 93,747 shares of Common Stock,
subject to adjustment upon certain events. Pursuant to their terms, the
Additional Warrants will be exercised upon consummation of the Offering at an
exercise price of $0.01 per share. The initial holders of the Warrants and
Additional Warrants, under certain conditions, are entitled to participate on
the same terms in the sale of Common Stock by the Initial Stockholders if such
sale would result in a Change in Control (as defined in the Securities Purchase
Agreements) of the Company. The Warrants and Additional Warrants contain
registration rights in respect of the shares of Common Stock issuable upon
exercise thereof. See "Shares Eligible for Future Sale."
Restrictions under Franchise Agreements
A number of franchise agreements to which the Company is party impose
restrictions on the transfer of the Common Stock. The most prohibitive
restrictions, imposed by Honda, provide that, under certain circumstances, the
Company may be forced to sell or lose its Honda and Acura franchises if a person
or entity acquires a 5% ownership interest in the Company if Honda objects to
such acquisition within 180 days, except that, so long as control of the Company
is held by its current non-public stockholders, any bank, mutual fund, insurance
company or pension fund may acquire up to a 10% ownership interest (15%
ownership interest in the case of any entity in its capacity as investment
advisor, trustee or custodian for the benefit of third parties) in the Company
without such consent but only if such bank, mutual fund, insurance company or
pension fund is not owned or controlled by or owns 15% or more of, or controls,
any entity (other than an automobile dealership) that competes with Honda or its
affiliates in manufacturing, marketing or selling automotive products or
services. Similarly, several Manufacturers have the right to approve the
acquisition of 20% ownership interests in the Company. In addition, under the
Company's agreement with Honda, no more than 40% of the Company's capital stock
(on a fully diluted basis) may be freely tradable and unrestricted at any time.
Similarly, a number of Manufacturers, including Chrysler, prohibit transactions
that may affect management control of the Company. Such restrictions may prevent
or deter prospective acquirers from obtaining control of the Company. See "Risk
Factors -- Stock Ownership/Issuance Limits."
Certain Provisions of Certificate of Incorporation and Bylaws
The Certificate of Incorporation and Bylaws of the Company provide that the
Board of Directors will be divided into three classes of directors, each class
to be as nearly equal in number as possible. The term of office of one class of
directors expires each year in rotation so that one class is elected at each
annual meeting of stockholders for a three-year term. The Certificate of
Incorporation provides that the size of the Board of Directors shall be
determined as set forth in the Bylaws, which provide for eight directors upon
consummation of the Offering and thereafter as may be fixed from time to time by
resolution of the Board of Directors. The affirmative vote of the holders of at
least two-thirds of the outstanding shares of capital stock entitled to vote
thereon is required to amend or repeal these provisions of the Certificate of
Incorporation and Bylaws. Accordingly, it would take at least two elections of
directors for any outside individual or group to gain control of the Board of
Directors. In addition, stockholder action must be taken at duly convened
meetings, not by written consent. These provisions could render more difficult
or discourage an attempt to obtain control of the Company.
Certain Effects of Authorized but Unissued Stock
After the consummation of the Offering, there will be approximately 21.5 million
shares of Common Stock, 20.0 million shares of Class C Common Stock and 100,000
shares of Preferred Stock available for future issuance without stockholder
approval. These additional shares may be utilized for a variety of corporate
purposes, including future public offerings to raise additional capital or to
facilitate corporate acquisitions. The Company currently does not have any plans
to issue additional shares of capital stock.
One of the effects of the existence of unissued and unreserved Common Stock and
Preferred Stock of the Company may be to enable the Board of Directors to issue
shares to persons supportive of current management, which could render more
difficult or discourage an attempt to obtain control of the Company by means of
a merger, tender offer, proxy contest or otherwise, and thereby protect the
continuity of the Company's management and possibly deprive
59
the stockholders of opportunities to sell their shares of Common Stock at prices
higher than prevailing market prices. Such additional shares also could be used
to dilute the stock ownership of persons seeking to obtain control of the
Company pursuant to the operation of a shareholders' rights plan or otherwise.
Delaware General Corporation Law
Pursuant to Section 203 of the DGCL, with certain exceptions, a Delaware
corporation may not engage in any of a broad range of business combinations,
such as mergers, consolidations and sales of assets, with an "interested
stockholder" for a period of three years from the date that such person became
an interested stockholder unless (i) the transaction that results in the
person's becoming an interested stockholder, or the business combination, is
approved by the board of directors of the corporation before the person becomes
an interested stockholder, (ii) the interested stockholder acquires 85% or more
of the outstanding voting stock of the corporation in the same transaction that
makes it an interested stockholder or (iii) on or after the date the person
becomes an interested stockholder, the business combination is approved by the
corporation's board of directors and by holders of at least two-thirds of the
corporation's outstanding voting stock, excluding shares owned by the interested
stockholder, at a meeting of the stockholders. Under Section 203, an "interested
stockholder" is defined as any person that is (i) the owner of 15% or more of
the outstanding voting stock of the corporation or (ii) an affiliate or
associate of the corporation and the owner of 15% or more of the outstanding
voting stock of the corporation at any time within the three-year period
immediately prior to the date on which it is sought to be determined whether
such person is an interested stockholder or (iii) an affiliate or associate of
such person. Pursuant to an exception within Section 203, no stockholders of the
Company existing prior to the Offering are subject to the restrictions of
Section 203.
Under certain circumstances, Section 203 makes it more difficult for a person
who would be an "interested stockholder" to effect various business combinations
with a corporation for a three-year period, although the stockholders may elect
to exclude a corporation from the restrictions imposed thereunder. The Company's
Certificate of Incorporation does not exclude the Company from the restrictions
imposed under Section 203. The provisions of Section 203 may encourage companies
interested in acquiring the Company to negotiate in advance with the Company's
Board, since the stockholder approval requirement would be avoided if a majority
of the directors then in office approve either the business combination or the
transaction which results in the shareholder becoming an interested shareholder.
Such provisions also may have the effect of preventing changes in the management
of the Company. It is possible that such provisions could make it more difficult
to accomplish transactions which stockholders may otherwise deem to be in their
best interests.
Limitation of Liability of Directors
The Certificate of Incorporation provides that a director of the Company will
not be personally liable to the Company or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL,
which concerns unlawful payments of dividends, stock purchases or redemption, or
(iv) for any transaction from which the director derived an improper personal
benefit.
While the Certificate of Incorporation provides directors with protection from
awards for monetary damages for breaches of their duty of care, it does not
eliminate such duty. Accordingly, the Certificate of Incorporation will have no
effect on the availability of equitable remedies such as an injunction or
rescission based on a director's breach of his duty of care. The provisions of
the Certificate of Incorporation described above apply to an officer of the
Company only if he is a director of the Company and is acting in his capacity as
director, and do not apply to officers of the Company who are not directors.
Registration Rights
Certain holders of shares of Common Stock are entitled to certain registration
rights. See "Shares Eligible for Future Sale."
Transfer Agent
The transfer agent and registrar of the Common Stock is The Bank of Nova Scotia
Trust Company of New York.
60
Shares Eligible for Future Sale
Of the 15,528,684 shares of Common Stock outstanding immediately after the
consummation of the Offering, the 5,500,000 shares of Common Stock sold in the
Offering will be freely transferable without restriction under the Securities
Act unless held by "affiliates" of the Company as that term is used under the
Securities Act and the regulations promulgated thereunder. The remaining
10,028,684 shares of Common Stock outstanding, including the 1,113,841 shares to
be issued in the Minority Exchange, were sold by the Company in reliance on
exemptions from the registration requirements of the Securities Act and are
deemed "restricted" securities within the meaning of Rule 144 under the
Securities Act and may not be resold without registration under the Securities
Act or pursuant to an exemption from registration, including exemptions provided
by Rule 144 under the Securities Act. All of the Restricted Shares are subject
to lock-up agreements (as described under "Underwriting"). Of the Restricted
Shares, 4,254,208 will become eligible for sale beginning 180 days after the
date of this Prospectus upon expiration of such lock-up agreements and subject
to compliance with Rule 144. The remaining 5,774,476 Restricted Shares,
including the 1,113,841 shares to be issued in the Minority Exchange, will have
been held for less than two years upon the expiration of such lock-up agreements
and will become eligible for sale under Rule 144 at various dates thereafter as
the holding period provisions of Rule 144 are satisfied.
In general, under Rule 144 as currently in effect, any person (or persons whose
shares are aggregated), including an affiliate of the Company, who has
beneficially owned shares for at least a two-year period (as computed under Rule
144) is entitled to sell within any three-month period commencing 90 days after
the Offering such number of shares that does not exceed the greater of (i) 1% of
the then outstanding shares of Common Stock (approximately 155,287 shares upon
consummation the Offering) and (ii) the average weekly trading volume in the
Common Stock during the four calendar weeks immediately preceding such sale.
Sales under Rule 144 are also subject to certain manner-of-sale provisions,
notice requirements and the availability of current public information about the
Company. A person who is not deemed to have been an affiliate of the Company at
any time during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least three years, is entitled to
sell such shares under Rule 144(k) without regard to the volume limitations or
other requirements described above. The foregoing summary of Rule 144 is not
intended to be a complete description of that rule.
The Company has authorized 1,500,838 shares of Common Stock for issuance under
the Stock Option Plan. As of the date of this Prospectus, options to purchase up
to 673,000 shares of Common Stock have been granted under the Stock Option Plan.
In addition, options to purchase up to 400,000 shares of Common Stock have been
granted under the Spielvogel Employment Agreement. The Company intends to file a
registration statement on Form S-8 as soon as practicable after the consummation
of the Offering with respect to all or a portion of the shares of Common Stock
issuable upon exercise of such options. Options to purchase up to 50,847 shares
of Common Stock have been granted as part of the consideration for the DiFeo
Group Minority Interest, which shares are subject to registration rights.
Further, upon consummation of the Offering, 1,016,099 shares of Common Stock
will be issuable upon the exercise of the Warrants at a nominal exercise price.
Prior to the Offering, there has been no public market for securities of the
Company. No predictions can be made of the effect, if any, that the sale or
availability for sale of shares of additional Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of a substantial number of
such shares by existing stockholders or by stockholders purchasing in the
Offering could have a negative effect on the market price of the Common Stock.
The Company, its directors, executive officers, stockholders and certain other
persons have agreed not to offer, sell, contract to sell or otherwise dispose of
any shares of Common Stock or any securities convertible into or exchangable for
shares of Common Stock, for a period of 180 days after the date of this
Prospectus, without the prior written consent of J.P. Morgan Securities Inc.,
with certain limited exceptions.
In connection with the Equity Facility, pursuant to a registration rights
agreement dated October 15, 1993, the Company granted the Initial Stockholders
registration rights in respect of up to 8,504,750 shares of Common Stock to be
issued pursuant to the Equity Facility. Each of three specified classes of
Initial Stockholders has the right to request one registration, provided that
such registration relates to a least 20% of the registrable securities held by
the person requesting registration or is expected to have an offering price of
$10 million or more. The Initial Stockholders also have the right to request
unlimited registrations on Form S-3, provided that the anticipated net aggregate
61
offering price exceeds $500,000. In addition, the Initial Stockholders are
entitled to have their registrable securities included in an unlimited number of
registrations initiated by the Company, subject to certain customary conditions.
The registration rights are presently exercisable, although the Company would
not be required to file a registration statement prior to 180 days after the
date of this Prospectus, and are subject to customary conditions. In addition to
the 8,504,750 shares of Common Stock that have been issued pursuant to the
Equity Facility, such registration rights also apply to an additional 316,346
shares of Common Stock issued by the Company.
In connection with the acquisition of certain automobile dealerships and the
related agreements to exchange shares of Common Stock for the remaining minority
interests in such dealerships in the Minority Exchange, the Company granted
registration rights in respect of 1,113,841 shares of Common Stock.
The Warrants to purchase 1,016,099 shares of Common Stock and Additional
Warrants to purchase 93,747 shares of Common Stock contain registration rights
in respect of the shares of Common Stock issuable upon exercise thereof. Such
rights entitle the holders thereof to request one registration, plus two
registrations on Form S-3, and have their shares included in an unlimited number
of Company registrations, subject to customary conditions.
62
Underwriting
Under the terms and subject to the conditions set forth in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the Underwriters
named below, for whom J.P. Morgan Securities Inc., Montgomery Securities and
Smith Barney Inc. are acting as representatives (the "Representatives"), have
severally agreed to purchase, and the Company has agreed to sell to them, the
respective number of shares of Common Stock set forth opposite their names
below:
---------------
Number of
Underwriters Shares
---------------
J.P. Morgan Securities Inc.
Montgomery Securities
Smith Barney Inc.
---------------
Total............................................... 5,500,000
---------------
---------------
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase shares of Common Stock are subject to the approval of
certain legal matters by counsel and certain other conditions. The Underwriters
are obligated to take and pay for all such shares of Common Stock, if any are
taken.
The Underwriters propose initially to offer such shares of Common Stock directly
to the public at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $ per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $
per share to certain other dealers. After the shares of Common Stock are
released for sale to the public, the offering price and such concessions may be
changed.
The Company has granted to the Underwriters an option, expiring at the close of
business on the 30th day after the date of this Prospectus, to purchase up to
750,000 additional shares of Common Stock at the public offering price, less the
underwriting discount. The Underwriters may exercise such option solely for the
purpose of covering over-allotments, if any. To the extent that the Underwriters
exercise such option, each Underwriter will have a firm commitment, subject to
certain conditions, to purchase approximately the same percentage of such
additional shares as the number set forth next to such Underwriter's name in the
preceding table bears to the total number of shares of Common Stock offered
hereby.
The Common Stock has been approved for listing on the NYSE under the symbol
"UAG," subject to official notice of issuance. The Underwriters have undertaken
to comply with the NYSE distribution standards.
The Company, its directors, executive officers, stockholders and certain other
persons have agreed not to offer, sell, contract to sell or otherwise dispose of
any shares of Common Stock or any securities convertible into or exercisable or
exchangeable for shares of Common Stock, for a period of 180 days after the date
of this Prospectus, without the prior written consent of J.P. Morgan Securities
Inc., with certain limited exceptions.
At the request of the Company, the Underwriters have reserved up to 250,000 of
the shares of Common Stock offered hereby for sale at the public offering price
set forth on the cover page of this Prospectus to employees, directors and
persons having business relationships with the Company.
Prior to the Offering, there has been no public market for the Common Stock. The
initial public offering price for the Common Stock offered hereby has been
determined by agreement between the Company and the Representatives.
63
Among the factors considered in making such determination were the history of
and the prospects of the industry in which the Company competes, an assessment
of the Company's management, the past and present operations of the Company, the
historical results of operations of the Company and the trend of its revenues
and earnings, the prospects for future earnings of the Company and the general
condition of the securities markets at the time of the Offering. There can be no
assurance that an active trading market will develop for the Common Stock or
that the Common Stock will trade in the public market subsequent to the offering
at or above the initial public offering price.
The Representatives have informed the Company that the Underwriters do not
intend to sell shares of Common Stock offered hereby to any accounts over which
the Underwriters exercise discretionary authority.
J.P. Morgan Capital Corporation (or an affiliate thereof), an affiliate of J.P.
Morgan Securities Inc., holds $20,000,000 aggregate principal amount of the
Senior Notes, Warrants to purchase 580,628 shares of Common Stock at a nominal
exercise price and Additional Warrants that will be exercised on the date of
this Prospectus for 53,570 shares of Common Stock at an exercise price of $0.01
per share. Morgan Guaranty, an affiliate of J.P. Morgan Securities Inc.,
provides loans to the Company under the Credit Agreement and has committed to
lend up to $25,000,000 to the Company under the Acquisition Facility. J.P.
Morgan Securities Inc. has provided financial advisory services to the Company
in the past, for which it has received customary fees.
Under Rule 2710(c)(8) of the Conduct Rules of the National Association of
Securities Dealers, Inc. (the "NASD"), when more than 10% of the net proceeds of
a public offering of equity securities is to be paid to members of the NASD or
affiliates thereof, the price at which the equity securities are distributed to
the public must be no higher than that recommended by a "qualified independent
underwriter" meeting certain standards. J.P. Morgan Securities Inc. is an NASD
member and its affiliate, J.P. Morgan Capital Corporation, will receive more
than 10% of the net proceeds from the Offering as a result of the use of such
proceeds to repay the Senior Notes. Therefore, in compliance with such rule,
Smith Barney Inc. is assuming the responsibilities of acting as a qualified
independent underwriter in pricing the Offering and conducting due diligence.
The excess of the initial public offering price per share over the price paid
for the Additional Warrants by J.P. Morgan Capital Corporation (and its
affiliates) and The Equitable Life Assurance Society of the United States is
deemed by the NASD to be underwriting compensation pursuant to Rule 2710 of the
Conduct Rules.
Derek Lemke-von Ammon, Frank Dunlevy and Jerome Markowitz are affiliated with
Montgomery Securities and own 2,786, 2,786 and 5,572 shares of Common Stock,
respectively, which shares are entitled to registration rights granted to the
Initial Stockholders in connection with the Equity Facility. See "Shares
Eligible for Future Sale." The aggregate ownership interest in the Company
represented by such shares is less than 1%.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments which the Underwriters may be required to make in respect thereof.
Legal Matters
The validity of the Common Stock offered hereby will be passed upon for the
Company by Willkie Farr & Gallagher, New York, New York. Certain legal matters
in connection with the Offering will be passed upon for the Underwriters by
Cahill Gordon & Reindel (a partnership including a professional corporation),
New York, New York.
Experts
The (i) consolidated financial statements of UAG and its subsidiaries as of
December 31, 1994 and 1995 and for each of the three years in the period ended
December 31, 1995, (ii) financial statements of Landers Auto as of December 31,
1994 and July 31, 1995 and for each of the two years in the period ended
December 31, 1994 and the seven-month period ended July 31, 1995, (iii)
financial statements of Atlanta Toyota as of December 31, 1994 and 1995 and for
each of the three years in the period ended December 31, 1995, (iv) financial
statements of United Nissan as of December 31, 1994 and 1995 and for the period
from inception (April 5, 1993) to December 31, 1993 and each of the two years in
the period ended December 31, 1995, (v) financial statements of Hickman Nissan
as of December 31, 1995 and for the year ended December 31, 1995, (vi) combined
financial statements of the Sun Group as of December 31, 1994 and 1995 and for
each of the three years in the period ended December 31, 1995, (vii) financial
statements of Standefer Motor as of December 31, 1994 and 1995 and for each of
the three years in
64
the period ended December 31, 1995 and (viii) combined financial statements of
the Evans Group as of December 31, 1995 and for the year ended December 31, 1995
included in this Registration Statement have been included in reliance upon the
reports of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of that Firm as experts in accounting and auditing.
Additional Information
The Company has filed with the Commission a Registration Statement on Form S-1
(herein, together with all amendments thereto, called the "Registration
Statement") under the Securities Act with respect to the Common Stock offered by
the Company hereby. This Prospectus, which is part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement and the exhibits and financial schedules thereto, to which reference
is hereby made. Statements contained in this Prospectus as to the contents of
any contract or other document are summaries which are not necessarily complete
and in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such statement
herein being qualified in all respects by such reference. The Registration
Statement, including the exhibits thereto, may be inspected without charge at
the public reference facilities maintained by the Commission at Room 1024, 450
Fifth Avenue, N.W., Washington, D.C. 20549, and at the Commission's regional
offices at Seven World Trade Center, 13th Floor, New York, New York 10048.
Copies of such materials can be obtained at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. The Commission also maintains a Website (http://www.sec.gov.) that
contains reports, proxy and information statements and other information that is
filed electronically with the Commission.
65
Index to Financial Statements
United Auto Group, Inc.
Report of Independent Accountants................................................... F-3
Consolidated Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996...... F-4
Consolidated Statements of Operations for the years ended December 31, 1993, 1994
and 1995 and the six months ended June 30, 1995 and 1996........................... F-5
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1993, 1994 and 1995 and the six months ended June 30, 1996......................... F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994
and 1995 and the six months ended June 30, 1995 and 1996........................... F-7
Notes to Consolidated Financial Statements.......................................... F-9
Landers Auto Sales, Inc.
Report of Independent Accountants................................................... F-22
Balance Sheets as of December 31, 1994 and July 31, 1995............................ F-23
Statements of Operations for the years ended December 31, 1993 and 1994 and the
seven months ended July 31, 1995................................................... F-24
Statements of Retained Earnings for the years ended December 31, 1993 and 1994 and
the seven months ended July 31, 1995............................................... F-25
Statements of Cash Flows for the years ended December 31, 1993 and 1994 and the
seven months ended July 31, 1995................................................... F-26
Notes to Financial Statements....................................................... F-28
Atlanta Toyota, Inc.
Report of Independent Accountants................................................... F-33
Balance Sheets as of December 31, 1994 and 1995..................................... F-34
Statements of Operations for the years ended December 31, 1993, 1994 and 1995....... F-35
Statements of Retained Earnings for the years ended December 31, 1993, 1994 and
1995............................................................................... F-36
Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995....... F-37
Notes to Financial Statements....................................................... F-38
Steve Rayman Nissan, Inc. (presently United Nissan, Inc.)
Report of Independent Accountants................................................... F-41
Balance Sheets as of December 31, 1994 and 1995..................................... F-42
Statements of Operations for the period from inception (April 5, 1993) to December
31, 1993 and the years ended December 31, 1994 and 1995 and the three months ended
March 31, 1995 and the four months ended April 30, 1996............................ F-43
Statements of Retained Earnings for the period from inception (April 5, 1993) to
December 31, 1993 and the years ended December 31, 1994 and 1995................... F-44
Statements of Cash Flows for the period from inception (April 5, 1993) to December
31, 1993 and the years ended December 31, 1994 and 1995 and the three months ended
March 31, 1995 and the four months ended April 30, 1996............................ F-45
Notes to Financial Statements....................................................... F-46
Hickman Nissan, Inc. (presently Peachtree Nissan, Inc.)
Report of Independent Accountants................................................... F-51
Balance Sheets as of December 31, 1995, and June 30, 1996........................... F-52
Statements of Income and Retained Earnings for the year ended December 31, 1995 and
the six months ended June 30, 1995 and 1996........................................ F-53
Statements of Cash Flows for the year ended December 31, 1995 and the six months
ended June 30, 1995 and 1996....................................................... F-54
Notes to Financial Statements....................................................... F-55
F-1
Sun Automotive Group
Report of Independent Accountants................................................... F-58
Combined Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996.......... F-59
Combined Statements of Operations for the years ended December 31, 1993, 1994 and
1995 and the six months ended June 30, 1995 and 1996............................... F-60
Combined Statements of Stockholders' Equity for the years ended December 31, 1993,
1994 and 1995 and the six months ended June 30, 1996............................... F-61
Combined Statements of Cash Flows for the years ended December 31, 1993, 1994 and
1995 and the six months ended June 30, 1995 and 1996............................... F-62
Notes to Combined Financial Statements.............................................. F-64
Evans Automotive Group
Report of Independent Accountants................................................... F-71
Combined Balance Sheets as of December 31, 1995 and June 30, 1996................... F-72
Combined Statements of Operations and retained earnings for the year ended December
31, 1995 and the six months ended June 30, 1995 and 1996........................... F-73
Combined Statements of Cash Flows for the year ended December 31, 1995 and the six
months ended June 30, 1995 and 1996................................................ F-74
Notes to Combined Financial Statements.............................................. F-75
Standefer Motor Sales, Inc.
Report of Independent Accountants................................................... F-80
Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996................... F-81
Statements of Operations for the years ended December 31, 1993, 1994 and 1995 and
the six months ended June 30, 1995 and 1996........................................ F-82
Statements of Retained Earnings for the years ended December 31, 1993, 1994 and 1995
and the six months ended June 30, 1996............................................. F-83
Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and
the six months ended June 30, 1995 and 1996........................................ F-84
Notes to Financial Statements....................................................... F-85
F-2
Report of Independent Accountants
To the Stockholders of
United Auto Group, Inc.:
We have audited the accompanying consolidated balance sheets of United Auto
Group, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of United
Auto Group, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Princeton, New Jersey
June 17, 1996
F-3
UNITED AUTO GROUP, INC.
Consolidated Balance Sheets
(In thousands except per share data)
---------------------------------
(Unaudited)
December 31, June 30,
-------------------- -----------
1994 1995 1996
--------- --------- -----------
ASSETS
Auto Dealerships
Cash and cash equivalents $ 751 $ 4,697 $ 9,301
Accounts receivable 19,588 27,349 48,209
Inventories 96,065 101,556 121,289
Deferred income taxes -- 5,153 5,333
Other current assets 2,130 2,894 2,848
--------- --------- -----------
Total current assets 118,534 141,649 186,980
Property and equipment, net 12,072 12,146 14,609
Intangible assets, net 23,018 48,774 66,131
Due from related parties 10,388 14,578 15,727
Other assets 5,754 10,128 11,090
--------- --------- -----------
Total Auto Dealership assets 169,766 227,275 294,537
--------- --------- -----------
Auto Finance
Cash and cash equivalents 32 531 1,530
Finance assets, net -- 7,555 775
Other assets 544 666 14,262
--------- --------- -----------
Total Auto Finance assets 576 8,752 16,567
--------- --------- -----------
Total assets $ 170,342 $ 236,027 $ 311,104
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Auto Dealerships
Floor plan notes payable $ 92,310 $ 97,823 $ 129,009
Short-term debt 20,050 16,187 15,069
Accounts payable 7,638 12,393 20,626
Accrued expenses 3,922 9,875 14,150
Current portion of long-term debt 1,905 3,169 2,463
--------- --------- -----------
Total current liabilities 125,825 139,447 181,317
Long-term debt 6,735 24,073 38,694
Due to related party 750 1,109 1,191
Deferred income taxes -- 2,279 2,279
--------- --------- -----------
Total Auto Dealership liabilities 133,310 166,908 223,481
--------- --------- -----------
Auto Finance
Short-term debt -- 4,661 2,516
Accounts payable and other liabilities 285 590 1,502
--------- --------- -----------
Total Auto Finance liabilities 285 5,251 4,018
--------- --------- -----------
Minority interests subject to repurchase 7,962 13,608 15,299
--------- --------- -----------
Stock purchase warrants -- 1,020 1,597
--------- --------- -----------
Commitments and contingent liabilities
Stockholders' Equity
Class A Convertible Preferred Stock, $0.0001 par value, shares authorized 4,911; shares
issued and outstanding 1,972 and 3,651 at December 31, 1994 and 1995, respectively 1 1 1
Voting Common Stock, $0.0001 par value, shares authorized 15,100; shares issued and
outstanding 1,529 and 2,583 at December 31, 1994 and 1995, respectively 1 1 1
Non-voting Common Stock, $0.0001 par value, authorized 1,025; none issued and
outstanding -- -- --
Additional paid-in-capital 30,827 54,748 68,319
Accumulated deficit (2,044) (5,510) (1,612)
--------- --------- -----------
Total stockholders' equity 28,785 49,240 66,709
--------- --------- -----------
Total liabilities, minority interests subject to repurchase, stock purchase warrants
and stockholders' equity $ 170,342 $ 236,027 $ 311,104
--------- --------- -----------
--------- --------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
UNITED AUTO GROUP, INC.
Consolidated Statements of Operations
(In thousands except per share data)
-----------------------------------------------------
(Unaudited)
Years ended Six months ended
December 31, June 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
Auto Dealerships
Vehicle sales $ 528,484 $ 644,380 $ 716,394 $ 310,217 $ 535,173
Finance and insurance 24,666 27,518 29,806 14,499 22,339
Service and parts 52,941 59,731 59,421 28,023 40,427
--------- --------- --------- --------- ---------
Total revenues 606,091 731,629 805,621 352,739 597,939
Cost of sales, including floor plan
interest for the years ended December 31,
1993, 1994 and 1995 of $3,754, $4,557 and
$5,784, respectively 537,688 647,643 720,344 316,525 531,560
--------- --------- --------- --------- ---------
Gross profit 68,403 83,986 85,277 36,214 66,379
Selling, general and administrative
expenses 66,910 80,415 90,586 41,941 56,975
--------- --------- --------- --------- ---------
Operating income (loss) 1,493 3,571 (5,309) (5,727) 9,404
Related party interest income -- -- 3,039 1,519 1,548
Other interest expense (1,233) (860) (1,438) (402) (2,049)
Equity in income (loss) of uncombined
investees -- (2,899) (831) (508) 75
--------- --------- --------- --------- ---------
Income (loss) before income taxes -- Auto
Dealerships 260 (188) (4,539) (5,118) 8,978
--------- --------- --------- --------- ---------
Auto Finance
Revenues -- 2 530 101 1,029
Interest expense -- -- (174) (13) (176)
Operating and other expenses -- (618) (1,738) (789) (1,202)
--------- --------- --------- --------- ---------
Loss before income taxes -- Auto Finance -- (616) (1,382) (701) (349)
--------- --------- --------- --------- ---------
Total Company
Income (loss) before minority interests
and provision for income taxes 260 (804) (5,921) (5,819) 8,629
Minority interests (117) (887) 366 917 (1,734)
Benefit (provision) for income taxes (47) -- 2,089 -- (2,997)
--------- --------- --------- --------- ---------
Net income (loss) $ 96 $ (1,691) $ (3,466) $ (4,902) $ 3,898
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income (loss) per common share (see note
2) $ .05 $ (.44) $ (.63) $ (1.05) $ .46
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Shares used in computing net income (loss)
per common share 1,894 3,873 5,482 4,682 8,500
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
UNITED AUTO GROUP, INC.
