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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Voting Common Stock, par value New York Stock Exchange
$0.0001 per share
Securities registered pursuant to Section 12(g) of the Act: NONE.
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 .....
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
The aggregate market value of the voting common stock and the non-voting common
stock held by non-affiliates as of March 24, 1999 was $127,419,860.
As of March 24, 1999, there were 21,289,619 shares of voting common stock and
605,454 shares of non-voting common stock outstanding.
Portions of the registrant's proxy statement to be filed in connection with the
annual meeting of shareholders, presently scheduled to be held on May 20, 1999,
are incorporated by reference in Part III of this Form 10-K.
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TABLE OF CONTENTS
PART I
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PAGE
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1. Business.......................................................................................... 2
2. Properties........................................................................................ 7
3. Legal Proceedings................................................................................. 7
4. Submission of Matters to a Vote of Securityholders................................................ 7
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters............................. 7
6. Selected Consolidated Financial Data.............................................................. 9
7. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 10
7A. Quantitative and Qualitative Disclosures about Market Risk........................................ 19
8. Financial Statements and Supplementary Data....................................................... 20
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..............
20
PART III
10. Directors and Executive Officers of the Registrant................................................ 20
11. Executive Compensation............................................................................ 20
12. Security Ownership of Certain Beneficial Owners and Management.................................... 20
13. Certain Relationships and Related Transactions.................................................... 20
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................. 20
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PART I
ITEM 1. BUSINESS
OVERVIEW
United Auto Group, Inc. ("UAG" or the "Company") is a leading acquirer,
consolidator and operator of franchised automobile and light truck dealerships
and related businesses. The Company is the second largest publicly-traded
retailer of new motor vehicles in the United States. At the end of 1998, the
Company operated franchises located in Arizona, Arkansas, California,
Connecticut, Florida, Georgia, Illinois, Indiana, Louisiana, Nevada, New Jersey,
New York, North Carolina, South Carolina, Tennessee, Texas and Puerto Rico. As
an integral part of its dealership operations, UAG also sells used vehicles. All
of UAG's franchised dealerships include integrated service and parts operations,
which are an important source of recurring revenues. In addition, UAG
dealerships market a complete line of aftermarket automotive products and
services through its wholly owned subsidiaries United Auto Care, Inc. ("UAC")
and United Auto Care Products, Inc. ("UAC Products").
UAG was incorporated in the State of Delaware in December 1990 and commenced
dealership operations in October 1992. Unless the context otherwise requires,
references herein to "Common Stock" refers to the Company's Voting Common Stock,
par value $0.0001 per share.
The Company was formed to capitalize on consolidation opportunities within the
highly fragmented automotive retailing industry by acquiring, consolidating, and
operating large automobile retailers and related businesses. As capital
requirements to operate dealerships continue to increase and many owners who
were granted franchises in the 1950s and 1960s approach retirement age, many
individual dealers are seeking exit opportunities. These conditions present
attractive consolidation opportunities for larger automobile retailers such as
UAG.
The following table sets forth information with respect to dealerships acquired
by the Company during 1998:
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DATE
ACQUIREE ACQUIRED LOCATIONS FRANCHISES
- - -------- -------- --------- ----------
<S> <C> <C> <C>
Skelton Group 1/98 Memphis, TN Toyota, Mazda, Hyundai
Young Group 2/98 Kissimmee, FL Toyota
Indianapolis, IN Chevrolet, Honda, Isuzu
Tipton, IN Chevrolet, Buick, Pontiac, GMC
Bloomington, IL Chevrolet
Goldsboro, NC Cadillac, Chevrolet, Oldsmobile
Hilton Head, SC BMW, Buick, Pontiac, GMC
Classic Group 2/98 New Jersey Chevrolet, Toyota, Nissan, Buick, GMC, Hyundai,
BMW, Acura, Honda
Graceland Dodge 2/98 Memphis, TN Dodge
Pioneer Ford 4/98 Phoenix, AZ Ford
San Diego dealerships 7/98 San Diego, CA Toyota, Lexus, Dodge, Mazda
Citrus 11/98 Dade City, FL Chrysler, Plymouth, Dodge
</TABLE>
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UAG purchases substantially all new car inventories directly from manufacturers.
