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, 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 NOVEMBER 11, 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 September 30, 1999 and
December 31, 1998 1
Consolidated Condensed Statements of Operations for the three and nine
months ended September 30, 1999 and 1998 2
Consolidated Condensed Statements of Cash Flows for the nine months
ended September 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 15
2. Changes in Securities 16
4. Submission of Matters to a Vote of Security Holders 16
6. Exhibits and Reports on Form 8-K 17
Signatures 18
UNITED AUTO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
ASSETS
Cash and cash equivalents $44,127 $38,538
Accounts receivable, net 138,110 125,460
Inventories 420,759 410,295
Other current assets 15,070 16,420
------------- ------------
Total current assets 618,066 590,713
Property and equipment, net 58,340 51,483
Intangible assets, net 497,885 482,049
Net assets of discontinued operations 15,573 23,323
Other assets 28,245 36,626
------------- ------------
TOTAL ASSETS $1,218,109 $1,184,194
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Floor plan notes payable $398,633 $397,234
Accounts payable 45,835 38,435
Accrued expenses 56,733 45,104
Current portion of long-term debt 23,906 24,756
------------- ------------
Total current liabilities 525,107 505,529
Long-term debt 214,340 288,265
Other long-term liabilities 52,367 48,750
------------- ------------
TOTAL LIABILITIES 791,814 842,544
Commitments and contingent liabilities
STOCKHOLDERS' EQUITY
Preferred Stock - -
Voting Common Stock 2 2
Non-voting Common Stock - -
Additional paid-in-capital 415,631 352,591
Retained earnings (accumulated deficit) 10,662 (10,943)
------------- ------------
Total stockholders' equity 426,295 341,650
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,218,109 $1,184,194
============= =============
See Notes to Consolidated Condensed Financial Statements
1
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,
---------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
Vehicle sales $935,270 $766,885 $2,610,785 $2,163,492
Finance and insurance 45,679 37,333 125,678 95,341
Service and parts 104,417 92,788 297,233 246,301
------------- ------------- ------------- -------------
Total revenues 1,085,366 897,006 3,033,696 2,505,134
Cost of sales, including floor plan interest 945,881 774,948 2,641,345 2,181,290
------------- ------------- ------------- -------------
Gross profit 139,485 122,058 392,351 323,844
Selling, general and administrative expenses 117,323 101,676 332,359 272,683
------------- ------------- ------------- -------------
Operating income 22,162 20,382 59,992 51,161
Other interest expense (7,255) (8,407) (23,510) (23,381)
Other income (expense), net 874 1,779 2,270 3,627
------------- ------------- ------------- -------------
Income from continuing operations before
minority interests, income tax provision and
extraordinary item 15,781 13,754 38,752 31,407
Minority interests (181) (42) (542) (126)
Income tax provision (6,631) (5,652) (16,923) (12,903)
------------- ------------- ------------- -------------
Income from continuing operations 8,969 8,060 21,287 18,378
Income from discontinued operations, net of tax 28 167 28 341
------------- ------------- ------------- -------------
Income before extraordinary item 8,997 8,227 21,315 18,719
Extraordinary item (net of income tax benefit) 320 -- 320 (1,235)
------------- ------------- ------------- -------------
Net income $9,317 $8,227 $21,635 $17,484
============= ============= ============= =============
Basic income from continuing operations per common share $0.41 $0.39 $0.97 $0.91
============= ============= ============= =============
Basic net income per common share $0.42 $0.40 $0.99 $0.86
============= ============= ============= =============
Income from continuing operations per diluted common share $0.31 $0.39 $0.84 $0.90
============= ============= ============= =============
Net income per diluted common share $0.32 $0.40 $0.86 $0.86
============= ============= ============= =============
Shares used in computing basic per share data 22,000 20,693 21,934 20,255
============= ============= ============= =============
Shares used in computing diluted per share data 29,048 20,726 25,207 20,349
============= ============= ============= =============
See Notes to Consolidated Condensed Financial Statements
2
UNITED AUTO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1999 1998
----------- -----------
Operating activities:
Net income $21,635 $17,484
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 14,180 12,139