Consolidated Statements of Stockholders' Equity
(Dollars in thousands)
------------------------------------------------------------------------------------
Class A
Convertible Preferred
Stock Common Stock
---------------------- ---------------------- Additional Total
Issued Issued Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
--------- ----------- --------- ----------- ----------- ----------- ----------
Balances, December 31, 1992 -- $ -- 1,281,250 $ 1 $ 15,999 $ (449) $ 15,551
Issuance of stock for cash 1,570,000 1 62,500 -- 14,616 -- 14,617
Distribution to stockholder -- -- -- -- (5,000) -- (5,000)
Net income for 1993 -- -- -- -- -- 96 96
--------- --- --------- --- ----------- ----------- ----------
Balances, December 31, 1993 1,570,000 1 1,343,750 1 25,615 (353) 25,264
Issuance of stock for cash 401,611 -- 185,486 -- 5,212 -- 5,212
Net loss for 1994 -- -- -- -- -- (1,691) (1,691)
--------- --- --------- --- ----------- ----------- ----------
Balances, December 31, 1994 1,971,611 1 1,529,236 1 30,827 (2,044) 28,785
Issuance of stock for cash 1,679,118 -- 1,053,549 -- 23,921 -- 23,921
Net loss for 1995 -- -- -- -- -- (3,466) (3,466)
--------- --- --------- --- ----------- ----------- ----------
Balances, December 31, 1995 3,650,729 1 2,582,785 1 $ 54,748 (5,510) 49,240
Issuance of stock for cash
(Unaudited) 840,325 -- 717,017 -- 13,571 -- 13,571
Net income for the six months
ended June 30, 1996 (Unaudited) -- -- -- -- -- 3,898 3,898
--------- --- --------- --- ----------- ----------- ----------
Balances, June 30, 1996
(Unaudited) 4,491,054 $ 1 3,299,802 $ 1 $ 68,319 $ (1,612) $ 66,709
--------- --- --------- --- ----------- ----------- ----------
--------- --- --------- --- ----------- ----------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
UNITED AUTO GROUP, INC.
Consolidated Statements of Cash Flows
(Dollars in thousands)
-------------------------------------------------------------------------------------------------
(Unaudited)
Years ended December 31, Six months ended June 30,
----------------------------------------------------- ------------------------------------------
1993 1994 1995 1995 1996
--------- -------------------- -------------------- -------------------- --------------------
Auto Auto Auto Auto Auto Auto Auto Auto Auto
Dealerships Dealerships Finance Dealerships Finance Dealerships Finance Dealerships Finance
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Operating
activities:
Net income
(loss) $ 96 $ (1,075) $ (616) $ (2,084) $ (1,382) $ (4,201) $ (701) $ 4,247 $ (349)
Adjustments to
reconcile net
income (loss)
to net cash
used in
operating
activities:
Depreciation
and
amortization 924 2,225 20 2,536 284 1,109 62 1,619 90
Deferred
income tax
benefit -- -- -- (2,374) -- -- -- -- --
Related party
interest
income -- -- -- (3,039) -- -- -- -- --
Accrued
interest
related
parties...... -- -- -- -- -- (1,519) -- (1,548) --
Loss on sale
of interest
in uncombined
investee -- 117 -- 348 -- 253 -- -- --
Equity in
income (loss)
of uncombined
investee -- 2,782 -- 483 -- 255 -- (75) --
Gain on sales
of loans -- -- -- -- (129) -- -- -- (510)
Loans
originated -- -- -- -- (18,769) -- (3,219) -- (44,075)
Loans repaid
or sold -- -- -- -- 11,236 -- 339 -- 37,456
Minority
interests 117 887 -- (366) -- (917) -- 1,734 --
Changes in
operating
assets and
liabilities:
Accounts
receivable (8,315) (7,042) -- (1,524) -- (2,343) -- (16,091) --
Inventories (23,982) (12,417) -- 16,319 -- (2,054) -- (2,494) --
Floor plan
notes payable 22,458 14,874 -- (14,753) -- 3,020 -- 16,651 --
Accounts
payable and
accrued
expenses (4,431) (1,239) 288 5,240 302 4,223 (79) 8,430 910
Other 460 (879) (5) (90) 411 (499) 38 (598) 2,670
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Net cash
provided by
(used in)
operating
activities (12,673) (1,767) (313) 696 (8,047) (2,673) (3,560) 11,875 (3,808)
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Investing
activities:
Purchase of
equipment and
improvements (1,624) (4,675) (562) (1,496) (243) (1,158) (117) (1,916) (153)
Dealership
acquisitions (1,975) (755) -- (19,921) -- (92) -- (20,803) --
Investment in
auto finance
subsidiary -- (907) 907 (4,592) 4,592 (4,125) 4,125 (9,400) 9,400
Funding for
subsequent
acquisition -- -- -- (1,840) -- -- -- -- --
Advances to
related parties (1,775) (5,923) -- (1,496) -- (64) -- 400 --
Investment and
advances to
uncombined
investee -- (4,087) -- (799) -- 102 -- (1,438) --
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Net cash
provided by
(used in)
investing
activities (5,374) (16,347) 345 (30,144) 4,349 (5,337) 4,008 (33,157) 9,247
--------- --------- --------- --------- --------- --------- --------- --------- ---------
F-7
UNITED AUTO GROUP, INC.
Consolidated Statements of Cash Flows (Continued)
(Dollars in thousands)
-------------------------------------------------------------------------------------------------
(Unaudited)
Six months
ended June
Years ended December 31, 30,
-------------------------------------------------------- ----------
1993 1994 1995 1995
---------- --------------------- --------------------- ----------
Auto Auto Auto Auto Auto Auto
Dealerships Dealerships Finance Dealerships Finance Dealerships
---------- ---------- --------- ---------- --------- ----------
Financing activities:
Proceeds from issuance of stock 15,209 5,450 -- 25,220 -- 10,079
Proceeds from borrowings of long-term debt 2,320 4,299 -- 16,300 -- 410
Deferred financing costs -- -- -- (2,549) -- --
Net borrowings (repayments) of short-term debt 11,023 9,027 -- (3,863) -- (3,129)
Payments of long-term debt and capitalized lease
obligations (2,680) (1,139) -- (2,073) -- (1,063)
Distribution to stockholders and minority interest (5,328) (42) -- -- -- --
Advances from affiliates 6,162 -- -- 359 -- 1,187
Advances to affiliates -- (7,389) -- -- -- --
Borrowings of warehouse credit line -- -- -- -- 14,202 --
Payments of warehouse credit line -- -- -- -- (10,005) --
---------- ---------- --------- ---------- --------- ----------
Net cash provided by financing activities 26,706 10,206 0 33,394 4,197 7,484
---------- ---------- --------- ---------- --------- ----------
Net increase (decrease) in cash and cash
equivalents 8,659 (7,908) 32 3,946 499 (526)
Cash and cash equivalents, beginning of year 0 8,659 0 751 32 751
---------- ---------- --------- ---------- --------- ----------
Cash and cash equivalents, end of year $ 8,659 $ 751 $ 32 $ 4,697 $ 531 $ 225
---------- ---------- --------- ---------- --------- ----------
---------- ---------- --------- ---------- --------- ----------
1996
---------------------
Auto Auto Auto
Finance Dealerships Finance
--------- ---------- ---------
Financing activities:
Proceeds from issuance of stock -- 15,986 --
Proceeds from borrowings of long-term debt -- 13,220 --
Deferred financing costs -- (908) --
Net borrowings (repayments) of short-term debt -- (1,118) --
Payments of long-term debt and capitalized lease
obligations -- (1,376) --
Distribution to stockholders and minority interest -- -- --
Advances from affiliates -- 82 --
Advances to affiliates -- -- --
Borrowings of warehouse credit line 45 -- 30,880
Payments of warehouse credit line -- -- (35,320)
--------- ---------- ---------
Net cash provided by financing activities 45 25,886 (4,440)
--------- ---------- ---------
Net increase (decrease) in cash and cash
equivalents 493 4,604 999
Cash and cash equivalents, beginning of year 32 4,697 531
--------- ---------- ---------
Cash and cash equivalents, end of year $ 525 $ 9,301 $ 1,530
--------- ---------- ---------
--------- ---------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
UNITED AUTO GROUP, INC.
(Information related to the six months ended June 30, 1995 and 1996 is
unaudited)
Notes to Consolidated Financial Statements
(Dollars in thousands)
1. Organization:
United Auto Group, Inc. ("UAG" or the "Company") is engaged in the sale of new
and used motor vehicles, finance and insurance products, vehicle service and
parts and aftermarket products. Through its wholly-owned consumer finance
subsidiary, Atlantic Auto Finance Corporation ("AAFC"), UAG also purchases,
sells and services financing contracts on new and used vehicles originated by
both UAG and third party dealerships.
The Company has through its wholly owned subsidiaries, DiFeo Partnership, Inc.
and United Landers, Inc., a 70% interest in the partnerships within the United
DiFeo Automotive Group (the "DiFeo Group") and an 80% interest in the
corporations of Landers Auto Sales, Inc. ("Landers"), respectively. The DiFeo
Group is comprised of twenty-seven automobile dealerships, organized as
partnerships, and a management partnership. These partnerships operate in
Connecticut, New Jersey and New York and are under common ownership, management
and control. Landers is comprised of two automobile dealerships organized as
corporations, operating in Arkansas.
The Company operates dealerships which hold franchise agreements with a number
of automotive manufacturers. In accordance with the individual franchise
agreement, each dealership is subject to certain rights and restrictions typical
of the industry. The ability of the manufacturers to influence the operations of
the dealerships or the loss of a franchise agreement could have a negative
impact on operating results of the Company.
2. Summary of Significant Accounting Policies:
ESTIMATES:
The preparation of 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 financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The accounts which require the
use of significant estimates are receivables, inventory, taxes, intangibles and
accrued expenses.
INTERIM FINANCIAL STATEMENTS (UNAUDITED):
The interim unaudited financial statements reflect adjustments, consisting only
of normal recurring accruals, which are, in the opinion of the Company's
management, necessary for a fair presentation of the financial position and
results of operations for the periods presented. Operating results for any
interim period are not necessarily indicative of the results for a full year.
PRINCIPLES OF CONSOLIDATION:
These consolidated financial statements include all significant majority-owned
subsidiaries and reflect the operating results, assets, liabilities and cash
flows for two business segments: auto dealerships and financial services. The
assets and liabilities of the auto dealerships segment are classified as current
or noncurrent and those of the financial services segment are unclassified. All
material accounts and transactions among the consolidated affiliates have been
eliminated. Affiliated companies that are 20% to 50% owned are accounted for
under the equity method of accounting.
RECLASSIFICATIONS:
Certain reclassifications have been made to 1993 and 1994 amounts to conform
them to the 1995 presentation.
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents include all highly-liquid investments that have an
original maturity of three months or less at the date of purchase.
F-9
UNITED AUTO GROUP, INC.
(Information related to the six months ended June 30, 1995 and 1996 is
unaudited)
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands)
2. Summary of Significant Accounting Policies: (Continued)
REVENUE RECOGNITION -- AUTO DEALERSHIPS:
Revenue is recognized by the Company when vehicles are delivered to consumers or
motor vehicle service work is performed and parts are delivered. Finance and
insurance revenues are recognized upon the sale of the finance or insurance
contract. An allowance for chargebacks against revenue recognized from Company
originated and sold customer finance contracts is established during the period
in which the related revenue is recognized.
REVENUE RECOGNITION --AUTO FINANCE:
Revenue from finance receivables is recognized over the term of the receivable
using the interest method. Certain loan origination costs are deferred and
amortized over the term of the related receivable as a reduction in financing
revenue. Generally, finance receivables are accumulated by the Company until
they attain a value in excess of $5,000, at which time they are sold into a
commercial paper conduit (loan warehouse facility). An allowance for financing
losses on receivables is provided for the period from the date of purchase to
the date of sale. This allowance is shown as a reduction in receivables held for
sale. Revenue is recognized upon sale to the conduit. Interest is received and
credited to interest income based on the daily principal balance of the
receivables outstanding. Loan servicing fees on receivables sold to the conduit
are recognized as collected.
INVENTORY VALUATION:
Inventories are stated at the lower of cost or market with cost determined by
the following methods:
------------------------
Inventory Component Valuation Method
- --------------------------- ------------------------
New vehicles Last in, first out
(LIFO)
Used vehicles Specific identification
Parts, accessories and Factory list price
other
New vehicle and parts inventories are purchased primarily from the related
vehicle manufacturer.
PROPERTY AND EQUIPMENT:
Property and equipment are recorded at cost and depreciated over their estimated
useful lives, primarily using the straight-line method. Useful lives for
purposes of computing depreciation are:
Leasehold improvements and -- Economic life or life of
equipment under capital the lease, whichever is
lease shorter.
Equipment, furniture and -- 5 to 7 years
fixtures
Expenditures for repairs and maintenance which increase the useful life or
substantially increase serviceability of the asset are capitalized. When
equipment is sold or otherwise disposed of, the cost and related accumulated
depreciation are removed from their respective accounts, and any resulting gain
or loss is included in the statement of operations.
INCOME TAXES:
The Company provides for income taxes in accordance with Statement of Financial
Accounting Standard No. 109 "Accounting for Income Taxes" ("SFAS 109") which
requires the asset and liability method of accounting for income taxes. Deferred
tax assets or liabilities are computed based upon the difference between the
financial statement and income tax basis of assets and liabilities using enacted
tax rates. The Company provides a valuation allowance for net deferred tax
assets when it will be more likely than not that taxable income will not be
sufficient to realize such assets.
F-10
UNITED AUTO GROUP, INC.
(Information related to the six months ended June 30, 1995 and 1996 is
unaudited)
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands)
2. Summary of Significant Accounting Policies: (Continued)
INTANGIBLE ASSETS:
Intangible assets consists of excess of cost over net assets acquired which is
being amortized on a straight-line basis over the estimated benefit period of 40
years. The Company periodically reviews these costs to assess recoverability.
Losses in value, if any, are charged to operations in the period such losses are
determined to be permanent. Amortization expense was $549, $570 and $904 for the
years ended December 31, 1993, 1994 and 1995.
The Company's policy with respect to assessing whether there has been a
permanent impairment in the value of excess cost over net assets acquired is to
compare the carrying value of a business' excess cost over net assets acquired
with the anticipated undiscounted future cash flows from operating activities of
the business. Factors considered by the Company in performing this assessment
include current operating income, trends and other economic factors.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents and
debt. The carrying amount of these financial instruments approximates fair value
due either to length of maturity or existence of variable interest rates that
approximates prevailing market rates.
LONG-LIVED ASSETS:
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" ("SFAS
121") requires that long-lived assets be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of the asset in
question may not be recoverable. SFAS 121 was adopted in 1996 and did not have a
material effect on the Company's results of operations, cash flows or financial
position.
AUTO FINANCE -- FINANCE ASSETS:
All finance receivables are sold principally into a commercial paper conduit
through the issuance of a certificate indicating ownership of the contracts by
CXC Incorporated ("CXC"), a Citibank, N. A. related entity. These contracts are
carried at the lower of their principal balance outstanding or market value.
Market value is estimated based on the characteristics of the finance
receivables held for sale and the terms of recent sales of similar finance
receivables computed by the Company. While finance receivables are being
accumulated for sale into the conduit, they are pledged against a liquidity
credit line with Citibank, N.A. As of December 31, 1995, none of the finance
receivables qualified as impaired, subject to the terms set forth in Statement
of Financial Accounting Standards No. 114, "Accounting by Creditors for
Impairment of a Loan."
The Company is required to hedge each pool of finance receivables sold to CXC.
Swaps against the commercial paper rate have been used to provide protection for
the net yield in each pool as required by CXC. The differential to be paid or
received as interest rates change is included in the calculation of excess
servicing and amortized over the life of the pool. The notional amounts of
outstanding hedges were $0 and $10,987 at December 31, 1994 and 1995,
respectively. There were no swap agreements outstanding as of December 31, 1994.
The fair value of interest rate swap agreements represented an unrecorded
liability of $170 as of December 31, 1995.
The Company has credit and interest rate risk on finance receivables held for
sale. The Company has a program of credit review prior to final approval of
specific loans and maintains reserves as appropriate. Interest rate risk is
mitigated by the short period of time that receivables are held.
NET INCOME (LOSS) PER COMMON SHARE:
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin Topic
4-D, all stock options and warrants granted by the Company during the twelve
months preceding the Company's initial public offering have been included in the
calculation of net income (loss) per common shares outstanding as if they were
outstanding for all periods presented, using the treasury stock method at an
assumed public offering price of $29.50 per share.
F-11
UNITED AUTO GROUP, INC.
(Information related to the six months ended June 30, 1995 and 1996 is
unaudited)
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands)
2. Summary of Significant Accounting Policies: (Continued)
Net income (loss) per common share data calculated in accordance with APB No. 15
is as follows:
-----------------------------------------------------
For the Years Six Months Ended
Ended December 31, June 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
Net loss per common share........................................... $ .07 $ (.51) $ (.71) $ (1.19) $ .49
Weighted average shares outstanding (In thousands).................. 1,317 3,296 4,905 4,105 7,923
The computations of net income (loss) per share in accordance with APB No. 15
are based on the weighted average number of common shares, the weighted average
number of preferred shares and warrants outstanding to the extent dilutive.
3. Acquisition of Landers Auto Sales, Inc.:
Effective August 1, 1995, the Company acquired an 80% interest in Landers for
$20,000 in cash and $4,014 in notes payable through August 2000. The acquisition
was accounted for under the purchase method and the accompanying financial
statements reflect the results of operations from the date of acquisition. The
excess of purchase price over the underlying estimated fair value of net assets
acquired was $25,777. In addition, if Landers achieves certain levels of annual
pre-tax earnings, the Company will be obligated to make additional payments
during each of the next three years. Any additional purchase price incurred
under the terms of this agreement will be recorded as additional cost in excess
of net assets acquired.
The following unaudited pro forma summary presents the consolidated results of
operations of the Company for 1994 and 1995 with pro forma adjustments as if the
acquisition had been consummated as of January 1, 1994.
----------------------
December 31,
----------------------
1994 1995
---------- ----------
Revenues $ 960,541 $ 969,989
Income before minority interests and provision for income taxes 4,921 502
The foregoing pro forma results are not necessarily indicative of results of
operations that would have been reported had the acquisition been completed at
January 1, 1994.
4. Inventories:
Inventories consist of the following:
-----------------------------------
June 30,
December 31, 1996
---------------------- -----------
1994 1995 (Unaudited)
---------- ---------- -----------
New vehicles $ 83,393 $ 74,789 $ 86,588
Used vehicles 12,098 24,917 33,332
Parts, accessories and other 5,154 6,220 6,492
---------- ---------- -----------
100,645 105,926 126,412
Cumulative LIFO reserve (4,580) (4,370) (5,123)
---------- ---------- -----------
$ 96,065 $ 101,556 $ 121,289
---------- ---------- -----------
---------- ---------- -----------
F-12
UNITED AUTO GROUP, INC.
(Information related to the six months ended June 30, 1995 and 1996 is
unaudited)
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands)
4. Inventories: (Continued)
For the years ended December 31, 1993, 1994 and 1995 and for the six months
ended June 30, 1995 and 1996, the effect of using the LIFO method as compared to
the First In, First Out (FIFO) method was to decrease net income by $1,146 in
1993, increase net loss by $1,446 in 1994 and decrease net loss by $290 in 1995,
increase net loss by $350 in June 1995 and decrease net income by $753 in June
1996.
5. Property and Equipment:
Property and equipment consists of the following:
--------------------
December 31,
--------------------
1994 1995
--------- ---------
Equipment $ 4,516 $ 4,602
Furniture and fixtures 957 1,237
Equipment under capital lease 2,380 2,380
Leasehold improvements 6,696 7,705
--------- ---------
Total 14,549 15,924
Less: Accumulated depreciation and amortization 2,477 3,778
--------- ---------
Total property and equipment, net $ 12,072 $ 12,146
--------- ---------
--------- ---------
Depreciation and amortization expense for the years ended December 31, 1993,
1994 and 1995 was $1,052, $1,497 and $1,632, respectively. Accumulated
amortization, included in accumulated depreciation and amortization above, on
equipment under capital lease was approximately $747 and $1,072 at December 31,
1994 and 1995, respectively.
6. Other Assets:
Auto dealerships other assets consist of the following:
--------------------
December 31,
--------------------
1994 1995
--------- ---------
Restricted cash $ -- $ 1,840
Investment and advances in uncombined subsidiary 2,134 3,228
Security deposits 679 956
Deferred financing costs 1,685 2,934
Other 1,256 1,170
--------- ---------
$ 5,754 $ 10,128
--------- ---------
--------- ---------
Restricted cash represents the proceeds from capital stock issued for the
purpose of financing an acquisition completed in January 1996.
Equity in uncombined subsidiary represents net investment, services provided,
cash advances and used vehicle transactions with dealerships where the Company
does not own a majority interest.
F-13
UNITED AUTO GROUP, INC.
(Information related to the six months ended June 30, 1995 and 1996 is
unaudited)
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands)
7. Floor Plan Notes Payable:
The DiFeo Group vehicle floor plan agreement is with General Motors Acceptance
Corporation ("GMAC"). The Landers new vehicle floor plan agreement is with
Chrysler Credit Corporation ("Chrysler"). The Landers used vehicle floor plan
agreements are with Chrysler and Benton State Bank.
Floor plan notes payable reflects amounts for the purchase of specific vehicle
inventory and consists of the following:
--------------------
December 31,
--------------------
1994 1995
--------- ---------
GMAC, bearing interest at prime commercial lending rate plus 1%. The borrowing rate was 9.75%
at December 31, 1995 $ 92,310 $ 63,728
Chrysler, bearing interest at LIBOR plus 2.75% or prime plus 0.5%, whichever is less. The
borrowing rate was 8.75% at December 31, 1995 -- 31,354
Benton State Bank, bearing interest at the prime commercial lending rate. The borrowing rate
was 8.75% at December 31, 1995 -- 2,741
--------- ---------
$ 92,310 $ 97,823
--------- ---------
--------- ---------
The floor plan agreements grant a collateral interest in substantially all of
the Company's inventory and generally require the repayment of debt within two
weeks of inventory sales. In addition, the GMAC floorplan agreement provides the
DiFeo Group with additional borrowing facilities beyond the floor plan agreement
(see Notes 8 and 9).
Included in the Chrysler vehicle floor plan at December 31, 1995 is $6,928
payable to a related party participating in the floor plan agreements. This was
repaid in May 1996.
The weighted average interest rate on floor plan borrowings was 7.1% and 8.9%
for the years ended December 31, 1994 and 1995, respectively.
8. Short-Term Debt:
The DiFeo Group and GMAC have entered into additional short-term and long-term
debt agreements which share in the collateral interest granted under the floor
plan arrangement. One such agreement permitted maximum borrowings of $15,000 at
December 31, 1994 and $10,000 at December 31, 1995, subject to a formula based
on parts and used vehicle collateral limitations, and includes covenants that
require the maintenance of tangible net worth and other financial ratios. At
December 31, 1994 and 1995, $15,000 and $8,187, respectively, were outstanding
under this agreement. These borrowings are made at the prime rate plus 1.25%.
The borrowing rate at December 31, 1995 was 10.0%.
The Company has a $9,000 revolving line of credit with Morgan Guaranty Trust
Company of New York that expires on September 30, 1996. At December 31, 1995,
$8,000 was outstanding under this agreement. The line of credit bears interest
at a variable rate, the prime rate plus two or the Federal Funds rate plus two
and one half percent, whichever is greater. The borrowing rate at December 31,
1995 was 10.5%.
The weighted average interest rate on short term borrowings was 7.1% and 10.25%
for the years ended December 31, 1994 and 1995, respectively.
In addition, AAFC maintains a $5,000 loan arrangement with Citibank, N.A. for
the purpose of purchasing finance receivables. The amount borrowed by AAFC may
not exceed 93% of the outstanding principal balance of eligible receivables
pledged to secure the loan. The total amount outstanding under this arrangement
at December 31, 1994 and 1995 was $0 and $4,197, respectively.
F-14
UNITED AUTO GROUP, INC.
(Information related to the six months ended June 30, 1995 and 1996 is
unaudited)
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands)
9. Long-Term Debt:
Long-term debt consists of the following:
---------------------------------
June 30,
December 31, 1996
-------------------- -----------
1994 1995 (Unaudited)
--------- --------- -----------
Series A and B Senior Notes due 2003, net of unamortized discount of $1,007 $ -- $ 15,293 $ 27,988
Landers term notes, payable in monthly installments through August 2000, bearing
interest at 8.0% -- 3,697 3,302
Term note, payable July 1998 bearing interest at 8 1/2% -- -- 2,100
GMAC term loan, payable in equal monthly installments of $17 through March 1998
with a final payment of $1,000 in April 1998; interest at the prime rate plus
1.0% 1,650 1,450 1,350
GMAC term loan, payable in equal monthly installments of $25 through June 1999
with a final payment of $1,500 in July 1999; interest at the prime rate plus
1.0% 2,850 2,550 2,400
Capitalized lease obligations 2,243 1,686 1,444
Other installment loans 1,897 2,566 2,573
--------- --------- -----------
8,640 27,242 41,157
Less: Current portion 1,905 3,169 2,463
--------- --------- -----------
$ 6,735 $ 24,073 $ 38,694
--------- --------- -----------
--------- --------- -----------
The GMAC term loans share in the security interest granted to the lender under
the floor plan arrangement.
Maturities of long-term debt for the next five years and thereafter are as
follows:
---------
Amount
---------
1996 $ 3,169
1997 2,166
1998 2,009
1999 2,484
2000 2,121
2001 and thereafter 16,300
---------
$ 28,249
---------
---------
On September 22, 1995, the Company finalized a placement on $35,000 of Series A
and B Senior Notes (collectively referred to as the "Notes") due in 2003 under
which Notes are available to be issued through March 1997. The Company initially
issued $16,300 of the Notes at 12.0% with an original issue discount of $1,020,
which is being amortized to interest expense over the term of the Notes,
increasing the effective interest rate on such Notes to 12.8%. Such interest
rate will increase by 2.0% if certain franchisor approvals are not obtained by
March 1997 and would be effective as of the date of original issuance of the
Notes. The Notes are callable by the Company at a premium as determined pursuant
to the placement agreement of up to 10% of the principal balance. The Notes also
contain covenants that require the maintenance of certain financial ratios and
restrict additional indebtedness.
The Notes contain detachable warrants, whereby each warrant grants the holder
the option to purchase UAG Common Stock at $.01 per share. The warrants become
exercisable after certain franchisor approvals are received and were recorded at
their fair value at the date of issuance. At December 31, 1995, there were
526,039 warrants outstanding. The warrants expire in 2003. If certain franchisor
approvals are not received by March 1997, the
F-15
UNITED AUTO GROUP, INC.
(Information related to the six months ended June 30, 1995 and 1996 is
unaudited)
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands)
9. Long-Term Debt: (Continued)
warrants will convert to contingent value obligations ("CVO's"). The CVO's are
intended to provide the holder with economic benefits substantially similar to
those that would have been realized upon exercise of the warrants and sale of
the underlying Common Stock. The warrants have been recorded as temporary equity
at their fair value at their dates of issuance due to the CVO feature. No
accretion to the carrying amount has been made as franchisors' approvals are
probable.
10. Operating Lease Obligations:
The Company leases its dealership facilities and corporate office under
operating lease agreements primarily with related parties. These leases are
noncancelable and expire on various dates through 2012. The lease agreements are
subject to renewal under essentially the same terms and conditions as the
original lease.
The following is a schedule by year of future minimum rental payments required
under the operating leases as of December 31, 1995.
---------
Amount
---------
1996 $ 5,859
1997 6,002
1998 6,391
1999 6,470
2000 5,286
2001 and thereafter 17,093
---------
$ 47,101
---------
---------
Total rent expense for the years ended December 31, 1993, 1994 and 1995
approximated $6,367, $6,302 and $7,113, respectively.
Rental payments to related parties were $4,272 and $4,502 for the years ended
December 31, 1994 and 1995, respectively.
11. Minority Interests Subject to Repurchase:
As result of the minority ownership of the DiFeo Group and Landers, the Company
has recorded minority interests. The minority owners have the right to require
repurchase of their interest by UAG at fair value if they are not converted into
UAG common stock in connection with an initial public offering or equity
offering. The minority interests were recorded at fair value at the dates of
acquisition and such amounts are adjusted for their share of the applicable
earnings and losses. If repurchased, the difference between the recorded value
and the repurchase amount will adjust the recorded amount of assets and
liabilities including the cost in excess of net assets acquired in accordance
with purchase accounting.
12. Other Related Party Transactions:
The Company was owed $10,388, $14,578 and $15,727 from the minority shareholders
and certain of their related entities as of December 31, 1994 and 1995 and June
30, 1996, respectively, arising out of advances for certain business
acquisitions and working capital advances for dealerships in which the Company
has no ownership. Related party interest income represents interest on the above
mentioned advances and advances to the uncombined investee. The Company owes a
stockholder $750, $1,109 and $1,191 as of December 31, 1994 and 1995 and June
30, 1996, respectively, for working capital advances. Such indebtedness is
subject to offset against a guarantee of $2,000 third party indebtedness to the
Company.
F-16
UNITED AUTO GROUP, INC.
(Information related to the six months ended June 30, 1995 and 1996 is
unaudited)
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands)
13. Stock Options:
Options have been granted to purchase 127,200 shares of the Company's Common
Stock under an employment agreement at an exercise price of twelve dollars and
fifty cents per share. These options vest over four years. At December 31, 1995,
31,800 options were exercisable.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 "Accounting for Stock Based Compensation"
("SFAS 123"). SFAS 123 establishes financial and reporting standards for stock
based compensation plans. The Company anticipates adopting the disclosure only
provisions of this standards during 1996.
