UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-12297
UNITED AUTO GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-3086739
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
375 PARK AVENUE, NEW YORK, NEW YORK 10152
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 223-3300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF
COMMON STOCK AS OF NOVEMBER 11, 1997:
VOTING COMMON STOCK, $0.0001 PAR VALUE 18,289,724
NON-VOTING COMMON STOCK, $0.0001 PAR VALUE 605,454
TABLE OF CONTENTS
PART I
PAGE
--------
1. Financial Statements and Supplementary Data
Consolidated Condensed Balance Sheets as of September 30, 1997 and
December 31, 1996 ............................................................... 1
Consolidated Condensed Statements of Income for the three months and nine
months ended September 30, 1997 and 1996 ........................................ 3
Consolidated Condensed Statements of Cash Flows for the nine months ended
September 30, 1997 and 1996 ..................................................... 4
Notes to Consolidated Condensed Financial Statements ............................. 5
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations ..................................................................... 8
PART II
1. Legal Proceedings ............................................................... 13
2. Changes in Securities ........................................................... 13
6. Exhibits and Reports on Form 8-K ................................................ 13
Signatures ...................................................................... 15
UNITED AUTO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1997 1996
--------------- --------------
ASSETS
AUTO DEALERSHIPS
Cash and cash equivalents .. $172,638 $ 66,875
Accounts receivable, net ... 80,370 52,018
Inventories ................. 248,555 168,855
Other current assets ........ 9,629 11,823
--------------- --------------
Total current assets ....... 511,192 299,571
Property and equipment, net . 34,478 22,341
Intangible assets, net ....... 297,016 177,194
Other assets ................. 15,927 6,587
--------------- --------------
TOTAL AUTO DEALERSHIP ASSETS 858,613 505,693
--------------- --------------
AUTO FINANCE
Cash and cash equivalents .. 3,793 2,688
Finance receivables, net ... 22,347 9,723
Other assets ................ 2,850 4,846
--------------- --------------
TOTAL AUTO FINANCE ASSETS ... 28,990 17,257
--------------- --------------
TOTAL ASSETS ................. $887,603 $522,950
=============== ==============
See Notes to Consolidated Condensed Financial Statements
1
UNITED AUTO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1997 1996
--------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
AUTO DEALERSHIPS
Floor plan notes payable .................. $242,960 $170,170
Short-term debt ........................... 6,469 6,069
Accounts payable .......................... 31,757 22,187
Accrued expenses .......................... 25,795 17,585
Current portion of long-term debt ........ 7,472 5,444
--------------- --------------
Total current liabilities ................ 314,453 221,455
Long-term debt ............................. 237,356 11,121
Due to related party ....................... 517 1,334
Deferred income taxes ...................... 8,362 4,867
--------------- --------------
TOTAL AUTO DEALERSHIP LIABILITIES .......... 560,688 238,777
--------------- --------------
AUTO FINANCE
Short-term debt ........................... 321 1,001
Accounts payable and other liabilities ... 2,875 1,704
--------------- --------------
TOTAL AUTO FINANCE LIABILITIES ............. 3,196 2,705
--------------- --------------
Commitments and contingent liabilities ....