Each of the Company's dealerships operates pursuant to a franchise agreement
between the applicable manufacturer and the subsidiary of the Company that
operates such dealership. In accordance with the individual franchise
agreements, each dealership is subject to certain rights and restrictions
typical of the industry. The ability of manufacturers to influence the
operations of a dealership, or the loss of a franchise agreement, could have a
negative impact on the Company's operating results.
Manufacturers allocate inventory based on the size and location of dealerships,
but actual shipments result from negotiations with individual dealers. The
Company believes that larger dealers, such as UAG, are better positioned to
secure favorable inventory shipments and optimize manufacturers' allocations.
UAG finances its inventory purchases through revolving credit arrangements known
in the industry as floor plan facilities.
BUSINESS STRATEGY
UAG seeks to be a leader in the consolidation of the automotive retailing
industry and to increase stockholder value through a business strategy that
includes the following principal elements:
Acquire and Integrate Profitable Dealership Operations
UAG seeks to capitalize on continuing consolidation in the U.S. automotive
retailing industry by selectively acquiring profitable dealerships. The Company
targets dealerships or dealership groups with established records of
profitability as well as with experienced management willing to remain in place.
The Company focuses on opportunities in geographic markets with above-average
projected population and job growth. The Company attempts to create regional
hubs of dealerships that will be able to share administrative and other
operations to reduce costs.
The Company's acquisition program has been specifically tailored to address
dealers' desire to retain a management role in their businesses while achieving
personal liquidity. Owners of acquired dealerships typically continue as
dealership managers and some also participate in overall Company operations
through UAG's Chairman's Committee. The Company believes it provides dealership
managers additional management tools, as its economies of scale, marketing
expertise and corporate resources act as catalysts for continual dealership
growth. In addition, the dealer may retain an equity interest in the business
through the ownership of capital stock and/or stock options of UAG.
Grow Higher-Margin Operating Businesses
UAG is focusing on higher-margin businesses such as the retail sale of used
vehicles, aftermarket products and service and parts.
Used Vehicles. Used vehicle sales by franchised dealers, with average prices
approximating 60% of new vehicle prices, typically generate higher gross margins
as a percentage of sales value than new car sales because of limited
comparability among them and the somewhat subjective nature of their valuation.
Consumer acceptance of used vehicle purchasing has grown, due principally to (i)
an increase in the availability of late-model, low-mileage used vehicles due in
part to the large supply of vehicles coming off short-term leases, (ii)
improvements in the quality of motor vehicles and (iii) increases in the prices
of new vehicles.
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UAG believes that through its new vehicle franchises, it enjoys significant
advantages over both independent and chain used-vehicle companies in sourcing
used vehicles. Specifically, the Company has access to (i) a steady supply of
used vehicles accepted as trade-ins for new vehicle purchases, (ii) off-lease
vehicles that were originally leased through the new vehicle franchise and (iii)
used vehicle auctions open only to new vehicle dealers. In addition, only new
vehicle franchises are able to sell used vehicles certified by the manufacturer
under recently introduced programs in which the manufacturer supports specific
high-quality used cars with extended warranties and attractive financing
options.
Aftermarket Products. Each sale of a new or used vehicle provides the
opportunity for the Company to sell aftermarket products. Aftermarket products
include accessories such as radios, cellular phones, alarms, custom wheels,
paint sealants and fabric protectors, as well as agency services such as
extended service contracts, credit insurance policies and financing and lease
contracts. In addition, the Company receives fees for placing financing and
lease contracts. In order to meet customers' needs and help create a "one-stop"
shopping experience, management continues to expand aftermarket product
offerings through UAC and UAC Products.
Service and Parts. Each of UAG's new vehicle dealerships offers a fully
integrated service and parts department. The service and parts business provides
an important recurring revenue stream to the Company's dealerships, which may
help to mitigate the effects of downturns in the automobile sales cycle. Unlike
independent service shops or used car dealerships with service operations, UAG
is qualified to perform work covered by manufacturer warranties. Since warranty
service work is paid for by the manufacturer, consumers are motivated to service
their vehicles at a dealership for the warranty period. In recent years,
manufacturers have generally lengthened standard warranty coverage on new cars
and introduced warranty coverage on used cars, further enhancing customer
retention opportunities in the service area. To grow their service and parts
businesses, UAG dealerships have implemented programs to track maintenance
records of customers and contact them regarding dealership promotions and
maintenance schedules. In addition, the Company is actively marketing
warranty-covered services to potential customers such as municipalities and
corporations with large fleets of automobiles located near certain of its
dealerships. The Company is able to offer repair services to such customers on a
more efficient and less costly basis than such customers generally can perform
themselves. The Company also believes that its market share will grow at the
expense of independent mechanics' shops, which may be unable to address the
increased mechanical and electronic sophistication of today's motor vehicles and
the increased expenses of compliance with more stringent environmental
regulations.