14. Stockholders' Equity:
On December 29, 1993, UAG and certain investors entered into a private placement
agreement (the "Agreement") whereby the investors committed to purchase over a
period of time an aggregate 4,911,000 shares of Class A Convertible Preferred
Stock (the "Preferred Stock") at ten dollars per share. The Preferred Stock can
be issued as UAG calls upon the funds committed by the investors pursuant to the
Agreement.
If by December 29, 1999 the Company has not (i) redeemed at least 50% of the
Preferred Stock, (ii) consummated a Qualified Public Offering (as defined in the
Company's Certificate of Incorporation) or (iii) sold all or substantially all
of the Company's assets or merged with or into another entity in a transaction
in which 50% or more of the voting control of the Company is transferred
(collectively a "Triggering Event"), certain rights of the holders of the
Company's Preferred Stock (the "Preferred Investors") under the Agreement will
be triggered. Specifically, the Preferred Investors will receive warrants to
purchase, at a nominal price, 50% of the fully diluted equity of the Company
(after exercise of such warrants) in the form of Common Stock. If a Triggering
Event does not occur by December 29, 2000, the Preferred Investors will receive
warrants to purchase, at a nominal price, an additional 25% of the fully diluted
equity of the Company (after exercise of such warrants) in the form of Common
Stock. In lieu of such warrants, after December 29, 1999, the Preferred
Investors may elect to receive promissory notes evidencing indebtedness of the
Company in an amount equal to 50% of the fair market value of the fully diluted
equity of the Company. If a Triggering Event does not occur by December 29,
2000, in lieu of warrants, the Preferred Investors may elect to receive
promissory notes in an amount equal to an additional 25% of the fair market
value of the fully diluted equity of the Company. Upon the occurrence of any of
these events, the holders of the warrants, the warrant shares or the CVOs could
experience significant diminution of value, although the warrants contain
certain anti-dilution protection in the event the above-described warrants are
issued. The Preferred Stock has been included as a component of equity as these
rights are incremental and the Preferred Shares will remain outstanding.
The Agreement also provides a commitment by existing common stockholders to
purchase an aggregate 2,250,000 shares of Common Stock at eight dollars per
share. Such shares must be purchased in proportion to Preferred Stock. Common
Stock dividends are payable only with the approval of the Preferred Investors.
F-17
UNITED AUTO GROUP, INC.
(Information related to the six months ended June 30, 1995 and 1996 is
unaudited)
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands)
15. Income Taxes:
The provision (benefit) for income taxes consists of the following components:
-------------------------------
Years ended December 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
Currently payable:
Federal $ -- $ -- $ --
State and local 47 -- 285
--- --- ---------
Total currently payable 47 -- 285
--- --- ---------
Deferred tax liability (asset):
Federal -- -- (2,374)
State and local -- -- --
--- --- ---------
Total deferred -- -- (2,374)
--- --- ---------
Total (benefit) provision $ 47 $ 0 $ (2,089)
--- --- ---------
--- --- ---------
The reasons for the differences between the provision for income taxes using the
Federal statutory income tax rate and the tax provisions reported by the Company
are as follows:
-------------------------------
Years ended December 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
Tax provisions computed at the Federal statutory income tax rate $ (33) $ 592 $ 1,944
State and local income taxes, net of Federal benefit -- -- (186)
Valuation allowance -- (745) 745
Other (14) 153 (414)
--- --------- ---------
Benefit (provision) for income taxes $ (47) $ 0 $ 2,089
--- --------- ---------
--- --------- ---------
F-18
UNITED AUTO GROUP, INC.
(Information related to the six months ended June 30, 1995 and 1996 is
unaudited)
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands)
15. Income Taxes: (Continued)
The Company accounts for income taxes in accordance with SFAS 109. Under SFAS
109, deferred income taxes reflect the estimated tax effect of temporary
differences between assets and liabilities for financial accounting purposes and
those amounts as measured by tax laws and regulations. The components of
deferred income tax assets and liabilities were as follows:
--------------------
Years ended December
31,
--------------------
1994 1995
--------- ---------
Deferred Tax Assets
Net operating loss carryforward $ 2,214 $ 4,467
Capital loss carryforwards -- 201
Organization costs 259 241
All other -- 244
--------- ---------
Total deferred tax assets 2,473 5,153
Valuation allowance (745) --
--------- ---------
Net deferred tax assets 1,728 5,153
Deferred Tax Liabilities
Partnership investments (1,728) (2,179)
Sale of finance receivables -- (47)
All other -- (53)
--------- ---------
Total deferred tax liabilities (1,728) (2,279)
--------- ---------
Net deferred tax assets (liabilities) $ 0 $ 2,874
--------- ---------
--------- ---------
The Company had determined, based upon prior taxable losses, that taxable income
would probably not be sufficient to recognize a net deferred tax asset at
December 31, 1993 and 1994. Accordingly, a valuation allowance was provided for
the net deferred tax assets.
Based upon the restructuring of dealerships and other operational measures
implemented in 1995 (see Note 16), the Company determined that it was more
likely than not that future taxable income would be sufficient to fully
recognize the net deferred tax asset at December 31, 1995.
At December 31, 1995, the Company has $10,600 of regular tax, net operating loss
carryforwards for Federal income tax purposes expiring from 2008 to 2010, of
which $3,300 is subject to an annual limitation of approximately $1,300 per year
as imposed by Section 382 of the Internal Revenue Code.
16. Terminated Franchises:
During the first quarter of 1995, the Company commenced a restructuring of its
then unprofitable DiFeo Group. Such restructuring included the termination of
certain unprofitable franchises, a reduction in personnel of approximately 250
employees, the implementation of pay plans linked to net profit and the
liquidation of outdated inventory. Costs associated with this restructuring were
approximately $680 and $450 for the year ended December 31, 1995 and the six
months ended June 30, 1996, respectively, and were primarily related to
severance, and the program was substantially completed by the fourth quarter of
1995. No goodwill had been allocated to the terminated franchises.
F-19
UNITED AUTO GROUP, INC.
(Information related to the six months ended June 30, 1995 and 1996 is
unaudited)
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands)
17. Supplemental Cash Flow Information:
The following table presents certain supplementary information to the
Consolidated Statements of Cash Flows:
-----------------------------------------------------
1993 1994 1995
--------- -------------------- --------------------
Auto Auto Auto Auto Auto
Dealerships Dealerships Finance Dealerships Finance
--------- --------- --------- --------- ---------
Supplemental information:
Cash paid for interest $4,901 $6,385 -- $8,437 $109
Cash paid for income taxes -- -- -- -- 3
Non-cash financing
activities:
Stock issuance costs
amortized against proceeds
from issuance of stock 883 543 -- 910 --
Dealership acquisition cost
financed by long-term debt -- -- -- 4,014 --
Capitalized lease
obligations 1,777 433 -- -- --
Warrants issued -- -- -- 1,020 --
18. Summary of Quarterly Financial Data (Unaudited)
-------------------------------------------------
Three Months Ended
-------------------------------------------------
March 31, 1995 June 30, 1995 September 30, 1995
-------------- ------------- ------------------
Statements of Operational Data:
Auto Dealerships
Total revenues $162,598 $190,142 $239,601
Gross profit 16,544 19,671 26,228
Operating income (loss) (4,285) (1,442) 2,271
Auto Finance
Loss before income taxes (354) (347) (356)
Total Company
Income (loss) before minority interests and provision for
income taxes (4,104) (1,715) 2,074
Net income (loss) (3,231) (1,671) 1,082
Net income (loss) per common share $(.72) $(.34) $.17
December 31, 1995
-----------------
Statements of Operational Data:
Auto Dealerships
Total revenues $213,280
Gross profit 22,834
Operating income (loss) (1,853)
Auto Finance
Loss before income taxes (325)
Total Company
Income (loss) before minority interests and provision for
income taxes (2,176)
Net income (loss) 354
Net income (loss) per common share $.05
In the fourth quarter of 1995 the Company determined that it was more likely
than not that future taxable income would be sufficient to fully recognize a net
deferred tax asset of $2,874 (See Note 16).
The net income (loss) per common share amounts are calculated independently for
each of the quarters presented and are not presented in thousands. The sum of
the quarters may not equal the full year net income (loss) per common share
amount.
F-20
UNITED AUTO GROUP, INC.
(Information related to the six months ended June 30, 1995 and 1996 is
unaudited)
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands)
19. Subsequent Events:
Effective January 1, 1996, the Company acquired a 100% interest in Atlanta
Toyota, Inc. for a purchase price consisting of $9,100 in cash plus $2,400 in
notes. This acquisition was accounted for under the purchase method and the
accompanying financial statements reflect the results of operations from the
date of acquisition. In order to finance the acquisition, the Company issued
additional Preferred Stock and Common Stock in the amount of $6,100 and issued
Notes in the amount of $4,400 at an interest rate of 11.60%.
On May 1, 1996, the Company acquired a 100% interest in Steve Rayman Nissan,
Inc. for a purchase price of $11,500 in cash. This acquisition will be accounted
for under the purchase method and the financial statements will reflect the
results of operations from the date of acquisition. The dealership has been
renamed United Nissan. In order to finance the acquisition, the Company issued
additional Preferred Stock and Common Stock in the amount of $7,380 and issued
Notes in the amount of $4,620 at an interest rate of 11.95%.
The following unaudited pro forma summary presents the consolidated results of
operations of the Company, Landers and the aforementioned acquisitions for 1994
and 1995 with pro forma adjustments as if these transactions had been
consummated as of January 1, 1994.
--------------------
December 31,
--------------------
1994 1995
--------- ---------
Revenues $1,122,463 $1,144,823
Income before minority interests and provision
for income taxes 6,678 4,187
The foregoing pro forma results are not necessarily indicative of results of
operations that would have been reported had the acquisitions been completed at
January 1, 1994.
F-21
Report of Independent Accountants
To the Stockholders of
Landers Auto Sales, Inc.
We have audited the accompanying balance sheets of Landers Auto Sales, Inc. as
of July 31, 1995 and December 31, 1994 and the related statements of operations,
retained earnings and cash flows for the period ended July 31, 1995 and the
years ended December 31, 1994 and 1993. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Landers Auto Sales, Inc. as of
July 31, 1995 and December 31, 1994 and the results of its operations and its
cash flows for the period ended July 31, 1995 and the years ended December 31,
1994 and 1993 in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Memphis, Tennessee
May 31, 1996
F-22
LANDERS AUTO SALES, INC.
Balance Sheets
(Dollars in thousands)
------------------------
December 31, July 31,
1994 1995
------------- ---------
Assets:
Current Assets
Cash $ 3,229 $ 2,278
Accounts receivable 6,948 6,593
Inventories 26,871 22,433
Other current assets -- 29
------------- ---------
Total current assets 37,048 31,333
------------- ---------
Property and equipment, net 871 927
Intangible assets 55 49
------------- ---------
Total assets $ 37,974 $ 32,309
------------- ---------
------------- ---------
Liabilities and stockholders' equity:
Current Liabilities
Floor plan notes payable $ 26,328 $ 21,384
Current portion of long-term debt 88 115
Due to stockholders 2,669 2,046
Accounts payable 1,374 1,337
Accrued expenses 959 1,313
Income taxes payable 1,623 336
Accrued dividends -- 1,545
------------- ---------
Total current liabilities 33,041 28,076
------------- ---------
Long-term debt -- net of current portion 187 239
------------- ---------
Total liabilities 33,228 28,315
------------- ---------
Commitments and contingent liabilities
Stockholders' equity:
Common stock, no par value; authorized 100 shares, issued and outstanding 10 shares 805 805
Retained earnings 3,941 3,189
------------- ---------
Total stockholders' equity 4,746 3,994
------------- ---------
Total liabilities and stockholders' equity $ 37,974 $ 32,309
------------- ---------
------------- ---------
The accompanying notes are an integral part of the financial statements.
F-23
LANDERS AUTO SALES, INC.
Statements of Operations
(Dollars in thousands)
----------------------------------
Period
Years ended ended July
December 31, 31,
---------------------- ----------
1993 1994 1995
---------- ---------- ----------
Sales $ 163,343 $ 228,912 $ 164,368
Cost of sales, including floor plan interest for the years ended December 31,
1993 and 1994 and for the period ended July 31, 1995 of $274, $1,922 and
$1,503, respectively 153,631 208,932 147,566
---------- ---------- ----------
Gross profit 9,712 19,980 16,802
Selling, general and administrative expenses 9,530 15,445 10,132
---------- ---------- ----------
Income from operations 182 4,535 6,670
Other income (expense), net 214 209 242
---------- ---------- ----------
Income before income taxes 396 4,744 6,912
Provision for income taxes 181 1,810 449
---------- ---------- ----------
Net income $ 215 $ 2,934 $ 6,463
---------- ---------- ----------
---------- ---------- ----------
The accompanying notes are an integral part of the financial statements.
F-24
LANDERS AUTO SALES, INC.
Statements of Retained Earnings
(Dollars in thousands)
-------------
Retained earnings, December 31, 1992 $ 850
Net income for the year 215
------
Retained earnings, December 31, 1993 1,065
Dividends (58)
Net income for the year 2,934
------
Retained earnings, December 31, 1994 3,941
Dividends (7,215)
Net income for the period 6,463
------
Retained earnings, July 31, 1995 $ 3,189
------
------
The accompanying notes are an integral part of the financial statements.
F-25
LANDERS AUTO SALES, INC.
Statements of Cash Flows
(Dollars in thousands)
-------------------------------
Period
Years ended ended
December 31, July 31,
-------------------- ---------
1993 1994 1995
--------- --------- ---------
Operating activities:
Net income $ 215 $ 2,934 $ 6,463
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 177 290 159
Amortization 38 27 7
Net loss (gain) on sale of assets -- 19 (5)
Changes in operating assets and liabilities:
Accounts receivable (2,236) (2,390) 353
Inventories (858) (7,534) 4,439
Other current assets (534) 654 (29)
Floor plan notes payable 1,862 5,954 (4,944)
Accounts payable 523 89 (37)
Accrued expenses 583 292 354
Income taxes payable (319) 1,623 (1,287)
--------- --------- ---------
Net cash provided by (used in) operating activities (549) 1,958 5,473
Investing activities:
Acquisition of property and equipment (365) (414) (76)
Proceeds from sale of assets -- 13 21
--------- --------- ---------
Net cash used in investing activities (365) (401) (55)
Financing activities:
Payment on debt (30) (96) (76)
Net increase (decrease) in cash overdrafts 1,015 (1,015) --
Net increase (decrease) in due to stockholders (67) 2,201 (623)
Dividends paid -- -- (5,670)
--------- --------- ---------
Net cash provided by (used in) financing activities 918 1,090 (6,369)
--------- --------- ---------
Net increase (decrease) in cash 4 2,647 (951)
Cash, beginning of period 578 582 3,229
--------- --------- ---------
Cash, end of period $ 582 $ 3,229 $ 2,278
--------- --------- ---------
--------- --------- ---------
The accompanying notes are an integral part of the financial statements.
F-26
LANDERS AUTO SALES, INC.
Statements of Cash Flows -- Supplemental Information
(Dollars in thousands)
---------------------------------------
Period
Years ended December 31, ended July
-------------------------- 31,
1993 1994 1995
------------ ------------ -----------
Supplemental cash flow information:
Cash paid during the period:
Interest $ 183 $ 1,966 $ 1,525
Income taxes 993 88 1,804
Supplemental Disclosures of Non-Cash Activities:
During the years ended December 31, 1993 and 1994 and the period ended July 31,
1995, the Company purchased equipment and vehicles totaling $88, $70 and $125,
respectively, through direct financing. During the period ended July 31, 1995,
the Company acquired computer equipment totaling $31 through a capital lease.
During the year ended December 31, 1993, the Company entered into the capital
lease of a computer for $230.
During the year ended December 31, 1994, a Company vehicle was destroyed. The
note relating to the vehicle in the amount of $20 was subsequently paid off by
the insurance company in full.
During the year ended December 31, 1994, the Company paid dividends to
stockholders in the form of Company owned land with a cost and a fair value of
$58.
During the period ended July 31, 1995, the Company accrued dividends to
stockholders in the amount of $1,545.
The accompanying notes are an integral part of the financial statements.
F-27
LANDERS AUTO SALES, INC.
Notes to Financial Statements
(Dollars in thousands)
1. Organization:
The December 31, 1993 financial statements of Landers Auto Sales, Inc. (the
"Company") were prepared on a consolidated basis and included the accounts of
its wholly owned subsidiaries, Landers Oldsmobile-GMC, Inc. and Landers
Jeep-Eagle, Inc. As of December 22, 1994, Landers Oldsmobile-GMC, Inc. and
Landers Jeep-Eagle, Inc. were merged into Landers Auto Sales, Inc. and operate
as divisions of Landers Auto Sales, Inc. under the trade names of Landers
Oldsmobile-GMC Trust and Landers Jeep-Eagle/Chrysler-Plymouth-Dodge,
respectively. All material divisional accounts and transactions have been
eliminated.
The Company, operating in Benton, Arkansas, sells and services new Oldsmobile,
GMC Trucks, Jeep, Eagle, Chrysler, Plymouth, Dodge cars and trucks and used
automobiles and service contracts thereon. The Company also earns a commission
on the sale of finance and insurance contracts.
The Company operates dealerships which hold franchise agreements with a number
of automotive manufacturers. In accordance with the individual franchise
agreement, each dealership is subject to certain rights and restrictions typical
of the industry. The ability of the manufacturers to influence the operations of
the dealerships or the loss of a franchise agreement could have a negative
impact on operating results of the Company.
2. Summary of Significant Accounting Policies:
The following is a summary of significant accounting policies followed in the
preparation of the financial statements.
ESTIMATES:
The preparation of 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 financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
REVENUE RECOGNITION:
Revenue is recognized by the Company when vehicles and parts are delivered to
consumers and when service work is performed.
INVENTORIES:
Inventories are stated at the lower of cost or market with cost determined by
the following methods: new vehicles are valued at the Last-in, first-out (LIFO)
method; used vehicles at the specific identification method; and parts,
accessories and other at factory list price.
PROPERTY AND EQUIPMENT:
Equipment and improvements are recorded at cost and depreciated over their
estimated useful lives, using the straight-line and accelerated methods. Useful
lives of equipment and improvements for purposes of computing depreciation are:
Leasehold improvements -- Economic life or life of the lease,
whichever is shorter.
Equipment, furniture and -- 5 to 7 years
fixtures
Expenditures for repairs and maintenance which increase the useful life or
substantially increase serviceability of the asset are capitalized. All others
are charged to expense as incurred. When equipment is sold or otherwise disposed
of, the cost and related accumulated depreciation are removed from their
respective accounts and any resulting gain or loss is included in the statement
of operations.
AMORTIZATION:
Amortization of intangibles is computed on the straight-line method. The period
of amortization is based upon the estimated time of benefit assigned to
intangible assets when acquired.
F-28
LANDERS AUTO SALES, INC.
Notes to Financial Statements (Continued)
(Dollars in thousands)
3. Concentration of Credit Risk:
The Company's significant concentration of credit risk is with its cash. The
Company maintains cash balances at several financial institutions located in
Arkansas which are at times in excess of federally-insured amounts.
4. Inventories:
Inventories consist of the following items as of:
-----------------------
December 31, July 31,
1994 1995
------------ ---------
New vehicles $ 18,945 $ 13,001
Used vehicles 7,903 9,517
Parts, accessories and other 1,503 1,435
------------ ---------
28,351 23,953
Cumulative LIFO reserve 1,480 1,520
------------ ---------
$ 26,871 $ 22,433
------------ ---------
------------ ---------
If the FIFO method had been used instead of the LIFO method, inventories would
have been higher by $1,480 and $1,520 at December 31, 1994 and July 31, 1995,
respectively.
5. Property and Equipment:
Property and equipment consists of the following as of:
-------------------------
December 31, July 31,
1994 1995
------------ -----------
Buildings and leasehold improvements $ 249 $ 289
Machinery and shop equipment 707 791
Furniture and fixtures 487 542
Company vehicles 147 148
------------ -----------
Total 1,590 1,770
Less: Accumulated depreciation and amortization 719 843
------------ -----------
Total property and equipment, net $ 871 $ 927
------------ -----------
------------ -----------
The Company has entered into several leases of computer equipment. The leases
meet the criteria of a capital lease and, accordingly, have been recorded as
such. The leases are noncancelable and expire in September 1998. The following
is a schedule of the computer equipment under capital leases at December 31,
1994 and July 31, 1995:
-------------------------
December 31, July 31,
1994 1995
------------ -----------
Computer equipment $ 230 $ 260
Accumulated depreciation (120) (147)
------------ -----
$ 110 $ 113
------------ -----
------------ -----
F-29
LANDERS AUTO SALES, INC.
Notes to Financial Statements (Continued)
(Dollars in thousands)
6. Floor Plan Notes Payable:
The amounts payable to financial institutions under trust receipt transactions
are collateralized by liens on inventories of specific new and used vehicles.
Floor plan notes payable for new and used vehicles are as follows as of:
----------------------------
December 31, July 31,
1994 1995
------------- -------------
Chrysler Credit Corporation:
Interest rate on new and used vehicles is prime plus 1/2%;
collateralized by specific motor vehicles and the personal guarantees
of the stockholders $ 19,027 $ 15,091
Interest is at prime plus 1%; collateralized by specific motor vehicles
and the personal guarantees of the stockholders 5,416 3,762
Benton Savings Bank:
Interest is at prime; collateralized by specific motor vehicles and the
personal guarantees of the stockholders 1,885 2,531
------------- -------------
Total floor plan notes payable -- new and used vehicles $ 26,328 $ 21,384
------------- -------------
------------- -------------
The prime rate at December 31, 1994 and July 31, 1995 was 8.5% and 8.75%,
respectively.
Included in the Chrysler vehicle floor plan at December 31, 1994 and July 31,
1995 is $126 and $0, respectively, payable to a related party participating in
the floor plan agreements.
7. Long-Term Debt:
Long-term debt consists of the following as of:
-------------------------
December 31, July 31,
1994 1995
------------ -----------
Benton State Bank:
Various notes payable; interest is 7%. Monthly payment of $4 includes
principal and interest; collateralized by specific vehicles and various
Company assets expiring through June 1998 $ 102 $ 113
Chrysler Credit Corporation:
Interest is 7.5%. Monthly principal payment of $2, plus interest;
collateralized by specific equipment expiring June 2000 12 76
Capital lease obligations:
Interest is 8.4%. Monthly payments are $5. 161 166
------------ ---
Total 275 355
Less -- current portion 88 116
------------ ---
Long-term debt $ 187 $ 239
------------ ---
------------ ---
F-30
LANDERS AUTO SALES, INC.
Notes to Financial Statements (Continued)
(Dollars in thousands)
7. Long-Term Debt: (Continued)
Principal maturities of long-term debt in each of the next five years are as
follows:
-----------
Twelve month period ending July 31, Amount
- ------------------------------------------------------------------------------------- -----------
1996 $ 116
1997 115
1998 99
1999 15
2000 10
---
Total $ 355
---
---
Interest expense on all indebtedness amounted to $279, $1,989 and $1,504 for the
years ended December 31, 1993 and 1994 and for the period ended July 31, 1995,
respectively.
8. Related Party Transactions:
The Company leases its buildings and lots from Steve Landers, John Landers and
Bob Landers, stockholders of the Company. Rent expense for the year ended
December 31, 1994 and the period ended July 31, 1995 amounted to $429 and $378,
respectively. Effective August 1, 1995, the Company entered into a new twenty
year lease agreement with such stockholders.
Future minimum lease payments are as follows:
---------
Twelve month period ending July 31, Amount
- ------------------------------------------------------------------------------------ ---------
1996 $ 540
1997 540
1998 540
1999 540
2000 540
Thereafter 8,100
---------
Total $ 10,800
---------
---------
The balance due to stockholders at December 31, 1994 and July 31, 1995 totaled
$2,669 and $2,046, respectively. The stockholders are paid interest at a rate of
2% above the current certificate of deposit interest which are adjusted monthly
and payable on demand. The balance was repaid on August 15, 1995.
9. Provisions for Income Taxes:
Prior to January 1, 1995, the Company was treated as a C corporation for federal
income tax purposes. As of January 1, 1995, the Company elected to be treated as
an S corporation. Under this election, the Company's stockholders were
responsible for reporting the Company's federal taxable income on their personal
income tax returns.
F-31
LANDERS AUTO SALES, INC.
Notes to Financial Statements (Continued)
(Dollars in thousands)
9. Provisions for Income Taxes: (Continued)
The provision for income taxes consists of the following:
----------------------------------
Years Ended December Period Ended
31, July 31,
1993 1994 1995
--------- --------- ------------
Federal $ 166 $ 1,506 $ 449
State 15 304 0
--------- --------- ------------
$ 181 $ 1,810 $ 449
--------- --------- ------------
--------- --------- ------------
Prior to January 1, 1995, deferred income taxes were recognized for tax
consequences of temporary difference by applying enacted statutory tax rates,
applicable to future years, to differences between the financial reporting and
the tax basis of existing assets and liabilities. These differences relate
primarily to depreciation and amortization of intangibles which were minimal in
1994 and 1993.
Prior to January 1, 1995, the Company's effective income tax rate differed from
the Federal statutory tax rate principally due to state income taxes and certain
expenses which are not deductible for tax purposes. Such non-deductible expenses
were minimal during 1994 and 1993. The provision for income tax in 1995 relates
to the recapture of the LIFO reserve upon the Company's S Corporation election.
10. Profit Sharing Plan:
The Company maintains a profit sharing plan for all employees over the age of 21
who have completed one year of service. Contributions to the plan are at
management's discretion. Contributions for the year ended December 31, 1993 and
1994 and the period ended July 31, 1995 amounted to $190, $300 and $117,
respectively.
11. Reclassifications:
Certain amounts in the 1994 and 1993 financial statements have been reclassified
to conform to the presentation adopted in 1995.
12. Subsequent Event:
On August 15, 1995, the stockholders of the Company sold 80% of the stock to
United Auto Group, Inc. Upon completion of the sale, two of the original
stockholders each had a 10% interest in the Company. The remaining original
stockholder held no interest in the Company.
F-32
Report of Independent Accountants
To the Stockholder
Atlanta Toyota, Inc.
We have audited the accompanying balance sheets of Atlanta Toyota, Inc. as of
December 31, 1995 and 1994 and the related statements of operations, retained
earnings, and cash flows for each of the three years in the period ended
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Atlanta Toyota, Inc. as of
December 31, 1995 and 1994 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995 in conformity
with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
June 30, 1996
F-33
ATLANTA TOYOTA, INC.
Balance Sheets
(Dollars in thousands)
--------------------
December 31,
--------------------
1994 1995
--------- ---------
Assets
Current Assets:
Cash $ 1,677 $ 555
Accounts receivable, net of allowance for doubtful accounts ($4 and $7 for 1994 and
1995, respectively) 1,069 1,714
Current portion of notes receivable from related parties, net of allowance for
doubtful accounts of $219 and $378 in 1994 and 1995, respectively) 622 842
Inventories 8,282 8,123
Other current assets 11 1
--------- ---------
Total current assets 11,661 11,235
Property and equipment, net 336 1,150
Notes receivable from related parties, net of allowance for doubtful accounts ($128
and $379 in 1994 and 1995, respectively), non-current portion 357 857
Intangible assets 32 30
Other assets 2 1
--------- ---------
Total assets $ 12,388 $ 13,273
--------- ---------
Liabilities and Stockholders' Equity
Current Liabilities:
Floor plan notes payable $ 8,627 $ 8,847
Accounts payable 1,277 1,639
Accrued expenses 510 720
Deferred revenue 2,701 2,762
Reserve for chargebacks of finance and insurance income 243 471
--------- ---------
Total Current Liabilities 13,358 14,439
--------- ---------
Commitments and contingent liabilities
Stockholder's equity:
Common stock -- authorized, 10,000 shares of $.10 par value; issued and outstanding
1,000 shares 0 0
Distributions in excess of earnings (970) (1,166)
--------- ---------
Total stockholder's equity (970) (1,166)
--------- ---------
Total liabilities and stockholder's equity $ 12,388 $ 13,273
--------- ---------
--------- ---------
The accompanying notes are an integral part of the financial statements.
F-34
ATLANTA TOYOTA, INC.
Statements of Operations
(Dollars in thousands)
-------------------------------
Years ended December 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
Sales $ 104,080 $ 114,394 $ 112,162
Cost of sales, including floor plan interest for the years
ended December 31, 1993, 1994 and 1995 of $440, $540 and $752,
respectively 90,556 100,350 98,969
--------- --------- ---------
Gross profit 13,524 14,044 13,193
Selling, general and administrative 11,067 11,938 11,182
--------- --------- ---------
Income from operations 2,457 2,106 2,011
Other income (expense), net (148) (105) 17
--------- --------- ---------
Net income $ 2,309 $ 2,001 $ 2,028
--------- --------- ---------
--------- --------- ---------
The accompanying notes are an integral part of the financial statements.
F-35
ATLANTA TOYOTA, INC.
Statements of Retained Earnings
(Dollars in thousands)
-------------
Distribution in excess of earnings at December 31, 1992 $ (552)
Net income for the year 2,309
Distributions to stockholder (2,114)
------
Distribution in excess of earnings at December 31, 1993 (357)
Net income for the year 2,001
Distributions to stockholder (2,614)
------
Distribution in excess of earnings at December 31, 1994 (970)
Net income for the year 2,028
Distributions to stockholder (2,224)
------
Distribution in excess of earnings at December 31, 1995 $ (1,166)
------
------
The accompanying notes are an integral part of the financial statements.
