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 MARCH 31, 1999
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 MAY 7, 1999:
VOTING COMMON STOCK, $0.0001 PAR VALUE 21,289,619
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 March 31, 1999 and
December 31, 1998 1
Consolidated Condensed Statements of Operations for the three months
ended March 31, 1999 and 1998 2
Consolidated Condensed Statements of Cash Flows for the three months
ended March 31, 1999 and 1998 3
Notes to Consolidated Condensed Financial Statements 4
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 8
PART II
1. Legal Proceedings 13
2. Changes in Securities 14
6. Exhibits and Reports on Form 8-K 14
Signatures 15
UNITED AUTO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
(UNAUDITED)
MARCH 31, DECEMBER 31,
ASSETS 1999 1998
----------- ------------
Cash and cash equivalents $23,132 $38,538
Accounts receivable, net 128,189 125,460
Inventories 436,520 410,295
Other current assets 16,805 16,420
----------- ------------
Total current assets 604,646 590,713
Property and equipment, net 55,127 51,483
Intangible assets, net 484,508 482,049
Net assets of discontinued operations 22,423 23,323
Other assets 33,528 36,626
----------- ------------
TOTAL ASSETS $1,200,232 $1,184,194
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Floor plan notes payable $418,418 $397,234
Accounts payable 35,937 38,435
Accrued expenses 41,335 45,104
Current portion of long-term debt 30,569 24,756
----------- ------------
Total current liabilities 526,259 505,529
Long-term debt 279,204 288,265
Other long-term liabilities 52,299 48,750
----------- ------------
TOTAL LIABILITIES 857,762 842,544
Commitments and contingent liabilities
STOCKHOLDERS' EQUITY
Voting Common Stock 2 2
Additional paid-in-capital 349,713 352,591
Accumulated deficit (7,245) (10,943)
----------- ------------
Total stockholders' equity 342,470 341,650
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,200,232 $1,184,194
=========== ============
See Notes to Consolidated Condensed Financial Statements
1
UNITED AUTO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------------------------
1999 1998
------------ -----------
Vehicle sales $775,360 $616,974
Finance and insurance 36,664 24,389
Service and parts 92,708 70,346
------------ -----------
Total revenues 904,732 711,709
Cost of sales, including floor plan interest 786,477 622,485
------------ -----------
Gross profit 118,255 89,224
Selling, general and administrative expenses 103,552 78,541
------------ -----------
Operating income 14,703 10,683
Other interest expense (8,442) (7,094)
Other income (expense), net 794 353
------------ -----------
Income from continuing operations before
minority interests, income tax provision and
extraordinary item 7,055 3,942
Minority interests (148) (34)
Income tax provision (3,209) (1,617)
------------ -----------
Income from continuing operations 3,698 2,291
Income from discontinued operations, net of
income tax provision of $5 in 1998 -- 8
------------ -----------
Income before extraordinary item 3,698 2,299
Extraordinary item, net of income tax benefit of $859 in 1998 -- (1,235)
------------ -----------
Net income $3,698 $1,064
=========== ===========
Basic income from continuing operations per common share $0.17 $0.12
=========== ===========
Basic net income per common share $0.17 $0.05
=========== ===========
Income from continuing operations per diluted common share $0.16 $0.12
=========== ===========
Net income per diluted common share $0.16 $0.05
=========== ===========
Shares used in computing basic per share data 21,895 19,781
=========== ===========
Shares used in computing diluted per share data 23,307 19,924
=========== ===========
See Notes to Consolidated Condensed Financial Statements
2
UNITED AUTO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-----------------------
1999 1998
--------- ---------
Operating activities:
Net income $3,698 $1,064
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 4,555 3,439
Income from discontinued operations - (8)
Minority interests 148 34
Changes in operating assets and liabilities:
Accounts receivable (3,346) (1,674)
Inventories (26,984) (33,303)
Floor plan notes payable 21,184 40,501
Accounts payable and accrued expenses (5,146) (2,499)
Other 2,476 (1,917)
--------- ---------
Net cash provided by (used in) operating activities (3,415) 5,637
--------- ---------
INVESTING ACTIVITIES:
Purchase of equipment and improvements (5,038) (3,636)
Dealership acquisitions (4,624) (81,671)
--------- ---------
Net cash used in investing activities (9,662) (85,307)
--------- ---------
FINANCING ACTIVITIES:
Payments of long-term debt and capital leases (3,229) (13,415)
Proceeds from issuance of common stock - 366
Proceeds from borrowings of long-term debt - 35,900
Payment of deferred financing costs - (1,842)
--------- ---------
Net cash provided by (used in) financing activities (3,229) 21,009
--------- ---------
Net cash provided by (invested in) discontinued operations 900 (15,250)
--------- ---------
Net decrease in cash and cash equivalents (15,406) (73,911)
Cash and cash equivalents, beginning of period 38,538 94,435
--------- ---------
Cash and cash equivalents, end of period $23,132 $20,524
========= =========
See Notes to Consolidated Condensed Financial Statements
3
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 March 31, 1999 and 1998 and for the three month
periods then ended is unaudited, but includes all adjustments (consisting only
of normal recurring accruals) which the management of United Auto Group, Inc.