Income from discontinued operations (28) (341)
Non-cash compensation expense 2,250 -
Minority interests 542 126
Changes in operating assets and liabilities:
Accounts receivable (7,852) (3,982)
Inventories 13,594 84,298
Floor plan notes payable (20,457) (78,468)
Accounts payable and accrued expenses 14,538 2,862
Other (110) (935)
----------- -----------
Net cash provided by operating activities 38,292 33,183
----------- -----------
INVESTING ACTIVITIES:
Purchase of equipment and improvements (10,632) (8,008)
Dealership acquisitions (22,008) (125,427)
----------- -----------
Net cash used in investing activities (32,640) (133,435)
----------- -----------
FINANCING ACTIVITIES:
Payments of long-term debt and capital leases (84,813) (19,276)
Proceeds from issuance of preferred stock and warrants 77,000 -
Proceeds from issuance of common stock - 2,017
Proceeds from borrowings of long-term debt - 68,400
Payment of deferred financing costs - (1,842)
----------- -----------
Net cash provided by (used in) financing activities (7,813) 49,299
----------- -----------
Net cash provided by (invested in) discontinued operations 7,750 (18,150)
----------- -----------
Net increase (decrease) in cash and cash equivalents 5,589 (69,103)
Cash and cash equivalents, beginning of period 38,538 94,435
----------- -----------
Cash and cash equivalents, end of period $44,127 $25,332
=========== ===========
See Notes to Consolidated Condensed 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 September 30, 1999 and 1998 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") 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. EXTRAORDINARY ITEM
In September 1999, the Company repurchased $12.0 million of its 11% Senior
Subordinated Notes due 2007 (the "Notes"). As a result, the Company recorded a
gain of $0.3 million ($0.01 per share), net of $0.3 million of tax. The Company
repurchased an additional $37.0 million of the Notes during October 1999,
resulting in an additional $0.9 million gain, net of $0.7 million of tax.
3. INVENTORIES
Inventories consisted of the following:
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------- -------------
New vehicles $284,945 $284,343
Used vehicles 107,959 99,411
Parts, accessories and other 27,855 26,541
-------------- -------------
Total Inventories $420,759 $410,295
============== =============
4. 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 $874 and $2,270 for the three and nine month
periods ended September 30, 1999, respectively, and $1,779 and $3,627 for the
three and nine month periods ended September 30, 1998, respectively, has been
included in other income (expense), net in the accompanying consolidated
condensed statements of operations.
4
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Thousands, Except Per Share Amounts)
(UNAUDITED)
5. 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
continued 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 non-current
asset 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.
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 effective
October 1, 1999.
Summarized financial information of discontinued operations follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ------------------------
1999 1998 1999 1998
---------- ---------- --------- ----------
Revenues $690 $2,915 $3,025 $8,091
Income from operations, net of taxes
of $16 for the three and nine months
ended September 30, 1999, $94 for the
three months ended September 30, 1998
and $189 for the nine months ended
September 30, 1998. 28 167 28 341
Net income 28 167 28 341
Net income per diluted common share -- 0.01 -- 0.01
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
Cash and cash equivalents $2,941 $3,615
Restricted cash 759 1,009
Finance assets, net 14,321 26,947
Other assets 1,232 967
Short-term debt, accrued liabilities
and other liabilities 3,680 9,215
6. 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 nine months ended September 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. The pro forma results
do not reflect the impact of insignificant acquisitions which have been
completed during 1999.
5
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Thousands, Except Per Share Amounts)
(UNAUDITED)
6. BUSINESS COMBINATIONS (CONTINUED)
NINE MONTHS ENDED
SEPTEMBER 30, 1998
------------------
Revenues $2,635,213
Income from continuing operations before minority interests and income tax provision 35,634
Income from continuing operations 20,898
Income from continuing operations per diluted common share 0.94
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.