STOCKHOLDERS' EQUITY
Voting common stock ....................... 2 2
Additional paid-in capital ................ 310,159 284,502
Retained earnings (accumulated deficit) ... 13,558 (3,036)
--------------- --------------
TOTAL STOCKHOLDERS' EQUITY ................. 323,719 281,468
--------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $887,603 $522,950
=============== ==============
See Notes to Consolidated Condensed Financial Statements
2
UNITED AUTO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ------------------------
1997 1996 1997 1996
---------- ---------- ------------ ----------
AUTO DEALERSHIPS
Vehicle sales............................... $549,395 $319,004 $1,353,609 $854,177
Finance and insurance....................... 20,768 12,944 52,280 35,283
Service and parts........................... 55,812 24,897 135,244 65,324
---------- ---------- ------------ ----------
Total revenues............................. 625,975 356,845 1,541,133 954,784
Cost of sales, including floor plan
interest................................... 545,834 316,919 1,344,730 848,479
---------- ---------- ------------ ----------
Gross profit............................... 80,141 39,926 196,403 106,305
Selling, general and administrative
expenses................................... 64,644 33,020 160,367 90,040
---------- ---------- ------------ ----------
Operating income............................ 15,497 6,906 36,036 16,265
Other interest expense ..................... (5,003) (1,614) (7,249) (3,619)
Other income (expense), net................. 0 672 297 2,295
---------- ---------- ------------ ----------
INCOME BEFORE INCOME TAXES--AUTO
DEALERSHIPS.................................. 10,494 5,964 29,084 14,941
---------- ---------- ------------ ----------
AUTO FINANCE
Revenues.................................... 387 575 2,472 1,604
Interest expense............................ (148) (100) (408) (276)
Operating and other expenses................ (1,414) (852) (3,438) (2,054)
---------- ---------- ------------ ----------
LOSS BEFORE INCOME TAXES--AUTO FINANCE ...... (1,175) (377) (1,374) (726)
---------- ---------- ------------ ----------
TOTAL COMPANY
Income before minority interests and
provision for income taxes ................ 9,319 5,587 27,710 14,215
Minority interests.......................... (21) (1,058) (118) (2,792)
Provision for income taxes.................. (3,728) (2,308) (11,106) (5,305)
---------- ---------- ------------ ----------
Net income .................................. $ 5,570 $ 2,221 $ 16,486 $ 6,118
========== ========== ============ ==========
Net income per common share ................. $ 0.29 $ 0.22 $ 0.89 $ 0.67
========== ========== ============ ==========
Shares used in computing net income per
common share................................ 19,210 10,283 18,481 9,087
========== ========== ============ ==========
See Notes to Consolidated Condensed Financial Statements
3
UNITED AUTO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------
1997 1996
------------------------- -------------------------
AUTO AUTO AUTO AUTO
DEALERSHIPS FINANCE DEALERSHIPS FINANCE
------------- ---------- ------------- ----------
OPERATING ACTIVITIES:
Net income (loss) ............................. $ 17,310 $ (824) $ 6,844 $ (726)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization ................ 6,417 385 2,410 140
Deferred income tax expense .................. 5,130 4,362
Related party interest income ................ (2,322)
Gain on sales of finance receivables ........ (57) (486)
Finance receivables originated ............... (84,254) (61,041)
Collections on finance receivables ........... 75,481 60,237
Minority interests portion of income ......... 118 2,792
Changes in operating assets and liabilities:
Accounts receivable .......................... (12,638) (7,114)
Inventories .................................. 10,677 662
Floor plan notes payable ..................... (7,223) 2,796
Accounts payable and accrued expenses ....... 7,527 779 4,223 571
Other ........................................ (3,952) (1,827) 933 (1,418)
------------- ---------- ------------- ----------
Net cash provided by (used in) operating
activities:................................. 23,366 (10,317) 15,586 (2,723)
------------- ---------- ------------- ----------
INVESTING ACTIVITIES:
Purchase of equipment and improvements ...... (8,329) (49) (3,360) (235)
Dealership acquisitions ...................... (81,651) (32,879)
Investment in auto finance subsidiary ....... (12,300) 12,300 (9,750) 9,750
Funding for subsequent acquisition ........... (2,397)
Advances to related parties .................. (876)
Investment in and advances to
uncombined investee ......................... (290) (1,418)
Other......................................... 426
------------- ---------- ------------- ----------
Net cash provided by (used in)
investing activities ....................... (101,854) 12,251 (49,552) 8,097
------------- ---------- ------------- ----------
FINANCING ACTIVITIES:
Proceeds from issuance of stock .............. 4,634 24,564
Repurchase of common stock ................... (8,821)
Proceeds from borrowings of long-term debt .. 251,949 18,700
Deferred financing costs ..................... (9,540) (511)
Net borrowings (repayments) of
short-term debt ............................. (5,118)
Payments of long-term debt and
capitalized leases........................... (53,154) (1,502)
Advances (to) from affiliates ................ (817) 168
Distribution to stockholders and
minority interest............................ (600)
Borrowings from warehouse credit line ....... 40,760 44,716
Payments of warehouse credit line ............ (41,589) (49,099)
------------- ---------- ------------- ----------
Net cash provided by (used in)
financing activities ....................... 184,251 (829) 35,701 (4,383)
------------- ---------- ------------- ----------
Net increase in cash and cash equivalents ... 105,763 1,105 1,735 991
Cash and cash equivalents, beginning of
period........................................ 66,875 2,688 4,697 531
------------- ---------- ------------- ----------
Cash and cash equivalents, end of period ...... $ 172,638 $ 3,793 $ 6,432 $ 1,522
============= ========== ============= ==========
See Notes to Consolidated Condensed Financial Statements
4
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. BASIS OF PRESENTATION
The information presented as of September 30, 1997 and 1996, and for the
three and nine month periods then ended, is unaudited, but includes all
adjustments (consisting only of normal recurring accruals) which the
management of United Auto Group, Inc. (the "Company" or "UAG") believes to be
necessary for the fair presentation of results for the periods presented. The
results for the interim periods are not necessarily indicative of results to
be expected for the year. These consolidated condensed financial statements
should be read in conjunction with the Company's audited financial statements
for the year ended December 31, 1996, which were included as part of the
Company's Annual Report on Form 10-K.