(the "Company") believes to be necessary for the fair presentation of results
for the periods presented. The results for the interim periods are not
necessarily indicative of results to be expected for the year. These
consolidated condensed financial statements should be read in conjunction with
the Company's audited financial statements for the year ended December 31, 1998,
which were included as part of the Company's Annual Report on Form 10-K. In
order to maintain consistency and comparability of financial information between
periods presented, certain reclassifications have been made to the Company's
prior year condensed financial statements to conform to the current year
presentation.
2. INVENTORIES
Inventories consisted of the following:
MARCH 31, DECEMBER 31,
1999 1998
----------------- ----------------
New vehicles $305,321 $284,343
Used vehicles 104,888 99,411
Parts, accessories and other 26,311 26,541
----------------- ----------------
Total Inventories $436,520 $410,295
================= ================
3. MANAGED DEALERSHIPS
The Company has entered into management agreements at certain dealerships for
which the closing of the acquisition of such dealerships is pending final
manufacturer approval. Pursuant to such management agreements, the Company is
paid a monthly fee for managing all aspects of the dealerships' operations.
Management fee income amounting to $794 and $353 for the three month periods
ended March 31, 1999 and 1998, respectively, has been included in other income
(expense), net in the accompanying consolidated condensed statements of
operations.
4. DISCONTINUED OPERATIONS
In December 1998, the Company discontinued the auto finance business of its
wholly-owned subsidiary United Auto Finance, Inc. ("UAF"). As a result, UAF no
longer engages in the purchase or sale of automotive loans; however, it
continues to service its securitized portfolios in accordance with contractual
commitments. Consequently, UAF has been reported as a discontinued operation in
the accompanying consolidated condensed statements of operations. In addition,
the remaining assets and liabilities of UAF have been presented as a separate
line item in non-current assets on the consolidated condensed balance sheets.
The Company has restated its prior financial statements to present the results
of UAF as a discontinued operation for all periods presented.
4
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Thousands, Except Per Share Amounts)
(UNAUDITED)
Summarized financial information of discontinued operations follows:
THREE MONTHS ENDED MARCH 31,
1999 1998
--------- ---------
Revenues $1,219 $2,181
Income from operations, net of taxes of $5 in 1998. -- 8
Net income -- 8
Net income per diluted common share -- --
AS OF AS OF
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
Cash and cash equivalents $3,545 $3,615
Restricted cash 950 1,009
Finance assets, net 24,819 26,947
Other assets 1,380 967
Short-term debt, accrued liabilities and other liabilities 8,271 9,215
5. BUSINESS COMBINATIONS
The Company completed the acquisition of a number of dealerships and dealership
groups during 1998. Each of these acquisitions has been accounted for using the
purchase method of accounting. As a result, the Company's financial statements
include the results of operations of such dealerships and dealership groups only
from the respective dates of acquisition. The following unaudited pro forma
summary presents the consolidated results of continuing operations of the
Company for the three months ended March 31, 1998 after reflecting the pro forma
adjustments that would be necessary to present those results as if the
acquisitions had been consummated as of January 1, 1998.
