<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 SEPTEMBER 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 OCTOBER 23, 1998:
VOTING COMMON STOCK, $0.0001 PAR VALUE 20,738,384
NON-VOTING COMMON STOCK, $0.0001 PAR VALUE 605,454
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TABLE OF CONTENTS
PART I
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PAGE
<S> <C> <C>
1. Financial Statements and Supplementary Data
Consolidated Condensed Balance Sheets as of September 30, 1998 and
December 31, 1997 1
Consolidated Condensed Statements of Income for the three and nine months
ended September 30, 1998 and 1997 2
Consolidated Condensed Statements of Cash Flows for the nine months
ended September 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
</TABLE>
PART II
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<CAPTION>
<S> <C> <C>
1. Legal Proceedings 14
2. Changes in Securities 14
6. Exhibits and Reports on Form 8-K 14
Signatures 15
</TABLE>
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UNITED AUTO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
AUTO DEALERSHIPS
Cash and cash equivalents $25,332 $94,435
Accounts receivable, net 124,377 92,601
Inventories 359,558 324,330
Other current assets 24,831 20,413
------------ ------------
Total current assets 534,098 531,779
Property and equipment, net 52,199 37,588
Intangible assets, net 470,317 326,774
Other assets 33,507 42,322
------------ ------------
TOTAL AUTO DEALERSHIP ASSETS 1,090,121 938,463
------------ ------------
AUTO FINANCE
Cash and cash equivalents 4,369 1,557
Restricted cash 2,708 3,547
Finance assets, net 46,469 30,408
Other assets 3,312 1,687
------------ ------------
TOTAL AUTO FINANCE ASSETS 56,858 37,199
------------ ------------
TOTAL ASSETS $1,146,979 $975,662
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
AUTO DEALERSHIPS
Floor plan notes payable $339,720 $328,203
Accounts payable 44,062 30,199
Accrued expenses 56,240 40,136
Short-term debt 5,069 6,069
Current portion of long-term debt 10,468 9,981
------------ ------------
Total current liabilities 455,559 414,588
Long-term debt 303,394 238,550
Other long-term liabilities 22,680 17,369
------------ ------------
TOTAL AUTO DEALERSHIP LIABILITIES 781,633 670,507
------------ ------------
AUTO FINANCE
Accounts payable and other liabilities 1,919 4,211
Short-term debt 3,485 387
------------ ------------
TOTAL AUTO FINANCE LIABILITIES 5,404 4,598
------------ ------------
Commitments and contingent liabilities
STOCKHOLDERS' EQUITY
Voting common stock 2 2
Additional paid-in capital 352,027 310,373
Retained earnings (deficit) 7,913 (9,818)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 359,942 300,557
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,146,979 $975,662
============ ============
</TABLE>
1
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UNITED AUTO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- -------------------------
1998 1997 1998 1997
---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
AUTO DEALERSHIPS
Vehicle sales $766,885 $549,395 $2,163,492 $1,353,609
Finance and insurance 35,032 20,768 89,469 52,280
Service and parts 92,788 55,812 246,301 135,244
---------- --------- ----------- -----------
Total revenues 894,705 625,975 2,499,262 1,541,133
Cost of sales, including floor plan interest 772,647 545,334 2,175,418 1,344,230
---------- --------- ----------- -----------
Gross profit 122,058 80,641 323,844 196,903
Selling, general and administrative expenses 101,676 64,644 272,683 160,367
---------- --------- ----------- -----------
Operating income 20,382 15,997 51,161 36,536
Other interest expense (8,407) (5,003) (23,381) (7,249)
Other income (expense), net 1,779 -- 3,627 297
---------- --------- ----------- -----------
INCOME BEFORE INCOME TAXES - AUTO DEALERSHIPS 13,754 10,994 31,407 29,584
---------- --------- ----------- -----------
AUTO FINANCE
Revenues 2,995 387 8,091 2,472
Interest expense (445) (148) (865) (408)
Operating and other expenses (2,289) (1,414) (6,692) (3,438)
---------- --------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES - AUTO FINANCE 261 (1,175) 534 (1,374)
---------- --------- ----------- -----------