2. NET INCOME PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 128"). SFAS 128 establishes standards for computing and presenting
earnings per share for periods ending after December 15, 1997. Basic and
diluted earnings per share, calculated pursuant to SFAS 128, are not expected
to be materially different from net income per common share as reflected in
the accompanying Consolidated Condensed Statements of Income.
3. INVENTORIES
Inventories consisted of the following at the balance sheet dates:
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
New vehicles ................. $156,099 $109,414
Used vehicles ................ 77,168 50,060
Parts, accessories and other 15,288 9,381
------------------ -----------------
Total Inventories ........... $248,555 $168,855
================== =================
4. SENIOR SUBORDINATED NOTES
On July 23, 1997, the Company completed the sale of $150,000 aggregate
principal amount of 11% Senior Subordinated Notes due 2007 (the "Series A
Notes"). On September 16, 1997, the Company completed the sale of an
additional $50,000 aggregate principal amount of 11% Senior Subordinated
Notes due 2007, Series B (together with the Series A Notes the "Notes"). The
sale of the Notes were exempt from registration under the Securities Act of
1933 pursuant to Rule 144A thereunder. Proceeds from the offering of the
Notes after issue discount, discount to initial purchasers and estimated
transaction costs amounted to approximately $189,469.
The Notes are fully and unconditionally guaranteed (subject to fraudulent
conveyence laws) on a joint and several basis by the Company's Auto Dealership
subsidiaries (the "Note Guarantors"). Separate financial information of the
Note Guarantors has been omitted because (i) the Company is a holding company
with no independent operations and (ii) separate financial information for the
Note Guarantors is presented on the face of the Company's consolidated
financial statements under the caption "Auto Dealerships." If required, the
Company will seek no-action relief from any additional reporting requirements
relating to the Note Guarantors that may be required pursuant to Regulation
S-X.
5. PRO FORMA RESULTS OF OPERATIONS
The Company made a number of acquisitions in 1996 and 1997. Each of these
acquisitions has been accounted for using the purchase method of accounting
and as a result, the Company's financial
5
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
5. PRO FORMA RESULTS OF OPERATIONS (Continued)
statements include the results of operations of the acquired dealerships only
from the date of acquisition. The following unaudited pro forma summary
presents the consolidated results of operations of the Company for the nine
months ended September 30, 1997 and 1996 after reflecting the pro forma
adjustments that would be necessary to present those results as if the
acquisitions made during 1996 and 1997 had been consummated as of January 1,
1996.
PRO FORMA RESULTS OF
OPERATIONS
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
------------ ------------
Revenues ...................................... $1,823,673 $1,854,339
Income before minority interests and provision
for income taxes ............................. $ 19,357 $ 20,520
Net income .................................... $ 11,474 $ 12,312
Net income per common share ................... $ 0.60 $ 0.64
The foregoing pro forma results are not necessarily indicative of results
of operations that would have been reported had the acquisitions been
completed as of January 1, 1996. Additionally, the pro forma results do not
reflect a reduction of cost of sales related to reduced interest on floor
plan notes payable resulting from the application of unused proceeds from the
Company's initial public sale of common stock (the "IPO") and the sale of the
Notes. If the reduction of the floor plan interest expense were reflected,
pro forma net income (and net income per common share) would have been
$15,668 ($0.82 per share) and $19,660 ($1.02 per share) for the nine month
periods ended September 30, 1997 and 1996, respectively.
