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 JUNE 30, 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 AUGUST 12, 1999:
VOTING COMMON STOCK, $0.0001 PAR VALUE 21,394,257
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 June 30, 1999 and
December 31, 1998 1
Consolidated Condensed Statements of Operations for the three
and six months ended June 30, 1999 and 1998 2
Consolidated Condensed Statements of Cash Flows for the six
months ended June 30, 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
2. Changes in Securities
5. Other
6. Exhibits and Reports on Form 8-K
Signatures
UNITED AUTO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
ASSETS
Cash and cash equivalents $ 43,670 $ 38,538
Accounts receivable, net 141,503 125,460
Inventories 455,945 410,295
Other current assets 15,228 16,420
----------- -----------
Total current assets 656,346 590,713
Property and equipment, net 56,978 51,483
Intangible assets, net 490,628 482,049
Net assets of discontinued operations 18,823 23,323
Other assets 28,546 36,626
----------- -----------
TOTAL ASSETS $ 1,251,321 $ 1,184,194
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Floor plan notes payable $ 435,438 $ 397,234
Accounts payable 41,679 38,435
Accrued expenses 53,603 45,104
Current portion of long-term debt 55,776 24,756
----------- -----------
Total current liabilities 586,496 505,529
Long-term debt 238,933 288,265
Other long-term liabilities 53,072 48,750
----------- -----------
TOTAL LIABILITIES 878,501 842,544
Preferred stock 33,551 --
Commitments and contingent liabilities
STOCKHOLDERS' EQUITY
Non-voting Common Stock -- --
Voting Common Stock 2 2
Additional paid-in-capital 337,892 352,591
Retained earnings (accumulated deficit) 1,375 (10,943)
----------- -----------
Total stockholders' equity 339,269 341,650
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,251,321 $ 1,184,194
=========== ===========
See Notes to Consolidated Financial Statements
1
UNITED AUTO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ----------------------------
1999 1998 1999 1998
-------------- ------------- ------------- -------------
Vehicle sales $900,155 $779,633 $1,675,515 $1,396,607
Finance and insurance 43,335 33,619 79,999 58,008
Service and parts 100,108 83,167 192,816 153,513
-------------- ------------- ------------- -------------
Total revenues 1,043,598 896,419 1,948,330 1,608,128
Cost of sales, including floor plan interest 908,987 783,857 1,695,464 1,406,342
-------------- ------------- ------------- -------------
Gross profit 134,611 112,562 252,866 201,786
Selling, general and administrative expenses 111,484 92,466 215,036 171,007
-------------- ------------- ------------- -------------
Operating income 23,127 20,096 37,830 30,779
Other interest expense (7,813) (7,880) (16,255) (14,974)
Other income (expense), net 602 1,495 1,396 1,848
-------------- ------------- ------------- -------------
Income from continuing operations before
minority interests, income tax provision and
extraordinary item 15,916 13,711 22,971 17,653
Minority interests (213) (50) (361) (84)
Income tax provision (7,083) (5,634) (10,292) (7,251)
-------------- ------------- ------------- -------------
Income from continuing operations 8,620 8,027 12,318 10,318
Income from discontinued operations, net of $94 and $99 tax
for the three and six month periods ended June 30, 1998 -- 166 -- 174
-------------- ------------- ------------- -------------
Income before extraordinary item 8,620 8,193 12,318 10,492
Extraordinary item (net of income tax benefit of $859) -- -- -- (1,235)
============== ============= ============= =============
Net income $8,620 $8,193 $12,318 $9,257
============== ============= ============= =============
Basic income from continuing operations per common share $0.39 $0.40 $0.56 $0.52
============== ============= ============= =============
Basic net income per common share $0.39 $0.40 $0.56 $0.46
============== ============= ============= =============
Income from continuing operations per diluted common share $0.35 $0.40 $0.53 $0.51