7. 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 nine month periods ended September
30, 1999 and 1998 is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
-------------- ------------- ------------- -------------
Weighted average number of common shares
outstanding 22,000,000 20,693,000 21,934,000 20,255,000
Effect of stock options 240,000 33,000 74,000 94,000
Effect of convertible preferred stock 6,808,000 -- 3,199,000 --
-------------- ------------- ------------- -------------
Weighted average number of common shares
outstanding, including effect of dilutive 29,048,000 20,726,000 25,207,000 20,349,000
securities
============== ============= ============= =============
8. SUPPLEMENTAL CASH FLOW INFORMATION
The following table presents certain supplementary information to the
consolidated condensed statements of cash flows:
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
----------- ----------
SUPPLEMENTAL INFORMATION:
Cash paid for interest $29,952 $24,588
Cash paid for income taxes 5,623 2,280
NON-CASH FINANCING AND INVESTING ACTIVITIES:
Dealership acquisition costs paid by issuance of stock -- 39,632
Dealership acquisition costs financed by long-term debt 1,500 11,200
6
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Thousands, Except Per Share Amounts)
(UNAUDITED)
9. 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.
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 $44,400 of term loans and
$18,400 of revolving loan commitments outstanding under the Company's credit
agreement, to pay approximately $6,800 of fees incurred in connection with the
execution of the Securities Purchase Agreement and fund certain acquisition
related costs.
10. SUBSEQUENT EVENT
On October 8, 1999, the Company entered into a new Credit Agreement, dated as of
August 3, 1999, as amended (the "Credit Agreement"), which provides for up to
$250.0 million in revolving loans to be used for acquisitions, working capital,
letters of credit and general corporate purposes. Borrowings under the Credit
Agreement generally bear interest at LIBOR plus 2.00%. The Credit Agreement
contains a number of significant covenants that, among other things, restrict
the ability of the Company to dispose of assets, incur additional indebtedness,
repay other indebtedness, create liens on assets, make investments or
acquisitions and engage in mergers or consolidations. In addition, the Company
is required to comply with specified financial ratios and tests, including debt
to equity, debt to EBITDA, and minimum net worth requirements. The Credit
Agreement also contains typical events of default including change of control
and non-payment of obligations.
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 1999 and 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 nine and three month periods ended
September 30, 1999 and 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
Revenues. Revenues increased by $528.6 million, or 21.1%, from $2.5 billion to
$3.0 billion. The overall increase in revenues is due primarily to (i)
dealership acquisitions made subsequent to January 1, 1998 and (ii) an aggregate
13.0% increase in retail revenues at dealerships owned prior to January 1, 1998,
partially offset by a decrease in revenues resulting from the divestiture of
certain dealerships. The overall increase in retail revenues at dealerships
owned prior to January 1, 1998 reflects 12.9%, 26.1% and 9.6% increases in
retail vehicle sales, finance and insurance and service and parts revenues,
respectively.
8
Sales of new and used vehicles increased by $447.3 million, or 20.7%, from $2.2
billion to $2.6 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 resulting from the divestiture of
certain dealerships. The increase at dealerships owned prior to January 1, 1998
is due primarily to a 9.6% increase in retail unit sales and an increase in the
comparative average selling price per vehicle. Aggregate retail unit sales of
new and used vehicles increased by 21.1% and 11.8%, respectively, due
principally to acquisitions and the net increase at dealerships owned prior to
January 1, 1998, offset by the decrease due to divested dealerships. The Company
retailed 70,318 new vehicles (63.6% of total vehicle sales) and 40,192 used
vehicles (36.4% of total vehicle sales) during the nine months ended September
30, 1999, compared with 58,069 new vehicles (61.8% of total vehicle sales) and
35,934 used vehicles (38.2% of total vehicle sales) during the nine months ended
September 30, 1998.
Finance and insurance revenues increased by $30.3 million, or 31.8%, from $95.3
million to $125.7 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) a 29.0% increase in revenues at UAC, offset
by a decrease resulting from the divestiture of certain dealerships.