TOTAL COMPANY
Income before minority interests, provision
for income taxes and extraordinary item 14,015 9,819 31,941 28,210
Minority interests (42) (21) (126) (118)
Provision for income taxes (5,746) (3,928) (13,096) (11,306)
---------- --------- ----------- -----------
Income before extraordinary item 8,227 5,870 18,719 16,786
Extraordinary item (net of income tax benefit of $859) -- -- (1,235) --
---------- --------- ----------- -----------
Net income $8,227 $5,870 $17,484 $16,786
========== ========= =========== ===========
Basic per share data:
Income before extraordinary item $0.40 $0.31 $0.92 $0.93
========== ========= =========== ===========
Net income $0.40 $0.31 $0.86 $0.93
========== ========= =========== ===========
Diluted per share data:
Income before extraordinary item $0.40 $0.31 $0.92 $0.91
========== ========= =========== ===========
Net income $0.40 $0.31 $0.86 $0.91
========== ========= =========== ===========
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
2
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UNITED AUTO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
---------------------------- -----------------------------
AUTO AUTO AUTO AUTO
DEALERSHIPS FINANCE DEALERSHIPS FINANCE
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $17,169 $315 $17,610 ($824)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 12,139 698 6,417 385
Gain on sales of loans - (2,046) - (57)
Loans originated - (408,697) - (84,254)
Loans repaid or sold - 389,610 - 75,481
Changes in operating assets and liabilities:
Accounts receivable (3,982) - (12,638) -
Finance subsidiary assets - 6,016 - -
Inventories 84,298 - 10,677 -
Floor plan notes payable (78,468) - (7,223) -
Accounts payable and accrued expenses 2,862 (2,153) 7,527 779
Other (835) (1,650) 605 (1,827)
----------- ----------- ----------- -----------
Net cash provided by (used in) operating activities: 33,183 (17,907) 22,975 (10,317)
----------- ----------- ----------- -----------
INVESTING ACTIVITIES:
Purchase of equipment and improvements (8,008) (211) (8,329) (49)
Dealership acquisitions (125,427) - (81,651) -
Net investment in and advances to UnitedAuto Finance (18,150) 18,150 (12,300) 12,300
----------- ----------- ----------- -----------
Net cash provided by (used in) investing activities (151,585) 17,939 (102,280) 12,251
----------- ----------- ----------- -----------
FINANCING ACTIVITIES:
Proceeds from borrowings of long-term debt 68,400 - 251,949 -
Payments of long-term debt and capitalized leases (17,116) - (53,154) -
Net repayments of short-term debt (2,160) - - -
Deferred financing costs (1,842) - (9,540) -
Proceeds from issuance of stock 2,017 - 4,634 -
Repurchase of common stock - - (8,821) -
Borrowings from warehouse credit line - 136,251 - 40,760
Payments of warehouse credit line - (133,471) - (41,589)
----------- ----------- ----------- -----------
Net cash provided by (used in) financing activities 49,299 2,780 185,068 (829)
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (69,103) 2,812 105,763 1,105
Cash and cash equivalents, beginning of period 94,435 1,557 66,875 1,138
=========== =========== =========== ===========
Cash and cash equivalents, end of period $25,332 $4,369 $172,638 $2,243
=========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
3
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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 September 30, 1998 and 1997 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,
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 nine month periods ended
September 30, 1997.
3. INVENTORIES
Inventories consisted of the following:
<TABLE>
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SEPTEMBER 30, DECEMBER 31,
1998 1997
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<S> <C> <C>
New vehicles $239,989 $232,804
Used vehicles 93,235 74,285
Parts, accessories and other 26,334 17,241
============= ===========
Total inventories $359,558 $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 $1,779 and $3,627 for the three and nine
month periods ended September 30, 1998 has been included in other income
(expense), net in the accompanying Consolidated Condensed Statements of Income.