============== ============= ============= =============
Net income per diluted common share $0.35 $0.40 $0.53 $0.46
============== ============= ============= =============
Shares used in computing basic per share data 21,907 20,251 21,901 20,033
============== ============= ============= =============
Shares used in computing diluted per share data 24,422 20,406 23,202 20,134
============== ============= ============= =============
See Notes to Consolidated Financial Statements
2
UNITED AUTO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
----------------------
1999 1998
--------- ---------
OPERATING ACTIVITIES:
Net income $ 12,318 $ 9,257
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 9,234 7,552
Income from discontinued operations -- (174)
Minority interests 361 84
Changes in operating assets and liabilities:
Accounts receivable (14,065) (5,842)
Inventories (29,834) 35,114
Floor plan notes payable 25,168 (25,443)
Accounts payable and accrued expenses 10,505 4,612
Other 3,631 277
-------- --------
Net cash provided by operating activities 17,318 25,437
-------- --------
INVESTING ACTIVITIES:
Purchase of equipment and improvements (8,056) (5,485)
Dealership acquisitions (10,312) (111,088)
-------- --------
Net cash (used in) investing activities (18,368) (116,573)
-------- --------
FINANCING ACTIVITIES:
Payments of long-term debt and capital leases (29,009) (13,752)
Proceeds from issuance of preferred stock 30,691 --
Proceeds from issuance of common stock -- 973
Proceeds from borrowings of long-term debt -- 64,400
Payment of deferred financing costs -- (1,842)
-------- --------
Net cash provided by financing activities 1,682 49,779
-------- --------
Net cash provided by (invested in) discontinued operations 4,500 (16,650)
-------- --------
Net increase (decrease) in cash and cash equivalents 5,132 (58,007)
Cash and cash equivalents, beginning of period 38,538 94,435
-------- --------
Cash and cash equivalents, end of period $ 43,670 $ 36,428
======== ========
See Notes to Consolidated Financial Statements
3
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Thousands, Except Per Share Amounts)
(UNAUDITED)
1. BASIS OF PRESENTATION
The information presented as of June 30, 1999 and 1998 and for the three and six
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:
JUNE 30, DECEMBER 31,
1999 1998
---------- -----------
New vehicles $319,691 $284,343
Used vehicles 107,926 99,411
Parts, accessories and other 28,328 26,541
---------- -----------
Total Inventories $455,945 $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 $602 and $1,396 for the three and six month
periods ended June 30, 1999, respectively, and $1,495 and $1,848 for the three
and six month periods ended June 30, 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)
On July 30, 1999, the Company entered into an agreement with Premier Auto
Finance, Inc. ("Premier") pursuant to which Premier will assume certain
servicing obligations with respect to UAF's securitized portfolios.
Summarized financial information of discontinued operations follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 1998 1999 1998
------ ------ ------ ------
Revenues $1,116 $2,915 $2,335 $5,096
Income from operations, net of
taxes of $94 and $99 for the three
and six months ended June 30, 1998 -- 166 -- 174
Net income -- 166 -- 174
Net income per diluted common
share -- -- -- 0.01
AS OF AS OF
JUNE 30, DECEMBER 31,
1999 1998
------------- --------------
Cash and cash equivalents $3,739 $3,615
Restricted cash 472 1,009
Finance assets, net 20,915 26,947
Other assets 1,109 967
Short-term debt, accrued liabilities and other liabilities 7,412 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 six months ended June 30, 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.
SIX MONTHS ENDED
JUNE 30, 1998
------------------
Revenues $1,695,474
Income from continuing operations before minority interests and income tax provision 19,064
Income from continuing operations 11,163
Income from continuing operations per diluted common share 0.55
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.