THREE MONTHS
ENDED MARCH 31,
1998
------------------
Revenues $778,489
Income from continuing operations before minority interests and income tax provision 4,816
Income from continuing operations 2,807
Income from continuing operations per diluted common share 0.13
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, 1998.
6. EARNINGS PER SHARE
A reconciliation of the number of shares used for the calculation of basic and
dilutive earnings per share for the three month periods ended March 31, 1999 and
1998 is as follows:
THREE MONTHS ENDED MARCH 31,
1999 1998
--------------- ----------------
Weighted average number of common shares outstanding 21,895,000 19,781,000
Effect of stock options 14,000 143,000
Effect of minimum share price guarantee 1,398,000 --
=============== ================
Weighted average number of common shares outstanding, including effect
of dilutive securities 23,307,000 19,924,000
=============== ================
5
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Thousands, Except Per Share Amounts)
(UNAUDITED)
7. SUPPLEMENTAL CASH FLOW INFORMATION
The following table presents certain supplementary information to the
consolidated condensed statements of cash flows:
THREE MONTHS ENDED MARCH 31,
1999 1998
------------ ------------
SUPPLEMENTAL INFORMATION:
Cash paid for interest $13,024 $7,189
Cash paid for income taxes 645 2,648
NON-CASH FINANCING AND INVESTING ACTIVITIES:
Dealership acquisition costs paid by issuance of stock -- 31,232
Dealership acquisition costs financed by long-term debt -- 7,800
8. SUBSEQUENT EVENT
On April 12, 1999, the Company and International Motor Cars Group I, L.L.C. and
International Motor Cars Group II, L.L.C., Delaware limited liability companies
controlled by Penske Capital Partners, L.L.C. (together, the "Purchaser"),
entered into a Securities Purchase Agreement (the "Securities Purchase
Agreement") pursuant to which, subject to the satisfaction of certain closing
conditions, the Purchaser will purchase (i) an aggregate of 7,903.12456 shares
of the Company's Series A Convertible Preferred Stock, par value $0.0001 per
share (the "Series A Preferred Stock"), (ii) an aggregate of 396.876 shares of
the Company's Series B Convertible Preferred Stock, par value $0.0001 per share
(the "Series B Preferred Stock"), and (iii) warrants (the "Warrants") to
purchase (a) 3,898,665 shares of the Company's voting Common Stock, par value
$0.0001 per share (the "Common Stock"), and (b) 1,101,335 shares of the
Company's non-voting Common Stock, par value $0.0001 per share (the "Non-Voting
Common Stock") for $83,000. The shares of Series A Preferred Stock and Series B
Preferred Stock will entitle the Purchaser to dividends at a rate of 6.5% per
year, payable in kind for the first two years. The Series A Preferred Stock is
convertible into an aggregate of 7,903,124 shares of Common Stock and the Series
B Preferred Stock is convertible into an aggregate of 396,876 shares of
Non-Voting Common Stock. The Warrants are exercisable at a price of $12.50 per
share for the thirty months following the date of issuance, and $15.50 per share
thereafter until May 2, 2004.
Following conversion of the Series A Preferred Stock and the Series B Preferred
Stock and exercise of the Warrants, the Purchaser will own approximately 38% of
the Company's Common Stock and Non-Voting Common Stock, on a fully diluted
basis. Pursuant to the Securities Purchase Agreement, the Company has agreed
that, subject to certain conditions, its Board of Directors will recommend that
the Company's stockholders vote in favor of the transactions contemplated by the
Securities Purchase Agreement, including the election to the Board of Directors
of such number of the Purchaser's designees as will constitute a majority of the
Board of Directors.
6
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Thousands, Except Per Share Amounts)
(UNAUDITED)
The transaction will be consummated in two steps: first, the acquisition of
approximately $33,550 of Series A Preferred Stock and, second, the acquisition
of approximately $49,450 of Series A Preferred Stock, Series B Preferred Stock
and Warrants. The first step of the transaction closed on May 3, 1999.