F-36
ATLANTA TOYOTA, INC.
Statements of Cash Flows
(Dollars in thousands)
-------------------------------
Years ended December 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
Operating activities:
Net income $ 2,309 $ 2,001 $ 2,028
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 287 240 215
Net loss (gain) on sales of assets (15) 4 --
Provision for losses on accounts and notes receivable 323 143 413
Provision for chargebacks on finance and insurance income and
warranty claims 393 311 228
Changes in operating assets and liabilities:
Accounts and notes receivable (619) (482) (1,776)
Inventories (922) 1,043 243
Prepaid expenses (20) 55 10
Other assets (3) 1 1
Floorplan notes payable 2,514 (790) 223
Accounts payable and accrued liabilities (888) 751 635
--------- --------- ---------
Net cash provided by operating activities 3,359 3,277 2,220
--------- --------- ---------
Investing activities:
Refund of deposit -- 110 --
Purchases of equipment and leasehold improvements (351) (107) (1,115)
Proceeds from sale of assets 53 12 --
--------- --------- ---------
Net cash provided by (used for) investing activities (298) 15 (1,115)
--------- --------- ---------
Financing activities:
Payments on long-term debt (250) -- --
Net payments on notes payable on rental vehicles (65) (88) (3)
Principal payments on capital lease obligations (121) -- --
Distributions to stockholders (2,114) (2,614) (2,224)
--------- --------- ---------
Net cash used in financing activities (2,550) (2,702) (2,227)
--------- --------- ---------
Net increase (decrease) in cash 511 590 (1,122)
Cash, beginning of year 576 1,087 1,677
--------- --------- ---------
Cash, end of year $ 1,087 $ 1,677 $ 555
--------- --------- ---------
--------- --------- ---------
Supplemental cash flow information:
Cash paid during the period for interest $ 432 $ 540 $ 753
The accompanying notes are an integral part of the financial statements.
F-37
ATLANTA TOYOTA, INC.
Notes to Financial Statements
(Dollars in thousands)
1. Organization:
Atlanta Toyota, Inc. (the "Company"), a Texas Corporation, operating in Duluth,
Georgia, sells and services new Toyota and Buick vehicles and used automobiles
and service contracts thereon. The Company also earns a commission on the sale
of finance and insurance contracts.
The Company operates two franchise agreements with automotive manufacturers. In
accordance with the individual franchise agreement, each dealership is subject
to certain rights and restrictions typical of the industry. The ability of the
manufacturers to influence the operations of the dealerships or the loss of a
franchise agreement could have a negative impact on the operating results of the
Company.
2. Summary of Accounting Policies:
The following is a summary of significant accounting policies followed in the
preparation of the financial statements.
ESTIMATES
The preparation of 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 financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue is recognized by the Company when vehicles and parts are delivered to
consumers and when service work is performed.
NOTES RECEIVABLE
In the ordinary course of business, the Company sells used vehicles on an
installment payment basis through a related acceptance corporation installment
receivables that generally range from twelve to fifteen months. The related
acceptance corporation collects the installment payments and transmits to the
Company its portion periodically. The installment receivables are collateralized
by the related vehicle sold.
Management provides an allowance for estimated uncollectible amounts based on
historical experience and an evaluation of specific past-due notes.
INVENTORIES
Inventories are stated at the lower of cost or market with cost determined by
the following methods: new vehicles are valued at the last-in, first-out (LIFO)
method; used vehicles at the specific identification method; and parts,
accessories and other at factory list price.
PROPERTY AND EQUIPMENT
Equipment and improvements are recorded at cost and depreciated over their
estimated useful lives, principally on a straight-line basis. Leasehold
improvements are amortized over the lives of the respective leases or the
service lives of the improvements, whichever is shorter.
Expenditures for repairs and maintenance which increase the useful life or
substantially increase serviceability of the asset are capitalized. All others
are charged to expense as incurred. When equipment is sold or otherwise disposed
of, the cost and related accumulated depreciation are removed from their
respective accounts and any resulting gain or loss is included in the statement
of operations.
AMORTIZATION
Amortization of intangibles is computed on the straight-line method. The period
of amortization is based upon the estimated time of benefit assigned to
intangible assets when acquired.
F-38
ATLANTA TOYOTA, INC.
Notes to Financial Statements (Continued)
(Dollars in thousands)
2. Summary of Accounting Policies: (Continued)
RESERVE FOR CHARGEBACKS OF FINANCE AND INSURANCE INCOME
Provisions for chargebacks of finance and insurance income resulting from
customer prepayments and repossessions are recorded based on management's
estimates and historical experience.
LIABILITY FOR SERVICE CONTRACT WARRANTY CLAIMS
The Company sells extended service contracts on vehicles. A liability for future
repair costs covered by these service contracts and amounts for future contract
cancellations is established based on management's estimates and historical
experience.
INCOME TAXES
The income taxes on the net earnings of the Company are payable personally by
the stockholder pursuant to an S corporation election under the Internal Revenue
Code. Accordingly, no provision for income taxes has been made in these
financial statements.
3. Concentration of Credit Risk:
The Company's significant concentration of credit risk is with its cash and
notes receivable from a related party. The Company maintains cash balances at
several financial institutions located in Georgia which are at times in excess
of federally insured amounts. The notes receivable are from a related acceptance
corporation and are supported by installment receivables that generally range
from twelve to fifteen months.
4. Inventories:
Inventories consist of the following:
--------------------
December 31,
1994 1995
--------- ---------
New vehicles $ 8,867 $ 7,517
Used vehicles 872 2,283
Parts, accessories and other 645 625
--------- ---------
10,384 10,425
Cumulative LIFO reserve (2,102) (2,302)
--------- ---------
$ 8,282 $ 8,123
--------- ---------
--------- ---------
If the FIFO method had been used instead of the LIFO method, inventories would
have been higher by $2,102 and $2,302 at December 31, 1994 and 1995,
respectively.
5. Property and Equipment:
Property and equipment consists of the following:
--------------------
December 31,
1994 1995
--------- ---------
Furniture, fixtures and equipment $ 995 $ 944
Service vehicles 309 332
Leasehold improvements 29 241
Construction in progress -- 786
--------- ---------
Total 1,333 2,303
Less: Accumulated depreciation and amortization 997 1,153
--------- ---------
Total property and equipment, net $ 336 $1,150
--------- ---------
--------- ---------
F-39
ATLANTA TOYOTA, INC.
Notes to Financial Statements (Continued)
(Dollars in thousands)
6. Floor Plan Notes Payable:
The amounts payable to financial institutions under trust receipt transactions
are collateralized by liens on inventories of specific new and used vehicles.
Notes payable for new and used vehicles at December 31 are as follows:
--------------------------
December 31,
1994 1995
------------ ------------
General Electric Capital Corporation:
Interest rate on new and used vehicles is 8.5% and 8.75%, respectively;
collateralized by specific motor vehicles $8,547 $8,770
South East Toyota Distributors:
Interest is at prime; collateralized by specific motor vehicles and the
personal guarantee of the stockholder 80 77
------------ ------------
Total notes payable -- new and used vehicles $8,627 $8,847
------------ ------------
------------ ------------
The prime rate at December 31, 1994 and 1995 was 8.5%.
7. Operating Lease Commitments:
The Company conducts its operations in leased facilities under a long-term
operating lease agreement with a related party requiring monthly payments of
approximately $90 through March 1997. Total rent expense paid was $1,072, $1,089
and $1,085 for 1993, 1994 and 1995, respectively.
8. Related Party Transactions:
The Company utilizes an advertising agency which is owned by the Company's
stockholder. The agency charges the Company an agency fee of fifteen percent of
total advertising costs plus a monthly consulting fee. Such advertising costs
were $1,638, $1,673 and $1,624 and total agency and consulting fees were $271,
$281 and $274 in 1993, 1994 and 1995, respectively.
The Company contracts with a related party which is majority owned by the
Company's stockholder to administer extended service contracts sold to
customers. A fee of forty-two dollars per contract is charged for
administration. Total administration fees were approximately $81, $70 and $62 in
1993, 1994 and 1995, respectively.
The Company sells used car notes receivable to an acceptance corporation which
is majority owned by the Company's stockholder. The related notes receivable
totaled $1,200 and $2,585 at December 31, 1994 and 1995, respectively.
9. Reclassifications:
Certain amounts in the 1993 and 1994 financial statements have been reclassified
to conform to the presentation adopted in 1995.
10. Subsequent Event:
On January 16, 1996, the stockholder of Atlanta Toyota, Inc. sold 100% of the
stock to United Auto Group, Inc.
F-40
Report of Independent Accountants
To the Stockholders
of Steve Rayman Nissan, Inc.:
We have audited the accompanying balance sheets of Steve Rayman Nissan, Inc. as
of December 31, 1995 and 1994, and the related statements of operations,
retained earnings and cash flows for each of the two years in the period ended
December 31, 1995 and from the date of inception (April 5, 1993) to December 31,
1993. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Steve Rayman Nissan, Inc. as of
December 31, 1995 and 1994 and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 1995 and from the
date of inception (April 5, 1993) to December 31, 1993, in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
June 14, 1996
F-41
STEVE RAYMAN NISSAN, INC.
Balance Sheets
(Dollars in thousands except per share amounts)
--------------------
December 31,
--------------------
1994 1995
--------- ---------
ASSETS
Current assets:
Cash $ 187 $ 6
Accounts receivable 942 2,522
Inventories 4,172 4,514
Prepaid expenses and other assets 12 33
--------- ---------
Total current assets 5,313 7,075
Leasehold improvements, furniture and equipment, net 281 205
Intangibles, net 619 543
--------- ---------
Total assets $ 6,213 $ 7,823
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Floor plan notes payable $ 2,954 $ 4,100
Current portion of long-term debt 100 100
Current portion of payable for noncompete agreements 75 75
Current portion of obligation under capital lease 71 70
Accounts payable 392 734
Accrued expenses 352 471
--------- ---------
Total current liabilities 3,944 5,550
Long-term debt, net of current portion 225 125
Payable for noncompete agreements, non-current 550 475
Obligation under capital lease, non-current 133 63
--------- ---------
Total liabilities 4,852 6,213
Commitments and contingent liabilities
Stockholders' equity:
Common stock, par value $100 per share, authorized issued and outstanding 5,000 shares 500 500
Additional paid-in capital 100 100
Retained earnings 761 1,010
--------- ---------
Total stockholders' equity 1,361 1,610
--------- ---------
Total liabilities and stockholders' equity $ 6,213 $ 7,823
--------- ---------
--------- ---------
The accompanying notes are an integral part of the financial statements.
F-42
STEVE RAYMAN NISSAN, INC.
Statements of Operations
(Dollars in thousands)
-------------------------------------------------------------
Unaudited Unaudited
Nine months Three months Four months
ended Years ended ended March ended
December 31, December 31, 31, April 30,
------------ -------------------- ------------ -----------
1993 1994 1995 1995 1996
------------ --------- --------- ------------ -----------
Sales $ 27,750 $ 46,637 $ 62,672 $ 13,072 $ 19,892
Cost of sales, including floor plan interest of
$164, $262 and $434 for 1993, 1994 and 1995,
respectively 23,415 40,036 52,570 11,150 16,503
------------ --------- --------- ------------ -----------
Gross profit 4,335 6,601 10,102 1,922 3,389
Selling, general and administrative expenses 3,981 6,045 8,989 1,889 2,481
------------ --------- --------- ------------ -----------
Operating income 354 556 1,113 33 908
Other income (expense), net (22) (27) 1 -- --
------------ --------- --------- ------------ -----------
Net income $ 332 $ 529 $ 1,114 $ 33 $ 908
------------ --------- --------- ------------ -----------
------------ --------- --------- ------------ -----------
The accompanying notes are an integral part of the financial statements.
F-43
STEVE RAYMAN NISSAN, INC.
Statements of Retained Earnings
(Dollars in thousands)
---------
Retained earnings, April 5, 1993 $ 0
Net income for the year 332
Dividends (100)
---------
Retained earnings, December 31, 1993 232
Net income for the year 529
---------
Retained earnings, December 31, 1994 761
Net income for the year 1,114
Dividends (865)
---------
Retained earnings, December 31, 1995 $ 1,010
---------
---------
The accompanying notes are an integral part of the financial statements.
F-44
STEVE RAYMAN NISSAN, INC.
Statements of Cash Flows
(Dollars in thousands)
-----------------------------------------------------------
Unaudited
Unaudited Four
Nine months Three Months months
ended Years ended ended ended
December 31, December 31, March 31, April 30,
------------ -------------------- ------------ ---------
1993 1994 1995 1995 1996
------------ --------- --------- ------------ ---------
Operating activities:
Net income $ 332 $ 529 $ 1,114 $ 33 $ 908
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 28 37 38 14 8
Amortization 126 145 145 19 --
Changes in operating assets and liabilities:
Accounts receivables (702) (241) (1,580) (666) 452
Inventories (696) (234) (343) (1,226) (2,120)
Prepaid expenses and other assets (3) 7 (21) (54) (254)
Floor plan notes payable 500 (287) 1,146 934 1,570
Accounts payable and accrued expenses 543 204 461 1,026 211
------------ --------- --------- ------------ ---------
Net cash provided by operating activities 128 160 960 80 775
------------ --------- --------- ------------ ---------
Investing activities:
Purchase of property and equipment (146) (16) (32) (9) (6)
Other (16) 0 2 -- --
------------ --------- --------- ------------ ---------
Net cash used in investing activities (162) (16) (30) (9) (6)
------------ --------- --------- ------------ ---------
Financing activities:
Cash overdraft -- -- -- -- 398
Cash paid for noncompete agreement (50) (75) (75) (19) --
Proceeds from the sale of common stock 600 0 0 -- --
Principal payments under capital lease (59) (64) (71) (70) --
Principal payments on long-term borrowings (75) (100) (100) (25) (775)
Cash dividends paid (100) 0 (865) -- (398)
------------ --------- --------- ------------ ---------
Net cash provided by (used in) financing
activities 316 (239) (1,111) (114) (775)
------------ --------- --------- ------------ ---------
Net increase (decrease) in cash 282 (95) (181) (43) (6)
Cash at beginning of the period 0 282 187 187 6
------------ --------- --------- ------------ ---------
Cash at end of period $ 282 $ 187 $ 6 $ 144 $ 0
------------ --------- --------- ------------ ---------
------------ --------- --------- ------------ ---------
Supplemental schedule of non-cash investing and
financing activities:
Capitalization of noncompete agreement and
related debt $ 750
The accompanying notes are an integral part of the financial statements.
F-45
STEVE RAYMAN NISSAN, INC.
(Information related to the three months ended March 31, 1995
and four months ended 1996 is unaudited)
Notes to Financial Statements
(Dollars in thousands)
1. Organization:
Steve Rayman Nissan, Inc. (the "Company"), operating in Morrow, Georgia, sells
and services new Nissan cars and trucks and used vehicles and service contracts
thereon. The Company also earns a commission on the sale of finance and
insurance contracts.
The Company operates a dealership which holds a franchise agreement with an
automotive manufacturer. In accordance with the franchise agreement, the
dealership is subject to certain rights and restrictions typical of the
industry. The ability of the manufacturer to influence the operations of the
dealership or the loss of the franchise agreement would have a negative impact
on operating results of the Company.
2. Summary of Significant Accounting Policies:
The following is a summary of significant accounting policies followed in the
preparation of the financial statements.
ESTIMATES:
The preparation of 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 financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
REVENUE RECOGNITION:
Revenue is recognized by the Company when vehicles or parts are delivered to
consumers and when service work is performed.
INVENTORIES:
New and used vehicles and parts and accessories inventories are valued at the
lower of cost or market. Cost is determined on the Last-in, first-out (LIFO)
method.
LEASEHOLD IMPROVEMENTS, FURNITURE AND EQUIPMENT:
Leasehold improvements, furniture and equipment are stated at cost and
depreciated over their estimated useful lives, principally by the straight-line
method. Computer equipment under a capital lease used in operating the
dealership is amortized over the life of the lease (five years).
Expenditures for repairs and maintenance which increase the useful life or
substantially increase serviceability of the asset are capitalized. All others
are charged to expense as incurred. When equipment is sold or otherwise disposed
of, the cost and related accumulated depreciation are removed from their
respective accounts and any resulting gain or loss included in the statement of
operations.
INTANGIBLES:
Intangibles are being amortized using the straight-line method over ten years.
Accumulated amortization of intangibles as of December 31, 1994 and 1995 was
$131 and $205, respectively.
INCOME TAXES:
The income taxes on the net earnings of the Company are payable personally by
the stockholder pursuant to an S corporation election under the Internal Revenue
Code. Accordingly, no provision for income taxes has been made in these
financial statements.
F-46
STEVE RAYMAN NISSAN, INC.
(Information related to the three months ended March 31, 1995
and four months ended 1996 is unaudited)
Notes to Financial Statements (Continued)
(Dollars in thousands)
2. Summary of Significant Accounting Policies: (Continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying values of cash, contracts in transit, accounts receivable, factory
receivables, warranty receivables, notes payable, long-term debt and accounts
payable approximate their fair values due to the short-term maturities of those
instruments.
3. Concentration of Credit Risk:
The Company's significant concentration of credit risk is with its cash. The
Company maintains cash balances at several financial institutions located in
Georgia which are at times in excess of federally-insured amounts.
4. Inventories:
Inventories consist of the following:
--------------------
December 31,
--------------------
1994 1995
--------- ---------
New vehicles and demonstrators $ 3,063 $ 3,737
Used vehicles 686 391
Parts and accessories 423 386
--------- ---------
$ 4,172 $ 4,514
--------- ---------
--------- ---------
The use of the LIFO method of determining the cost of new and used vehicle
inventories and parts had the effect of decreasing inventories at December 31,
1994 and 1995 by $273 and $446, respectively, and decreasing net income for the
periods ended December 31, 1993, 1994 and 1995 by $121, $152 and $173,
respectively, as compared to what they would have been under the
specific-identification cost method.
5. Leasehold Improvements, Furniture and Equipment:
Leasehold improvements, furniture and equipment consists of:
--------------------
1994 1995
--------- ---------
Computer equipment under capital lease $ 347 $ 347
Machinery and shop equipment 33 44
Furniture and fixtures 73 79
Leasehold improvements 44 53
Service vehicles 10 12
--- ---
507 535
Less: accumulated depreciation and amortization 226 330
--- ---
$ 281 $ 205
--- ---
--- ---
6. Floor Plan Payable:
Floor plan notes payable are collateralized by chattel mortgages on new and used
vehicles. Amounts are payable when the collateral is sold. The obligation is
guaranteed by the stockholders. Interest was payable at the LIBOR rate on the
first day of the month plus 2.5%, and at the prime commercial rate at prime plus
1/2% for the years ended December 31, 1994 and 1995, respectively. The effective
rate at December 31, 1995 was 8.4%, and the prime rate was 8.5% for the year
ended December 31, 1994.
F-47
STEVE RAYMAN NISSAN, INC.
(Information related to the three months ended March 31, 1995
and four months ended 1996 is unaudited)
Notes to Financial Statements (Continued)
(Dollars in thousands)
7. Long-Term Debt:
Long-term debt consists of a note payable to a bank, due in monthly installments
of $8 plus interest to April 1998. Interest is payable at the bank's prime
commercial rate. The bank's prime rate at December 31, 1994 and 1995 was 8.5%.
The note is collateralized by all inventories, not otherwise provided as
collateral, tools, equipment and receivables and is guaranteed by the
stockholders.
--------------------
December 31,
--------------------
1994 1995
--------- ---------
Total debt $ 325 $ 225
Less: current maturity of long-term debt 100 100
--- ---
Long-term debt $ 225 $ 125
--- ---
--- ---
Maturities of long-term debt are as follows:
-----------
Year Ending December 31, Amount
- ----------------------------------- -----------
1996 $ 100
1997 100
1998 25
---
$ 225
---
---
Interest expense on all long-term debt amounted to $23, $27 and $25, for the
years ended December 31, 1993, 1994 and 1995.
8. Acquisition of Nissan Dealership and Noncompete Agreements:
On April 5, 1993, the Company acquired the inventory and equipment of Stovall
Nissan, Inc. for approximately $2,284. The debt for new vehicles acquired was
assumed by the Company as an addition to the floor plan note payable.
On April 5, 1993, in connection with the acquisition, the Company entered into
noncompete agreements with the former owners of the Company in which the former
owners are precluded from participating in direct or indirect competition
related to the sale of new Nissan vehicles for a period of ten years in exchange
for $750. During the periods ended December 31, 1993, 1994 and 1995, the Company
paid $50, $75 and $75, respectively, in accordance with the noncompete
agreements. The maturity of the remaining obligations is as follows:
----------
December
31,
1995
----------
Total amount due $ 550
Less: current portion of amount due 75
----------
Long-term payable for noncompete agreements $ 475
----------
----------
F-48
STEVE RAYMAN NISSAN, INC.
(Information related to the three months ended March 31, 1995
and four months ended 1996 is unaudited)
Notes to Financial Statements (Continued)
(Dollars in thousands)
9. Lease Transactions:
The Company leases its building and land under an operating lease from a
stockholder. The lease expires in May 2004 and requires annual rentals plus the
payment of property taxes and insurance on the property. The rent expense was
$162 for the period ended December 31, 1993 and $226 for each of the years ended
December 31, 1994 and 1995.
The following is a schedule by year of future minimum rental payments required
unde the operating leases as of December 31, 1995.
---------
Year Ending December 31, Amount
- -------------------------------------------------------------------- ---------
1996 $ 228
1997 228
1998 236
1999 248
2000 260
Thereafter 1,132
---------
$ 2,332
---------
---------
The Company leases certain computer equipment and software used in the operation
of the dealership. The leases have been accounted for as capital leases. The
assets under capital leases of $347 are being amortized over the lives of the
leases on a straight-line basis. Accumulated amortization amounted to $162 and
$231 as of December 31, 1994 and 1995 respectively.
As of December 31, 1995, minimum future lease payments due under the capital
leases are as follows:
---------
Year Ending December 31, Amount
- -------------------------------------------------------------------- ---------
1996 $ 80
1997 66
---------
Total minimum lease payments 146
Less amount representing interest 13
---------
Present value of net minimum lease payments 133
Less current principal maturities of obligations under capital lease 70
---------
Long-term obligation under capital lease $ 63
---------
---------
F-49
STEVE RAYMAN NISSAN, INC.
(Information related to the three months ended March 31, 1995
and four months ended 1996 is unaudited)
Notes to Financial Statements (Continued)
(Dollars in thousands)
10. Transactions With Affiliates:
Transactions with related parties are as follows:
-------------------------------
Period Ended
December 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
Management fees (paid to company under common control) $ 452 $ 683 $ 1,230
Rent (paid to majority stockholder) 162 226 226
Receivables (from companies under common control) -- 49 113
Payables (to companies under common control) -- -- 3
Sales (to companies under common control, primarily body shops and other
auto dealerships) 165 363 474
Purchases (from companies under common control, primarily body shops and
other auto dealerships) -- 315 318
11. President-Stockholder Bonus Arrangement:
The Company has agreed to pay a year-end bonus equal to 25% of its net income
before the bonus and the LIFO effect on income to its president, who is also a
49% stockholder. The bonus was $609, $913 and $1,650 for the years ended
December 31, 1993, 1994 and 1995, respectively.
12. Employee Benefit Plan:
The Company provides a savings plan under Section 401(k) of the Internal Revenue
Code. The savings plan covers all employees who elect to be participants and who
have been credited with 1,000 hours of service in the preceding twelve months of
the plan year. Employees may contribute to the savings plan up to 20% of their
salary. The amount the Company contributes is discretionary. Company
contributions vest in varying percentages over six years and Company
contributions to those employees with over six years of service vest
immediately. Company contributions are charged to expense. Amounts recorded for
Company contributions were $0, $10 and $11 for the periods ended December 31,
1993, 1994 and 1995, respectively.
13. Reclassifications:
Certain amounts in the 1993 and 1994 financial statements have been reclassified
to conform to the presentation adopted in 1995.
14. Subsequent Event:
On May 1, 1996, the stockholders of the Company consummated a transaction to
sell the outstanding stock of the Company to a third party. The acquisition
agreement provides for the Company to lease the land and building on which the
dealership is located for a period of 20 years, with an option to extend up to
30 years.
F-50
Report of Independent Accountants
To the Stockholder of
Hickman Nissan, Inc.:
We have audited the accompanying balance sheet of Hickman Nissan, Inc. as of
December 31, 1995 and the related statements of income and retained earnings and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hickman Nissan, Inc. as of
December 31, 1995 and the results of its operations and cash flows for the year
then ended in conformity with generally accepting accounting principles.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Atlanta, Georgia
August 16, 1996
F-51
HICKMAN NISSAN, INC.
Balance Sheets
(Dollars in thousands except per share data)
--------------------
(Unaudited)
December June 30,
31, 1995 1996
--------- ---------
ASSETS
Current
Cash and cash equivalents $ -- $ 211
Accounts receivable 5,789 4,442
Inventories (note 3) 4,766 6,272
Prepaid expenses 49 264
--------- ---------
Total current assets 10,604 11,189
Property and equipment, at cost
Furniture and Office equipment 1,077 1,134
Leasehold improvements 746 746
Parts and service equipment 338 352
Company vehicles 150 138
Signs 39 43
--------- ---------
Total property and equipment 2,350 2,413
Less: accumulated depreciation 1,869 1,870
--------- ---------
Property and equity, net 481 543
Other assets
Deposits 61 64
--------- ---------
Total assets $ 11,146 $ 11,796
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current
Notes payable (note 4)
Bank South floor plan 6,975 8,978
Reyna Financial, current portion 31 33
--------- ---------
Total notes payable 7,006 9,011
Accounts payable 1,574 916
Accrued liabilities 910 646
--------- ---------
Total current liabilities 9,490 10,573
Long-term portion of notes payable (note 4) 75 56
--------- ---------
Total liabilities 9,565 10,629
Stockholder's Equity
Common stock, $100 par value, 10,000 shares
authorized,
500 shares issued and outstanding 50 50
Paid-in capital 1 1
Retained earnings 1,530 1,116
--------- ---------
1,581 1,167
--------- ---------
Total liabilities and stockholder's equity $ 11,146 $ 11,796
--------- ---------
--------- ---------
The accompanying notes are an integral part of the financial statements.
F-52
HICKMAN NISSAN, INC.
Statements of Income and Retained Earnings
(Dollars in thousands)
-----------------------------------
Year Ended (Unaudited)
December Six Months Ended
31, June 30,
1995 1995 1996
---------- ---------- -----------
Net sales
New vehicles $ 59,966 $ 27,028 $ 28,556
Used vehicles 15,568 7,368 7,564
Finance, insurance and other revenue 2,668 3,795 4,198
Parts and service 7,620 794 1,002
---------- ---------- -----------
Total net sales 85,822 38,985 41,320
Cost of sales, including floor plan interest of $668
at December 31, 1995 77,256 35,005 36,581
---------- ---------- -----------
Gross profit 8,566 3,980 4,739
Operating expenses 7,619 3,597 4,072
---------- ---------- -----------
Operating income 947 383 667
Other income net of other (expense) 21 (7) 19
---------- ---------- -----------
Net income 968 376 686
Retained earnings, beginning of period 562 562 1,530
Distributions -- -- (1,100)
---------- ---------- -----------
Retained earnings, end of period $ 1,530 $ 938 $ 1,116
---------- ---------- -----------
The accompanying notes are an integral part of the financial statements.
F-53
HICKMAN NISSAN, INC.
Statements of Cash Flows
(Dollars in thousands)
---------------------------------------
Year Ended (Unaudited)
December Six Months Ended
31, June 30,
----------- --------------------------
1995 1995 1996
----------- ------------ ------------
Cash flows from operating activities:
Net income $ 968 $ 376 $ 686
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 212 106 51
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (3,153) (859) 1,347
(Increase) in inventory (418) (3,286) (1,506)
(Increase) in prepaid (11) (6) (215)
(Increase) decrease in other assets (267) 18 (3)
Proceeds of notes payable -- floor plan 1,600 3,540 2,003
Increase (decrease) in accounts payable 142 72 (110)
Increase (decrease) in accrued liabilities 444 127 (264)
----------- ------------ ------------
Net cash provided by (used in) operating
activities (483) 88 1,989
----------- ------------ ------------
Cash flows from investing activities:
Purchase of fixed assets (280) (248) (113)
----------- ------------ ------------
Net cash used in investing activities (280) (248) (113)
----------- ------------ ------------
Cash flows from financing activities:
Cash overdraft 548 -- (548)
Distributions to Owner -- -- (1,100)
Repayment of note payable (37) (19) (17)
----------- ------------ ------------
Net cash provided by financing activities 511 (19) (1,665)
----------- ------------ ------------
Net increase (decrease) in cash and cash equivalents (252) (179) 211
Cash and cash equivalents, beginning of period 252 252 0
----------- ------------ ------------
Cash and cash equivalents, end of period $ 0 $ 73 $ 211
----------- ------------ ------------
----------- ------------ ------------
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 668
-----------
-----------
The accompanying notes are an integral part of the financial statements.
F-54
HICKMAN NISSAN, INC.
Notes to Financial Statements
(Information related to the six months ended June 30, 1995 and 1996 is
unaudited)
(Dollars in thousands)
1. Organization:
The Company was organized in the State of Georgia on October 14, 1976 to operate
a Nissan automobile dealership in DeKalb County, Georgia. The Company is engaged
in the sale of new and used motor vehicles and vehicle service and parts. The
Company also earns a commission on the sale of finance and insurance contracts.