5
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Thousands, Except Per Share Amounts)
(UNAUDITED)
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 and six month periods ended June 30,
1999 and 1998 is as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 1998 1999 1998
-------------- -------------- ------------- --------------
Weighted average number of common
shares outstanding 21,907,000 20,251,000 21,901,000 20,033,000
Effect of stock options 89,000 155,000 47,000 101,000
Effect of convertible preferred stock 2,426,000 -- 1,254,000 --
------------- -------------- ------------ -------------
Weighted average number of common
shares outstanding, including
effect of dilutive securities 24,422,000 20,406,000 23,202,000 20,134,000
============== ============== ============= ==============
7. SUPPLEMENTAL CASH FLOW INFORMATION
The following table presents certain supplementary information to the
consolidated condensed statements of cash flows:
SIX MONTHS ENDED JUNE 30,
1999 1998
---------------- ---------------
SUPPLEMENTAL INFORMATION:
Cash paid for interest $14,886 $11,990
Cash paid for income taxes 2,688 1,239
NON-CASH FINANCING AND INVESTING ACTIVITIES:
Dealership acquisition costs paid by issuance of stock -- 31,232
Dealership acquisition costs financed by long-term debt 1,500 7,800
8. PREFERRED STOCK
On April 12, 1999, the Company and International Motor Cars Group I, L.L.C. and
International Motor Cars Group II, L.L.C. ("IMCG II"), 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 the Purchaser agreed to purchase (i) an
aggregate of 7,903.124 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 entitle the Purchaser to dividends
at a rate of 6.5% per year, payable in kind for the first two years, except that
IMCG II's dividends will be paid in shares of Series B Preferred Stock. 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.
6
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Thousands, Except Per Share Amounts)
(UNAUDITED)
The transaction was 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. The
Series A Preferred Stock issued on May 3, 1999 was subject to mandatory
redemption by the Company at the Purchaser's option under certain circumstances
prior to the second closing. On August 3, 1999, the transaction was approved by
the Company's stockholders, after which the second step of the transaction
closed. Proceeds from the issuance of the securities pursuant to the Securities
Purchase Agreement were used to prepay the remaining $44.4 million of term loans
and $18.4 million of revolving loan commitments outstanding under the Company's
credit agreement, pay approximately $6.8 million of fees incurred in connection
with the execution of the Securities Purchase Agreement and fund certain
acquisition related costs. The balance of the proceeds were deposited in
interest bearing accounts.
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,
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 markets 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 six and three month periods ended June
30, 1999 and 1998.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Revenues. Revenues increased by $340.2 million, or 21.2%, from $1.6 billion to
$1.9 billion. The overall increase in revenues is due primarily to (i)
dealership acquisitions made subsequent to January 1, 1998 and (ii) an aggregate
10.2% 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 9.7%, 26.5% and 8.7% increases in retail
vehicle sales, finance and insurance and service and parts revenues,
respectively.
8
Sales of new and used vehicles increased by $278.9 million, or 20.0%, from $1.4
billion to $1.7 billion. 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
5.9% increase in retail unit sales. Aggregate retail unit sales of new and used
vehicles increased by 19.8% and 13.1%, 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 44,258 new vehicles (62.9% of total vehicle sales) and 26,086 used
vehicles (37.1% of total vehicle sales) during the six months ended June 30,
1999, compared with 36,944 new vehicles (61.6% of total vehicle sales) and
23,063 used vehicles (38.4% of total vehicle sales) during the six months ended
June 30, 1998.
Finance and insurance revenues increased by $22.0 million, or 37.9%, from $58.0
million to $80.0 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 $39.3 million, or 25.6%, from $153.5
million to $192.8 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 $51.1 million, or 25.3%, from $201.8
million to $252.9 million. The increase in gross profit is due to (i)
acquisitions made subsequent to January 1, 1998 and (ii) an aggregate 12.7%
increase in retail gross profit at stores owned prior to January 1, 1998, offset
by a decrease due to dealerships which were divested during 1998. Gross profit
as a percentage of revenues increased from 12.5% to 13.0%. 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 $44.0 million, or 25.7%, from $171.0
million to $215.0 million. Such expenses as a percentage of revenue increased
from 10.6% to 11.0%. The increase in selling, general and administrative expense
is due principally to (i) acquisitions made subsequent to January 1, 1998 and
(ii) a 13.7% 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
$15.0 million to $16.3 million. The increase is due primarily to higher
outstanding indebtedness under the Company's credit facility during the six
months ended June 30, 1999 compared to the six months ended June 30, 1998.