6. SUPPLEMENTAL CASH FLOW INFORMATION
The following table presents certain supplementary information to the
Consolidated Statements of Cash Flows:
NINE MONTHS ENDED SEPTEMBER 30,
1997 1996
------------------------ ------------------------
AUTO AUTO AUTO AUTO
DEALERSHIPS FINANCE DEALERSHIPS FINANCE
------------- --------- ------------- ---------
SUPPLEMENTAL INFORMATION:
Cash paid for interest .......................... $ 7,189 $173 $7,565 $203
Cash paid for income taxes ...................... 2,648 44 148 33
NON-CASH FINANCING AND INVESTING ACTIVITIES:
Dealership acquisition costs paid by issuance of
stock .......................................... 28,150 -- -- --
Dealership acquisition costs financed by
long-term debt ................................. 27,104 -- 4,000 --
Capitalized lease obligations.................... 274 148 301 --
Stock issuance costs amortized against proceeds
from issuance of common stock................... -- -- 775 --
Warrants issued.................................. -- -- 812 --
6
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
7. LEGAL PROCEEDINGS
In May and June 1997, three complaints were filed in the United States
District Court for the Southern District of New York on behalf of a purported
class consisting of all persons who purchased UAG common stock issued in
connection with and/or traceable to the Company's IPO at any time up to and
including February 26, 1997 (the "Lawsuits"). The complaints name as
defendants the Company, Carl Spielvogel, Marshall S. Cogan, J.P. Morgan
Securities Inc., Montgomery Securities and Smith Barney, Inc. The plaintiffs
in the Lawsuits seek unspecified damages in connection with their allegations
that the Prospectus and Registration Statement disseminated in connection
with the IPO contained material misrepresentations and omissions in violation
of Sections 11, 12(a)(2) and 15 of the Securities Act. They also seek to have
their actions certified as class actions under the Federal Rules of Civil
Procedure. On August 5, 1997, the Lawsuits were ordered consolidated for all
purposes. The Company believes that the plaintiffs' claims are without merit
and intends to defend the Lawsuits vigorously.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company retails new and used automobiles and light trucks, operates
service and parts departments and sells various aftermarket products,
including finance and insurance contracts. For the quarter ended September
30, 1997, UAG had revenues of approximately $626.0 million and retailed
15,424 new and 9,574 used vehicles. Vehicle sales represented 87.8% of the
Company's revenues for the quarter ended September 30, 1997; service and
parts accounted for 8.9% of revenues, with finance and insurance representing
the remaining 3.3%.
New vehicle revenues include sales to retail customers and to leasing
companies providing consumer automobile leasing. Used vehicle revenues
include amounts received for used vehicles sold to retail customers, leasing
companies providing consumer leasing, other dealers and wholesalers. Finance
and insurance revenues are generated from sales of accessories 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, and financing and lease contracts. UAG
dealerships market a complete line of aftermarket automotive products and
services through the Company's wholly-owned subsidiary, United AutoCare.
Service and parts revenues include amounts paid by consumers for repair and
maintenance service and the purchase of replacement parts.
Through its automobile finance subsidiary, Atlantic Auto Finance (to be
renamed UnitedAuto Finance), the Company derives revenues from the purchase,
sale and servicing of motor vehicle installment contracts originated by both
UAG and third-party dealerships.
The Company's selling expenses consist of advertising and compensation for
sales department personnel, including commissions and related bonuses.
General and administrative expenses include compensation for administration,
finance and general management personnel, depreciation, amortization, rent,
insurance, utilities and other outside services. 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 made a number of acquisitions in 1996 and 1997. Each of these
acquisitions has been accounted for using the purchase method of accounting
and as a result, the Company's financial statements include the results of
operations of the acquired dealerships only from the date of acquisition.
RESULTS OF OPERATIONS
The following discussion and analysis relates to the Company's
consolidated historical results of operation for the nine and three months
ended September 30, 1997 and 1996.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996
Auto Dealerships
Revenues. Revenues increased by $586.3 million, or 61.4%, from $954.8
million to $1.5 billion due principally to acquisitions. Revenues at
dealerships acquired during 1996 and 1997 amounted to $653.1 million. The
overall increase in revenues in the comparative periods is due principally to
the inclusion of revenues of each of the entities acquired during 1996 and
1997 since their respective acquisition dates, offset by a net decrease in
sales at dealerships owned prior to September 30, 1996 due primarily to (i) a
reduction in revenues at Atlanta Toyota, impacted by shortages of inventory
of certain models and a slowdown in the Atlanta economy, (ii) a reduction in
sales volume at the Company's DiFeo division resulting in part from the
closure of unprofitable dealerships and (iii) a decrease at Company Nissan
dealerships throughout the United States.