2. Accounting Principles Followed:
The following summarizes the accounting principles applied to designated items:
REVENUE RECOGNITION
Revenue is recognized by the Company when vehicles are delivered to consumers,
when finance and insurance income is earned, and when motor vehicles service
work is performed and parts are delivered.
INVENTORY VALUATION
All inventories are stated at the lower of cost or market, with cost determined
by the Last-in, first-out (LIFO) method. See note 3 for inventories summary.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. The Company depreciates its assets
using the straight-line method and predominately accelerated methods over lives
ranging from three to fifteen years. Depreciation expense for the year ended
December 31, 1995 is $212.
INCOME TAXES
Due to the Company's status as an S corporation, net income and investment tax
credits flow through to the stockholder and are reported by the stockholder in
such stockholder's return.
CASH & CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
CREDIT RISK
There are funds in excess of federally insured amounts for the Company of
approximately $150. However, due
to the rating and stability of the financial institution at which these funds
are held, the Company considers that credit risk to be minimal.
ESTIMATES
The preparation of these financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported. Actual results are not expected
to, but could, differ from those estimates. The accounts which require the use
of estimates are receivables, inventory, and accrued expenses.
UNAUDITED FINANCIAL STATEMENTS
The financial statements as of June 30, 1995 and 1996 and for the six month
periods then ended are unaudited; however, in the opinion of management, all
adjustments (consisting of normal recurring adjustments) necessary for a fair
presentation of the financial statements for the interim periods have been
included.
F-55
HICKMAN NISSAN, INC.
Notes to Financial Statements
(Information related to the six months ended June 30, 1995 and 1996 is
unaudited)
(Dollars in thousands) (Continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents, trade
accounts receivable and payable, and debt. The carrying amount of these
financial instruments approximates fair value due either to length of maturity
or existence of variable interest rates that approximate prevailing market
rates.
3. Inventories Summary:
--------------------------
(unaudited)
December 31, June 30,
1995 1996
------------- -----------
New Kia cars and trucks $ 1,278 $ --
New Nissan cars and trucks 3,857 6,907
Used cars and trucks 1,010 739
Parts, accessories and other 961 977
Cumulative LIFO reserve (2,340) (2,351)
------ -----------
$ 4,766 $ 6,272
------ -----------
------ -----------
4. Notes Payable:
The Company is obligated on notes payable as follows:
-----------
December
31,
1995
-----------
Floor plan notes payable to Bank South, due upon demand, secured by inventory
and personal guarantee of Lynda Hickman, interest is LIBOR plus 225 basis
points and is adjusted monthly. Interest at December 31 was 8.12% $ 6,975
-----------
-----------
Note payable, $3 monthly including interest at approximately 9%, through March
1999 secured by computer equipment. 103
Note payable $1 monthly including interest at approximately 11%, through March
1996 secured by computer system. 3
-----------
106
Less current maturities 31
-----------
Long term $ 75
-----------
-----------
Maturities of long-term debt for the year ending December 31,
-----------
Amount
-----------
1996 $ 31
1997 31
1998 34
1999 10
2000 --
-----------
$ 106
-----------
-----------
F-56
HICKMAN NISSAN, INC.
Notes to Financial Statements
(Information related to the six months ended June 30, 1995 and 1996 is
unaudited)
(Dollars in thousands) (Continued)
5. Related Party Transactions:
The Company leases the dealership lot and buildings from a stockholder. Rent is
$34 per month.
Subsequent to December 31, 1995, these related party leases were terminated upon
sale of the Company (note 7) and new leases were executed with payments of $35
due monthly, with CPI adjustments beginning January 1, 1998 through June 30,
2016.
The Company sells finance contracts which it originates on used automobiles to
an entity owned by Lynda Hickman. These finance contracts are sold on an
approximate 35% discount to face amount basis. Sales proceeds and the face
amount of finance contracts sold during 1995 were $707 and $1,087, respectively.
At December 31, 1995, the Company had contract receivables from Peachtree
Acceptance Corporation of $95.
6. Operating Leases:
The Company leases property and equipment under operating leases expiring in
various years through 2016.
Minimum future rental payments under non-cancelable operating leases having
remaining terms in excess of one year as of December 31, 1995 for each of the
next 5 years and in the aggregate are:
-----------
Year Ending Amount
- ----------------------------------------------------------- -----------
1996 $ 459
1997 458
1998 458
1999 458
2000 447
Thereafter 6,433
-----------
$ 8,713
-----------
-----------
The above table includes the related party leases as described in note 5.
7. Subsequent Events:
In 1996, the Company terminated its Kia automobile dealership agreement. The
Company did not incur any losses as a result of terminating this dealership
agreement.
On July 12, 1996 and effective June 30, 1996, the sole stockholder of the
Company sold 100% of the common stock of the Company to an affiliate of United
Auto Group, Inc.
8. Restatement:
Subsequent to the issuance of the Company's financial statements, management
determined that estimated liabilities for finance chargebacks had not been
included in those financial statements. The effect of including these estimated
liabilities in the Company's financial statements is to reduce retained earnings
at January 1, 1995 and December 31, 1995 and reduce net income for the year
ended December 31, 1995 as disclosed in the following table.
As
Previously As
Reported Restated
------------ ----------
Retained Earnings, January 1, 1995 $ 705 $ 562
Net Income for the year 1995 1,019 968
Retained Earnings, December 31, 1995 1,724 1,530
In addition, certain amounts have been reclassified to conform to current
presentation.
F-57
Report of Independent Accountants
To Stockholders of
Sun Automotive Group:
We have audited the accompanying combined balance sheets of Sun Automotive Group
as of December 31, 1995 and 1994, and the related combined statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1995. These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Sun Automotive Group
as of December 31, 1994 and 1995, and the results of its combined operations and
its combined cash flows for each of the three years in the period ended December
31, 1995, in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Phoenix, Arizona
June 12, 1996
F-58
SUN AUTOMOTIVE GROUP
Combined Balance Sheets
(Dollars in thousands)
-------------------------------
(Unaudited)
December 31, June 30,
1994 1995 1996
--------- --------- ---------
ASSETS:
Current assets:
Cash $ -- $ -- $ 121
Accounts receivable 5,160 6,562 6,907
Current portion of notes receivable 475 -- --
Inventories 11,747 20,366 15,968
Other current assets 35 30 53
--------- --------- ---------
Total current assets 17,417 26,958 23,049
--------- --------- ---------
Notes receivable, net of current portion 380 -- --
Property and equipment, net 10,329 11,358 11,128
Intangible assets -- 1,157 1,137
Other assets 206 690 843
--------- --------- ---------
Total assets $ 28,332 $ 40,163 $ 36,157
--------- --------- ---------
--------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable $ 1,624 $ 2,015 $ 1,357
Accrued liabilities 2,636 3,497 2,946
Floor plan note payable 9,732 17,104 14,263
Current portion of long-term debt 647 1,260 1,329
--------- --------- ---------
Total current liabilities 14,639 23,876 19,895
--------- --------- ---------
Long-Term Liabilities:
Long-term debt, net of current portion 11,994 13,708 12,960
--------- --------- ---------
Total liabilities 26,633 37,584 32,855
--------- --------- ---------
Commitments and contingent liabilities
Stockholders' Equity:
Common stock, no par value, authorized
50,000 and 70,000 shares, issued and
outstanding 3,595 and 5,229 shares, as
of December 31, 1994 and 1995,
respectively 4,935 6,978 7,228
Retained earnings (deficit) (3,236) (4,399) (3,926)
--------- --------- ---------
Total stockholders' equity 1,699 2,579 3,302
--------- --------- ---------
Total liabilities and stockholders'
equity $ 28,332 $ 40,163 $ 36,157
--------- --------- ---------
--------- --------- ---------
The accompanying notes are an integral part of the financial statements.
F-59
SUN AUTOMOTIVE GROUP
Combined Statements of Operations
(Dollars in thousands)
-----------------------------------------------------
(Unaudited) For the
For the Years Ended December Six Months Ended
31, June 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
Sales $ 98,130 $ 116,252 $ 154,502 $ 74,822 $ 93,823
Cost of sales, including floor plan interest
for the years ended December 31, 1993, 1994
and 1995 of $499, $670 and $1,237,
respectively. 83,758 100,125 133,980 64,728 80,389
--------- --------- --------- --------- ---------
Gross profit 14,372 16,127 20,522 10,094 13,434
Selling, general and administrative expenses 13,194 14,301 17,319 8,030 9,661
--------- --------- --------- --------- ---------
Income from operations 1,178 1,826 3,203 2,064 3,773
Other income (expense), net (748) (536) (1,181) (500) (717)
--------- --------- --------- --------- ---------
Net income $ 430 $ 1,290 $ 2,022 $ 1,564 $ 3,056
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
The accompanying notes are an integral part of the financial statements.
F-60
SUN AUTOMOTIVE GROUP
Combined Statements of Stockholders' Equity
(Dollars in thousands)
--------------------------------------------
Common Stock Retained
-------------------- Earnings
Shares Amount (Deficit) Total
--------- --------- ----------- ---------
Balance, December 31, 1992 2,526 $ 3,148 $ (1,426) $ 1,722
Issuance of common stock 670 1,342 -- 1,342
Dividends -- -- (2,010) (2,010)
Net income -- -- 430 430
--------- --------- ----------- ---------
Balance, December 31, 1993 3,196 4,490 (3,006) 1,484
Issuance of common stock 399 445 -- 445
Dividends -- -- (1,520) (1,520)
Net income -- -- 1,290 1,290
--------- --------- ----------- ---------
Balance, December 31, 1994 3,595 4,935 (3,236) 1,699
Issuance of common stock 1,634 2,043 -- 2,043
Dividends -- -- (3,185) (3,185)
Net income -- -- 2,022 2,022
--------- --------- ----------- ---------
Balance, December 31, 1995 5,229 6,978 (4,399) 2,579
Issuance of common stock (Unaudited) -- 250 -- 250
Dividends (Unaudited) -- -- (2,583) (2,583)
Net income (Unaudited) -- -- 3,056 3,056
--------- --------- ----------- ---------
Balance, June 30, 1996 (Unaudited) 5,229 $ 7,228 $ (3,926) $ 3,302
--------- --------- ----------- ---------
--------- --------- ----------- ---------
The accompanying notes are an integral part of the financial statements.
F-61
SUN AUTOMOTIVE GROUP
Combined Statements of Cash Flows
for the years ended December 31, 1993, 1994 and 1995
(Dollars in thousands)
-----------------------------------------------------
(Unaudited)
Six Months
Years Ended Ended
December 31, June 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
Operating activities:
Net income $ 430 $ 1,290 $ 2,022 $ 1,564 $ 3,056
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 462 545 726 296 364
Net gain on sale of assets -- -- (244) -- (287)
Changes in operating assets and liabilities:
Accounts receivable 156 (712) (1,402) (3,909) (345)
Inventories 279 (250) (7,220) (4,294) 4,398
Notes receivable -- (855) 127 -- --
Prepaid and other assets 414 502 (479) (573) (176)
Floor plan notes payable (789) 741 7,372 7,222 (2,841)
Accounts payable and accrued liabilities 1,040 (176) 1,383 55 (837)
--------- --------- --------- --------- ---------
Net cash provided by operating activities 1,992 1,085 2,285 361 3,332
--------- --------- --------- --------- ---------
Investing activities:
Purchases of property and equipment (390) (846) (1,308) (669) (115)
Proceeds from sale of assets -- -- 971 -- 287
Acquisition of dealership -- -- (1,936) (1,936) --
--------- --------- --------- --------- ---------
Net cash used in investing activities (390) (846) (2,273) (2,605) 172
--------- --------- --------- --------- ---------
Financing activities:
Cash overdraft, net (408) 374 (131) 923 (371)
Payment on debt (816) (553) (2,070) (478) (679)
Proceeds from issuance of long-term debt 290 1,015 3,293 2,100 --
Dividends paid to shareholders (2,010) (1,520) (3,147) (1,537) (2,583)
Proceeds from issuance of common stock 1,342 445 2,043 1,236 250
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing
activities (1,602) (239) (12) 2,244 (3,383)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash 0 0 0 0 121
Cash, beginning of year 0 0 0 0 0
--------- --------- --------- --------- ---------
Cash, end of year $ 0 $ 0 $ 0 $ 0 $ 121
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
The accompanying notes are an integral part of the financial statements.
F-62
SUN AUTOMOTIVE GROUP
Statements of Cash Flows -- Supplemental Information
(Dollars in thousands)
-------------------------------
Years Ended December 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 2,503 $ 2,042 $ 1,805
Property acquired under capital leases:
Assets 87 -- --
Liabilities 87 -- --
Property acquired with debt:
Assets -- -- 191
Liabilities -- -- 191
The accompanying notes are an integral part of the financial statements.
F-63
SUN AUTOMOTIVE GROUP
(Information related to the six months ended June 30, 1995 and 1996 is
unaudited)
Notes To Combined Financial Statements
(Dollars in thousands)
1. Organization:
The Sun Automotive Group (the "Combined Group" or the "Company"), operating in
the State of Arizona, is engaged in the sale of new and used vehicles and
service contracts thereon. The Company also earns a commission on the sale of
finance and insurance contracts.
The Company operates dealerships which hold franchise agreements with a number
of automotive manufacturers. In accordance with the individual franchise
agreement, each dealership is subject to certain rights and restrictions typical
of the industry. The ability of the manufacturers to influence the operations of
the dealerships or the loss of a franchise agreement could have a negative
impact on the operating results of the Company.
2. Summary of Significant Accounting Policies:
The following is a summary of significant accounting policies followed in the
preparation of the financial statements.
COMBINATION POLICY - COMMON CONTROL
The accompanying combined financial statements include the following automotive
affiliated companies that are all under common control:
Scottsdale Management Group, Ltd.
SA Automotive, Ltd. (Scottsdale Acura)
Scottsdale Jaguar, Ltd. (Scottsdale Jaguar)
SL Automotive, Ltd. (Scottsdale Lexus)
SPA Automotive, Ltd. (Land Rover Scottsdale)
Sun BMW, Ltd. (Camelback BMW)
LRP, Ltd. (Land Rover Phoenix)
6725 Dealership, Ltd.
6725 Agent
Arizona Cars & Credit
Arizona Cars & Credit provided used vehicles and financing in Scottsdale,
Arizona. This affiliate was sold in July 1995, resulting in a $244 gain on the
sale.
All significant intercompany transactions and balances have been eliminated in
the combination.
ESTIMATES
The preparation of 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 financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INTERIM FINANCIAL STATEMENTS (UNAUDITED):
The interim unaudited financial statements reflect adjustments, consisting only
of normal recurring accruals, which are, in the opinion of the Company's
management, necessary for a fair presentation of the financial position and
results of operations for the periods presented. Operating results for any
interim period are not necessarily indicative of the results for a full year.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all highly liquid investments that have an
original maturity of three months or less at the date of purchase. The Company
also reflects outstanding checks in excess of the ledger cash balance as a
component of accounts payable. Such amounts as of December 31, 1994 and 1995
were $502 and $371, respectively.
REVENUE RECOGNITION
Revenue is recognized by the Company when vehicles and parts are delivered to
consumers, or when service is performed.
F-64
SUN AUTOMOTIVE GROUP
(Information related to the six months ended June 30, 1995 and 1996 is
unaudited)
Notes To Combined Financial Statements (Continued)
(Dollars in thousands)
2. Summary of Significant Accounting Policies: (Continued)
INVENTORIES
Inventories are stated at the lower of cost or market. In 1993, cost was
determined by using the specific identification method for vehicles and the
First-in, first-out (FIFO) method for parts. The Company changed its method of
inventory valuation to the Last-in, first-out (LIFO) method for both vehicles
and parts in 1994. Under the current economic environment of rising vehicle
prices, the Company believes that the LIFO method will result in a better
measurement of operating results. The effect of the change in 1994 was to
decrease net income by approximately $489. The cumulative effect of the change
has not been calculated nor have proforma results of prior periods been prepared
as it would require assumptions that may furnish results different from what
they would have been had the LIFO method actually been used in prior periods.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated over their estimated
useful lives, using the straight-line and accelerated methods. Useful lives for
purposes of computing depreciation and amortization are:
Buildings -- 31.5 years
Leasehold improvements -- Economic life or life of
the lease, whichever is
shorter.
Equipment, furniture and -- 5 to 7 years
fixtures, and company
vehicles
Expenditures for repairs and maintenance which increase the useful life or
substantially increase serviceability of the asset are capitalized. All others
are charged to expense as incurred. When equipment is sold or otherwise
disposed, the cost and related accumulated depreciation are removed from their
respective accounts and any resulting gain or loss is included in the statement
of operations.
INTANGIBLE ASSETS
Intangible assets consist of excess of cost over net assets acquired which is
being amortized on a straight-line basis over the estimated benefit period of 40
years. The Company periodically reviews these costs to assess recoverability.
Losses in value, if any, are charged to operations in the period such losses are
determined to be permanent.
The Company's policy with respect to assessing whether there has been a
permanent impairment in the value of excess of cost over net assets is to
compare the carrying value of a business' excess of cost over net assets with
the anticipated undiscounted future cash flows from operating activities of the
business. Factors considered by the Company in performing this assessment
include current operating income, trends and other economic factors. Accumulated
amortization at December 31, 1994 and 1995 was $0 and $43, respectively.
RESERVE FOR CHARGEBACK OF FINANCE AND INSURANCE INCOME
Provisions for chargebacks of finance and insurance income resulting from
customer prepayments and repossessions are recorded based on management's
estimates and historical experience.
LONG-LIVED ASSETS
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of" ("SFAS
121") requires that long-lived assets be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of the asset in
question may not be recoverable. SFAS 121 was adopted 1996, and did not have an
effect on the Group's results of operations, cash flows or financial position.
F-65
SUN AUTOMOTIVE GROUP
(Information related to the six months ended June 30, 1995 and 1996 is
unaudited)
Notes To Combined Financial Statements (Continued)
(Dollars in thousands)
2. Summary of Significant Accounting Policies: (Continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, accounts receivable,
accounts payable, debt, and an interest rate swap agreement. The carrying amount
of these financial instruments approximates fair value due either to length of
maturity or existence of variable interest rates that approximate prevailing
market rates. The fair value of the interest rate swap is the amount the Company
would receive or pay to terminate the swap agreement. At December 31, 1994 and
1995, the Company would have been required to pay $39 and $149, respectively, to
settle this agreement, representing an excess of carrying value over fair value,
based on estimates received from financial institutions.
INTEREST RATE SWAP AGREEMENT
The Company entered into an interest rate swap agreement to exchange fixed and
variable rate interest payment obligations without the exchange of the
underlying principal amounts in order to manage interest rate exposures on its
variable rate long-term mortgage obligations. The differential to be paid or
received is accrued as interest rates change and is recognized as an adjustment
to interest expense over the life of the agreement. The Company does not hold or
issue interest rate swap agreements for trading purposes.
CAPITAL STOCK
Each affiliate of the Company is an individual entity that issues stock for that
entity only and at different and unrelated prices. The Company as a single
entity does not issue stock. For purposes of these financial statements, the
capital stock activity of the individual affiliates have been summed to present
combined totals.
INCOME TAXES
Scottsdale Management Group, Ltd. is a C corporation under the provisions of the
Internal Revenue Code and, accordingly, is subject to federal and state income
taxes. The other affiliates of Sun Automotive Group have elected S corporation
status under the provisions of the Internal Revenue Code, except for 6725 Agent
which is a general partnership. Accordingly, they are generally not subject to
federal and state income taxes. For income tax reporting purposes, all profits
and losses, and certain other items, pass through to the stockholders/partners
of the other affiliates of Sun Automotive Group, who report these items on their
individual income tax returns. Scottsdale Management Group Ltd. recognizes no
profit or loss and as such a tax provision has not been made.
3. Concentration of Credit Risk:
The Company's significant concentration of credit risk is with its cash. The
Company maintains cash balances at a financial institution located in Arizona
which are at times in excess of federally-insured levels.
4. Inventories:
Inventories consist of the following:
---------------------------------
June 30,
December 31, 1996
1994 1995 (Unaudited)
--------- --------- -----------
New vehicles $ 8,314 $ 15,790 $ 11,583
Used vehicles 2,565 3,682 3,687
Parts, accessories and other 1,357 1,768 1,646
--------- --------- -----------
12,236 21,240 16,916
Cumulative LIFO reserve 489 874 948
--------- --------- -----------
$ 11,747 $ 20,366 $ 15,968
--------- --------- -----------
--------- --------- -----------
F-66
SUN AUTOMOTIVE GROUP
(Information related to the six months ended June 30, 1995 and 1996 is
unaudited)
Notes To Combined Financial Statements (Continued)
(Dollars in thousands)
4. Inventories: (Continued)
If the FIFO method had been used instead of the LIFO methods, inventories would
have been higher by $489 and $874 at December 31, 1994 and December 31, 1995,
respectively.
5. Property and Equipment:
Property and equipment consists of the following as of:
--------------------
December 31,
--------------------
1994 1995
--------- ---------
Land $ 3,473 $ 3,473
Buildings and leasehold improvements 6,528 6,556
Machinery and shop equipment 1,159 1,412
Furniture, fixtures, vehicles and other 2,694 3,912
--------- ---------
Total 13,854 15,353
Less: Accumulated depreciation and amortization 3,525 3,995
--------- ---------
Total property and equipment, net $ 10,329 $ 11,358
--------- ---------
--------- ---------
The Company has entered into a lease of computer equipment. The lease meets the
criteria of a capital lease and, accordingly, has been recorded as such. The
lease is noncancelable and expires November 1997. As of December 31, 1994 and
1995, there are approximately $87 of assets under capital leases.
6. Acquisitions:
On February 27, 1995, the Company acquired substantially all the assets of two
dealer franchises for $1,936 in cash and $1,231 of notes payable. The
acquisition was accounted for under the purchase method and the accompanying
financial statements reflect the results of operations from the date of
acquisition. The excess of purchase price over the underlying estimate fair
value of assets acquired was $1,200.
Included in other assets long-term and as part of the purchase, the Company
entered into certain lease arrangements with the seller to lease certain land
and buildings. As part of this lease, the Company made a $500 payment to the
seller as an advance on rent; the balance of which is being amortized over the
life of the lease.
7. Floor Plan Notes Payable:
The amounts payable to financial institutions under trust receipt transactions
are collateralized by liens on inventories of specific new and used vehicles.
Floor plan notes payable are as follows:
--------------------
December 31,
--------------------
1994 1995
--------- ---------
Bank of America, interest at variable reference rate as determined by
Bank of America National Trust and Savings Association $ 7,852 $ 13,558
Jaguar Cars, Inc. and other, interest at prime minus 2%, increasing
to prime plus 1% after 180 days 1,880 3,546
--------- ---------
Total $ 9,732 $ 17,104
--------- ---------
--------- ---------
The Bank of America note contains, among other provisions, requirements for
maintaining certain working capital and other financial ratios and restrictions
on incurring additional indebtedness.
The prime rate at December 31, 1994 and 1995 was 8.5%.
F-67
SUN AUTOMOTIVE GROUP
(Information related to the six months ended June 30, 1995 and 1996 is
unaudited)
Notes To Combined Financial Statements (Continued)
(Dollars in thousands)
8. Long-Term Debt:
Long-term debt consists of the following as of:
--------------------
December 31,
--------------------
1994 1995
--------- ---------
Bank of America:
Mortgage note payable, interest negotiated periodically based on the
bank's First Rate, interest was 7.75% at December 31, 1994 and 1995,
due in 2004, collateralized by land and buildings $ 8,783 $ 8,618
Bank of America:
Notes payable, interest negotiated periodically based on the bank's
First Rate, interest ranged from 7.75% to 8.5% at December 31, 1994
and 1995, maturing between March 1997 and December 2004,
collateralized by all the Company's personal property including
inventories, receivables, and furniture and fixtures 1,484 5,609
Camelback Automotive:
Note payable, interest at 6%, due in three annual installments of $150,
$150, and $200 plus interest in February 1996, 1997, and 1998,
respectively, collateralized by all BMW personal property and
inventory -- 500
H.M. Knappenberger Revocable Trusts:
Notes payable, interest at prime, due 367 days from demand 2,028 --
ADP Credit Corporation:
Capital lease obligation, terminated in September 1995 244 --
ADP Credit Corporation:
Note payable, interest at 9.4%, due September 2000, collateralized by
certain computer equipment -- 186
Toyota Motor Distributors:
Capital lease obligation, monthly payments of $2 including interest at
7.5% through December 1997, collateralized by computer equipment 66 45
Various notes payable 36 10
--------- ---------
12,641 14,968
Less - current portion 647 1,260
--------- ---------
$ 11,994 $ 13,708
--------- ---------
--------- ---------
F-68
SUN AUTOMOTIVE GROUP
(Information related to the six months ended June 30, 1995 and 1996 is
unaudited)
Notes To Combined Financial Statements (Continued)
(Dollars in thousands)
8. Long-Term Debt: (Continued)
Principal maturities of long-term debt in each of the next five years are as
follows:
---------
Period Ending
December 31, Amount
- -------------- ---------
1996 $ 1,260
1997 1,328
1998 1,308
1999 1,133
2000 6,584
Thereafter 3,355
---------
Total $ 14,968
---------
---------
The terms of certain financing agreements contain, among other provisions,
requirements for maintaining certain cash flows, current ratios and tangible net
worth ratios and restrictions on incurring additional indebtedness.
Interest expense for the years ending December 31, 1993, 1994 and 1995 was $762,
$664, and $1,150, respectively.
9. Commitments:
The Company is leasing land and buildings in Arizona under several noncancelable
operating leases with terms expiring at various dates from December 15, 1998
through December 31, 2005. Annual payments range from $89 to $324. Certain
leases provide for periodic increases in payments throughout the lease term in
proportion to increases in the consumer price index and other factors. Certain
leases also contain options to purchase the related property.
Rental expense for the years ended December 31, 1993, 1994 and 1995 was $508,
$668 and $1,183, respectively.
Future minimum lease commitments are summarized as follows:
---------
Amount
---------
1996 $ 1,253
1997 1,248
1998 1,231
1999 1,127
2000 1,054
Thereafter 4,245
---------
Total $ 10,158
---------
---------
10. Interest Rate Swap Agreement:
At December 31, 1995, the Company had one outstanding interest rate swap
agreement with Bank of America, under which the Company receives a variable rate
based on three month LIBOR rates on a notional amount of $5,750 and pays a fixed
rate of 7.45% as determined in three month intervals. The transaction
effectively changes a portion of the Company's interest rate exposure from a
variable rate to a fixed rate. The interest rate swap agreement expires at
January 31, 1997. The Company is exposed to credit loss in the event of
nonperformance by the other party to the interest rate swap agreements. However,
the Company does not anticipate nonperformance by the counterparties.
F-69
SUN AUTOMOTIVE GROUP
(Information related to the six months ended June 30, 1995 and 1996 is
unaudited)
Notes To Combined Financial Statements (Continued)
(Dollars in thousands)
11. Terminated Franchises:
In the first quarter of 1993, the Company terminated two franchises. As a result
of the termination, the Company recognized a charge to earnings from operations
of $1,161 which represented the remainder of rental payments for which the
Company was obligated under a non-cancelable lease obligation net of future
sublet rental income.
12. Defined Contribution Plan:
The Company has a 401(k) and profit sharing plan (the "Plan") for all employees
meeting certain service requirements. This Plan qualifies under Section 401(k)
of the Internal Revenue Code. The Plan allows employees to contribute up to 20%
of their annual compensation subject to Internal Revenue Code limitations. The
Company may make matching contributions at its discretion. During the years
ended December 31, 1993, 1994, and 1995, the Company contributed $30, $50 and
$75 to the Plan, respectively.
13. Reclassification:
Certain amounts in the 1993 and 1994 financial statements have been reclassified
to conform with the presentation adopted in 1995.
14. Subsequent Event:
In January 1996, the Company sold its Saab franchise and realized net profit of
$287 as a result of the sale of the franchise.
On June 6, 1996, the Company entered into an acquisition agreement and plan of
merger with United Auto Group, Inc.
F-70
Report of Independent Accountants
To Stockholders of
Evans Automotive Group:
We have audited the accompanying combined balance sheet of Evans Automotive
Group as of December 31, 1995, and the related combined statements of
operations, stockholders' equity and cash flows for the year ended December 31,
1995. These combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Evans Automotive
Group as of December 31, 1995, and the results of its combined operations and
its combined cash flows for the year ended December 31, 1995, in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
September 1, 1996
F-71
EVANS AUTOMOTIVE GROUP
Combined Balance Sheets
(Dollars in thousands, except per share data)
--------------------
December (Unaudited)
31, June 30,
1995 1996
--------- ---------
ASSETS:
Current assets:
Cash $ 667 $ 701
Accounts receivable 4,491 5,812
Inventories 9,024 8,927
Prepaid expenses and other assets 84 81
--------- ---------
Total current assets 14,266 15,521
--------- ---------
Property and equipment, net 365 335
Due from stockholder 550 699
Other assets 29 32
--------- ---------
Total assets $ 15,210 $ 16,587
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 757 $ 1,977
Accrued liabilities 682 729
Floor plan note payable 9,502 9,286
Due to stockholder 1,040 522
Other current liabilities 34 37
--------- ---------
Total current liabilities 12,015 12,551
--------- ---------
Deferred tax liability 6 6
Long-term lease obligations 104 89
--------- ---------
Total liabilities 12,125 12,646
--------- ---------
Commitments and contingent liabilities
Stockholders' equity:
Common stock, par value $1 per share, shares
authorized 1,500,000, shares issued and outstanding
1,501 2 2
Additional paid-in capital 922 922
Retained earnings 2,186 3,042
Less: Treasury stock, 500 shares at cost (25) (25)
--------- ---------
Total stockholders' equity 3,085 3,941
--------- ---------
Total liabilities and stockholders' equity $ 15,210 $ 16,587
--------- ---------
--------- ---------
The accompanying notes are an integral part of the financial statements.