Accordingly, on that date, the Company issued approximately 3,728 shares of the
Series A Preferred Stock. The second step of the transaction is subject to
customary closing conditions, including approval by the Company's stockholders
and receipt or waiver of third-party consents. There can be no assurance when or
whether the second step of the transaction will occur. If the second step does
not occur by December 31, 1999, the Company may be required to repurchase the
investment made in the first step; if not, the conversion price of the Series A
Preferred Sock and the Series B Preferred Stock will be $9.00 per share.
7
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Thousands)
(UNAUDITED)
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,
warranty, extended service and insurance contracts.
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, warranty policies, extended service
contracts and credit insurance policies, as well as fees for placing finance and
lease contracts. UAG dealerships market a complete line of aftermarket
automotive products and services through its wholly-owned subsidiaries, United
Auto Care, Inc. and United Auto Care Products, Inc. (together with United Auto
Care, Inc. "UAC"). Service and parts revenues include fees paid for repair and
maintenance service and the sale of replacement parts.
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 interest
relating to floor plan inventory financing which is included in cost of sales.
The Company made a number of dealership acquisitions in 1998. 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 operations for the three months ended March 31, 1999 and
1998.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Revenues. Revenues increased by $193.0 million, or 27.1%, from $711.7 million to
$904.7 million. The overall increase in revenues is due primarily to (i)
dealership acquisitions made subsequent to January 1, 1998 and (ii) an aggregate
10.7% increase in retail revenues at dealerships owned prior to January 1, 1998,
partially offset by a decrease in revenues due to dealerships which were
divested during 1998. The overall increase in retail revenues at dealerships
owned prior to January 1, 1998 reflects 10.1%, 30.6% and 9.1% increases in
retail vehicle sales, finance and insurance and service and parts revenues,
respectively.
8
Sales of new and used vehicles increased by $158.4 million, or 25.7%, from
$617.0 million to $775.4 million. The increase is due primarily to (i)
acquisitions made subsequent to January 1, 1998 and (ii) the net increase at
dealerships owned prior to January 1, 1998, offset by a decrease due to
dealerships which were divested during 1998. The increase at dealerships owned
prior to January 1, 1998 is due to an increase in the comparative average
selling price per vehicle and a 5.7% increase in retail unit sales. Aggregate
retail unit sales of new and used vehicles increased by 27.3% and 20.5%,
respectively, due principally to acquisitions and the net increase at
dealerships owned prior to January 1, 1998, offset by the decrease due to
dealerships which were divested during 1998. The Company sold 20,240 new
vehicles (61.7% of total vehicle sales) and 12,569 used vehicles (38.3% of total
vehicle sales) during the three months ended March 31, 1999, compared with
15,899 new vehicles (60.4% of total vehicle sales) and 10,427 used vehicles
(39.6% of total vehicle sales) during the three months ended March 31, 1998.
Finance and insurance revenues increased by $12.3 million, or 50.3%, from $24.4
million to $36.7 million. The increase is due primarily to (i) acquisitions made
subsequent to January 1, 1998, (ii) the net increase at dealerships owned prior
to January 1, 1998 and (iii) an increase in revenues at UAC, offset by a
decrease due to dealerships which were divested during 1998.
Service and parts revenues increased by $22.4 million, or 31.8%, from $70.3
million to $92.7 million. The increase is due primarily to (i) acquisitions made
subsequent to January 1, 1998 and (ii) the net increase at dealerships owned
prior to January 1, 1998, offset by a decrease due to dealerships which were
divested during 1998.