Sales of new and used vehicles increased by $499.4 million, or 58.5%, from
$854.2 million to $1.4 billion. Vehicle sales at dealerships acquired during
1996 and 1997 amounted to $567.0 million. The
8
overall increase in vehicle sales in the comparative periods is due
principally to the inclusion of vehicle sales of each of
the entities acquired during 1996 and 1997 since their respective acquisition
dates, offset by the net decrease in new and used vehicle sales at
dealerships owned prior to September 30, 1996 noted above. Aggregate unit
retail sales of new and used vehicles increased by 37.0% and 74.7%,
respectively, due principally to acquisitions. For the nine months ended
September 30, 1997, the Company sold 38,181 new vehicles (61.9% of total
vehicle sales) and 23,517 used vehicles (38.1% of total vehicle sales). For
the nine months ended September 30, 1996, the Company sold 27,868 new
vehicles (67.4% of total vehicle sales) and 13,459 used vehicles (32.6% of
total vehicle sales). The increase in the relative proportion of used vehicle
sales to total vehicle sales was due principally to the expansion of used car
operations in response to the popularity of used cars. New vehicle selling
prices increased by an average of 13.9% due primarily to changes in the mix
of models sold and changes in manufacturer pricing. Used vehicle selling
prices increased by an average of 10.1% due to changes in market conditions
which resulted in a change in the mix of used vehicles sold and the increase
in sales of recent model year off-lease vehicles.
Finance and insurance revenues (aftermarket product sales) increased by
$17.0 million, or 48.2%, from $35.3 million to $52.3 million due primarily to
acquisitions and the establishment of United AutoCare, offset to a degree by
a net decrease at dealerships owned prior to September 30, 1996 due to the
decrease in new and used vehicle sales noted above.
Service and parts revenues increased by $69.9 million, or 107.0%, from
$65.3 million to $135.2 million due principally to acquisitions.
Gross Profit. Gross profit increased by $90.1 million, or 84.8%, from
$106.3 million to $196.4 million. Gross profit as a percentage of revenues
increased from 11.1% to 12.7%. The increase in gross profit and in gross
profit as a percentage of revenues is due to (i) acquisitions, (ii) increased
dealership finance and insurance and service and parts revenues, which yield
higher margins, as a percentage of total revenues, (iii) improved gross
profit margins on service and parts revenues and (iv) the establishment of
United AutoCare.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $70.3 million, or 78.1%, from $90.0
million to $160.4 million due principally to acquisitions and an increase in
the infrastructure required to manage the substantial increase in the
Company's operations and the planned expansion of its business in the future.
Such expenses as a percentage of revenue increased from 9.4% to 10.4%.
Other Interest Expense. Other interest expense increased by $3.6 million,
from $3.6 million to $7.2 million. The increase is due to an increase in
interest expense arising from borrowings under the Company's credit facility,
the issuance of the Company's Senior Subordinated Notes due 2007 in July and
September 1997 and the issuance of acquisition-related debt, offset by a
reduction in interest expense due to the retirement of the Company's Senior
Notes in October 1996.
Other Income (Expense), Net. Other income (expense), net decreased by $2.0
million, from $2.3 million to $0.3 million due principally to a reduction in
related party interest income resulting from the disposition of the minority
interests in certain dealerships in October 1996.
Auto Finance
Loss before income taxes. Atlantic Auto Finance's loss before income taxes
increased by $0.6 million, from $0.7 million to $1.4 million. The increase is
due principally to an increase in the infrastructure required to manage the
substantial increase in Atlantic Auto Finance's operations and the planned
expansion of its business in the future, as well as a charge relating to
revised loan loss estimates.
Total Company
Provision for Income Taxes. The 1997 provision for income taxes increased
$5.8 million from $5.3 million to $11.1 million. The increase is due to the
increase in taxable income and a change in the Company's estimated effective
tax rate.
9
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1996
Auto Dealerships
Revenues. Revenues increased by $269.1 million, or 75.4%, from $356.8
million to $626.0 million due principally to acquisitions. Revenues at
dealerships acquired subsequent to September 30, 1996 amounted to $286.8
million, offset slightly by a net decrease in sales at dealerships owned
prior to September 30, 1996 due primarily to (i) a reduction in revenues at
Atlanta Toyota, impacted by shortages of inventory of certain models and a
slowdown in the Atlanta economy, (ii) a reduction in sales volume at the
Company's DiFeo division resulting in part from the closure of unprofitable
dealerships and (iii) a decrease at Company Nissan dealerships in the United
States.
