<PAGE>
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, 1998
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 11, 1998:
VOTING COMMON STOCK, $0.0001 PAR VALUE 20,132,930
NON-VOTING COMMON STOCK, $0.0001 PAR VALUE 605,454
<PAGE>
TABLE OF CONTENTS
PART I
PAGE
1. Financial Statements and Supplementary Data
Consolidated Condensed Balance Sheets as of June 30, 1998 and
December 31, 1997 1
Consolidated Condensed Statements of Income for the three and
six months ended June 30, 1998 and 1997 2
Consolidated Condensed Statements of Cash Flows for the
six months ended June 30, 1998 and 1997 3
Notes to Consolidated Condensed Financial Statements 4
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II
1. Legal Proceedings 12
4. Submission of Matters to a Vote of Security Holders 13
5. Other Information 13
6. Exhibits and Reports on Form 8-K 14
Signatures 15
<PAGE>
UNITED AUTO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
AUTO DEALERSHIPS
Cash and cash equivalents $ 36,428 $ 94,435
Accounts receivable, net 123,396 92,601
Inventories 399,443 324,330
Other current assets 21,638 20,413
----------- -----------
Total current assets 580,905 531,779
Property and equipment, net 44,843 37,588
Intangible assets, net 457,340 326,774
Other assets 34,266 42,322
----------- -----------
TOTAL AUTO DEALERSHIP ASSETS 1,117,354 938,463
----------- -----------
AUTO FINANCE
Cash and cash equivalents 9,281 1,557
Restricted cash 1,938 3,547
Finance assets, net 40,191 30,408
Other assets 3,590 1,687
----------- -----------
TOTAL AUTO FINANCE ASSETS 55,000 37,199
----------- -----------
TOTAL ASSETS $ 1,172,354 $ 975,662
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
AUTO DEALERSHIPS
Floor plan notes payable $ 382,896 $ 328,203
Accounts payable 43,560 30,199
Accrued expenses 50,692 40,136
Short-term debt 5,069 6,069
Current portion of long-term debt 10,581 9,981
----------- -----------
Total current liabilities 492,798 414,588
Long-term debt 301,403 238,550
Other long-term liabilities 30,577 17,369
----------- -----------
TOTAL AUTO DEALERSHIP LIABILITIES 824,778 670,507
----------- -----------
AUTO FINANCE
Accounts payable and other liabilities 1,944 4,211
Short-term debt 3,413 387
----------- -----------
TOTAL AUTO FINANCE LIABILITIES 5,357 4,598
----------- -----------
Commitments and contingent liabilities
STOCKHOLDERS' EQUITY
Voting common stock 2 2
Additional paid-in capital 342,578 310,373
Accumulated deficit (361) (9,818)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 342,219 300,557
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,172,354 $ 975,662
=========== ===========
</TABLE>
See Notes to Consolidated Condensed Financial Statements
1
<PAGE>
UNITED AUTO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
AUTO DEALERSHIPS
Vehicle sales $ 779,633 $ 463,381 $ 1,396,607 $ 804,214
Finance and insurance 31,556 18,029 54,437 31,512
Service and parts 83,167 45,548 153,513 79,432
----------- ----------- ----------- -----------
Total revenues 894,356 526,958 1,604,557 915,158
Cost of sales, including floor plan interest 781,794 458,308 1,402,771 798,896
----------- ----------- ----------- -----------
Gross profit 112,562 68,650 201,786 116,262
Selling, general and administrative expenses 92,466 53,967 171,007 95,723
----------- ----------- ----------- -----------
Operating income 20,096 14,683 30,779 20,539
Other interest expense (7,880) (1,777) (14,974) (2,246)
Other income (expense), net 1,495 -- 1,848 297
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES - AUTO DEALERSHIPS 13,711 12,906 17,653 18,590
----------- ----------- ----------- -----------
AUTO FINANCE
Revenues 2,915 1,100 5,096 2,085
Interest expense (325) (116) (420) (260)
Operating and other expenses (2,330) (1,087) (4,403) (2,024)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES - AUTO FINANCE 260 (103) 273 (199)
----------- ----------- ----------- -----------
TOTAL COMPANY
Income before minority interests,
provision for income taxes and
extraordinary item 13,971 12,803 17,926 18,391
Minority interests (50) (61) (84) (97)