Gross Profit. Gross profit increased by $29.0 million, or 32.5%, from $89.2
million to $118.3 million. The increase in gross profit is due to (i)
acquisitions made subsequent to January 1, 1998, (ii) an aggregate 13.3%
increase in retail gross profit at stores owned prior to January 1, 1998 and
(iii) the increase in revenues at UAC, offset by a decrease due to dealerships
which were divested during 1998. Gross profit as a percentage of revenues
increased from 12.5% to 13.1%. The increase in gross profit as a percentage of
revenues is primarily attributable to (i) the increase in higher margin finance
and insurance and service and parts revenues as a percentage of total revenues,
(ii) improved gross profit margins on retail vehicle sales revenues and (iii)
improved gross profit margins on service and parts revenues, offset in part by a
decrease in gross profit margins on finance and insurance revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $25.0 million, or 31.8%, from $78.5 million
to $103.6 million. Such expenses as a percentage of revenue increased from 11.0%
to 11.4%. The increase in selling, general and administrative expense is due
principally to (i) acquisitions made subsequent to January 1, 1998 and (ii) a
13.9% increase at stores owned prior to January 1, 1998. The increase in
selling, general and administrative expenses at stores owned prior to January 1,
1998 is due in large part to increased selling expenses, including increased
variable compensation, as a result of the increase in gross profit compared with
the prior year.
Other Interest Expense. Other interest expense increased by $1.3 million, from
$7.1 million to $8.4 million. The increase is due primarily to higher
outstanding indebtedness under the Company's credit facility during the first
quarter of 1999 compared to the first quarter of 1998, offset in part
by a net decrease in acquisition related debt outstanding during the comparative
periods.
9
Income Tax Provision. The 1999 income tax provision increased by $1.6 million
from $1.6 million to $3.2 million. The increase is due to an increase in pre-tax
income in 1999 compared with 1998, coupled with an increase in the Company's
estimated annual effective income tax rate. The increase in the Company's
estimated annual effective income tax rate is due primarily to non-deductible
goodwill incurred in connection with certain acquisitions and increased
effective state tax rates.
Extraordinary Item. The 1998 extraordinary item of $1.2 million, net of taxes of
$0.9 million, represents a loss resulting from the write-off of unamortized
deferred financing costs relating to the Company's previous credit facility.
LIQUIDITY AND CAPITAL RESOURCES
CASH AND LIQUIDITY REQUIREMENTS
The cash requirements of the Company are primarily for the acquisition of new
dealerships, working capital and the expansion or improvement of existing
facilities. Historically, these cash requirements have been met through
issuances of equity and debt instruments and cash flow from operations. At March
31, 1999, the Company had working capital of $78.4 million.
On April 12, 1999, the Company and the Purchaser entered into the Securities
Purchase Agreement, pursuant to which, subject to the satisfaction of certain
closing conditions, the Company will issue (i) the Series A Preferred Stock,
(ii) the Series B Convertible Preferred Stock, and (iii) the Warrants for $83.0
million. The shares of Series A Preferred Stock and Series B Preferred Stock
will entitle the Purchaser to dividends at a rate of 6.5% per year, payable in
kind for the first two years. The transaction will be consummated in two steps:
first, the acquisition of approximately $33.5 million of Series A Preferred
Stock and, second, the acquisition of approximately $49.5 million of Series A
Preferred Stock, Series B Preferred Stock and Warrants. The first step of the
transaction closed on May 3, 1999. Accordingly, the Company issued approximately
3,728 shares of the Series A Preferred Stock in exchange for approximately $33.5
million. Proceeds from the issuance of the Series A Preferred Stock were used to
prepay $18.4 million of revolving loan commitments outstanding under the
Company's Credit Agreement and to pay $2.6 million of fees incurred in
connection with the execution of the Securities Purchase Agreement. The balance
of the proceeds were deposited in interest bearing accounts.
The second step of the transaction is subject to customary closing conditions,
including approval by the Company's stockholders and receipt or waiver of
third-party consents. There can be no assurance when or whether the second step
of the transaction will occur. If the second step does not occur by December 31,
1999, the Company may be required to repurchase the investment made in the first
step; if so, the conversion price of the Series A Preferred Sock and the Series
B Preferred Stock will be $9.00 per share.
Net cash used in operations during the three months ended March 31, 1999 totaled
$3.4 million. Net cash used in investing activities during the three months
ended March 31, 1999, relating primarily to dealership acquisitions and capital
expenditures, totaled $9.7 million. Net cash used in financing activities during
the three months ended March 31, 1999, relating to net proceeds from the
issuance of long-term debt, totaled $3.2 million. The Company also received a
$0.9 million distribution during the first quarter from UAF in partial
settlement of an intercompany obligation.