F-72
EVANS AUTOMOTIVE GROUP
Combined Statements of Operations and Retained Earnings
(Dollars in thousands)
--------------------------------
For the
Year Ended (Unaudited) For the
December Six Months Ended
31, June 30,
---------- --------------------
1995 1995 1996
---------- --------- ---------
Sales $ 81,669 $ 38,593 $ 46,369
Cost of sales, including floor plan interest for the year
ended December 31, 1995 of $709 72,459 34,264 40,497
---------- --------- ---------
Gross profit 9,210 4,329 5,872
Selling, general and administrative expenses 7,842 3,666 4,664
---------- --------- ---------
Income from operations 1,368 663 1,208
Other income (expense), net (34) (11) 13
---------- --------- ---------
Income before provision for income taxes 1,334 652 1,221
Provision for income taxes 457 161 365
---------- --------- ---------
Net income 877 491 856
Retained earnings, beginning of period 1,309 1,309 2,186
---------- --------- ---------
Retained earnings, end of period $ 2,186 $ 1,800 $ 3,042
---------- --------- ---------
---------- --------- ---------
The accompanying notes are an integral part of the financial statements.
F-73
EVANS AUTOMOTIVE GROUP
Combined Statements of Cash Flows
for the year ended December 31, 1995
(Dollars in thousands)
----------------------------------
(Unaudited)
Six Months
Year Ended Ended
December 31, June 30,
------------ --------------------
1995 1995 1996
------------ --------- ---------
Operating activities:
Net income $ 877 $ 491 $ 856
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 90 45 48
Changes in operating assets and liabilities:
Accounts receivable 377 1,601 (1,321)
Inventories (1,522) (1,993) 97
Prepaid expenses and other current assets 1 (20) 3
Other assets 5 -- (3)
Floor plan notes payable 864 484 (216)
Floor plan notes payable--stockholder 143 116 (518)
Accounts payable and accrued liabilities (82) (110) 1,267
Deferred tax liability 6 -- --
------------ --------- ---------
Net cash provided by operating activities 759 614 213
------------ --------- ---------
Investing activities:
Purchases of property and equipment (91) (146) (30)
------------ --------- ---------
Net cash used in investing activities (91) (146) (30)
------------ --------- ---------
Financing activities:
Repayment of note payable to stockholder (67) -- --
Due from stockholder (184) 19 (149)
Increase in note payable to stockholder -- 44 --
------------ --------- ---------
Net cash provided by (used in) financing activities (251) 63 (149)
------------ --------- ---------
Net increase (decrease) in cash 417 531 34
Cash, beginning of year 250 250 667
------------ --------- ---------
Cash, end of year $ 667 $ 781 $ 701
------------ --------- ---------
------------ --------- ---------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 746
Property acquired under capital leases:
Assets $ 130
Liabilities $ (130)
The accompanying notes are an integral part of the financial statements.
F-74
EVANS AUTOMOTIVE GROUP
Notes To Combined Financial Statements
(Information related to the six months ended June 30, 1995 and 1996 is
unaudited)
(Dollars in thousands)
1. Organization:
The Evans Automotive Group (the "Group" or the "Company"), operating in the
State of Georgia, is engaged in the sale of new and used vehicles and service
contracts thereon. The Company also earns a commission on the sale of finance
and insurance contracts.
The Company operates dealerships which hold franchise agreements with two
automotive manufacturers. In accordance with the individual franchise agreement,
each dealership is subject to certain rights and restrictions typical of the
industry. The ability of the manufacturers to influence the operations of the
dealerships or the loss of a franchise agreement could have a negative impact on
the operating results of the Company.
2. Summary of Significant Accounting Policies:
The following is a summary of significant accounting policies followed in the
preparation of the financial statements.
COMBINATION POLICY - COMMON CONTROL
The accompanying combined financial statements include Charles Evans BMW, Inc.,
and Charles Evans Nissan, Inc.. All significant intercompany transactions and
balances have been eliminated in the combination.
ESTIMATES
The preparation of 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 financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INTERIM FINANCIAL STATEMENTS (UNAUDITED):
The interim unaudited financial statements reflect adjustments, consisting only
of normal recurring accruals, which are, in the opinion of the Company's
management, necessary for a fair presentation of the financial position and
results of operations for the periods presented. Operating results for any
interim period are not necessarily indicative of the results for a full year.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all highly liquid investments that have an
original maturity of three months or less at the date of purchase.
REVENUE RECOGNITION
Revenue is recognized by the Company when vehicles and parts are delivered to
consumers, and when services are performed. Finance and insurance revenues are
recognized upon the sale of the finance or insurance contract.
INVENTORIES
Inventories are stated at cost. The cost of new vehicles and parts is determined
using the Last-in, first-out (LIFO) method, and the cost of used vehicles is
determined on a specific identification basis.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated over their estimated
useful lives, using the straight-line and accelerated methods.
Expenditures for repairs and maintenance which increase the useful life or
substantially increase serviceability of the asset are capitalized. All others
are charged to expense as incurred. When equipment is sold or otherwise
disposed, the cost and related accumulated depreciation are removed from their
respective accounts and any resulting gain or loss is included in the statement
of operations.
F-75
EVANS AUTOMOTIVE GROUP
Notes To Combined Financial Statements (Continued)
(Information related to the six months ended June 30, 1995 and 1996 is
unaudited)
(Dollars in thousands)
2. Summary of Significant Accounting Policies: (Continued)
RESERVE FOR CHARGEBACK OF FINANCE AND INSURANCE INCOME
Provisions for chargebacks of finance and insurance income resulting from
customer prepayments and repossessions are recorded based on management's
estimates and historical experience.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, accounts receivable,
accounts payable and debt. The carrying amount of these financial instruments
approximates fair value due either to length of maturity or existence of
variable interest rates that approximate prevailing market rates.
CAPITAL STOCK
Each affiliate of the Company is an individual entity that issues stock for that
entity only and at different and unrelated prices. The Company as a single
entity does not issue stock. For purposes of these financial statements, the
capital stock activity of the individual affiliates have been summed to present
combined totals.
INCOME TAXES
Charles Evans BMW, Inc. is a C corporation under the provisions of the Internal
Revenue Code and, accordingly, is subject to federal and state income taxes for
which a provision has been made. The other affiliate of Evans Automotive Group
has elected S corporation status under the provisions of the Internal Revenue
Code. Accordingly, Charles Evans Nissan, Inc. is generally not subject to
federal and state income taxes. For income tax reporting purposes, all profits
and losses, and certain other items, pass through to the stockholder of Charles
Evans Nissan, Inc., who reports those items on the stockholder's individual
income tax return.
3. Concentration of Credit Risk:
The Company's significant concentration of credit risk is with its cash. The
Company maintains cash balances at a financial institution located in Georgia
which are at times in excess of federally-insured levels.
F-76
EVANS AUTOMOTIVE GROUP
Notes To Combined Financial Statements (Continued)
(Information related to the six months ended June 30, 1995 and 1996 is
unaudited)
(Dollars in thousands)
4. Inventories:
Inventories consist of the following:
-------------------------
June 30,
December 31, 1996
1995 (Unaudited)
------------ -----------
New vehicles $ 7,778 $ 8,107
Used vehicles 2,403 2,047
Parts, accessories and other 769 755
------------ -----------
10,950 10,909
Cumulative LIFO reserve 1,926 1,982
------------ -----------
$ 9,024 $ 8,927
------------ -----------
------------ -----------
5. Property and Equipment:
Property and equipment consists of the following as of:
-----------------
December 31, 1995
-----------------
Leasehold improvements $ 335
Machinery and shop equipment 640
Furniture, fixtures, vehicles and other 633
-----------------
Total 1,608
Less: Accumulated depreciation and amortization 1,243
-----------------
Total property and equipment, net $ 365
-----------------
-----------------
6. Floor Plan Notes Payable:
The amounts payable to financial institutions under trust receipt transactions
are collateralized by the inventories and fixed assets. Floor plan notes payable
are to NationsBank and bear interest at 8.5% at December 31, 1995. Related
parties also provide floor plan financing (see Note 9).
F-77
EVANS AUTOMOTIVE GROUP
Notes To Combined Financial Statements (Continued)
(Information related to the six months ended June 30, 1995 and 1996 is
unaudited)
(Dollars in thousands)
7. Income Taxes:
The provision (benefit) for income taxes consists of the following components:
------------
Year ended
December 31,
------------
1995
------------
Currently payable:
Federal $ 406
State and local 45
------------
Total currently payable 451
------------
Deferred tax liability:
Federal 5
State and local 1
------------
Total deferred 6
------------
Total provision $ 457
------------
------------
The reasons for the differences between the provision for income taxes using the
Federal statutory income tax rate and the tax provisions reported by the Group
are as follows:
------------
Year ended
December 31,
------------
1995
------------
Tax provision computed at the Federal statutory income tax rate $ 454
State and local income taxes, net of Federal benefit 48
Entity not subject to tax (49)
Other 4
------------
Provision for income taxes $ 457
------------
------------
The Group is comprised of two dealerships, one of which is structured as an S
corporation under the Internal Revenue Code. No tax provisions have been made
for the S corporation as amounts pass through to shareholder.
F-78
EVANS AUTOMOTIVE GROUP
Notes To Combined Financial Statements (Continued)
(Information related to the six months ended June 30, 1995 and 1996 is
unaudited)
(Dollars in thousands)
7. Income Taxes: (Continued)
The Group accounts for income taxes in accordance with SFAS 109. Under SFAS 109,
deferred income taxes reflect the estimated tax effect of temporary differences
between assets and liabilities for financial accounting purposes and those
amounts as measured by tax laws and regulations. The components of deferred
income tax liabilities of $11 at December 31, 1995 were the result of
depreciation and inventory accounting differences. The components of deferred
income tax assets of $60 at December 31, 1995 is the result of reserves and
accruals for inventory and chargebacks.
8. Commitments:
The Company leases certain computer and telephone equipment used in the
operation of the dealerships. The leases have been accounted for as capital
leases. The assets under capital leases of $163 are being amortized over the
lives of the leases on a straight-line basis. Accumulated amortization amounted
to $28 as of December 31, 1995.
Future minimum lease commitments are summarized as follows:
-----------
Amount
-----------
1996 $ 42
1997 41
1998 40
1999 40
2000 2
-----
Total minimum lease payments $ 165
Less amount representing interest (31)
-----
Present value of net minimum lease payments 134
Less current principal maturities of obligations
under capital leases 30
-----
Long-term obligation under capital lease $104
-----
-----
9. Related Party Transactions:
During 1994, the sole stockholder and other family members began floor planning
cars for the dealership. Interest is paid to the stockholder and family members
at prime. Total interest paid to the sole stockholder and family was $89 in
1995.
The Company rents both dealership facilities from the sole stockholder under a
month-to-month agreement currently requiring monthly payments of $42. Total rent
expense for 1995 was $504.
10. Defined Contribution Plan:
The Company has a 401(k) plan (the "Plan") for all employees meeting certain
service requirements. This Plan qualifies under Section 401(k) of the Internal
Revenue Code. The Company may make matching contributions at its discretion.
During the year ended December 31, 1995, the Company contributed $26 to the
Plan.
11. Subsequent Event:
In August 1996 the Company entered into an acquisition agreement and plan of
merger with United Auto Group, Inc.
F-79
Report of Independent Accountants
To the Stockholders
of Standefer Motor Sales, Inc.:
We have audited the accompanying balance sheets of Standefer Motor Sales, Inc.
as of December 31, 1995 and 1994, and the related statements of operations,
retained earnings and cash flows for each of the three years in the period ended
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Standefer Motor Sales, Inc. as
of December 31, 1995 and 1994 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Memphis, Tennessee
August 29, 1996
F-80
STANDEFER MOTOR SALES, INC.
Balance Sheets
(Dollars in thousands)
---------------------------------
December 31, (Unaudited)
-------------------- June 30,
1994 1995 1996
--------- --------- -----------
ASSETS
Current assets:
Cash $ 742 $ 1,043 $ 232
Accounts receivable 1,240 1,682 1,431
Inventories 5,792 6,980 8,430
--------- --------- -----------
Total current assets 7,774 9,705 10,093
Plant and equipment, net 42 178 226
Other assets 150 150 150
--------- --------- -----------
Total assets $ 7,966 $ 10,033 $ 10,469
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable-line of credit $ 466 $ 553 $ 480
Accounts payable 724 1,090 741
Accrued expenses 264 384 678
Notes payable-related parties 1,472 1,879 1,846
State income taxes payable 69 96 120
--------- --------- -----------
Total current liabilities 2,995 4,002 3,865
Commitments and contingent liabilities
Stockholders' equity:
Common stock, Class A, no par value 10,000 shares authorized, 1,000 shares issued
and outstanding 1 1 1
Common stock Class B, no par value, non-voting shares, 90,000 shares authorized,
9,000 shares issued and outstanding 9 9 9
Retained earnings 4,961 6,021 6,594
--------- --------- -----------
Total stockholders' equity 4,971 6,031 6,604
--------- --------- -----------
Total liabilities and stockholders' equity $ 7,966 $ 10,033 $ 10,469
--------- --------- -----------
--------- --------- -----------
The accompanying notes are an integral part of the financial statements.
F-81
STANDEFER MOTOR SALES, INC.
Statements of Operations
(Dollars in thousands)
-----------------------------------------------------
(Unaudited)
Years ended Six months ended
December 31, June 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
Sales $ 41,546 $ 50,203 $ 65,793 $ 29,897 $ 34,994
Cost of sales 37,055 44,874 58,284 26,703 31,018
--------- --------- --------- --------- ---------
Gross profit 4,491 5,329 7,509 3,194 3,976
Selling, general and administrative expenses 3,489 3,835 5,192 1,982 2,187
--------- --------- --------- --------- ---------
Operating income 1,002 1,494 2,317 1,212 1,789
Other income, net 217 166 183 21 30
--------- --------- --------- --------- ---------
Income before income taxes 1,219 1,660 2,500 1,233 1,819
Provision for income taxes 64 98 147 107 133
--------- --------- --------- --------- ---------
Net income $ 1,155 $ 1,562 $ 2,353 $ 1,126 $ 1,686
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
The accompanying notes are an integral part of the financial statements.
F-82
STANDEFER MOTOR SALES, INC.
Statements of Retained Earnings
(Dollars in thousands)
---------
Retained earnings, January 1, 1993 $ 3,878
Net income for the year 1,155
Dividends (771)
---------
Retained earnings, December 31, 1993 4,262
Net income for the year 1,562
Dividends (863)
---------
Retained earnings, December 31, 1994 4,961
Net income for the year 2,353
Dividends (1,293)
---------
Retained earnings, December 31, 1995 6,021
Net income for the period (unaudited) 1,686
Dividends (unaudited) (1,113)
---------
Retained earnings, June 30, 1996 (unaudited) $ 6,594
---------
---------
The accompanying notes are an integral part of the financial statements.
F-83
STANDEFER MOTOR SALES, INC.
Statements of Cash Flows
(Dollars in thousands)
--------------------------------------------------------
(Unaudited)
Six months ended
Years ended December 31, June 30,
---------------------------------- --------------------
1993 1994 1995 1995 1996
------------ --------- --------- --------- ---------
Operating activities:
Net income $ 1,155 $ 1,562 $ 2,353 $ 1,126 $ 1,686
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on disposition of assets (108) -- -- -- --
Depreciation 36 18 43 18 21
Changes in operating assets and liabilities:
Accounts receivables (377) (128) (442) 270 251
Inventories (341) (984) (1,188) (1,954) (1,450)
Note payable -- line of credit 119 466 87 993 (73)
Accounts payable and accrued expenses (595) 195 513 119 (31)
Notes payable -- related parties (79) (2) 407 235 (33)
------------ --------- --------- --------- ---------
Net cash provided by (used in) operating
activities (190) 1,127 1,773 807 371
------------ --------- --------- --------- ---------
Investing activities:
Purchase of plant and equipment (23) (6) (179) (96) (69)
Proceeds from sale of assets 164 -- -- -- --
------------ --------- --------- --------- ---------
Net cash provided by (used in) investing
activities 141 (6) (179) (96) (69)
------------ --------- --------- --------- ---------
Financing activities:
Cash dividends paid (771) (863) (1,293) (1,058) (1,113)
------------ --------- --------- --------- ---------
Net cash used in financing activities (771) (863) (1,293) (1,058) (1,113)
------------ --------- --------- --------- ---------
Net increase (decrease) in cash (820) 258 301 (347) (811)
Cash at beginning of the period 1,304 484 742 742 1,043
------------ --------- --------- --------- ---------
Cash at end of period $ 484 $ 742 $ 1,043 $ 395 $ 232
------------ --------- --------- --------- ---------
------------ --------- --------- --------- ---------
Supplemental schedule of cash flows
Cash paid during the year for:
Interest $ 178 $ 156 $ 259
------------ --------- ---------
------------ --------- ---------
Income taxes $ 25 $ 92 $ 123
------------ --------- ---------
------------ --------- ---------
The accompanying notes are an integral part of the financial statements.
F-84
STANDEFER MOTOR SALES, INC.
(Information related to the six months ended June 30, 1995 and 1996 is
unaudited)
Notes to Financial Statements
(Dollars in thousands)
1. Organization:
Standefer Motor Sales, Inc. (the "Company"), operating in Chattanooga,
Tennessee, sells and services new Nissan cars and trucks and used vehicles and
service contracts thereon. The Company also earns a commission on the sale of
finance and insurance contracts.
The Company operates a dealership which holds a franchise agreement with an
automotive manufacturer. In accordance with the franchise agreement, the
dealership is subject to certain rights and restrictions typical of the
industry. The ability of the manufacturer to influence the operations of the
dealership or the loss of the franchise agreement would have a negative impact
on operating results of the Company.
2. Summary of Significant Accounting Policies:
The following is a summary of significant accounting policies followed in the
preparation of the financial statements.
ESTIMATES:
The preparation of 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 financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INTERIM FINANCIAL STATEMENTS (UNAUDITED):
The interim unaudited financial statements reflect adjustments, consisting only
of normal recurring accruals, which are, in the opinion of the Company's
management, necessary for a fair presentation of the financial position and
results of operations for the periods presented. Operating results for any
interim period are not necessarily indicative of the results for a full year.
REVENUE RECOGNITION:
Revenue is recognized by the Company when vehicles or parts are delivered to
consumers and when service work is performed. Finance and insurance revenues are
recognized upon the sale of the finance or insurance product to a third party.
INVENTORIES:
New and used vehicles and parts and accessories inventories are valued at the
lower of cost or market. Cost is determined on the Last-in, first-out (LIFO)
method.
PLANT AND EQUIPMENT:
Plant and equipment are stated at cost and depreciated over their estimated
useful lives, principally by the straight-line method.
Expenditures for repairs and maintenance which increase the useful life or
substantially increase serviceability of the asset are capitalized. All others
are charged to expense as incurred. When equipment is sold or otherwise disposed
of, the cost and related accumulated depreciation are removed from their
respective accounts and any resulting gain or loss included in the statement of
operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying values of cash, accounts receivable, notes payable, and accounts
payable approximate their fair values due to the short-term maturities of those
instruments. The carrying value of long-term debt approximates fair value due to
the market rate of interest charged.
3. Concentrations of Credit Risk:
The Company's significant concentration of credit risk is with its cash. The
Company maintains cash balances at several financial institutions located in
Tennessee which are at times in excess of federally-insured amounts.
F-85
STANDEFER MOTOR SALES, INC.
(Information related to the six months ended June 30, 1995 and 1996 is
unaudited)
Notes to Financial Statements (Continued)
(Dollars in thousands)
4. Inventories:
Inventories consist of the following:
-------------------------------
June 30,
December 31, ---------
-------------------- 1996
1994 1995 (Unaudited)
--------- --------- ---------
New vehicles and demonstrators $ 4,546 $ 4,017 $ 4,742
Used vehicles 3,809 5,870 6,516
Parts and accessories 413 414 494
--------- --------- ---------
8,768 10,301 11,752
Cumulative LIFO Reserve (2,976) (3,321) (3,322)
--------- --------- ---------
$ 5,792 $ 6,980 $ 8,430
--------- --------- ---------
--------- --------- ---------
The use of the LIFO method of determining the cost of new and used vehicle
inventories and parts had the effect of decreasing inventories at December 31,
1994 and 1995 by $2,976 and $3,321, respectively, and decreasing net income for
the periods ended December 31, 1993, 1994 and 1995 by approximately $433, $563
and $345, respectively, as compared to what they would have been under the FIFO
cost method.
5. Plant and Equipment:
Property, plant and equipment consists of:
--------------------
1994 1995
--------- ---------
Building $ 35 $ 131
Machinery and equipment 69 93
Furniture and fixtures 54 113
Leasehold improvements 9 9
Service vehicles 22 22
--- ---
189 368
Less: accumulated depreciation and amortization 147 190
--- ---
$ 42 $ 178
--- ---
--- ---
At June 30, 1996, the Company had purchase commitments of approximately $120 for
computer equipment.
6. Line of Credit
The Company has a $2,000 line of credit with Suntrust Bank. Outstanding amounts
are due on demand. Interest is payable at the bank's prime rate (8.5% at
December 31, 1995). This line of credit is collateralized by substantially all
of the Company's assets.
7. Notes Payable-Related Parties:
Notes payable-related parties consists of various notes payable to the
stockholders and related parties at an interest rates of 10%. These amounts are
payable on demand.
8. Taxes on Income:
The Company has elected to be treated as an S corporation for Federal income tax
reporting purposes. Under this election, the Company's Stockholders are
responsible for reporting the Company's Federal taxable income on their personal
tax returns.
F-86
STANDEFER MOTOR SALES, INC.
(Information related to the six months ended June 30, 1995 and 1996 is
unaudited)
Notes to Financial Statements (Continued)
(Dollars in thousands)
8. Taxes on Income: (Continued)
For state tax purposes, the Company accounts for its taxes under the provisions
of Financial Accounting Standard 109, "Accounting for Income Taxes."
9. Other Related Party Transactions:
The Company rents its operating facilities and certain equipment from Standefer
Investment Co., a related partnership. A shareholder of the Company is also a
partner in the related partnership. Total rents paid to the partnership were
$282 for each of the years ended December 31, 1995, 1994 and 1993.
The stockholders of the Company are also stockholders in a related company
engaged in the sale of insurance contracts. Standefer Motor Sales received
commissions from this entity of $101, $82 and $47 for the years ended December
31, 1995, 1994 and 1993, respectively.
The Company has an investment in an insurance company which is engaged in the
sale of insurance contracts. Dividends received from such entity amounted to
$121, $98, and $41 for the years ended December 31, 1995, 1994, and 1993. Such
dividends are recorded as other income.
10. Reclassifications:
Certain amounts in the 1993 and 1994 financial statements have been reclassified
to conform to the presentation adopted in 1995.
11. Subsequent Event (Unaudited):
In September, 1996 the stockholders of the Company entered into an agreement to
sell the outstanding stock of the Company to United Auto Group, Inc.
F-87
[Artwork]
[UAG LOGO]
PART II
Information Not Required In Prospectus
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the various expenses in connection with the sale
and distribution of the securities being registered which will be paid solely by
the Company. All the amounts shown are estimates, except the Commission
registration fee and the NASD filing fee:
SEC Registration Fee.................................................... $ 64,029
NASD Fees............................................................... 19,250
NYSE Listing Fee........................................................ 140,000
Transfer Agent and Registrar Fees and Expenses.......................... 12,000
Printing and Engraving Expenses......................................... 485,000
Legal Fees and Expenses................................................. 1,000,000
Accounting Fees and Expenses............................................ 850,000
Blue Sky Fees and Expenses.............................................. 40,000
Miscellaneous Expenses.................................................. 14,721
----------
Total........................................................... $2,625,000
----------
----------
Item 14. Indemnification of Directors and Officers
Section 145 of the DGCL empowers a Delaware corporation to indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of such
corporation) by reason of the fact that such person is or was a director,
officer, employee or agent of such corporation, or is or was serving at the
request of such corporation as a director, officer, employee or agent of another
corporation or enterprise. A corporation may indemnify such person against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding if he acted in good faith and in a manner
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, has no
reasonable cause to believe his conduct was unlawful. A corporation may, in
advance of the final disposition of any civil, criminal, administrative or
investigative action, suit or proceeding, pay the expenses (including attorneys'
fees) incurred by any officer or director in defending such action, provided
that the director or officer undertake to repay such amount if it shall
ultimately be determined that he is not entitled to be indemnified by the
corporation.
A Delaware corporation may indemnify officers and directors in an action by or
in the right of the corporation to procure a judgment in its favor under the
same conditions, except that no indemnification is permitted without judicial
approval if the officer or director is adjudged to be liable to the corporation.
Where an officer or director is successful on the merits or otherwise in the
defense of any action referred to above, the corporation must indemnify him
against the expenses (including attorneys' fees) which he actually or reasonably
incurred in connection therewith. The indemnification provided is not deemed to
be exclusive of any other rights to which an officer or director may be entitled
under any corporation's bylaw, agreement, vote or otherwise.
The Company has adopted provisions in its Certificate of Incorporation and
Bylaws that provide that the Company shall indemnify its officers and directors
to the maximum extent permitted under the DGCL. The Spielvogel Employment
Agreement provides for indemnification of Mr. Spielvogel to the maximum extent
legally permitted or authorized by the Company's Certificate of Incorporation or
Bylaws or resolutions of the Board of Directors. The Stockholders Agreement
provides that in the event that a director elected pursuant thereto is made or
threatened to be made a party to any action, suit or proceeding with respect to
which such director may be entitled to indemnification by the Company, such
director will be entitled to be represented by counsel of his choice and the
reasonable expenses of such representation will be reimbursed by the Company to
the extent provided in or authorized by its Certificate of Incorporation or
Bylaws. Certain directors are also entitled to indemnification from the
organizations that employ them.
II-1
In addition, the Underwriting Agreement filed as Exhibit 1.1 to the Registration
Statement provides for indemnification of the Company, its officers and its
directors by the Underwriters under certain circumstances.
The Company has purchased insurance on behalf of its officers and directors for
liabilities arising out of their capacities as such.
Item 15. Recent Sales of Unregistered Securities
In the three years preceding the filing of this Registration Statement, the
Company has issued the following securities that were not registered under the
Securities Act.
In connection with the Equity Facility, the Company issued shares of its capital
stock in multiple transactions between December 28, 1993 and July 10, 1996.
Montgomery Securities acted as the placement agent for the Equity Facility and
received fees in the amount of $1.4 million in connection therewith. In
addition, on July 10, 1996, the Company issued additional shares of its capital
stock to its existing stockholders on terms substantially similar to those of
the Equity Facility. After giving effect to the Preferred Stock Conversion, the
number of shares of Common Stock purchased and the aggregate offering price paid
by each investor are set forth in the following table:
Aggregate
Shares of Offering
Investor Common Stock Price
- ------------------------------------------------------------------------- -------------- -------------
Trace International Holdings, Inc........................................ 3,531,156 $ 28,436,560
Aeneas Venture Corporation............................................... 2,843,656 28,436,560
AIF II, L.P.............................................................. 1,843,656 18,436,560
Ezra P. Mager............................................................ 163,240 1,319,900
Jeremy Grantham.......................................................... 104,474 1,044,740
Jules Kroll.............................................................. 104,474 1,044,740
Andrea Farace............................................................ 52,237 522,370
Natio Vie Developpment................................................... 52,237 522,370
Assu Venture............................................................. 36,566 365,660
Natio Fonds Venture 2.................................................... 36,566 365,660
Carl Spielvogel.......................................................... 26,118 261,180
Jerome Markowitz......................................................... 5,572 55,720
Philip Halperin.......................................................... 5,572 55,720
Derek Lemke-von Ammon.................................................... 2,786 27,860
Frank Dunlevy............................................................ 2,786 27,860
Pursuant to the Securities Purchase Agreements, the Company issued its Senior
Notes and Warrants in multiple transactions between September 22, 1995 and July
11, 1996. J.P. Morgan Securities Inc. acted as the placement agent for sales to
non-affiliated investors and received fees in the amount of $0.9 million in
connection therewith. In addition, on July 10, 1996, the Company issued
Additional Warrants to such investors. The amount of securities purchased and
the aggregate offering price paid by each investor are set forth in the
following table:
Shares of
Common Stock Aggregate
Principal Amount Subject to Offering
Investor of Senior Notes Warrants Price
- ---------------------------------------------------- ---------------- ----------------- -------------
J.P. Morgan Capital Corporation (and its
affiliates)........................................ $ 20,000,000 634,198 $ 20,535,164
The Equitable Life Assurance Society
of the United States............................... 15,000,000 475,648 15,401,368
On April 3, 1996, the Company granted Carl Spielvogel an option to purchase up
to 400,000 shares of Common Stock at an exercise price of $10.00 per share. The
stock option vests in four equal installments beginning on the first anniversary
of October 18, 1994, the date of Mr. Spielvogel's employment with the Company.
Under the Stock Option Plan, adopted April 23, 1996, the Company granted options
to purchase 473,000 shares of Common Stock at an exercise price of $10.00 per
share to employees of the Company and its affiliates. Such options vest in five
equal installments on each of the first five anniversaries of the later of
December 29, 1993 and the optionee's date of employment. See "Management --
Stock Option Plan." The grants of options under the Stock Option Plan were
effected in reliance on Rule 701 promulgated under the Securities Act for offers
and sales pursuant to certain compensatory benefit plans.