4
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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 nine months ended September 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
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
--------------------------------
<S> <C> <C>
Revenues $2,635,213 $2,525,783
Income before minority interests and provision for income taxes 35,634 35,728
Net income 20,898 21,297
Net income per diluted common share 1.01 1.03
</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 nine month periods ended
September 30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Weighted average number of common shares outstanding 20,693 18,851 20,255 18,027
Effect of stock options 33 359 94 454
------- ------ ------ ------
Weighted average number of common shares outstanding,
including effect of dilutive securities 20,726 19,210 20,349 18,481
======= ====== ====== ======
</TABLE>
5
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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>
NINE 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 $24,588 $303 $7,189 $173
Cash paid for income taxes 2,280 330 2,648 44
NON-CASH FINANCING AND INVESTING ACTIVITIES:
Dealership acquisition costs paid by issuance of stock 39,632 - 28,150 -
Dealership acquisition costs financed by long-term
debt 11,200 - 27,104 -
</TABLE>
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 nine and three months ended September
30, 1998 and 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Auto Dealerships
Revenues. Revenues increased by $958.1 million, or 62.2%, from $1.5 billion to
$2.5 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 which have been
divested. The increase in retail revenues at dealerships owned prior to January
1, 1997 reflects 0.8%, 15.0% and 7.2% increases in retail vehicle sales,
finance and insurance and service and parts revenues, respectively.
Sales of new and used vehicles increased by $809.9 million, or 59.8%, from $1.4
billion to $2.2 billion. The increase is due principally to (i) acquisitions
made subsequent to January 1, 1997 and (ii) the net increase at dealerships
owned prior to January 1, 1997, offset by a decrease at dealerships which have
been divested. The increase at dealerships owned prior to January 1, 1997 is
due to a decrease in retail unit sales, which was more than offset by an
increase in the comparative average selling price per vehicle in the current
period. Aggregate unit retail sales of new and used vehicles increased by 52.1%
and 52.8%, 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 which have been divested. The Company sold 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, compared with 38,181
new vehicles (61.9% of total vehicle sales) and 23,517 used vehicles (38.1% of
total vehicle sales) during the nine months ended September 30, 1997.
Finance and insurance revenues increased by $37.2 million, or 71.1%, from $52.3
million to $89.5 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 a decrease at dealerships which have been divested.
Service and parts revenues increased by $111.1 million, or 82.1%, from $135.2
million to $246.3 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 a decrease at dealerships which have
been divested.
Gross Profit. Gross profit increased by $126.9 million, or 64.5%, from $196.9
million to $323.8 million. The increase in gross profit is due to (i)
acquisitions made subsequent to January 1, 1997, (ii) a net increase in total
gross profit generated at stores owned prior to January 1, 1997 and (iii) the
increase in revenues at UnitedAuto Care, offset by a decrease at dealerships
which have been divested. Gross profit as a percentage of revenues increased
from 12.8% to 13.0%. The increase is primarily attributable to the increase in
higher margin finance and insurance and service and parts revenues as a
percentage of total revenues.
8
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Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $112.3 million, or 70.0%, from $160.4
million to $272.7 million. The increase is due principally to (i) acquisitions
made subsequent to January 1, 1997 and (ii) an increase at stores owned
prior to January 1, 1997. Such expenses as a percentage of revenue increased
from 10.4% to 10.9%.
Other Interest Expense. Other interest expense increased by $16.1 million, from
$7.2 million to $23.4 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 incurrence of acquisition-related debt.
Other Income (Expense), Net. Other income (expense), net increased by $3.3
million, due primarily to $3.6 million of income earned pursuant to dealership
management agreements during 1998.
Auto Finance
Income (loss) before income taxes. UnitedAuto Finance reported a profit of $0.5
million during the first nine months of 1998 compared with a loss of $1.4
million in the comparable period of 1997. The 1997 loss was due to expenses
incurred in connection with the increase in the infrastructure required to
manage the substantial increase in UnitedAuto Finance's operations during 1997,
as well as a charge relating to revised loan loss estimates.
Total Company
Income Tax Provision. The 1998 income tax provision increased $1.8 million from
$11.3 million to $13.1 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.
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 SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
Auto Dealerships
Revenues. Revenues increased by $268.7 million, or 42.9%, from $626.0 million
to $894.7 million. The overall increase in revenues is due primarily to
dealership acquisitions made subsequent to June 30, 1997, offset by (i) a 1.8%
decrease in retail revenues at dealerships owned prior to June 30, 1997 and
(ii) a decrease in revenues due to dealerships which have been divested. The
decrease in retail revenues at dealerships owned prior to June 30, 1997
reflects a 3.8% decrease in retail vehicle sales, offset by (i) a 29.8%
increase in finance and insurance revenue and (ii) a 5.4% increase in service
and parts revenues.