10
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 floor plan lending sources.
At March 31, 1999, the Company had approximately $23.1 million of cash available
to fund operations and future acquisitions. In addition, the Company is party to
a $75.0 million Credit Agreement, dated February 27, 1998 (as amended) (the
"Credit Agreement"), with a group of banks, which is to be used principally for
acquisitions and working capital. As of March 31, 1999, the Company was not in
compliance with certain financial covenants under its Credit Agreement, but on
April 29, 1999, the Credit Agreement was amended. The Company is now in
compliance with all financial covenant requirements in the amended Credit
Agreement. As of May 7, 1999, after the prepayment of all amounts outstanding
under the revolving loan commitment of the Credit Agreement, $23.0 million was
available for borrowing under the Credit Agreement.
The Credit Agreement restricts the Company from paying dividends in excess of
$5.0 million in the aggregate. In addition, the indentures governing the
Company's 11% Senior Subordinated Notes due 2007 (the "Notes") limit the
Company's ability to pay dividends based on a formula which takes into account,
among other things, the Company's consolidated net income. The Company is a
holding company whose assets consist primarily of the indirect ownership of the
capital stock of its operating subsidiaries. Consequently, the Company's ability
to pay dividends is dependent upon the earnings of its subsidiaries and their
ability to distribute earnings to the Company, and other advances and payments
by such subsidiaries to the Company. The Notes are fully and unconditionally
guaranteed on a joint and several basis by the Company's auto dealership
subsidiaries.
The Company's principal source of growth has come from acquisitions of
automobile dealerships. The Company believes that its existing capital resources
will be sufficient to fund its current operations and contractual commitments.
To the extent the Company pursues additional significant acquisitions, it may
need to raise additional capital either through the public or private issuance
of equity or debt securities or through additional bank borrowings. A public
equity offering would require the prior approval of certain automobile
manufacturers.
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 northeast United States, for
which the second and third quarters are the strongest with respect to vehicle
related sales. The service and parts business at all dealerships experiences
relatively modest seasonal fluctuations.
11
IMPACT OF YEAR 2000
Many existing computer systems and related applications use only two digits to
identify a year in the date field. As the year 2000 approaches, such programs
may be unable to distinguish years beginning with 20 from years beginning with
19. As a result, date sensitive systems and related applications may fail to
process data accurately, before, during or after the year 2000. The Company is
currently analyzing the potential for year 2000 issues to impact the operations
and management of its auto dealerships.
The Company's auto dealerships rely heavily upon two mission critical systems:
Dealer Management Systems ("DMS") and Dealer Communication Systems ("DCS"). The
DMS is a leased computer system that supports critical day-to-day operations of
the dealership, including vehicle sales, inventory, service and parts operations
and accounting functions. The DCS is a communication system through which the
dealerships exchange information with the manufacturer for processes such as
ordering vehicles and parts, submitting warranty claims, reporting financial
information and receiving technical information for vehicle service activities.
The Company has received assurances from each of the providers of these systems
that year 2000 compliant versions of the systems have been developed and are
available to the Company as part of the recurring maintenance of such systems.
The installation of year 2000 compliant DMS and DCS systems has been completed
at all but two of the Company's operating locations. The remaining locations are
scheduled to be operating on year 2000 compliant systems by June 30, 1999. In
order to test the ability of the Company's recently upgraded mission critical
systems to process date related information correctly, the Company has
established a redundant computer platform which is being used to evaluate the
reliability of such systems. The majority of such testing is expected to be
completed by May 31, 1999. Although the testing of mission critical systems is
ongoing, the Company has received assurances that the vendors supplying such
systems have made all corrections necessary to the systems to ensure date
related information is processed correctly. The cost of the upgraded mission
critical systems is included in the recurring fees paid by the Company to the
system providers. As a result, the implementation of such systems has not
resulted in incremental cost to the Company.