Provision for income taxes (5,728) (5,143) (7,350) (7,378)
----------- ----------- ----------- -----------
Income before extraordinary item 8,193 7,599 10,492 10,916
Extraordinary item (net of income tax benefit of $859) -- -- (1,235) --
=========== =========== =========== ===========
Net income $ 8,193 $ 7,599 $ 9,257 $ 10,916
=========== =========== =========== ===========
Basic and diluted per share data:
Income before extraordinary item $ 0.40 $ 0.42 $ 0.52 $ 0.61
=========== =========== =========== ===========
Net income $ 0.40 $ 0.42 $ 0.46 $ 0.61
=========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Condensed Financial Statements
2
<PAGE>
UNITED AUTO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1998 1997
---------------------- ----------------------
AUTO AUTO AUTO AUTO
DEALERSHIPS FINANCE DEALERSHIPS FINANCE
----------- ------- ----------- -------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 9,096 $ 161 $ 11,035 ($119)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 7,552 468 3,877 222
Gain on sales of loans -- (1,312) -- (679)
Loans originated -- (328,098) -- (49,934)
Loans repaid or sold -- 316,853 -- 43,126
Changes in operating assets and liabilities:
Accounts receivable (5,842) -- (13,803) --
Finance subsidiary assets -- 4,525 -- (976)
Inventories 35,114 -- (13,328) --
Floor plan notes payable (25,443) -- 22,673 --
Accounts payable and accrued expenses 4,612 (2,092) 1,572 1,934
Other 348 (2,236) 2,061 256
--------- --------- --------- ---------
Net cash provided by (used in) operating activities: 25,437 (11,731) 14,087 (6,170)
--------- --------- --------- ---------
INVESTING ACTIVITIES:
Purchase of equipment and improvements (5,485) (174) (5,774) (34)
Dealership acquisitions (111,088) -- (68,338) --
Net investment in and advances to UnitedAuto Finance (16,650) 16,650 (9,300) 9,300
--------- --------- --------- ---------
Net cash provided by (used in) investing activities (133,223) 16,476 (83,412) 9,266
--------- --------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from borrowings of long-term debt 64,400 -- 53,780 --
Payments of long-term debt and capitalized leases (11,592) -- (1,874) --
Net borrowings (repayments) of short-term debt (2,160) -- 500 --
Deferred financing costs (1,842) -- (2,141) --
Proceeds from issuance of stock 973 -- 4,324 --
Repurchase of common stock -- -- (8,821) --
Borrowings from warehouse credit line -- 63,727 -- 17,965
Payments of warehouse credit line -- (60,748) -- (18,764)
--------- --------- --------- ---------
Net cash provided by (used in) financing activities 49,779 2,979 45,768 (799)
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents (58,007) 7,724 (23,557) 2,297
Cash and cash equivalents, beginning of period 94,435 1,557 66,875 1,138
========= ========= ========= =========
Cash and cash equivalents, end of period $ 36,428 $ 9,281 $ 43,318 $ 3,435
========= ========= ========= =========
</TABLE>
See Notes to Consolidated Condensed Financial Statements
3
<PAGE>
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In thousands, Except Per Share Amounts)
(UNAUDITED)
1. BASIS OF PRESENTATION
The information presented as of June 30, 1998 and 1997 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,
1997, 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. CHANGE IN ACCOUNTING PRINCIPLE
In 1997, the Company changed its method of accounting for new vehicle
inventories from LIFO to the specific identification method. Management
believes the specific identification method (i) more accurately matches
revenues with costs, (ii) more accurately reflects the current market value of
new vehicle inventories and (iii) provides for a more meaningful comparison of
the Company's operating results and financial position with that of its
competition. This change in accounting principle has been applied by
retroactively restating the Company's financial statements for all prior
periods. The change in accounting principle did not have a material effect on
the Company's results of operations for the three or six month periods ended
June 30, 1997.
3. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- --------
<S> <C> <C>
New vehicles $283,136 $232,804
Used vehicles 89,732 74,285
Parts, accessories and other 26,575 17,241
-------- --------
Total inventories $399,443 $324,330
======== ========
</TABLE>
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 $1,495 and $1,848 for the three and six
month periods ended June 30, 1998 has been included in other income (expense),
net in the accompanying Consolidated Condensed Statements of Income.
4
<PAGE>
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(In thousands, Except Per Share Amounts)
(UNAUDITED)
5. BUSINESS COMBINATIONS
The Company completed the acquisition of a number of dealerships and dealership
groups during 1998 and 1997. Each of these acquisitions has been accounted for
using the purchase method of accounting and as a result, the Company's
financial statements include the results of operations of such dealerships and
dealership groups only from the respective dates of acquisition. The following
unaudited pro forma summary presents the consolidated results of operations of
the Company for the six months ended June 30, 1998 and 1997 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, 1997.
<TABLE>
<CAPTION>
PRO FORMA RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30,
1998 1997
---------- ----------
<S> <C> <C>
Revenues $1,695,474 $1,589,732
Income before minority interests and provision
for income taxes 19,064 20,727
Net income 11,163 12,318
Net income per diluted common share 0.55 0.61
</TABLE>
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, 1997.
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,
1998 and 1997 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Weighted average number of common shares outstanding 20,251 17,939 20,033 17,750
Effect of stock options 155 205 101 273
------ ------ ------ ------
Weighted average number of common shares outstanding,
including effect of dilutive securities 20,406 18,144 20,134 18,023
====== ====== ====== ======
</TABLE>
5
<PAGE>
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(In thousands, Except Per Share Amounts)
(UNAUDITED)
7. SUPPLEMENTAL CASH FLOW INFORMATION
The following table presents certain supplementary information to the
Consolidated Condensed Statements of Cash Flows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1998 1997
----- ----
AUTO AUTO AUTO AUTO
DEALERSHIPS FINANCE DEALERSHIPS FINANCE
----------- ------- ----------- -------
<S> <C> <C> <C> <C>
SUPPLEMENTAL INFORMATION:
Cash paid for interest $1,652 $184 $3,694 $124
Cash paid for income taxes 1,239 133 1,898 19
NON-CASH FINANCING AND INVESTING ACTIVITIES:
Dealership acquisition costs paid by issuance of stock 31,232 - 28,150 -
Dealership acquisition costs financed by long-term
debt 7,800 - 27,104 -
</TABLE>
8. SUBSEQUENT EVENTS
In July 1998, the Company completed the acquisition of four dealerships in the
San Diego area. Total consideration paid for the dealerships amounted to
$25,300, consisting of $13,500 in cash, $3,400 of promissory notes and $8,400
million of common stock.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company retails new and used automobiles and light trucks, operates service
and parts departments and sells various aftermarket products, including finance
and insurance contracts. The Company also owns UnitedAuto Finance, an
automobile finance company.
New vehicle revenues include sales to retail customers and to leasing companies
providing consumer automobile leasing. Used vehicle revenues include amounts
received for used vehicles sold to retail customers, leasing companies
providing consumer leasing, other dealers and wholesalers. Finance and
insurance revenues are generated from sales of accessories such as radios,
cellular phones, alarms, custom wheels, paint sealants and fabric protectors,
as well as amounts received as fees for placing extended service contracts,
credit insurance policies, and financing and lease contracts. The Company's
dealerships market a complete line of aftermarket automotive products and
services through its wholly-owned subsidiaries, UnitedAuto Care, Inc. and
UnitedAuto Care Products, Inc. Service and parts revenues include fees paid by
consumers for repair and maintenance service and the sale of replacement parts.