Sales of new and used vehicles increased by $230.4 million, or 72.2%, from
$319.0 million to $549.4 million. Vehicle sales at dealerships acquired
subsequent to September 30, 1996 amounted to $251.0 million, offset by the
net decrease in new and used vehicle sales at dealerships owned prior to
September 30, 1996 noted above. Unit retail sales of new and used vehicles
increased by 48.9% and 93.5%, respectively, due principally to acquisitions.
For the three months ended September 30, 1997, the Company sold 15,424 new
vehicles (61.7% of total vehicle sales) and 9,574 used vehicles (38.3% of
total vehicle sales). For the three months ended September 30, 1996, the
Company sold 10,359 new vehicles (67.7% of total vehicle sales) and 4,949
used vehicles (32.3% of total vehicle sales). The increase in the relative
proportion of used vehicle sales to total vehicle sales was due principally
to the expansion of used car operations in response to the popularity of used
cars. New vehicle selling prices increased by an average of 15.4% due
primarily to changes in the mix of models sold and changes in manufacturer
pricing. Used vehicle selling prices increased by an average of 10.7% due to
changes in market conditions which resulted in a change in the mix of used
vehicles sold.
Finance and insurance revenues (aftermarket product sales) increased by
$7.8 million, or 60.4%, from $12.9 million to $20.8 million due primarily to
acquisitions and the establishment of United AutoCare, offset to a degree by
a net decrease at dealerships owned prior to September 30, 1996 due to the
decrease in new and used vehicle sales noted above.
Service and parts revenues increased by $30.9 million, or 124.2%, from
$24.9 million to $55.8 million due principally to acquisitions.
Gross Profit. Gross profit increased by $40.2 million, or 100.7%, from
$39.9 million to $80.1 million. Gross profit as a percentage of revenues
increased from 11.2% to 12.8%. The increase in gross profit and in gross
profit as a percentage of revenues is due to (i) acquisitions, (ii) increased
dealership finance and insurance and service and parts revenues, which yield
higher margins, as a percentage of total revenues, (iii) improved gross
profit margins on service and parts revenues and (iv) the establishment of
United AutoCare.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $31.6 million, or 95.8%, from $33.0
million to $64.6 million due principally to acquisitions and an increase in
the infrastructure required to manage the substantial increase in the
Company's operations and the planned expansion of its business in the future.
Such expenses as a percentage of revenue increased from 9.3% to 10.3%.
Other Interest Expense. Other interest expense increased by $3.4 million,
from $1.6 million to $5.0 million. The increase is due to an increase in
interest expense arising from borrowings under the Company's credit facility,
the issuance of the Company's Senior Subordinated Notes due 2007 in July and
September 1997 and the issuance of acquisition-related debt, offset by a
reduction in interest expense due to the retirement of the Company's Senior
Notes in October 1996.
Other Income (Expense), Net. Other income (expense), net decreased by $0.7
million due principally to a reduction in related party interest income
resulting from the disposition of the minority interests in certain
dealerships in October 1996.
10
Auto Finance
Loss before income taxes. The loss before income taxes at Atlantic Auto
Finance increased by $0.8 million, from $0.4 million to $1.2 million. The
increase is due principally to an increase in the infrastructure required to
manage the substantial increase in Atlantic Auto Finance's operations and the
planned expansion of its business in the future, as well as a charge relating
to revised loan loss estimates.
Total Company
Provision for Income Taxes. The 1997 provision for income taxes increased
$1.4 million from $2.3 million to $3.7 million. The increase is due to the
increase in taxable income and a change in the Company's estimated effective
tax rate.
LIQUIDITY AND CAPITAL RESOURCES
CASH AND LIQUIDITY REQUIREMENTS
The cash requirements of the Company are primarily for acquisitions of new
dealerships, working capital and the expansion of existing facilities.
Historically, these cash requirements have been met through issuances of
equity and debt instruments, borrowings under various credit agreements and
cash flow from operations. At September 30, 1997, the Company's dealership
operations had working capital of $196.7 million.
During the nine months ended September 30, 1997, dealership activities
resulted in net cash provided by operations of $23.4 million. Net cash used
by dealerships in investing activities during the nine months ended September
30, 1997 totaled $101.9 million, relating primarily to dealership
acquisitions, funding provided to Atlantic Auto Finance and capital
expenditures. Dealership financing activities provided $184.3 million of cash
during the nine months ended September 30, 1997 principally relating to net
proceeds of long-term debt.
The Company finances substantially all of its new and used vehicle
inventory under revolving floor plan financing arrangements with various
lenders. 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.