Service and parts revenues increased by $50.9 million, or 20.7%, from $246.3
million to $297.2 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 resulting from the
divestiture of certain dealerships.
Gross Profit. Gross profit increased by $68.5 million, or 21.2%, from $323.8
million to $392.4 million. The increase in gross profit is due to (i)
acquisitions made subsequent to January 1, 1998 and (ii) an aggregate 13.4%
increase in retail gross profit at stores owned prior to January 1, 1998, offset
by a decrease resulting from the divestiture of certain dealerships. The gross
profit percentage of 12.9% for the nine months ended September 30, 1999 was
consistent with the same period in the prior year. While the comparative gross
profit remained constant, factors influencing the comparative gross profit
percentage include: (i) an increase in higher margin finance and insurance and
service and parts revenues as a percentage of total revenues during 1999 and
(ii) improved gross profit margins on service and parts revenues, offset by (i)
a decrease in gross profit margins on retail vehicle sales revenues and (ii) a
decrease in gross profit margins on finance and insurance revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $59.7 million, or 21.9%, from $272.7
million to $332.4 million. Such expenses as a percentage of revenue increased
from 10.9% to 11.0%, and as a percentage of gross profit increased from 84.2% to
84.7%. The increase in selling, general and administrative expense is due
principally to (i) acquisitions made subsequent to January 1, 1998, (ii) a 13.8%
increase at stores owned prior to January 1, 1998 and (iii) $2.5 million of
compensation expense arising from contractual commitments associated with the
issuance by the Company of equity securities in the second and third quarters of
1999, offset by a decrease resulting from the divestiture of certain
dealerships. 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 Income (Expense), Net. Other income decreased by $1.4 million, or 37.4%,
from $3.6 million to $2.3 million. The decrease is due primarily to the
completion of the acquisition of certain of the dealerships being operated
pursuant to management agreements.
9
Income Tax Provision. The 1999 income tax provision increased by $4.0 million
from $12.9 million to $16.9 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 $0.3 million extraordinary item in 1999 represents the
gain on the retirement of $12.0 of the Company's Senior Subordinated Notes (the
"Notes"), offset in part by the write-off of a portion of the deferred financing
costs related to the Notes. The $1.2 million extraordinary item in 1998
represents a loss resulting from the write-off of unamortized deferred financing
costs relating to a previous credit facility.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
Revenues. Revenues increased by $188.4 million, or 21.0%, from $897.0 million to
$1.1 billion. The overall increase in revenues is due primarily to (i)
dealership acquisitions made subsequent to June 30, 1998 and (ii) an aggregate
17.9% increase in retail revenues at dealerships owned prior to June 30, 1998,
partially offset by a decrease in revenues resulting from the divestiture of
certain dealerships. The overall increase in retail revenues at dealerships
owned prior to June 30, 1998 reflects 18.8%, 25.4% and 9.0% increases in retail
vehicle sales, finance and insurance and service and parts revenues,
respectively.
Sales of new and used vehicles increased by $168.4 million, or 22.0%, from
$766.9 million to $935.3 million. The increase is due primarily to (i)
acquisitions made subsequent to June 30, 1998 and (ii) the net increase at
dealerships owned prior to June 30, 1998, offset by a decrease resulting from
the divestiture of certain dealerships. The increase at dealerships owned prior
to June 30, 1998 is due to a 15.2% increase in retail unit sales and an increase
in the comparative average selling price per vehicle. Aggregate retail unit
sales of new and used vehicles increased by 23.4% and 9.6%, respectively, due
principally to acquisitions and the net increase at dealerships owned prior to
June 30, 1998, offset by the decrease resulting from the divestiture of certain
dealerships. The Company sold 26,060 new vehicles (64.9% of total vehicle sales)
and 14,106 used vehicles (35.1% of total vehicle sales) during the three months
ended September 30, 1999, compared with 21,125 new vehicles (62.1% of total
vehicle sales) and 12,871 used vehicles (37.9% of total vehicle sales) during
the three months ended September 30, 1998.