Sales of new and used vehicles increased by $217.5 million, or 39.6%, from
$549.4 million to $766.9 million. The increase is due principally to
acquisitions made subsequent to June 30, 1997, offset by (i) the decrease in
retail revenues at dealerships owned prior to June 30, 1997 and (ii) a decrease
at dealerships which have been divested. The decrease at stores owned prior to
June 30, 1997 is due to a decrease in retail unit sales, which was partially
offset by an increase in the comparative average
9
<PAGE>
selling price per vehicle in the current period. Aggregate unit retail sales of
new and used vehicles increased by 37.0% and 34.4%, respectively, due
principally to acquisitions, offset by (i) the net decrease at dealerships
owned prior to June 30, 1997 and (ii) a decrease at dealerships which have been
divested. The Company retailed 21,125 new vehicles (62.1% of total retail
vehicle sales) and 12,871 used vehicles (37.9% of total retail vehicle sales)
during the three months ended September 30, 1998, compared with 15,424 new
vehicles (61.9% of total retail vehicle sales) and 9,574 used vehicles (38.1%
of total retail vehicle sales) during the three months ended September 30,
1997.
Finance and insurance revenues increased by $14.3 million, or 68.7%, from $20.8
million to $35.0 million. The increase is due primarily to (i) acquisitions
made subsequent to June 30, 1997, (ii) the net increase at dealerships owned
prior to June 30, 1997 and (iii) an increase in revenues at UnitedAuto Care,
offset by a decrease at dealerships which have been divested.
Service and parts revenues increased by $37.0 million, or 66.3%, from $55.8
million to $92.8 million. The increase is due primarily to (i) acquisitions
made subsequent to June 30, 1997 and (ii) the net increase at dealerships owned
prior to June 30, 1997.
Gross Profit. Gross profit increased by $41.4 million, or 51.4%, from $80.6
million to $122.1 million. The increase in gross profit is due to (i)
acquisitions made subsequent to June 30, 1997, (ii) a net increase in total
gross profit generated at stores owned prior to June 30, 1997 and (iii) the
increase in revenues at UnitedAuto Care, offset by a net decrease at
dealerships which have been divested. The net increase in gross profit at
stores owned prior to June 30, 1997 is due to (i) the increase in finance and
insurance revenues, (ii) the increase in service and parts revenues and (iii)
an increase in margins on retail vehicle sales and service and parts revenues,
offset by the lower retail vehicle sales revenues. Gross profit as a percentage
of revenues increased from 12.9% to 13.6%. The increase is primarily
attributable to the increase in higher margin finance and insurance and service
and parts revenues as a percentage of total revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $37.0 million, or 57.3%, from $64.6
million to $101.7 million. The increase is due principally to (i) acquisitions
made subsequent to June 30, 1997 and (ii) an increase at stores owned
prior to June 30, 1997. Such expenses as a percentage of revenue increased from
10.3% to 11.4%.
Other Interest Expense. Other interest expense increased by $3.4 million, from
$5.0 million to $8.4 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 incurrence of acquisition-related debt.
Other Income (Expense), Net. Other income (expense), net amounting to $1.8
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 September 30, 1998 compared with a loss
of $1.2 million in the comparable period of 1997. The 1997 loss was due to
expenses incurred in connection with the increase in the infrastructure
required to manage the substantial increase in UnitedAuto Finance's operations
during 1997, as well as a charge relating to revised loan loss estimates.
10
<PAGE>
Total Company
Income Tax Provision. The 1998 income tax provision increased $1.8 million from
$3.9 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 September 30, 1998, the Company's dealership operations had
working capital of $78.5 million.
During the nine months ended September 30, 1998, cash flow from dealership
operations amounted to $33.2 million. Net cash used by dealerships in investing
activities during the nine months ended September 30, 1998, relating to
dealership acquisitions, funding provided to UnitedAuto Finance and capital
expenditures, totaled $151.6 million. Dealership financing activities provided
$49.3 million of cash during the nine months ended September 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 September 30, 1998, the Company had $25.3 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 September 30, 1998, $5.0 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.
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.
11
<PAGE>
SEASONALITY
The Company's combined business is modestly seasonal overall. The greatest
seasonalities exist with the dealerships in the northeastern 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.
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.
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, or
may not process data accurately, before, during or after the year 2000. The
Company is in the midst of an ongoing analysis to evaluate and address the
potential for year 2000 issues to impact the operations and management of its
auto dealerships and UnitedAuto Finance.