At September 30, 1997, the Company had approximately $176.4 million of
cash available to fund operations and future acquisitions. In addition, the
Company is party to a $50.0 million Senior Credit Facility, dated March 20,
1997 (as amended) (the "Senior Credit Facility"), with a group of banks which
is to be used principally for acquisitions. During July and September, the
Company issued $200.0 million aggregate principal amount of its 11% Senior
Subordinated Notes due 2007 (the "Notes"). Net proceeds from the sale of the
Notes amounted to $189.5 million, of which $50.0 million was used to repay in
full amounts then outstanding under the Senior Credit Facility. The balance
of the proceeds were deposited with the Company's floor plan lenders, which
deposits are earning interest at rates designated in the Company's floor plan
agreements with the various floor plan lenders. The Company has such deposits
to use for working capital and general corporate purposes, including
acquisitions. In connection with the sale of the second series of Notes, the
Company received the consent of the banks representing the majority of the
aggregate amount of the commitments under the Senior Credit Facility to amend
certain terms thereof, such as the debt incurrence covenant and various
financial ratios. Additionally, such banks waived any violations caused by
the sale of such Notes and agreed to commence the requisite internal
procedures to effect a formal amendment. Pending such amendment, the Company
is not permitted to borrow funds under the Senior Credit Facility. No
assurance can be given that such amendment will be effected.
The Company's principal source of growth has come, and is expected to
continue to come, from acquisitions of automobile dealerships. The Company
believes that its existing capital resources will be sufficient to fund its
current acquisition commitments. To the extent the Company pursues additional
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significant acquisitions, it may need to raise additional capital either
through the public or private issuance of equity or debt securities or
through additional bank borrowings. A public equity offering would require
the prior approval of certain automobile manufacturers.
CYCLICALITY
Unit sales of motor vehicles, particularly new vehicles, historically have
been cyclical, fluctuating with general economic cycles. During economic
downturns, the automotive retailing industry tends to experience similar
periods of decline and recession as the general economy. The Company believes
that the industry is influenced by general economic conditions and
particularly by consumer confidence, the level of personal discretionary
spending, interest rates and credit availability.
SEASONALITY
The Company's combined business is modestly seasonal overall. The greatest
seasonalities exist with the dealerships in the New York metropolitan area,
for which the second and third quarters are the strongest with respect to
vehicle related sales. The service and parts business at all dealerships
experiences relatively modest seasonal fluctuations.
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 that 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 placed at
a competitive disadvantage should interest rates increase due to increased
inflation since most other automobile dealers have similar floating rate
borrowing arrangements.
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PART II
ITEM 1 -- LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in litigation that has
arisen in the ordinary course of business. None of these matters, either
individually or in the aggregate, are expected to have a material adverse
effect on the Company's results of operations or financial condition.
ITEM 2 -- CHANGES IN SECURITIES
RECENT SALES OF UNREGISTERED SECURITIES
On July 23, 1997, the Company issued $150,000,000 aggregate principal
amount of its 11% Senior Subordinated Notes due 2007 (the "Notes") in an
offering exempt from registration under the Securities Act pursuant to Rule
144A thereunder as a private sale to qualified institutional buyers or to
persons other than U.S. persons outside of the United States in reliance upon
Regulation S thereunder. The initial purchasers of the Notes were J.P. Morgan
Securities Inc., Salomon Brothers Inc, CIBC Wood Gundy Securities Corp.,
Montgomery Securities and Scotia Capital Markets (USA) Inc. (the "Initial
Purchasers"). The aggregate discount to the Initial Purchasers was
$4,500,000.
On September 16, 1997, the Company issued $50,000,000 aggregate principal
amount of its 11% Senior Subordinated Notes due 2007, Series B (the "Series B
Notes") in an offering exempt from registration under the Securities Act
pursuant to Rule 144A thereunder as a private sale to qualified institutional
buyers. The initial purchasers of the Series B Notes were J.P. Morgan
Securities Inc. and Scotia Capital Markets (USA) Inc. (the "Series B Initial
Purchasers"). The aggregate discount to the Series B Initial Purchasers was
$1,500,000.
ITEM 6 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits
***3.1 Third Restated Certificate of Incorporation.
*3.2 Restated Bylaws.
*4.1 Specimen Common Stock certificate.
4.2 Indenture, dated as of July 23, 1997, among the Company, the Guarantors party thereto and The
Bank of New York, as Trustee, including form of Note and Guarantee.