9
Income Tax Provision. The 1999 income tax provision increased by $3.0 million
from $7.3 million to $10.3 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.
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Revenues. Revenues increased by $147.2 million, or 16.4%, from $896.4 million to
$1.0 billion. The overall increase in revenues is due primarily to (i)
dealership acquisitions made subsequent to March 31, 1998 and (ii) an aggregate
8.1% increase in retail revenues at dealerships owned prior to March 31, 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 March 31, 1998 reflects 7.4%, 21.4% and 8.8% increases in retail
vehicle sales, finance and insurance and service and parts revenues,
respectively.
Sales of new and used vehicles increased by $120.5 million, or 15.5%, from
$779.6 million to $900.2 million. The increase is due primarily to (i)
acquisitions made subsequent to March 31, 1998 and (ii) the net increase at
dealerships owned prior to March 31, 1998, offset by a decrease due to
dealerships which were divested during 1998. The increase at dealerships owned
prior to March 31, 1998 is due to an increase in the comparative average selling
price per vehicle and a 4.0% increase in retail unit sales. Aggregate retail
unit sales of new and used vehicles increased by 14.1% and 7.0%, respectively,
due principally to acquisitions and the net increase at dealerships owned prior
to March 31, 1998, offset by the decrease due to dealerships which were divested
during 1998. The Company sold 24,018 new vehicles (64.0% of total vehicle sales)
and 13,517 used vehicles (36.0% of total vehicle sales) during the three months
ended June 30, 1999, compared with 21,045 new vehicles (62.5% of total vehicle
sales) and 12,636 used vehicles (37.5% of total vehicle sales) during the three
months ended June 30, 1998.
Finance and insurance revenues increased by $9.7 million, or 28.9%, from $33.6
million to $43.3 million. The increase is due primarily to (i) acquisitions made
subsequent to March 31, 1998, (ii) the net increase at dealerships owned prior
to March 31, 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 $16.9 million, or 20.4%, from $83.2
million to $100.1 million. The increase is due primarily to (i) acquisitions
made subsequent to March 31, 1998 and (ii) the net increase at dealerships owned
prior to March 31, 1998, offset by a decrease due to dealerships which were
divested during 1998.
10
Gross Profit. Gross profit increased by $22.0 million, or 19.6%, from $112.6
million to $134.6 million. The increase in gross profit is due to (i)
acquisitions made subsequent to March 31, 1998 and (ii) an aggregate 10.0%
increase in retail gross profit at stores owned prior to March 31, 1998, offset
by a decrease due to dealerships which were divested during 1998. Gross profit
as a percentage of revenues increased from 12.6% to 12.9%. 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 $19.0 million, or 20.6%, from $92.5 million
to $111.5 million. Such expenses as a percentage of revenue increased from 10.3%
to 10.7%. The increase in selling, general and administrative expense is due
principally to (i) acquisitions made subsequent to March 31, 1998 and (ii) a
13.5% increase at stores owned prior to March 31, 1998. The increase in selling,
general and administrative expenses at stores owned prior to March 31, 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.
Income Tax Provision. The 1999 income tax provision increased by $1.4 million
from $5.6 million to $7.1 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 June
30, 1999, the Company had working capital of $69.9 million.
On April 12, 1999, the Company and International Motor Cars Group I, L.L.C. and
International Motor Cars Group II, L.L.C. ("IMCG II"), 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 the Purchaser agreed to purchase (i) an
aggregate of 7,903.124 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
11
Preferred Stock entitle the Purchaser to dividends at a rate of 6.5% per year,
payable in kind for the first two years, except that IMCG II's dividends will be
paid in shares of Series B Preferred Stock. 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.
The transaction was 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. The
Series A Preferred Stock issued on May 31, 1999 was subject to mandatory
redemption by the Company at the Purchaser's option prior to the second closing.