UnitedAuto Finance derives revenues from the purchase, sale and servicing of
motor vehicle installment contracts originated by both Company owned and
third-party dealerships, as well as from fees paid by financial institutions
which purchase installment contracts from customers referred to them by
UnitedAuto Finance.
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.
During 1997, the Company changed its method of accounting for new vehicle
inventory from LIFO to the specific identification method. All prior period
results of operations in this Management's Discussion and Analysis of Financial
Condition and Results of Operations have been restated to reflect such change
in accounting principle.
In addition, the Company made a number of dealership acquisitions in 1998 and
1997. Each of these acquisitions has been accounted for using the purchase
method of accounting and as a result, the Company's financial statements
include the results of operations of the acquired dealerships only from the
respective dates of acquisition.
7
<PAGE>
RESULTS OF OPERATIONS
The following discussion and analysis relates to the Company's consolidated
historical results of operations for the six and three months ended June 30,
1998 and 1997.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Auto Dealerships
Revenues. Revenues increased by $689.4 million, or 75.3%, from $915.2 million
to $1.6 billion. The overall increase in revenues is due primarily to (i)
dealership acquisitions made subsequent to January 1, 1997 and (ii) a slight
increase in retail revenues at dealerships owned prior to January 1, 1997,
partially offset by a decrease in revenues at dealerships divested or to be
divested. The increase in retail revenues at dealerships owned prior to January
1, 1997 reflects 12.4% and 8.7% increases in finance and insurance and service
and parts revenues, respectively, partially offset by a slight decline in
retail vehicle sales revenues.
Sales of new and used vehicles increased by $592.4 million, or 73.7%, from
$804.2 million to $1.4 billion. The increase is due principally to acquisitions
made subsequent to January 1, 1997, offset by (i) the slight decrease at
dealerships owned prior to January 1, 1997 and (ii) the decrease at dealerships
divested or to be divested. The decrease at dealerships owned prior to January
1, 1997 is due to a decrease in retail unit sales, partially offset by an
increase in the average selling price per vehicle. Aggregate unit retail sales
of new and used vehicles increased by 62.3% and 65.4%, respectively, due
principally to acquisitions, offset by (i) the net decrease at dealerships
owned prior to January 1, 1997 and (ii) the decrease at dealerships divested or
to be divested. The Company sold 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, compared with 22,757 new vehicles (62.0% of total
vehicle sales) and 13,943 used vehicles (38.0% of total vehicle sales) during
the six months ended June 30, 1997.
Finance and insurance revenues increased by $22.9 million, or 72.8%, from $31.5
million to $54.4 million. The increase is due primarily to (i) acquisitions
made subsequent to January 1, 1997, (ii) the net increase at dealerships owned
prior to January 1, 1997 and (iii) an increase in revenues at UnitedAuto Care,
offset by the decrease at dealerships divested or to be divested.
Service and parts revenues increased by $74.1 million, or 93.3%, from $79.4
million to $153.5 million. The increase is due primarily to (i) acquisitions
made subsequent to January 1, 1997 and (ii) the net increase at dealerships
owned prior to January 1, 1997, offset by the decrease at dealerships divested
or to be divested.
Gross Profit. Gross profit increased by $85.5 million, or 73.6%, from $116.3
million to $201.8 million. The increase in gross profit is due to (i)
acquisitions made subsequent to January 1, 1997, (ii) the net increase in
retail revenues at stores owned prior to January 1, 1997 and (iii) the increase
in revenues at UnitedAuto Care, offset by a decrease at dealerships divested or
to be divested. Gross profit as a percentage of revenues decreased from 12.7%
to 12.6%, reflecting lower margins on retail vehicle sales.
8
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $75.3 million, or 78.6%, from $95.7
million to $171.0 million due principally to acquisitions made subsequent to
January 1, 1997. Such expenses as a percentage of revenue increased from 10.5%
to 10.7%.
Other Interest Expense. Other interest expense increased by $12.7 million, from
$2.2 million to $15.0 million. The increase is due to (i) the issuance of the
Company's Senior Subordinated Notes due 2007 in July and September 1997 and
(ii) the issuance of acquisition-related debt.