4.3 Registration Rights Agreement, dated as of July 23, 1997, among the Company, the Guarantors
party thereto and J.P. Morgan Securities Inc., Salomon Brothers Inc, CIBC Wood Gundy
Securities Corp., Montgomery Securities and Scotia Capital Markets (USA) Inc.
4.4 Indenture, dated as of September 16, 1997, among the Company, the Guarantors party thereto
and The Bank of New York, as Trustee, including form of Series B Note and Guarantee.
4.5 Registration Rights Agreement, dated as of September 16, 1997, among the Company, the
Guarantors party thereto and J.P. Morgan Securities Inc. and Scotia Capital Markets (USA)
Inc.
10.17.1 Stock Purchase Agreement, dated July 25, 1997 among United Auto Group, Inc., UAG West Texas,
Inc., All American Chevrolet, Inc., Lynn Alexander, Inc., Jo-Vena Automotive, Inc., Lynn Rich
Management Company and R. Lynn Alexander.
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10.18.1 Stock Purchase Agreement, dated July 25, 1997 among United Auto Group, Inc., UAG Classic,
Inc., Classic Auto Group, Inc., Cherry Hill Classic Cars, Inc., Classic Enterprises Inc.,
Classic Buick, Inc., Classic Chevrolet, Inc., Classic Management, Inc., Classic Turnersville,
Inc., Classic Imports, Inc. and Thomas J. Hessert, Jr. (as amended).
10.19.1.1 Stock Purchase Agreement, dated as of September 25, 1997 among United Auto Group, Inc., UAG
Young, Inc., Dan Young Chevrolet, Inc., Dan Young, Inc., Parkway Chevrolet, Inc., Young
Management Group, Inc., Alan V. Young, William A. Young, Dan E. Young, Conway M. Anderson
III, Shirley J. Young Irrevocable GRAT Trust, Dan E. Young Irrevocable GRAT Trust,
Irrevocable Trust for Alan V. Young and Irrevocable Trust for William A. Young.
10.19.1.2 Agreement and Plan of Merger, dated as of September 25, 1997 among United Auto Group, Inc.,
UAG Kissimmee Motors, Inc., UAG Paramount Motors, Inc., UAG Century Motors, Inc., Paramount
Chevrolet-Geo, Inc., Century Chevrolet-Geo, Inc., Alan V. Young, William A. Young, Jennifer
Y. Taggart, Cathy Y. Dyer, Young/AVY II Irrevocable Trust fbo Lara A. Young, Young/AVY II
Irrevocable Trust fbo Courtney E. Young, Young/AVY II Irrevocable Trust fbo Daniel A. Young,
Young/Way II Irrevocable Trust, Young/Taggart II Irrevocable Trust fbo William E. Taggart,
Young/Taggart II Irrevocable Trust fbo Mary K. Taggart, Shirley J. Young Irrevocable GRAT
Trust and Dan E. Young Irrevocable GRAT Trust.
27.1 Financial Data Schedule.
- ------------
* Incorporated herein by reference to the identically numbered exhibit
to the Company's Registration Statement on Form S-1, Registration No.
333-09429.
*** Incorporated herein by reference to the identically numbered exhibit
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996, File No. 1-12297.
(b) Reports on Form 8-K.
The Company filed the following Current Reports on Form 8-K during the
quarter ended September 30, 1997:
(1) July 8, 1997, reporting under Items 5 and 7 (announcement of proposed
offering of $150.0 million aggregate principal amount of Senior
Subordinated Notes Due 2007).
(2) July 14, 1997, reporting under Item 7 (Staluppi Group financial
information).
(3) July 15, 1997, reporting under Items 5 and 7 (consummation of Reed
Group acquisition and termination of previously announced Mize Ford
acquisition agreement).
(4) August 7, 1997, reporting under Items 5 and 7 (announcement of Lynn
Alexander and Classic Auto acquisitions and management changes).
(5) September 24, 1997, reporting under Items 5 and 7 (announcement of
the private placement of $50.0 million aggregate principal amount of
Senior Subordinated Notes due 2007, Series B).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED AUTO GROUP, INC.
By: /s/ Marshall S. Cogan
-------------------------------
Marshall S. Cogan
Chairman of the Board,
Chief Executive Officer and
President
Date: November 14, 1997
By: /s/ James R. Davidson
-------------------------------
James R. Davidson
Senior Vice President--Finance
and Treasurer
(Chief Accounting Officer)
Date: November 14, 1997
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