Auto Dealerships
- ----------------
The Company's auto dealerships rely heavily upon 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 process
of installing the year 2000 compliant DMS and DCS systems has begun, and it is
expected that such upgraded systems will be in place and operating at each of
the Company's dealerships by December 31, 1998.
12
<PAGE>
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.
In addition to the critical systems and services noted above, the dealerships
utilize a variety of non-critical devices and systems containing embedded
systems which may fail, or may not process data accurately, before, during or
after the year 2000. Such non-critical devices and systems include personal
computers, software applications, phone systems and alarms. The Company is
evaluating the impact to each auto dealership of such items and plans to
initiate changes which make such systems year 2000 compliant through upgrades
or replacement by June 30, 1999.
UnitedAuto Finance
- ------------------
An analysis has been undertaken to evaluate and address the potential for year
2000 issues to impact UnitedAuto Finance. Management of UnitedAuto Finance has
created a summary of critical and non-critical year 2000 issues. A plan has
been implemented which is designed to identify and, if necessary, correct each
of the critical issues relating to internal systems or computer hardware before
March 31, 1999. UnitedAuto Finance is also attempting to verify that the
services provided by critical external service providers, such as public
utilities, credit bureaus and financial institutions with which UnitedAuto
Finance conducts business, will be available without interruption during the
transition to the year 2000. In the event such service providers are unable to
verify their ability to address year 2000 issues, the UnitedAuto Finance will
explore alternative sources for such services.
UnitedAuto Group, Inc.
- ----------------------
Despite the Company's efforts, there is a risk 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. All costs associated with
evaluating and correcting year 2000 issues are expensed as incurred. To date,
the costs associated with reviewing and correcting year 2000 issues have not
been material. The Company is evaluating the estimated costs of its year 2000
remediation program in concert with the review of year 2000 issues.
FORWARD LOOKING STATEMENTS
Certain portions of this Quarterly Report contain "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 in this
Quarterly Report 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 are described in the Company's Annual Report on Form 10-K. In
light of the foregoing, readers of this Quarterly Report are cautioned not
to place undue reliance on the forward-looking statements contained herein.
13
<PAGE>
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
In partial consideration for certain dealership acquisitions, the Company
issued 396,282 shares of common stock to the sellers of such acquired
dealerships. These shares were issued in reliance on Section 4(2) of the
Securities Act of 1933, as amended, as transactions not involving any public
offering.
ITEM 6 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
<S> <C>
(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.
- ------------------------
</TABLE>
(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 did not file any reports on Form 8-K during the three months ended
September 30, 1998.
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: October 29, 1998
By: /s/ James R. Davidson
----------------------------
James R. Davidson
Executive Vice President
(Chief Accounting Officer)
Date: October 29, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> SEP-30-1998 DEC-31-1997
<CASH> 25,332 94,435
<SECURITIES> 0 0
<RECEIVABLES> 124,971 93,488
<ALLOWANCES> (594) (887)
<INVENTORY> 359,558 324,330
<CURRENT-ASSETS> 534,098 531,779
<PP&E> 62,067 44,028
<DEPRECIATION> (9,868) (6,440)
<TOTAL-ASSETS> 1,146,979 975,662
<CURRENT-LIABILITIES> 455,559 414,588
<BONDS> 303,394 238,550
0 0
0 0
<COMMON> 2 2
<OTHER-SE> 352,027 300,555
<TOTAL-LIABILITY-AND-EQUITY> 1,146,979 975,662
<SALES> 2,499,262 2,087,148
<TOTAL-REVENUES> 2,507,353 2,089,763
<CGS> 2,175,418 1,830,086
<TOTAL-COSTS> 2,448,101 2,085,152
<OTHER-EXPENSES> 3,627 297
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 23,381 15,085
<INCOME-PRETAX> 31,941 (15,513)
<INCOME-TAX> 13,096 5,511
<INCOME-CONTINUING> 18,719 (10,140)
<DISCONTINUED> 0 0
<EXTRAORDINARY> (1,235) 0
<CHANGES> 0 0
<NET-INCOME> 17,484 (10,140)
<EPS-PRIMARY> 0.86 (0.56)
<EPS-DILUTED> 0.86 (0.54)
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