Other Income (Expense), Net. Other income (expense), net increased by $1.6
million, due primarily to $1.8 million of income earned pursuant to dealership
management agreements during 1998.
Auto Finance
Income (loss) before income taxes. UnitedAuto Finance reported a profit of $0.3
million during the first six months of 1998 compared with a loss of $0.2
million in the comparable period of 1997.
Total Company
Income Tax Provision. The 1998 income tax provision was consistent with the
prior year. The 1998 provision reflects a decrease in pre-tax income during
1998 compared with 1997, offset in part by an increase in the Company's
estimated annual effective income tax rate during 1998.
Extraordinary Item. The extraordinary item of $1.2 million, net of taxes of
$0.9 million, represents a loss resulting from the first quarter write-off of
unamortized deferred financing costs relating to the Company's previous credit
facility.
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Auto Dealerships
Revenues. Revenues increased by $367.4 million, or 69.7%, from $527.0 million
to $894.4 million. The overall increase in revenues is due primarily to (i)
dealership acquisitions made subsequent to March 31, 1997 and (ii) a 6.5%
increase in retail revenues at dealerships owned prior to March 31, 1997,
offset by a decrease in revenues at dealerships divested or to be divested. The
increase in retail revenues at dealerships owned prior to March 31, 1997
reflects 5.6%, 11.3% and 12.7% increases in retail vehicle sales, finance and
insurance and service and parts revenues, respectively.
9
<PAGE>
Sales of new and used vehicles increased by $316.3 million, or 68.2%, from
$463.4 million to $779.6 million. The increase is due principally to (i)
acquisitions made subsequent to March 31, 1997 and (ii) an increase at
dealerships owned prior to March 31, 1997, offset by a decrease at dealerships
divested or to be divested. The increase at stores owned prior to March 31,
1997 is due to a decrease in retail unit sales, which was more than offset by
an increase in the average selling price per vehicle. Aggregate unit retail
sales of new and used vehicles increased by 61.8% and 58.1%, respectively, due
principally to acquisitions, offset by (i) the net decrease at dealerships
owned prior to March 31, 1997 and (ii) the decrease at dealerships divested or
to be divested. The Company sold 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, compared with 13,006 new vehicles (61.9% of total
vehicle sales) and 7,994 used vehicles (38.1% of total vehicle sales) during
the three months ended June 30, 1997.
Finance and insurance revenues increased by $13.5 million, or 75.0%, from $18.0
million to $31.6 million. The increase is due primarily to (i) acquisitions
made subsequent to March 31, 1997, (ii) the net increase at dealerships owned
prior to March 31, 1997 and (iii) an increase in revenues at UnitedAuto Care,
offset by the decrease at dealerships divested or to be divested.
Service and parts revenues increased by $37.6 million, or 82.6%, from $45.5
million to $83.2 million. The increase is due primarily to (i) acquisitions
made subsequent to March 31, 1997 and (ii) the net increase at dealerships
owned prior to March 31, 1997, offset by the decrease at dealerships divested
or to be divested.
Gross Profit. Gross profit increased by $43.9 million, or 64.0%, from $68.7
million to $112.6 million. The increase in gross profit is due to (i)
acquisitions made subsequent to March 31, 1997, (ii) the net increase in retail
revenues at stores owned prior to March 31, 1997 and (iii) the increase in
revenues at UnitedAuto Care, offset by a net decrease at dealerships divested
or to be divested. Gross profit as a percentage of revenues decreased from
13.0% to 12.6%, reflecting lower margins on retail vehicle sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $38.5 million, or 71.3%, from $54.0
million to $92.5 million due principally to acquisitions made subsequent to
March 31, 1997. Such expenses as a percentage of revenue increased from 10.2%
to 10.3%.