Finance and insurance revenues increased by $8.3 million, or 22.4%, from $37.3
million to $45.7 million. The increase is due primarily to (i) acquisitions made
subsequent to June 30, 1998, (ii) the net increase at dealerships owned prior to
June 30, 1998 and (iii) a 12.8% increase in revenues at UAC, offset by a
decrease resulting from the divestiture of certain dealerships.
Service and parts revenues increased by $11.6 million, or 12.5%, from $92.8
million to $104.4 million. The increase is due primarily to (i) acquisitions
made subsequent to June 30, 1998 and (ii) the net increase at dealerships owned
prior to June 30, 1998, offset by a decrease resulting from the divestiture of
certain dealerships.
10
Gross Profit. Gross profit increased by $17.4 million, or 14.3%, from $122.1
million to $139.5 million. The increase in gross profit is due to (i)
acquisitions made subsequent to June 30, 1998 and (ii) an aggregate 10.0%
increase in retail gross profit at stores owned prior to June 30, 1998, offset
by a decrease resulting from the divestiture of certain dealerships. Gross
profit as a percentage of revenues decreased from 13.6% to 12.9%. The decrease
in gross profit as a percentage of revenues is primarily attributable to (i) a
decrease in higher margin finance and insurance and service and parts revenues
as a percentage of total revenues, (ii) a decrease in gross profit margins on
retail vehicle sales revenues and (iii) a decrease in gross profit margins on
finance and insurance revenues, offset in part by improved gross profit margins
on service and parts revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $15.6 million, or 15.4%, from $101.7
million to $117.3 million. The increase in selling, general and administrative
expense is due principally to (i) acquisitions made subsequent to June 30, 1998,
(ii) a 12.9% increase at stores owned prior to June 30, 1998 and (iii) $2.5
million of compensation expense arising from contractual commitments associated
with the issuance by the Company of equity securities in the second and third
quarters of 1999, offset in part by a decrease resulting from the divestiture of
certain dealerships. The increase in selling, general and administrative
expenses at stores owned prior to June 30, 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. Such
expenses as a percentage of revenue decreased from 11.3% to 10.8% and increased
as a percentage of gross profit from 84.2% to 84.7%.
Other Income (Expense), Net. Other income decreased by $0.9 million, or 50.9%,
from $1.8 million to $0.9 million. The decrease is due primarily to the
completion of the acquisition of certain of the dealerships being operated
pursuant to management agreements.
Income Tax Provision. The 1999 income tax provision increased by $1.0 million
from $5.7 million to $6.6 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 $0.3 million extraordinary item in 1999 represents the
gain on the retirement of $12.0 of the Notes, offset in part by the write-off of
a portion of the deferred financing costs related to the Notes.
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
September 30, 1999, the Company had working capital of $93.0 million.
11
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 $83.0 million. 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.
The transaction was 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. 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, to 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.
On October 8, 1999, the Company entered into a new Credit Agreement, dated as of
August 3, 1999, as amended, with various lending institutions (the "Credit
Agreement"), which provides for up to $250.0 million in revolving loans to be
used for acquisitions, working capital, letters of credit and general corporate
purposes. Borrowings under the Credit Agreement generally bear interest at LIBOR
plus 2.00%.
The Company finances substantially all 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.
Virtually all of the assets of the Company's dealerships are subject to security
interests granted to the lenders party to the Credit Agreement and floor plan
lending sources.
12
Net cash provided by operations during the nine months ended September 30, 1999
totaled $38.3 million. Net cash used in investing activities during the nine
months ended September 30, 1999, relating primarily to dealership acquisitions
and capital expenditures, totaled $32.6 million. Net cash used in financing
activities during the nine months ended September 30, 1999, relating to the net
proceeds from the placement of preferred stock, offset by the retirement of
long-term debt, totaled $7.8 million. In addition, the Company has received
distributions amounting to $7.8 million from UAF.