II-2
On July 31, 1996, the Company issued 10,000 shares of Class A Preferred Stock to
Richard Sinkfield for an aggregate offering price of $100,000.
In addition to any exemptions specified above, each of the foregoing offerings
was effected in reliance on Section 4(2) of the Securities Act as a transaction
not involving any public offering.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
No. Description
- ------------ ------------------------------------------------------------------------------------------
*1.1 Form of Underwriting Agreement.
3.1 Form of Restated Certificate of Incorporation.
*3.2 Form of Restated Bylaws.
*4.1 Specimen Common Stock certificate.
5.1 Opinion of Willkie Farr & Gallagher.
*10.1.1.1 Registration Rights Agreement, dated as of October 15, 1993, among the Company and the
investors listed therein.
*10.1.1.2 Amendment to Registration Rights Agreement, dated as of July 31, 1996, among the Company
and the investors listed therein.
*10.1.2 Waiver, Consent and Modification Agreement, dated as of September 22, 1995, among the
Company and its stockholders.
*10.1.3 Letter Agreement, dated September 22, 1996, between the Company and J.P. Morgan Capital
Corporation.
*10.1.4 Form of Warrant.
*10.1.5 Form of Additional Warrant.
*10.1.6 Employment Agreement, dated as of June 21, 1996, between the Company and Carl Spielvogel.
*10.1.7 Severance Agreement, dated April 5, 1996, among the Company, Trace and Ezra P. Mager.
*10.1.8 Stock Option Plan of the Company.
10.1.9 Registration Rights Agreement, dated as of August 1, 1995, among the Company and the
parties listed on Schedule I thereto.
*10.1.10 Sublease, dated August 1994, between Overseas Partners, Inc. and the Company.
*10.1.11 Letter, dated July 24, 1996, from Chrysler Corporation to the Company.
*10.1.12 Agreement, dated July 24, 1996, between the Company and Toyota Motor Sales U.S.A., Inc.
*10.1.13 Non-employee Director Compensation Plan of the Company.
10.1.14 Form of Agreement among the Company, certain of its affiliates and American Honda Motor
Co., Inc.
10.1.15 Form of Option Certificate of the Company in favor of Samuel X. DiFeo and Joseph C. DiFeo.
10.1.16 Form of Registration Rights Agreement among the Company and the parties listed on Schedule
I thereto.
10.2.1.1 Honda Automobile Dealer Sales and Service Agreement, dated October 5, 1995, between
American Honda Motor Co. Inc. and Danbury Auto Partnership (standard provisions are in
Exhibit 10.2.1.2 hereto).
10.2.1.2 American Honda Motor Co. Standard Provisions.
*10.2.2.1 Lexus Dealer Agreement, dated October 5, 1992, between Lexus, a division of Toyota Motor
Sales, U.S.A., Inc. and Somerset Motors Partnership (standard provisions are in Exhibit
10.2.2.2 hereto).
*10.2.2.2 Lexus Dealer Agreement Standard Provisions.
*10.2.3.1 Mitsubishi Motor Sales of America, Inc. Dealer Sales and Service Agreement, dated August
29, 1994, between Mitsubishi Motor Sales of America, Inc. and Rockland Motors Partnership,
as amended August 20, 1996 (standard provisions are in Exhibit 10.2.3.2 hereto).
*10.2.3.2 Mitsubishi Motor Sales of America, Inc. Dealer Sales and Service Agreement Standard
Provisions.
II-3
No. Description
- ------------ ------------------------------------------------------------------------------------------
10.2.4.1 BMW of North America, Inc. Dealer Agreement, dated January 1, 1994, between BMW of North
America, Inc. and DiFeo BMW Partnership, as amended October 21, 1996 (standard provisions
are in Exhibit 10.2.4.2 hereto).
*10.2.4.2 BMW of North America, Inc. Dealer Standard Provisions Applicable to Dealer Agreement.
*10.2.5.1 Term Dealer Sales and Service Agreement, dated July 3, 1996, between American Suzuki Motor
Corporation and Fair Hyundai Partnership, as amended September 6, 1996 (standard
provisions are in Exhibit 10.2.5.2)
*10.2.5.2 Suzuki Dealer Sales and Service Agreement Standard Provisions.
*10.2.6.1 Toyota Dealer Agreement, dated May 5, 1995, between Toyota Motor Distributors, Inc. and
Hudson Motors Partnership (standard provisions are in Exhibit 10.2.6.2 hereto).
*10.2.6.2 Toyota Dealer Agreement Standard Provisions.
*10.2.7.1 Oldsmobile Division Dealer Sales and Service Agreement, dated October 2, 1992, between
General Motors Corporation, Oldsmobile Division and J & F Oldsmobile-Isuzu Partnership, as
amended December 20, 1993 and July 23, 1996 (standard provision are in Exhibit 10.2.7.2
hereto).
*10.2.7.2 General Motors Dealer Sales and Service Agreement Standard Provisions.
*10.2.8.1 Chevrolet-Geo Dealer Sales and Service Agreement, dated November 1, 1995, between General
Motors Corporation, Chevrolet Motor Division and Fair Chevrolet-Geo Partnership
(substantially similar to Exhibit 10.2.7.1).
10.2.9.1 Nissan Dealer Term Sales and Service Agreement, between the Nissan Division of Nissan
Motor Corporation in U.S.A. and DiFeo Nissan Partnership (standard provisions are in
Exhibit 10.2.9.2 hereto).
10.2.9.2 Nissan Dealer Sales and Service Agreement Standard Provisions.
*10.2.10.1 Chrysler Corporation Term Sales and Service Agreement, dated August 16, 1995, between Fair
Chrysler Plymouth Partnership and Chrysler Corporation, (standard provisions are in
Exhibit 10.2.10.2).
*10.2.10.2 Chrysler Corporation Sales and Service Agreement Additional Terms and Provisions.
*10.2.11 Chrysler Corporation Eagle Sales and Service Agreement, dated October 8, 1992, between
DiFeo Jeep-Eagle Partnership and Chrysler Corporation (substantially similar to Exhibit
10.2.10.1).
*10.2.12 Chrysler Corporation Chrysler Sales and Service Agreement, dated August 16, 1995, between
DiFeo Chrysler Plymouth Jeep Eagle Partnership and Chrysler Corporation (substantially
similar to Exhibit 10.2.10.1).
*10.2.13 Chrysler Corporation Plymouth Sales and Service Agreement, dated November 13, 1992,
between DiFeo Chrysler Plymouth Jeep Eagle Partnership and Chrysler Corporation
(substantially similar to Exhibit 10.2.10.1).
*10.2.14 Toyota Dealer Agreement, dated May 5, 1995, between Toyota Motor Distributors, Inc. and
County Auto Group Partnership (substantially similar to Exhibit 10.2.6.1).
*10.2.15.1 Hyundai Motor America Dealer Sales and Service Agreement, dated October 12, 1992, between
Hyundai Motor America and Fair Hyundai Partnership as amended November 22, 1993, October
12, 1995, March 14, 1996 and September 18, 1996 (standard provisions are in Exhibit
10.2.15.2 hereto).
*10.2.15.2 Hyundai Motor America Dealer Sales and Service Agreement Standard Provisions.
*10.2.16 Hyundai Motor America Dealer Sales and Service Agreement, dated November 22, 1993, as
amended April 1, 1994, and November 3, 1995, between Hyundai Motor America and DiFeo
Hyundai Partnership (substantially similar to Exhibit 10.2.15.1).
*10.2.17 Toyota Dealer Agreement, dated August 23, 1995, between Toyota Motor Distributors, Inc.
and OCT Partnership (substantially similar to Exhibit 10.2.6.1).
*10.2.18 Mitsubishi Motor Sales of America, Inc. Sales and Service Agreement, dated June 30, 1994,
between Mitsubishi Motor Sales of America, Inc. and OCM Partnership (substantially similar
to Exhibit 10.2.3.1).
*10.2.19 Chrysler Corporation Jeep Sales and Service Agreement, dated October 8, 1992, between
DiFeo Jeep-Eagle Partnership and Chrysler Corporation (substantially similar to Exhibit
10.2.10.1).
II-4
No. Description
- ------------ ------------------------------------------------------------------------------------------
*10.2.20 Chevrolet-Geo Dealer Sales and Service Agreement, dated November 1, 1995 between General
Motors Corporation, Chevrolet Motor Division and DiFeo Chevrolet-Geo Partnership
(substantially similar to Exhibit 10.2.7.1).
*10.2.21 Isuzu Dealer Sales and Service Agreement, dated as of September 16, 1996 between American
Isuzu Motors Inc. and Fair Cadillac--Oldsmobile--Isuzu Partnership (standard provisions
are in Exhibit 10.2.22 hereto).
*10.2.22 Isuzu Dealer Sales and Service Agreement Additional Provisions.
**10.2.23 Loan and Security Agreement, dated as of October 1, 1992, between General Motors
Acceptance Corporation and Hudson Motors Partnership, as amended April 7, 1993 (a
substantially similar agreement exists with each other operating partnership in the DiFeo
Group).
10.2.24 Unconditional, Continuing Guaranty of Payment of the Company and its affiliates named
therein, dated as of October 1, 1992, in favor of General Motors Acceptance Corporation,
as amended April 7, 1993.
10.2.25 Term Loan and Borrowing Base Credit Line Loan Agreement, dated as of April 7, 1993,
between General Motors Acceptance Corporation and DiFeo-EMCO Management Partnership.
10.2.26 Settlement Agreement, dated as of October 3, 1996, among the Company and certain of its
affiliates, on the one hand, and Samuel X. DiFeo, Joseph C. DiFeo and certain of their
affiliates, on the other hand.
10.2.27 Form of Agreement and Plan of Merger used in the Minority Exchange of the DiFeo Group.
10.2.28 Form of Lease of certain facilities in the DiFeo Group.
10.2.29 Lease Agreement, dated September 27, 1990, between J & F Associates and TJGHCC Associates.
10.2.30 Lease Agreement, dated October 1, 1992, between Manly Chevrolet, Inc. and County Toyota,
Inc.
10.2.31 Sublease, dated October 1, 1992, between DiFeo BMW, Inc. and DiFeo BMW Partnership.
*10.3.1 Receivables Purchase Agreement, dated as of June 28, 1995, between Atlantic Auto Funding
Corporation and Atlantic Auto Finance Corporation.
*10.3.2 Loan and Security Agreement, dated as of June 28, 1995, among Atlantic Auto Funding
Corporation, Atlantic Auto Finance Corporation and Citibank, N.A.
*10.3.3 Support Agreement of the Company, dated as of June 28, 1995, in favor of Atlantic Auto
Funding Corporation.
*10.3.4 Purchase Agreement, dated as of June 14, 1996, between Atlantic Auto Finance Corporation
and Atlantic Auto Second Funding Corporation.
*10.3.5 Transfer and Administration Agreement, dated as of June 14, 1996, among Atlantic Auto
Second Funding Corporation, Atlantic Auto Finance Corporation and Morgan Guaranty Trust
Company of New York.
*10.3.6 Support Agreement of the Company, dated as of June 18, 1996, in favor of Atlantic Auto
Second Funding Corporation.
*10.3.7 Pooling and Servicing Agreement relating to Atlantic Auto Grantor Trust 1996-A, dated as
of June 20, 1996, among Atlantic Auto Third Funding Corporation, Atlantic Auto Finance
Corporation and The Chase Manhattan Bank.
*10.3.8 Insurance and Indemnity Agreement, dated as of June 20, 1996, among Financial Security
Assurance Inc., Atlantic Auto Third Funding Corporation and Atlantic Auto Finance
Corporation.
*10.3.9 Master Spread Account Agreement, dated as of June 20, 1996, among Atlantic Auto Third
Funding Corporation, Financial Security Assurance Inc. and The Chase Manhattan Bank.
*10.3.10 Lease Agreement, dated as of March 18, 1994, between Perinton Hills and the Company,
including guaranty of lease of Atlantic Auto Finance Corporation.
*10.4.1 Amended and Restated Stock Purchase Agreement, dated as of July 1, 1995, among the
Company, Landers Auto Sales, Inc., Steve Landers, John Landers and Bob Landers.
II-5
No. Description
- ------------ ------------------------------------------------------------------------------------------
*10.4.2 Promissory Note of the Company, dated August 1, 1995, in favor of Steve Landers and John
Landers.
*10.4.3 Promissory Note of the Company, dated August 1, 1995, in favor of Steve Landers and John
Landers.
*10.4.4 Guarantee of the Company, dated as of August 1, 1995, in favor of Steve Landers and John
Landers.
*10.4.5 Employment Agreement, dated as of August 1, 1995, between Landers Auto Sales, Inc. and
Steve Landers.
*10.4.6 Lease, dated as of August 1, 1995, among Steve Landers, John Landers, Bob Landers and
Landers Auto Sales, Inc., regarding Jeep-Eagle premises.
*10.4.7 Lease, dated as of August 1, 1995, among Steve Landers, John Landers, Bob Landers and
Landers Auto Sales, Inc., regarding Oldsmobile-GMC premises.
*10.4.8 Shareholders' Agreement, dated as of August 1, 1995, among the Company, United Landers,
Inc., Landers Auto Sales, Inc., Steve Landers and John Landers.
*10.4.9 Chrysler Corporation Eagle Sales and Service Agreement, dated August 16, 1995, between
United Landers Auto Sales, Inc. and Chrysler Corporation (standard provisions are in
Exhibit 10.2.10.2).
*10.4.10 Chrysler Corporation Jeep Sales and Service Agreement, dated August 16, 1995, between
United Landers Auto Sales, Inc. and Chrysler Corporation (substantially similar to Exhibit
10.4.9).
*10.4.11 Chrysler Corporation Dodge Sales and Service Agreement, dated August 16, 1995, between
United Landers Auto Sales, Inc. and Chrysler Corporation (substantially similar to Exhibit
10.4.9).
*10.4.12 Chrysler Corporation Plymouth Sales and Service Agreement, dated August 16, 1995, between
United Landers Auto Sales, Inc. and Chrysler Corporation (substantially similar to Exhibit
10.4.9).
*10.4.13 Chrysler Corporation Chrysler Sales and Service Agreement, dated August 16, 1995, between
United Landers Auto Sales, Inc. and Chrysler Corporation (substantially similar to Exhibit
10.4.9).
*10.4.14 Oldsmobile Division Dealer Sales and Service Agreement, dated November 1, 1995, between
General Motors Corporation, Oldsmobile Division and United Landers Auto Sales, Inc.
(substantially similar to Exhibit 10.2.7.1).
*10.4.15 GMC Truck Division Dealer Sales and Service Agreement, dated November 1, 1995, between
General Motors Corporation, GMC Truck Division and United Landers Auto Sales, Inc.
(substantially similar to Exhibit 10.2.7.1).
*10.4.16 Security Agreement and Master Credit Agreement, dated October 25, 1993, between Landers
Oldsmobile-GMC Inc. and Chrysler Credit Corporation.
*10.4.17 Security Agreement and Master Credit Agreement, dated May 17, 1989, between Landers
Jeep-Eagle, Inc. and Chrysler Credit Corporation.
*10.4.18 Continuing Guaranty of United Landers, Inc., dated August 15, 1994, in favor of Chrysler
Credit Corporation.
*10.4.19 Commercial Loan Agreement, dated December 5, 1994, between Landers Oldsmobile-GMC, Inc.
and The Benton State Bank.
*10.4.20 Commercial Security Agreement, dated December 5, 1994, between Landers Oldsmobile-GMC,
Inc. and The Benton State Bank.
*10.4.21 Agreement, dated July 31, 1995, between the Company and General Motors Corporation,
Oldsmobile Division.
*10.5.1 Stock Purchase Agreement, dated as of November 17, 1995, among the Company, UAG Atlanta,
Inc., Atlanta Toyota, Inc. and Carl H. Westcott.
*10.5.2 Promissory Note of UAG Atlanta, Inc., dated January 16, 1996, in favor of Carl H.
Westcott.
*10.5.3 Guaranty of the Company, dated as of January 16, 1996, in favor of Carl Westcott.
*10.5.4 Promissory Note of Atlanta Toyota, Inc., dated January 16, 1996, in favor of First
Extended Service Corporation.
*10.5.5 Guaranty of the Company, dated as of January 16, 1996, in favor of Carl Westcott.
II-6
No. Description
- ------------ ------------------------------------------------------------------------------------------
*10.5.6 Lease Agreement, dated as of January 3, 1996, between Carl Westcott and Atlanta Toyota,
Inc.
*10.5.7 Lease Guaranty of the Company, dated as of January 16, 1996, in favor of Carl Westcott.
*10.5.8 Toyota Dealer Agreement, dated January 16, 1996, between Southeast Toyota Motor
Distributors, Inc. and Atlanta Toyota, Inc. (substantially similar to Exhibit 10.2.6.1).
*10.5.9 Wholesale Floor Plan Security Agreement, dated May 24, 1996, between World Omni Financial
Corp. and Atlanta Toyota, Inc.
*10.5.10 Continuing Guaranty of the Company in favor of World Omni Financial Corp. and certain
affiliates.
*10.5.11 Inventory Financing Payment Agreement, dated May 24, 1996, among Atlanta Toyota, Inc.,
Fidelity Warranty Services, Inc. and World Omni Financial Corp.
*10.5.12 Shareholders' Agreement, dated as of July 31, 1996, among the Company, UAG Atlanta, Inc.,
Atlanta Toyota and John Smith.
*10.5.13 Employment Agreement, dated as of January 16, 1996, among the Company, UAG Atlanta, Inc.
and John Smith.
*10.6.1 Stock Purchase Agreement, dated as of March 1, 1996, among the Company, UAG Atlanta II,
Inc., Steve Rayman Nissan, Inc., Steven L. Rayman and Richard W. Keffer, Jr.
*10.6.2 Employment Agreement, dated as of May 1, 1996, among the Company, UAG Atlanta II, Inc.,
Steve Rayman Nissan, Inc. and Bruce G. Dunker.
*10.6.3 Lease Agreement, dated as of May 1, 1996, among Steven L. Rayman, Richard W. Keffer, Jr.
and Steve Rayman Nissan, Inc.
10.6.4 Nissan Dealer Term Sales and Service Agreement, between the Nissan Division of Nissan
Motor Corporation in U.S.A. and United Nissan, Inc. (substantially similar to Exhibit
10.2.9.1).
*10.6.5 Wholesale Floor Plan Security Agreement, dated April 29, 1996, between World Omni
Financial Corp. and United Nissan, Inc. (substantially similar to Exhibit 10.5.9).
*10.6.6 Continuing Guaranty of the Company, dated April 29, 1996, in favor of World Omni Financial
Corp. and certain affiliates (substantially similar to Exhibit 10.5.10).
*10.7.1 Stock Purchase Agreement, dated as of June 7, 1996, among the Company, UAG Atlanta III,
Inc., Hickman Nissan, Inc., Lynda Jane Hickman and Lynda Jane Hickman as Executrix under
the will of James Franklin Hickman, Jr., deceased.
10.7.2 Nissan Dealer Term Sales and Service Agreement, between the Nissan Division of Nissan
Motor Corporation in U.S.A. and Peachtree Nissan, Inc. (substantially similar to Exhibit
10.2.9.1).
*10.7.3 Automotive Wholesale Financing and Security Agreement, dated July 12, 1996, between Nissan
Motor Acceptance Corporation and Peachtree Nissan, Inc.
*10.7.4 Guaranty of the Company and UAG Atlanta III, Inc., dated July 12, 1996, in favor of Nissan
Motor Acceptance Corporation.
*10.7.5 Promissory Note of UAG Atlanta III, Inc., dated July 12, 1996, in favor of Lynda Jane
Hickman, as Executrix under the will of James Franklin Hickman, Jr.
*10.7.6 Guaranty of Note of Hickman Nissan, Inc., dated July 12, 1996, in favor of Lynda Jane
Hickman, as Executrix under the will of James Franklin Hickman, Jr.
*10.7.7 Guaranty of Note of the Company, dated July 12, 1996, in favor of Lynda Jane Hickman, as
Executrix under the will of James Franklin Hickman, Jr.
*10.7.8 Lease Agreement, dated July 12, 1996, between Lynda Jane Hickman, as Executrix under the
will of James Franklin Hickman, Jr., and Hickman Nissan, Inc.
*10.7.9 Lease Agreement, dated July 12, 1996, between Argonne Enterprises, Inc. and Hickman
Nissan, Inc.
*10.7.10 Guaranty of Lease of the Company, dated July 12, 1996, in favor of Lynda Jane Hickman, as
Executrix under the will of James Franklin Hickman, Jr.
*10.7.11 Guaranty of Lease of the Company, dated July 12, 1996, in favor of Argonne Enterprises,
Inc.
II-7
No. Description
- ------------ ------------------------------------------------------------------------------------------
10.8.1 Stock Purchase Agreement, dated as of June 6, 1996, among the Company, UAG West, Inc.,
Scottsdale Jaguar, LTD., SA Automotive, LTD., SL Automotive, LTD., SPA Automotive, LTD.,
LRP, LTD., Sun BMW, LTD., Scottsdale Management Group, LTD., 6725 Dealership, LTD., Steven
Knappenberger Revocable Trust Dated April 15, 1983, as amended, Brochick 6725 Trust dated
December 29, 1992, Beskind 6725 Trust dated December 29, 1992, Steven Knappenberger, Jay
P. Beskind December 29, 1992, Knappenberger 6725 Trust dated and George W. Brochick, as
amended on October 21, 1996 by Amendment No. 1, Amendment No. 2 and Amendment No. 3.
*10.8.2 Purchase and Sale Agreement, 6905 E. McDowell Road, dated June 6, 1996, among Steven
Knappenberger, as Trustee of the Steven Knappenberger Revocable Trust II, Bruce
Knappenberger, as Trustee of the Bruce Knappenberger Trust and UAG West, Inc.
*10.8.3 Form of Employment Agreement between the Company, UAG West, Inc. and Steven Knappenberger.
*10.8.4 Form of Broker's Agreement between UAG West, Inc. and KBB, Inc.
10.8.5.1 Form of Audi Dealer Agreement (standard provisions are in Exhibit 10.8.5.2 hereto).
10.8.5.2 Audi Standard Provisions.
10.8.6.1 Form of Acura Automobile Dealer Sales and Service Agreement (standard provisions are in
Exhibit 10.8.6.2 hereto).
10.8.6.2 Acura Standard Provisions.
10.8.7.1 Form of BMW of North America Dealer Agreement (substantially similar to Exhibit 10.2.4.1).
10.8.8.1 Form of Porsche Sales and Service Agreement.
**10.8.8.2 Form of Addendum to Porsche Sales and Service Agreement.
**10.8.9.1 Form of Land Rover North America, Inc. Dealer Agreement.
**10.8.9.2 Land Rover Standard Provisions.
10.8.10 Sublease, dated June 7, 1988, between Max of Switzerland and Scottsdale Porsche & Audi,
Ltd.
10.8.11 Lease, dated October 1990, between Lisa B. Zelinsky and R. J. Morgan Corporation of
America and Scottsdale Hyundai, Ltd.
10.8.12 Sublease, dated July 1, 1995, between Camelback Automotive, Inc. and LRP Ltd.
10.8.13 Lease, dated February 27, 1995, between Lee S. Maas and Sun BMW Ltd.
10.8.14 Form of Shareholders' Agreement among UAG West, Inc., SK Motors, Ltd., and the
Knappenberger Revocable Trust.
10.8.15 Form of Management Agreement among the Company, UAG West, Inc. and Scottsdale Jaguar, Ltd.
10.8.16 Form of Lease Agreement between 6725 Agent and Scottsdale Jaguar, Ltd.
**10.8.17 Form of Indemnification Agreement among the Company, UAG West, Inc., Scottsdale Jaguar,
Ltd., Steven Knappenberger, and certain other individuals and trusts.
10.8.18 Form of Real Estate Loan and Security Agreement, made by SA Automotive, Ltd. for the
benefit of Chrysler Financial Corporation.
10.8.19 Form of Security Agreement and Master Credit Agreement of Chrysler Credit Corporation
(substantially similar to Exhibit 10.4.16).
10.8.20 Form of Continuing Guaranty of each of the Company and UAG West, Inc. in favor of Chrysler
Credit Corporation (substantially similar to Exhibit 10.4.18).
*10.9.1 Stock Purchase Agreement, dated August 5, 1996, among the Company, UAG Atlanta IV, Inc.,
Charles Evans BMW, Inc. and Charles F. Evans.
*10.9.2 Stock Purchase Agreement, dated August 5, 1996, among the Company, UAG Atlanta IV, Inc.,
Charles Evans Nissan, Inc. and Charles F. Evans.
10.9.3 Form of Dealer Agreement between BMW North America, Inc. and Charles Evans BMW Inc.
(substantially similar to Exhibit 10.2.4.1).
10.9.4 Form of Nissan Dealer Term Sales and Service Agreement between Nissan Motor Corporation in
U.S.A. and Charles Evans Nissan, Inc. (substantially similar to Exhibit 10.2.9.1).
10.9.5 Form of Lease Agreement between Charles F. Evans and Charles Evans
BMW, Inc.
II-8
No. Description
- ------------ ------------------------------------------------------------------------------------------
10.9.6 Form of Lease Guaranty of the Company in favor of Charles F. Evans.
10.9.7 Form of Lease Agreement between Charles F. Evans and Charles Evans Nissan, Inc.
**10.9.8 Form of Lease Guaranty of the Company in favor of Charles F. Evans.
10.9.9 Form of Purchase and Sale Agreement for Charles Evans BMW Property between Charles F.
Evans and the Company.
10.9.10 Form of Purchase and Sale Agreement for Charles Evans Nissan Property between Charles F.
Evans and the Company.
10.9.11 Form of Inventory Financing and Security Agreement between BMW Financial Services NA, Inc.
and UAG Atlanta IV Motors, Inc.
10.9.12 Form of Guaranty of the Company in favor of BMW Financial Services NA, Inc.
10.9.13 Form of Inventory Financing and Security Agreement between BMW Financial Services NA, Inc.
and Conyers Nissan, Inc. (substantially similar to Exhibit 10.9.11).
10.9.14 Form of Guaranty of the Company in favor of BMW Financial Services NA, Inc. (substantially
similar to Exhibit 10.9.12).
*10.10.1 Stock Purchase Agreement, dated September 5, 1996, among the Company, UAG Tennessee, Inc.,
Standefer Motor Sales, Inc., Charles A. Standefer and Charles A. Standefer and Karen S.
Nicely, trustees under the Irrevocable Trust Agreement of Charles B. Standefer for the
primary benefit of children, dated December 21, 1992.
**10.10.2 Form of Nissan Dealer Term Sales and Service Agreement between Nissan Motor Corporation in
U.S.A. and Conyers Nissan, Inc. (standard provisions are in Exhibit 10.2.9.2).
10.10.3 Form of Lease Agreement between Standefer Investment Company and Standefer Motor Sales,
Inc.
**10.10.4 Form of Lease Guaranty of the Company in favor of Standefer Investment Company.
10.10.5 Form of Security Agreement and Master Credit Agreement between Chrysler Credit Corporation
and Standefer Motor Sales, Inc. (substantially similar to Exhibit 10.4.16).
10.10.6 Form of Continuing Guaranty of each of the Company and UAG Tennessee, Inc. in favor of
Chrysler Credit Corporation (substantially similar to Exhibit 10.4.18).
11.1 Statement re computation of per share earnings.
21.1 List of subsidiaries of the Company.
23.1.1 Consent of Coopers & Lybrand L.L.P.
23.1.2 Consent of Coopers & Lybrand L.L.P.
23.1.3 Consent of Coopers & Lybrand L.L.P.
23.1.4 Consent of Coopers & Lybrand L.L.P.
23.1.5 Consent of Coopers & Lybrand L.L.P.
23.1.6 Consent of Coopers & Lybrand L.L.P.
23.1.7 Consent of Coopers & Lybrand L.L.P.
23.1.8 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Willkie Farr & Gallagher (included in Exhibit 5.1).
*24.1 Powers of Attorney.
*27.1 Financial Data Schedules.
- ------------------------
*Previously filed.
**To be filed by amendment.
(b) Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts
Item 17. Undertakings
(1) The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreements certificates for the
Common Stock in such denominations and registered in such names as required
by the Underwriters to permit prompt delivery to each purchaser.
(2) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to its Bylaws, the Underwriting Agreements or otherwise,
the Registrant has been advised that, in the opinion of the Commission, such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director,
II-9
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
(3) The Registrant hereby undertakes that:
(a)For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of the
Registration Statement as of the time it was declared effective.
(b)For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-10
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Amendment No. 3 to be signed on its behalf by the undersigned,
thereunto duly authorized, in New York, New York on October 22, 1996.
UNITED AUTO GROUP, INC.
By: /s/ PHILIP N. SMITH, JR.
-----------------------------------
Philip N. Smith, Jr.
VICE PRESIDENT, SECRETARY
AND GENERAL COUNSEL
Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 3
has been signed by the following persons in the capacities and on the dates
indicated.