Other Interest Expense. Other interest expense increased by $6.1 million, from
$1.8 million to $7.9 million. The increase is due to (i) the issuance of the
Company's Senior Subordinated Notes due 2007 in July and September 1997 and
(ii) the issuance of acquisition-related debt.
Other Income (Expense), Net. Other income (expense), net amounting to $1.5
million relates to income earned pursuant to dealership management agreements.
Auto Finance
Income (loss) before income taxes. UnitedAuto Finance reported a profit of $0.3
million during the three months ended June 30, 1998 compared with a loss of
$0.1 million in the comparable period of 1997.
10
<PAGE>
Total Company
Income Tax Provision. The 1998 income tax provision increased $0.6 million from
$5.1 million to $5.7 million. The increase is due to an increase in pre-tax
income in 1998 compared with 1997, coupled with an increase in the Company's
estimated annual effective income tax rate during 1998.
LIQUIDITY AND CAPITAL RESOURCES
CASH AND LIQUIDITY REQUIREMENTS
The cash requirements of the Company are primarily for acquisitions of new
dealerships, working capital and the expansion of existing facilities.
Historically, these cash requirements have been met through issuances of equity
and debt instruments, borrowings under various credit agreements and cash flow
from operations. At June 30, 1998, the Company's dealership operations had
working capital of $88.1 million.
During the six months ended June 30, 1998, cash flow from dealership operations
amounted to $25.4 million. Net cash used by dealerships in investing activities
during the six months ended June 30, 1998, relating to dealership acquisitions,
funding provided to UnitedAuto Finance and capital expenditures, totaled $133.2
million. Dealership financing activities provided $49.8 million of cash during
the six months ended June 30, 1998, relating principally to net proceeds of
long-term debt.
The Company finances substantially all new and used vehicle inventories through
revolving floor plan financing arrangements with various lenders. Pursuant to
such floor plan financing arrangements, the Company makes monthly interest
payments relating to any financed inventories, but is not required to make loan
principal repayments until the inventory is sold. Substantially all of the
assets of the Company's dealerships are subject to security interests granted
to their floor plan lending sources.
At June 30, 1998, the Company had $36.4 million of cash available to fund
operations and future acquisitions. In addition, the Company is party to a
$75.0 million credit agreement, dated February 27, 1998 (the "Credit
Agreement"), with a group of banks which is to be used principally for
acquisitions. As of June 30, 1998, $9.0 million was available under the Credit
Agreement.
The Company's principal source of growth has come, and is expected to continue
to come, from acquisitions of automobile dealerships. The Company believes that
its existing capital resources will be sufficient to fund its current
acquisition commitments. To the extent the Company pursues additional
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.
11
<PAGE>
CYCLICALITY
Unit sales of motor vehicles, particularly new vehicles, have historically been
cyclical, fluctuating with general economic cycles. During economic downturns,
the automotive retailing industry tends to experience similar periods of
decline and recession as the general economy. The Company believes that the
industry is influenced by general economic conditions and particularly by
consumer confidence, the level of personal discretionary spending, interest
rates and credit availability.
SEASONALITY
The Company's combined business is modestly seasonal overall. The greatest
seasonalities exist with the dealerships in the New York metropolitan area, for
which the second and third quarters are the strongest with respect to vehicle
related sales. The service and parts business at all dealerships experiences
relatively modest seasonal fluctuations.
EFFECTS OF INFLATION
The Company believes that the relatively moderate rates of inflation over the
last few years have not had a significant impact on revenue or profitability.
The Company does not expect inflation to have any near-term material effects on
the sale of its products and services. However, there can be no assurance that
there will be no such effect in the future.
Interest on the Company's borrowings under floor plan financing arrangements
and the Credit Agreement vary based on the prime rate or LIBOR. Such rates have
historically increased during periods of increasing inflation. The Company does
not believe that it would be placed at a competitive disadvantage should
interest rates increase due to increased inflation since most other automobile
dealers have similar floating rate borrowing arrangements.