At September 30, 1999, the Company had approximately $44.1 million of cash
available to fund operations, capital projects and future acquisitions. In
addition, as of November 11, 1999, approximately $185.0 million was available
for borrowing under the Credit Agreement.
The indentures governing 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.
13
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 such 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 established a redundant computer platform which was used to evaluate the
reliability of such systems. The Company has completed the testing of these
systems and found them capable of processing date related information 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 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. To date, the majority of the non-mission critical systems
and devices have been corrected or replaced. The balance of the non-mission
critical systems and devices are
14
expected to be corrected or replaced by the end of the year. The cost of
addressing the non-mission critical systems and devices is not expected to be in
excess of $2.0 million, which is being paid out of the cash flow from operations
of the individual dealerships.
Despite the Company's efforts and testing, there is a risk that all possible
problems associated with the year 2000 issue may not 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, (xi) the
failure of the Company's DMS, DCS or other systems, or the failure of the
systems and services provided by vendors to the Company or other companies with
which the Company does business, to be year 2000 compliant; and (xii) 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.
15
ITEM 2 - CHANGES IN SECURITIES
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 $83.0 million. 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.
The transaction was 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. On August 3, 1999, the transaction was approved by the Company's
stockholders, after which the second step of the transaction closed.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) The Company's Annual Meeting of Stockholders (the "Annual Meeting") was
held on August 3, 1999.
b) Proxies for the Annual Meeting were solicited pursuant to regulation 14A
under the Securities Exchange Act of 1934, as amended. There were no
solicitations in opposition to management's nominees listed in the proxy
statement. Each of the five nominees listed in the proxy statement were
elected.
c) The following matters were voted upon at the Annual Meeting:
1) The election of one Class I, one Class II and three Class III
directors. The results of the vote follow:
Nominee Class For Withheld
------- ----- --- --------
Eustace W. Mita Class I 23,712,972 175,129
Donald J. Hofmann Class II 23,712,972 175,129
Roger S. Penske Class III 23,712,972 175,129
James A. Hislop Class III 23,712,972 175,129
Richard J. Peters Class III 23,712,972 175,129
16
2) Approval of the issuance and sale of (i) an aggregate 4,175.25496
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"), (iii) a warrant (the "Common Stock Warrant") to purchase
3,898,665 shares of the Company's voting Common Stock, par value
$0.0001 per share (the "Common Stock"), and (iv) a warrant (the
"Non-Voting Common Stock Warrant") to purchase 1,101,335 shares of the
Company's non-voting Common Stock, par value $0.0001 per share (the
"Non-Voting Common Stock") in connection with the investment of
approximately $49.5 million in the Company by two entities formed and
controlled by Penske Capital Partners, IMCG I and IMCG II, and to
adopt the Securities Purchase Agreement, dated April 12, 1999, under
which, among other things, the Second Investment is being made.
Approval of the Second Investment and adoption of the Securities
Purchase Agreement was deemed to constitute approval of the
transactions contemplated by the Purchase Agreement. The results of
the vote follow:
For Against Abstain
--- ------- -------
20,164,892 162,315 4,830
3) Approval of the amendment to the Company's Third Restated Certificate
of Incorporation to, among other things, (i) increase the number of
authorized shares on Non-voting Common Stock from 1,125,000 to
7,125,000, (ii) provide the holders of Non-Voting Common Stock with
the right to vote as a separate class in respect of certain
extraordinary corporate events and (iii) provide holders of Non-Voting
Common Stock the right to convert their shares into Common Stock if
such a holder reasonably believes that such converted shares will be
transferred within 15 days as a result of certain prescribed
transactions. The results of the vote follow:
For Against Abstain
--- ------- -------
19,969,438 355,269 7,680
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 September 30, 1999:
1. August 13, 1999, reporting under Items 1 and 7 (announcement of the
closing of the second tranche of the Securities Purchase Agreement).
17
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: November 12, 1999
By: /s/ James R. Davidson
------------------------------------
James R. Davidson
Executive Vice President - Finance
(Chief Accounting Officer)
Date: November 12, 1999
18