Signature Title Date
- ------------------------------------------ ------------------------------------------------- ------------------
*
--------------------------------- Chairman of the Board and Chief Executive Officer October 22, 1996
Carl Spielvogel (Principal Executive Officer)
*
--------------------------------- Executive Vice President and Chief Financial October 22, 1996
Arthur J. Rawl Officer (Principal Financial Officer)
/s/ ROBERT W. THOMPSON
--------------------------------- Vice President-Finance (Principal Accounting October 22, 1996
Robert W. Thompson Officer)
*
--------------------------------- Director October 22, 1996
Marshall S. Cogan
*
--------------------------------- Director October 22, 1996
Michael R. Eisenson
*
--------------------------------- Director October 22, 1996
John J. Hannan
*
--------------------------------- Director October 22, 1996
Jules B. Kroll
*
--------------------------------- Director October 22, 1996
Robert H. Nelson
Signature Title Date
- ------------------------------------------ ------------------------------------------------- ------------------
*
--------------------------------- Director October 22, 1996
John M. Sallay
*
--------------------------------- Director October 22, 1996
Richard Sinkfield
*By: /s/ PHILIP N. SMITH, JR.
----------------------------
Attorney-in-fact
Report of Independent Accountants on Financial Statement Schedule
In connection with our audits of the consolidated financial statements of United
Auto Group, Inc. and Subsidiaries as of December 31, 1995 and 1994, and for each
of the three years in the period ended December 31, 1995, which financial
statements are included in this Registration Statement, we have also audited the
financial statement schedule listed in Item 16 herein.
In our opinion, the financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Princeton, New Jersey
June 17, 1996
S-1
SCHEDULE II
UNITED AUTO GROUP, INC.
Valuation and Qualifying Accounts
For the years ended December 31, 1995, 1994 and 1993
-------------------------------------------------------------------------
Additions
----------------------------------
Balance Charged to Balance
beginning costs and Charged to end of
of period expenses other accounts Deductions period
----------- ----------------- --------------- ----------- -----------
1995
- --------------------------------------------
Allowance for uncollectibles................ $ 678 $ 500 $ (678) $ 500
Allowance for finance income chargebacks.... 2,123 3,634 (3,451) 2,306
1994
- --------------------------------------------
Allowance for uncollectibles................ 393 285 -- 678
Allowance for finance income chargebacks.... 2,564 1,176 (1,617) 2,123
1993
- --------------------------------------------
Allowance for uncollectibles................ 0 393 393
Allowance for finance income chargebacks.... 0 3,136 (572) 2,564
S-2
EXHIBIT INDEX
No. Description
- ------------ ------------------------------------------------------------------------------------------
*1.1 Form of Underwriting Agreement.
3.1 Form of Restated Certificate of Incorporation.
*3.2 Form of Restated Bylaws.
*4.1 Specimen Common Stock certificate.
5.1 Opinion of Willkie Farr & Gallagher.
*10.1.1.1 Registration Rights Agreement, dated as of October 15, 1993, among the Company and the
investors listed therein.
*10.1.1.2 Amendment to Registration Rights Agreement, dated as of July 31, 1996, among the Company
and the investors listed therein.
*10.1.2 Waiver, Consent and Modification Agreement, dated as of September 22, 1995, among the
Company and its stockholders.
*10.1.3 Letter Agreement, dated September 22, 1996, between the Company and J.P. Morgan Capital
Corporation.
*10.1.4 Form of Warrant.
*10.1.5 Form of Additional Warrant.
*10.1.6 Employment Agreement, dated as of June 21, 1996, between the Company and Carl Spielvogel.
*10.1.7 Severance Agreement, dated April 5, 1996, among the Company, Trace and Ezra P. Mager.
*10.1.8 Stock Option Plan of the Company.
10.1.9 Registration Rights Agreement, dated as of August 1, 1995, among the Company and the
parties listed on Schedule I thereto.
*10.1.10 Sublease, dated August 1994, between Overseas Partners, Inc. and the Company.
*10.1.11 Letter, dated July 24, 1996, from Chrysler Corporation to the Company.
*10.1.12 Agreement, dated July 24, 1996, between the Company and Toyota Motor Sales U.S.A., Inc.
*10.1.13 Non-employee Director Compensation Plan of the Company.
10.1.14 Form of Agreement among the Company, certain of its affiliates and American Honda Motor
Co., Inc.
10.1.15 Form of Option Certificate of the Company in favor of Samuel X. DiFeo and Joseph C. DiFeo.
10.1.16 Form of Registration Rights Agreement among the Company and the parties listed on Schedule
I thereto.
10.2.1.1 Honda Automobile Dealer Sales and Service Agreement, dated October 5, 1995, between
American Honda Motor Co. Inc. and Danbury Auto Partnership (standard provisions are in
Exhibit 10.2.1.2 hereto).
10.2.1.2 American Honda Motor Co. Standard Provisions.
*10.2.2.1 Lexus Dealer Agreement, dated October 5, 1992, between Lexus, a division of Toyota Motor
Sales, U.S.A., Inc. and Somerset Motors Partnership (standard provisions are in Exhibit
10.2.2.2 hereto).
*10.2.2.2 Lexus Dealer Agreement Standard Provisions.
*10.2.3.1 Mitsubishi Motor Sales of America, Inc. Dealer Sales and Service Agreement, dated August
29, 1994, between Mitsubishi Motor Sales of America, Inc. and Rockland Motors Partnership,
as amended August 20, 1996 (standard provisions are in Exhibit 10.2.3.2 hereto).
*10.2.3.2 Mitsubishi Motor Sales of America, Inc. Dealer Sales and Service Agreement Standard
Provisions.
10.2.4.1 BMW of North America, Inc. Dealer Agreement, dated January 1, 1994, between BMW of North
America, Inc. and DiFeo BMW Partnership, as amended October 21, 1996 (standard provisions
are in Exhibit 10.2.4.2 hereto).
*10.2.4.2 BMW of North America, Inc. Dealer Standard Provisions Applicable to Dealer Agreement.
*10.2.5.1 Term Dealer Sales and Service Agreement, dated July 3, 1996, between American Suzuki Motor
Corporation and Fair Hyundai Partnership, as amended September 6, 1996 (standard
provisions are in Exhibit 10.2.5.2)
*10.2.5.2 Suzuki Dealer Sales and Service Agreement Standard Provisions.
*10.2.6.1 Toyota Dealer Agreement, dated May 5, 1995, between Toyota Motor Distributors, Inc. and
Hudson Motors Partnership (standard provisions are in Exhibit 10.2.6.2 hereto).
No. Description
- ------------ ------------------------------------------------------------------------------------------
*10.2.6.2 Toyota Dealer Agreement Standard Provisions.
*10.2.7.1 Oldsmobile Division Dealer Sales and Service Agreement, dated October 2, 1992, between
General Motors Corporation, Oldsmobile Division and J & F Oldsmobile-Isuzu Partnership, as
amended December 20, 1993 and July 23, 1996 (standard provision are in Exhibit 10.2.7.2
hereto).
*10.2.7.2 General Motors Dealer Sales and Service Agreement Standard Provisions.
*10.2.8.1 Chevrolet-Geo Dealer Sales and Service Agreement, dated November 1, 1995, between General
Motors Corporation, Chevrolet Motor Division and Fair Chevrolet-Geo Partnership
(substantially similar to Exhibit 10.2.7.1).
10.2.9.1 Nissan Dealer Term Sales and Service Agreement, between the Nissan Division of Nissan
Motor Corporation in U.S.A. and DiFeo Nissan Partnership (standard provisions are in
Exhibit 10.2.9.2 hereto).
10.2.9.2 Nissan Dealer Sales and Service Agreement Standard Provisions.
*10.2.10.1 Chrysler Corporation Term Sales and Service Agreement, dated August 16, 1995, between Fair
Chrysler Plymouth Partnership and Chrysler Corporation, (standard provisions are in
Exhibit 10.2.10.2).
*10.2.10.2 Chrysler Corporation Sales and Service Agreement Additional Terms and Provisions.
*10.2.11 Chrysler Corporation Eagle Sales and Service Agreement, dated October 8, 1992, between
DiFeo Jeep-Eagle Partnership and Chrysler Corporation (substantially similar to Exhibit
10.2.10.1).
*10.2.12 Chrysler Corporation Chrysler Sales and Service Agreement, dated August 16, 1995, between
DiFeo Chrysler Plymouth Jeep Eagle Partnership and Chrysler Corporation (substantially
similar to Exhibit 10.2.10.1).
*10.2.13 Chrysler Corporation Plymouth Sales and Service Agreement, dated November 13, 1992,
between DiFeo Chrysler Plymouth Jeep Eagle Partnership and Chrysler Corporation
(substantially similar to Exhibit 10.2.10.1).
*10.2.14 Toyota Dealer Agreement, dated May 5, 1995, between Toyota Motor Distributors, Inc. and
County Auto Group Partnership (substantially similar to Exhibit 10.2.6.1).
*10.2.15.1 Hyundai Motor America Dealer Sales and Service Agreement, dated October 12, 1992, between
Hyundai Motor America and Fair Hyundai Partnership as amended November 22, 1993, October
12, 1995, March 14, 1996 and September 18, 1996 (standard provisions are in Exhibit
10.2.15.2 hereto).
*10.2.15.2 Hyundai Motor America Dealer Sales and Service Agreement Standard Provisions.
*10.2.16 Hyundai Motor America Dealer Sales and Service Agreement, dated November 22, 1993, as
amended April 1, 1994, and November 3, 1995, between Hyundai Motor America and DiFeo
Hyundai Partnership (substantially similar to Exhibit 10.2.15.1).
*10.2.17 Toyota Dealer Agreement, dated August 23, 1995, between Toyota Motor Distributors, Inc.
and OCT Partnership (substantially similar to Exhibit 10.2.6.1).
*10.2.18 Mitsubishi Motor Sales of America, Inc. Sales and Service Agreement, dated June 30, 1994,
between Mitsubishi Motor Sales of America, Inc. and OCM Partnership (substantially similar
to Exhibit 10.2.3.1).
*10.2.19 Chrysler Corporation Jeep Sales and Service Agreement, dated October 8, 1992, between
DiFeo Jeep-Eagle Partnership and Chrysler Corporation (substantially similar to Exhibit
10.2.10.1).
*10.2.20 Chevrolet-Geo Dealer Sales and Service Agreement, dated November 1, 1995 between General
Motors Corporation, Chevrolet Motor Division and DiFeo Chevrolet-Geo Partnership
(substantially similar to Exhibit 10.2.7.1).
*10.2.21 Isuzu Dealer Sales and Service Agreement, dated as of September 16, 1996 between American
Isuzu Motors Inc. and Fair Cadillac--Oldsmobile--Isuzu Partnership (standard provisions
are in Exhibit 10.2.22 hereto).
*10.2.22 Isuzu Dealer Sales and Service Agreement Additional Provisions.
**10.2.23 Loan and Security Agreement, dated as of October 1, 1992, between General Motors
Acceptance Corporation and Hudson Motors Partnership, as amended April 7, 1993 (a
substantially similar agreement exists with each other operating partnership in the DiFeo
Group).
10.2.24 Unconditional, Continuing Guaranty of Payment of the Company and its affiliates named
therein, dated as of October 1, 1992, in favor of General Motors Acceptance Corporation,
as amended April 7, 1993.
No. Description
- ------------ ------------------------------------------------------------------------------------------
10.2.25 Term Loan and Borrowing Base Credit Line Loan Agreement, dated as of April 7, 1993,
between General Motors Acceptance Corporation and DiFeo-EMCO Management Partnership.
10.2.26 Settlement Agreement, dated as of October 3, 1996, among the Company and certain of its
affiliates, on the one hand, and Samuel X. DiFeo, Joseph C. DiFeo and certain of their
affiliates, on the other hand.
10.2.27 Form of Agreement and Plan of Merger used in the Minority Exchange of the DiFeo Group.
10.2.28 Form of Lease of certain facilities in the DiFeo Group.
10.2.29 Lease Agreement, dated September 27, 1990, between J & F Associates and TJGHCC Associates.
10.2.30 Lease Agreement, dated October 1, 1992, between Manly Chevrolet, Inc. and County Toyota,
Inc.
10.2.31 Sublease, dated October 1, 1992, between DiFeo BMW, Inc. and DiFeo BMW Partnership.
*10.3.1 Receivables Purchase Agreement, dated as of June 28, 1995, between Atlantic Auto Funding
Corporation and Atlantic Auto Finance Corporation.
*10.3.2 Loan and Security Agreement, dated as of June 28, 1995, among Atlantic Auto Funding
Corporation, Atlantic Auto Finance Corporation and Citibank, N.A.
*10.3.3 Support Agreement of the Company, dated as of June 28, 1995, in favor of Atlantic Auto
Funding Corporation.
*10.3.4 Purchase Agreement, dated as of June 14, 1996, between Atlantic Auto Finance Corporation
and Atlantic Auto Second Funding Corporation.
*10.3.5 Transfer and Administration Agreement, dated as of June 14, 1996, among Atlantic Auto
Second Funding Corporation, Atlantic Auto Finance Corporation and Morgan Guaranty Trust
Company of New York.
*10.3.6 Support Agreement of the Company, dated as of June 18, 1996, in favor of Atlantic Auto
Second Funding Corporation.
*10.3.7 Pooling and Servicing Agreement relating to Atlantic Auto Grantor Trust 1996-A, dated as
of June 20, 1996, among Atlantic Auto Third Funding Corporation, Atlantic Auto Finance
Corporation and The Chase Manhattan Bank.
*10.3.8 Insurance and Indemnity Agreement, dated as of June 20, 1996, among Financial Security
Assurance Inc., Atlantic Auto Third Funding Corporation and Atlantic Auto Finance
Corporation.
*10.3.9 Master Spread Account Agreement, dated as of June 20, 1996, among Atlantic Auto Third
Funding Corporation, Financial Security Assurance Inc. and The Chase Manhattan Bank.
*10.3.10 Lease Agreement, dated as of March 18, 1994, between Perinton Hills and the Company,
including guaranty of lease of Atlantic Auto Finance Corporation.
*10.4.1 Amended and Restated Stock Purchase Agreement, dated as of July 1, 1995, among the
Company, Landers Auto Sales, Inc., Steve Landers, John Landers and Bob Landers.
*10.4.2 Promissory Note of the Company, dated August 1, 1995, in favor of Steve Landers and John
Landers.
*10.4.3 Promissory Note of the Company, dated August 1, 1995, in favor of Steve Landers and John
Landers.
*10.4.4 Guarantee of the Company, dated as of August 1, 1995, in favor of Steve Landers and John
Landers.
*10.4.5 Employment Agreement, dated as of August 1, 1995, between Landers Auto Sales, Inc. and
Steve Landers.
*10.4.6 Lease, dated as of August 1, 1995, among Steve Landers, John Landers, Bob Landers and
Landers Auto Sales, Inc., regarding Jeep-Eagle premises.
*10.4.7 Lease, dated as of August 1, 1995, among Steve Landers, John Landers, Bob Landers and
Landers Auto Sales, Inc., regarding Oldsmobile-GMC premises.
*10.4.8 Shareholders' Agreement, dated as of August 1, 1995, among the Company, United Landers,
Inc., Landers Auto Sales, Inc., Steve Landers and John Landers.
*10.4.9 Chrysler Corporation Eagle Sales and Service Agreement, dated August 16, 1995, between
United Landers Auto Sales, Inc. and Chrysler Corporation (standard provisions are in
Exhibit 10.2.10.2).
*10.4.10 Chrysler Corporation Jeep Sales and Service Agreement, dated August 16, 1995, between
United Landers Auto Sales, Inc. and Chrysler Corporation (substantially similar to Exhibit
10.4.9).
No. Description
- ------------ ------------------------------------------------------------------------------------------
*10.4.11 Chrysler Corporation Dodge Sales and Service Agreement, dated August 16, 1995, between
United Landers Auto Sales, Inc. and Chrysler Corporation (substantially similar to Exhibit
10.4.9).
*10.4.12 Chrysler Corporation Plymouth Sales and Service Agreement, dated August 16, 1995, between
United Landers Auto Sales, Inc. and Chrysler Corporation (substantially similar to Exhibit
10.4.9).
*10.4.13 Chrysler Corporation Chrysler Sales and Service Agreement, dated August 16, 1995, between
United Landers Auto Sales, Inc. and Chrysler Corporation (substantially similar to Exhibit
10.4.9).
*10.4.14 Oldsmobile Division Dealer Sales and Service Agreement, dated November 1, 1995, between
General Motors Corporation, Oldsmobile Division and United Landers Auto Sales, Inc.
(substantially similar to Exhibit 10.2.7.1).
*10.4.15 GMC Truck Division Dealer Sales and Service Agreement, dated November 1, 1995, between
General Motors Corporation, GMC Truck Division and United Landers Auto Sales, Inc.
(substantially similar to Exhibit 10.2.7.1).
*10.4.16 Security Agreement and Master Credit Agreement, dated October 25, 1993, between Landers
Oldsmobile-GMC Inc. and Chrysler Credit Corporation.
*10.4.17 Security Agreement and Master Credit Agreement, dated May 17, 1989, between Landers
Jeep-Eagle, Inc. and Chrysler Credit Corporation.
*10.4.18 Continuing Guaranty of United Landers, Inc., dated August 15, 1994, in favor of Chrysler
Credit Corporation.
*10.4.19 Commercial Loan Agreement, dated December 5, 1994, between Landers Oldsmobile-GMC, Inc.
and The Benton State Bank.
*10.4.20 Commercial Security Agreement, dated December 5, 1994, between Landers Oldsmobile-GMC,
Inc. and The Benton State Bank.
*10.4.21 Agreement, dated July 31, 1995, between the Company and General Motors Corporation,
Oldsmobile Division.
*10.5.1 Stock Purchase Agreement, dated as of November 17, 1995, among the Company, UAG Atlanta,
Inc., Atlanta Toyota, Inc. and Carl H. Westcott.
*10.5.2 Promissory Note of UAG Atlanta, Inc., dated January 16, 1996, in favor of Carl H.
Westcott.
*10.5.3 Guaranty of the Company, dated as of January 16, 1996, in favor of Carl Westcott.
*10.5.4 Promissory Note of Atlanta Toyota, Inc., dated January 16, 1996, in favor of First
Extended Service Corporation.
*10.5.5 Guaranty of the Company, dated as of January 16, 1996, in favor of Carl Westcott.
*10.5.6 Lease Agreement, dated as of January 3, 1996, between Carl Westcott and Atlanta Toyota,
Inc.
*10.5.7 Lease Guaranty of the Company, dated as of January 16, 1996, in favor of Carl Westcott.
*10.5.8 Toyota Dealer Agreement, dated January 16, 1996, between Southeast Toyota Motor
Distributors, Inc. and Atlanta Toyota, Inc. (substantially similar to Exhibit 10.2.6.1).
*10.5.9 Wholesale Floor Plan Security Agreement, dated May 24, 1996, between World Omni Financial
Corp. and Atlanta Toyota, Inc.
*10.5.10 Continuing Guaranty of the Company in favor of World Omni Financial Corp. and certain
affiliates.
*10.5.11 Inventory Financing Payment Agreement, dated May 24, 1996, among Atlanta Toyota, Inc.,
Fidelity Warranty Services, Inc. and World Omni Financial Corp.
*10.5.12 Shareholders' Agreement, dated as of July 31, 1996, among the Company, UAG Atlanta, Inc.,
Atlanta Toyota and John Smith.
*10.5.13 Employment Agreement, dated as of January 16, 1996, among the Company, UAG Atlanta, Inc.
and John Smith.
*10.6.1 Stock Purchase Agreement, dated as of March 1, 1996, among the Company, UAG Atlanta II,
Inc., Steve Rayman Nissan, Inc., Steven L. Rayman and Richard W. Keffer, Jr.
*10.6.2 Employment Agreement, dated as of May 1, 1996, among the Company, UAG Atlanta II, Inc.,
Steve Rayman Nissan, Inc. and Bruce G. Dunker.
*10.6.3 Lease Agreement, dated as of May 1, 1996, among Steven L. Rayman, Richard W. Keffer, Jr.
and Steve Rayman Nissan, Inc.
10.6.4 Nissan Dealer Term Sales and Service Agreement, between the Nissan Division of Nissan
Motor Corporation in U.S.A. and United Nissan, Inc. (substantially similar to Exhibit
10.2.9.1).
No. Description
- ------------ ------------------------------------------------------------------------------------------
*10.6.5 Wholesale Floor Plan Security Agreement, dated April 29, 1996, between World Omni
Financial Corp. and United Nissan, Inc. (substantially similar to Exhibit 10.5.9).
*10.6.6 Continuing Guaranty of the Company, dated April 29, 1996, in favor of World Omni Financial
Corp. and certain affiliates (substantially similar to Exhibit 10.5.10).
*10.7.1 Stock Purchase Agreement, dated as of June 7, 1996, among the Company, UAG Atlanta III,
Inc., Hickman Nissan, Inc., Lynda Jane Hickman and Lynda Jane Hickman as Executrix under
the will of James Franklin Hickman, Jr., deceased.
10.7.2 Nissan Dealer Term Sales and Service Agreement, between the Nissan Division of Nissan
Motor Corporation in U.S.A. and Peachtree Nissan, Inc. (substantially similar to Exhibit
10.2.9.1).
*10.7.3 Automotive Wholesale Financing and Security Agreement, dated July 12, 1996, between Nissan
Motor Acceptance Corporation and Peachtree Nissan, Inc.
*10.7.4 Guaranty of the Company and UAG Atlanta III, Inc., dated July 12, 1996, in favor of Nissan
Motor Acceptance Corporation.
*10.7.5 Promissory Note of UAG Atlanta III, Inc., dated July 12, 1996, in favor of Lynda Jane
Hickman, as Executrix under the will of James Franklin Hickman, Jr.
*10.7.6 Guaranty of Note of Hickman Nissan, Inc., dated July 12, 1996, in favor of Lynda Jane
Hickman, as Executrix under the will of James Franklin Hickman, Jr.
*10.7.7 Guaranty of Note of the Company, dated July 12, 1996, in favor of Lynda Jane Hickman, as
Executrix under the will of James Franklin Hickman, Jr.
*10.7.8 Lease Agreement, dated July 12, 1996, between Lynda Jane Hickman, as Executrix under the
will of James Franklin Hickman, Jr., and Hickman Nissan, Inc.
*10.7.9 Lease Agreement, dated July 12, 1996, between Argonne Enterprises, Inc. and Hickman
Nissan, Inc.
*10.7.10 Guaranty of Lease of the Company, dated July 12, 1996, in favor of Lynda Jane Hickman, as
Executrix under the will of James Franklin Hickman, Jr.
*10.7.11 Guaranty of Lease of the Company, dated July 12, 1996, in favor of Argonne Enterprises,
Inc.
10.8.1 Stock Purchase Agreement, dated as of June 6, 1996, among the Company, UAG West, Inc.,
Scottsdale Jaguar, LTD., SA Automotive, LTD., SL Automotive, LTD., SPA Automotive, LTD.,
LRP, LTD., Sun BMW, LTD., Scottsdale Management Group, LTD., 6725 Dealership, LTD., Steven
Knappenberger Revocable Trust Dated April 15, 1983, as amended, Brochick 6725 Trust dated
December 29, 1992, Beskind 6725 Trust dated December 29, 1992, Steven Knappenberger, Jay
P. Beskind December 29, 1992, Knappenberger 6725 Trust dated and George W. Brochick, as
amended on October 21, 1996 by Amendment No. 1, Amendment No. 2 and Amendment No. 3.
*10.8.2 Purchase and Sale Agreement, 6905 E. McDowell Road, dated June 6, 1996, among Steven
Knappenberger, as Trustee of the Steven Knappenberger Revocable Trust II, Bruce
Knappenberger, as Trustee of the Bruce Knappenberger Trust and UAG West, Inc.
*10.8.3 Form of Employment Agreement between the Company, UAG West, Inc. and Steven Knappenberger.
*10.8.4 Form of Broker's Agreement between UAG West, Inc. and KBB, Inc.
10.8.5.1 Form of Audi Dealer Agreement (standard provisions are in Exhibit 10.8.5.2 hereto).
10.8.5.2 Audi Standard Provisions.
10.8.6.1 Form of Acura Automobile Dealer Sales and Service Agreement (standard provisions are in
Exhibit 10.8.6.2 hereto).
10.8.6.2 Acura Standard Provisions.
10.8.7.1 Form of BMW of North America Dealer Agreement (substantially similar to Exhibit 10.2.4.1).
10.8.8.1 Form of Porsche Sales and Service Agreement.
No. Description
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**10.8.8.2 Form of Addendum to Porsche Sales and Service Agreement.
**10.8.9.1 Form of Land Rover North America, Inc. Dealer Agreement.
**10.8.9.2 Land Rover Standard Provisions.
10.8.10 Sublease, dated June 7, 1988, between Max of Switzerland and Scottsdale Porsche & Audi,
Ltd.
10.8.11 Lease, dated October 1990, between Lisa B. Zelinsky and R. J. Morgan Corporation of
America and Scottsdale Hyundai, Ltd.
10.8.12 Sublease, dated July 1, 1995, between Camelback Automotive, Inc. and LRP Ltd.
10.8.13 Lease, dated February 27, 1995, between Lee S. Maas and Sun BMW Ltd.
10.8.14 Form of Shareholders' Agreement among UAG West, Inc., SK Motors, Ltd., and the
Knappenberger Revocable Trust.
10.8.15 Form of Management Agreement among the Company, UAG West, Inc. and Scottsdale Jaguar, Ltd.
10.8.16 Form of Lease Agreement between 6725 Agent and Scottsdale Jaguar, Ltd.
**10.8.17 Form of Indemnification Agreement among the Company, UAG West, Inc., Scottsdale Jaguar,
Ltd., Steven Knappenberger, and certain other individuals and trusts.
10.8.18 Form of Real Estate Loan and Security Agreement, made by SA Automotive, Ltd. for the
benefit of Chrysler Financial Corporation.
10.8.19 Form of Security Agreement and Master Credit Agreement of Chrysler Credit Corporation
(substantially similar to Exhibit 10.4.16).
10.8.20 Form of Continuing Guaranty of each of the Company and UAG West, Inc. in favor of Chrysler
Credit Corporation (substantially similar to Exhibit 10.4.18).
*10.9.1 Stock Purchase Agreement, dated August 5, 1996, among the Company, UAG Atlanta IV, Inc.,
Charles Evans BMW, Inc. and Charles F. Evans.
*10.9.2 Stock Purchase Agreement, dated August 5, 1996, among the Company, UAG Atlanta IV, Inc.,
Charles Evans Nissan, Inc. and Charles F. Evans.
10.9.3 Form of Dealer Agreement between BMW North America, Inc. and Charles Evans BMW Inc.
(substantially similar to Exhibit 10.2.4.1).
10.9.4 Form of Nissan Dealer Term Sales and Service Agreement between Nissan Motor Corporation in
U.S.A. and Charles Evans Nissan, Inc. (substantially similar to Exhibit 10.2.9.1).
10.9.5 Form of Lease Agreement between Charles F. Evans and Charles Evans
BMW, Inc.
10.9.6 Form of Lease Guaranty of the Company in favor of Charles F. Evans.
10.9.7 Form of Lease Agreement between Charles F. Evans and Charles Evans Nissan, Inc.
**10.9.8 Form of Lease Guaranty of the Company in favor of Charles F. Evans.
10.9.9 Form of Purchase and Sale Agreement for Charles Evans BMW Property between Charles F.
Evans and the Company.
10.9.10 Form of Purchase and Sale Agreement for Charles Evans Nissan Property between Charles F.
Evans and the Company.
10.9.11 Form of Inventory Financing and Security Agreement between BMW Financial Services NA, Inc.
and UAG Atlanta IV Motors, Inc.
10.9.12 Form of Guaranty of the Company in favor of BMW Financial Services NA, Inc.
10.9.13 Form of Inventory Financing and Security Agreement between BMW Financial Services NA, Inc.
and Conyers Nissan, Inc. (substantially similar to Exhibit 10.9.11).
10.9.14 Form of Guaranty of the Company in favor of BMW Financial Services NA, Inc. (substantially
similar to Exhibit 10.9.12).
*10.10.1 Stock Purchase Agreement, dated September 5, 1996, among the Company, UAG Tennessee, Inc.,
Standefer Motor Sales, Inc., Charles A. Standefer and Charles A. Standefer and Karen S.
Nicely, trustees under the Irrevocable Trust Agreement of Charles B. Standefer for the
primary benefit of children, dated December 21, 1992.
**10.10.2 Form of Nissan Dealer Term Sales and Service Agreement between Nissan Motor Corporation in
U.S.A. and Conyers Nissan, Inc. (standard provisions are in Exhibit 10.2.9.2).
10.10.3 Form of Lease Agreement between Standefer Investment Company and Standefer Motor Sales,
Inc.
**10.10.4 Form of Lease Guaranty of the Company in favor of Standefer Investment Company.
No. Description
- ------------ ------------------------------------------------------------------------------------------
10.10.5 Form of Security Agreement and Master Credit Agreement between Chrysler Credit Corporation
and Standefer Motor Sales, Inc. (substantially similar to Exhibit 10.4.16).
10.10.6 Form of Continuing Guaranty of each of the Company and UAG Tennessee, Inc. in favor of
Chrysler Credit Corporation (substantially similar to Exhibit 10.4.18).
11.1 Statement re computation of per share earnings.
21.1 List of subsidiaries of the Company.
23.1.1 Consent of Coopers & Lybrand L.L.P.
23.1.2 Consent of Coopers & Lybrand L.L.P.
23.1.3 Consent of Coopers & Lybrand L.L.P.
23.1.4 Consent of Coopers & Lybrand L.L.P.
23.1.5 Consent of Coopers & Lybrand L.L.P.
23.1.6 Consent of Coopers & Lybrand L.L.P.
23.1.7 Consent of Coopers & Lybrand L.L.P.
23.1.8 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Willkie Farr & Gallagher (included in Exhibit 5.1).
*24.1 Powers of Attorney.
*27.1 Financial Data Schedules.
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*Previously filed.
**To be filed by amendment.