PART II
ITEM 1 - LEGAL PROCEEDINGS
In May and June, 1997, three complaints were filed in the United States
District Court for the Southern District of New York on behalf of a purported
class consisting of all persons who purchased the Company's Voting Common Stock
issued in connection with and/or traceable to the Company's IPO at any time up
to and including February 26, 1997. The complaints named as defendants the
Company, Carl Spielvogel, Marshall S. Cogan, J.P. Morgan Securities Inc.,
Montgomery Securities and Smith Barney Inc. The plaintiffs alleged that the
prospectus and the related registration statement disseminated in connection
with the IPO contained material misrepresentations and omissions in violation
of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, as amended (the
"Securities Act"). On August 5, 1997, the Lawsuits were ordered consolidated
for all purposes. On October 3, 1997, the plaintiffs filed a consolidated
amended class action complaint. On November 17, 1997, the Company filed a
motion to dismiss the consolidated amended class action complaint. On July 15,
1998, the District Court issued an opinion and order granting the Company's
motion to dismiss the consolidated amended class action complaint in its
entirety as to all defendants and denied plaintiffs leave to further amend
their complaint.
12
<PAGE>
Additionally, 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 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) The Company's Annual Meeting of Stockholders (the "Annual Meeting") was
held on May 21, 1998.
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 three nominees listed in the proxy statement were
elected.
c) The following matters were voted upon at the Annual Meeting:
1) The election of three Class II directors. The results of the vote
follow:
Nominee For Withheld
------- --- --------
Jules B. Kroll 15,429,584 38,377
Robert H. Nelson 15,429,584 38,377
Richard Sinkfield 15,429,584 38,377
2) Amendment to the Company's stock option plan. The results of the vote
follow:
For Against Abstain
--- ------- -------
15,386,300 72,840 8,821
3) Ratification of PricewaterhouseCoopers LLP (formerly Coopers & Lybrand
LLP) as the Company's independent accountant for the year ending
December 31, 1998. The results of the vote follow:
For Against Abstain
--- ------- -------
15,311,172 151,274 5,514
ITEM 5 - OTHER INFORMATION
If notice of any stockholder proposal intended to be presented at the Company's
1999 Annual Meeting of Stockholders is received by the Company after March 17,
1999, then the proxies solicited on behalf of the Board of Directors of the
Company will confer discretionary authority on the Company's management to vote
on such proposal. Stockholders are reminded that any stockholder proposal
intended to be included in the Company's proxy statement for such annual
meeting must be received by the Company by December 31, 1998. Such proposals
must also meet other legal requirements relating to stockholder proposals.
13
<PAGE>
ITEM 6 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits
3.1(c) Third Restated Certificate of Incorporation.
3.2(a) Restated Bylaws.
4.1(a) Specimen Common Stock certificate.
4.2(f) Indenture, dated as of July 23, 1997, among the Company, the
Guarantors party thereto and The Bank of New York, as Trustee,
including form of Note and Guarantee.
4.4(f) Indenture, dated as of September 16, 1997, among the Company, the
Guarantors party thereto and The Bank of New York, as Trustee,
including form of Series B Note and Guarantee.
27.1 Financial Data Schedule.
- --------------
(a) Incorporated herein by reference to the identically numbered exhibit
to the Company's Registration Statement on Form S-1, Registration No.
333-09429.
(c) Incorporated herein by reference to the identically numbered exhibit
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996, File No. 1-12297.
(f) Incorporated herein by reference to the identically numbered exhibit
to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997, File No. 1-12297.
(b) Reports on Form 8-K.
The Company filed the following Current Report on Form 8-K during the quarter
ended June 30, 1998:
1. April 22, 1998, reporting under Item 7 (required financial information
relating to the previously announced acquisition of the Young
Automotive Group).
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED AUTO GROUP, INC.
By: /s/ Marshall S. Cogan
------------------------------
Marshall S. Cogan
Chairman of the Board and
Chief Executive Officer
Date: August 13, 1998
By: /s/ James R. Davidson
------------------------------
James R. Davidson
Executive Vice President
(Chief Accounting Officer)
Date: August 13, 1998
15
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