On August 3, 1999, the transaction was approved by the Company's stockholders,
after which the second step of the transaction closed. Proceeds from the
issuance of the securities pursuant to the Securities Purchase Agreement were
used to prepay the remaining $44.4 million of term loans and $18.4 million of
revolving loan commitments outstanding under the Company's credit agreement, pay
approximately $6.8 million of fees incurred in connection with the execution of
the Securities Purchase Agreement and fund certain acquisition related costs.
The balance of the proceeds were deposited in interest bearing accounts.
Net cash provided by operations during the six months ended June 30, 1999
totaled $17.3 million. Net cash used in investing activities during the six
months ended June 30, 1999, relating primarily to dealership acquisitions and
capital expenditures, totaled $18.4 million. Net cash provided by financing
activities during the six months ended June 30, 1999, relating to the net
proceeds from the placement of preferred stock, offset in part by the retirement
of long-term debt, totaled $1.7 million. In addition, the Company has received
$4.5 million in aggregate distributions during 1999 from UAF.
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 June 30, 1999, the Company had approximately $43.7 million of cash available
to fund operations, capital projects 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 August 12, 1999,
after the prepayment of the term loans and revolving loans with proceeds from
the transactions outlined in the Securities Purchase Agreement, approximately
$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
12
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.
On August 3, 1999, the Company signed agreements for a $1.0 billion financing
arrangement with Chrysler Financial Company, L.L.C. ("Chrysler"), a wholly owned
subsidiary of DaimlerChrysler. The arrangement provides for a $250.0 million
revolving credit facility to be used for acquisitions and working capital, as
well as a $750.0 million floorplan facility to be used for new and used vehicle
inventory financing. Closing of the financing arrangement with Chrysler facility
is subject to due diligence and other normal closing conditions.
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.
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
13
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. 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.
Testing is ongoing, with the majority of such testing expected to be completed
by August 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 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.
14
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.
ITEM 2 - CHANGES IN SECURITIES
On April 12, 1999, the Company entered into the Securities Purchase Agreement,
pursuant to which the Purchaser agreed to purchase (i) an aggregate of 7,903.124
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 entitle the Purchaser to dividends at a rate of 6.5% per year,
payable in kind for the first two years except that IMCG II's dividends will be
paid in shares of Series B Preferred Stock. 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.
15
The transaction was 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. On August
3, 1999, the transaction was approved by the Company's stockholders, after which
the second step of the transaction closed.
In addition, the Company issued 104,638 shares of common stock to the sellers of
certain acquired dealerships in partial consideration for the acquisition of
their dealership. 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 5 - OTHER
On August 13, 1999, the Company filed a report on Form 8-K, reporting under
items 1 and 7, regarding the closing, on August 3, 1999, of the second step of a
two step transaction pursuant to which International Motor Cars Group I, L.L.C
("IMCG I") and International Motor Cars Group II, L.L.C. ("IMCG II"), each a
Delaware limited liability company controlled by Penske Capital Partners, L.L.C.
("PCP" and collectively with IMCG I and IMCG II, the "Purchaser"), acquired a
substantial equity interest in the Company and designees of the Purchaser were
elected to additional seats on the Board of Directors of the Company as a result
of which designees of the Purchaser hold five of the nine seats on the Board of
Directors.
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 filed the following Current Reports on Form 8-K during the three
months ended June 30, 1999:
1. April 15, 1999, reporting under Items 5 and 7 (announcement of the
sale of approximately $83.0 million of preferred stock and warrants
pursuant to the Securities Purchase Agreement).
2. May 10, 1999, reporting under Items 5 and 7 (announcement of the
closing of the first tranche of the Securities Purchase Agreement,
resulting in the issuance of 3,728 shares of Series A Preferred Stock
for net proceeds of approximately $30.7 million).
3. May 25, 1999, reporting under Items 4 and 7 (announcement of a change
in the Registrant's certifying accountant).
16
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: August 16, 1999
By: /s/ James R. Davidson
----------------------------------
James R. Davidson
Executive Vice President - Finance
(Chief Accounting Officer)
Date: August 16, 1999
17