The Company is also attempting to verify that the critical services provided by
external service providers, such as vehicle and parts manufacturers and
suppliers, public utilities and financial institutions with which the Company
conducts business, will be available without interruption during the transition
to the year 2000. Financial institutions with which the auto dealerships conduct
critical business activities include floorplan lending sources and retail
lending institutions. In the event such service providers are unable to verify
their ability to address year 2000 issues, the Company will explore alternative
sources for such services. If the Company's current service providers fail to
address year 2000 issues, and if the Company is unable to secure such services
from an alternative service provider, then such failure could result in a
material adverse effect on the Company.
In addition to the mission critical systems and critical services noted above,
the dealerships utilize a variety of non-critical devices and systems containing
embedded systems which may fail to process data accurately, before, during or
after the year 2000. Such non-critical devices and systems include personal
computers, software applications, service lifts and certain other equipment used
by service
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technicians, phone systems and alarms. The Company has developed a
summary list of potential year 2000 issues for its dealerships, which is based
on an industry guide designed to help dealerships address year 2000 issues, as
well as on information obtained through in-depth reviews of the potential impact
of year 2000 issues at certain Company dealerships. Each of the Company's
dealerships has completed a thorough review designed to identify such
non-mission critical systems and devices. In addition, each dealership is
expected to have addressed these non-mission critical systems by September 30,
1999. The cost of correcting the non-mission critical systems and devices is not
expected to be in excess of $2.0 million, which will be paid out of the cash
flow from operations of the individual dealerships.
Despite the Company's efforts and testing, there is a risk that not all possible
problems associated with the year 2000 issue will be corrected. Further, despite
assurances that the Company has received or will receive, there can be no
guarantee that the systems and services provided by vendors, or that the systems
of other companies with which the Company does business, will be year 2000
compliant. Any such non-compliance could result in the reduction or shutdown of
the retail sale of automobiles and ancillary products, which could have a
material adverse effect on the Company.
FORWARD LOOKING STATEMENTS
This Form 10-Q contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements, other than
statements of historical facts, included herein or incorporated herein by
reference regarding the Company's financial position and business strategy may
constitute forward-looking statements. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to have been correct.
Important factors that could cause actual results to differ materially from the
Company's expectations include the following: (i) the Company is subject to the
influence of various manufacturers whose franchises it holds; (ii) the Company
is leveraged and subject to restrictions imposed by the terms of its
indebtedness; (iii) the Company's growth depends in large part on the Company's
ability to manage expansion, control costs in its operations and consummate and
consolidate dealership acquisitions; (iv) many of the Company's franchise
agreements impose restrictions on the transferability of the Common Stock; (v)
the Company will require substantial additional capital to acquire automobile
dealerships and purchase inventory; (vi) unit sales of motor vehicles
historically have been cyclical; (vii) the automotive retailing industry is
highly competitive; (viii) the automotive retailing industry is a mature
industry; (ix) the Company's success depends to a significant extent on key
members of its management; (x) the Company's business is seasonal; and (xi) the
other important risk factors identified in the reports and other documents
filed by the Company with the Securities and Exchange Commission. In light of
the foregoing, readers of this Form 10-Q are cautioned not to place undue
reliance on the forward-looking statements contained herein
PART II
ITEM 1 - LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in litigation that has arisen in
the ordinary course of business. None of these matters, either individually or
in the aggregate, are expected to have a material adverse effect on the
Company's results of operations or financial condition.
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ITEM 2 - CHANGES IN SECURITIES
In partial consideration for certain dealership acquisitions, the Company issued
1,156,689 shares of common stock to the sellers of such acquired dealerships.
These shares were issued in reliance on Section 4(2) of the Securities Act of
1933, as amended (the "Securities Act"), as transactions not involving any
public offering.
ITEM 6 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the three months ended
March 31, 1999.
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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/ Samuel X. DiFeo
-----------------------------------
Samuel X. DiFeo
President and
Chief Operating Officer
Date: May 17, 1999
By: /s/ James R. Davidson
-----------------------------------
James R. Davidson
Executive Vice President - Finance
(Chief Accounting Officer)
Date: May 17, 1999
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