Implement "Best Practices"
The Chairman's Committee, comprised of senior executives and key managers, meets
periodically to review the operating performance of individual dealerships, as
well as to examine important industry trends and, where appropriate, recommend
specific operating improvements. This facilitates implementation of successful
strategies throughout the organization so that each dealership can benefit from
the successes of the others, as well as from the knowledge and experience of
UAG's senior management. Management also attends various industry sponsored
leadership and management seminars and receives continuing education in
products, marketing strategies and management information systems. The Company
shares training techniques across its dealership base and has made improving
service absorption and aftermarket revenues a Company-wide focus.
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Emphasize Customer Service
Central to UAG's overall philosophy is customer-oriented service designed to
meet the needs of an increasingly sophisticated and demanding automotive
consumer through "one-stop" shopping convenience, competitive pricing and a
sales staff that is knowledgeable about product offerings and responsive to a
customer's particular needs. The Company's goal is to establish lasting
relationships with its customers, which enhance its reputation in the community
and create the opportunity for significant repeat and referral business.
The quality of customer service provided by dealerships' sales and service
departments is measured by customer satisfaction index ("CSI") scores, which are
derived from data accumulated by manufacturers through individual customer
surveys. UAG relies on this data to track the performance of dealership
operations and uses it as a factor in determining the compensation of general
managers and sales and service personnel in its dealerships. The Company's most
recent CSI scores indicate that a majority of its dealerships' CSI scores were
at or above the average CSI scores for the applicable regions.
COMPETITION
Automobile Dealerships
The automotive retailing industry is extremely competitive. In large
metropolitan areas, consumers have a number of choices in deciding where to
purchase a new or used vehicle and where to have such a vehicle serviced.
For new vehicle sales, the Company competes with other franchised dealers in
each of its marketing areas. The Company does not have any cost advantage in
purchasing new vehicles from the manufacturer, and typically relies on
advertising and merchandising, sales expertise, service reputation and location
of its dealerships to sell new vehicles. In recent years, automobile dealers
have also faced increased competition in the sale of new vehicles from
independent leasing companies and on-line purchasing services and warehouse
clubs. Due to lower overhead and sales costs, these companies may be capable of
operating on smaller gross margins and offering lower sales prices than
franchised dealers. In addition, the Company may face competition in the future
from partnerships between manufacturers and dealers.
For used vehicle sales, the Company competes with other franchised dealers,
independent used vehicle dealers, automobile rental agencies, private parties
and used vehicle "superstores" for supply and resale of used vehicles.
The Company believes that the principal competitive factors in vehicle sales are
the marketing campaigns conducted by manufacturers, the ability of dealerships
to offer a wide selection of the most popular vehicles, the location of
dealerships and the quality of customer service. Other competitive factors
include customer preference for particular brands of automobiles, pricing
(including manufacturer rebates and other special offers) and warranties. The
Company believes that its dealerships are competitive in all of these areas.
5
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The Company competes against other franchised dealers to perform warranty
repairs and against other automobile dealers, franchised and unfranchised
service center chains, and independent garages for non-warranty repair and
routine maintenance business. The Company competes with other automobile
dealers, service stores and auto parts retailers in its parts operations. The
Company believes that the principal competitive factors in parts and service
sales are price, the use of factory-approved replacement parts, the familiarity
with a manufacturer's brands and models and the quality of customer service. A
number of regional or national chains offer selected parts and services at
prices that may be lower than the Company's prices.
EMPLOYEES AND LABOR RELATIONS
As of December 31, 1998, UAG employed approximately 5,500 people, approximately
590 of whom are covered by collective bargaining agreements with labor unions.
Relations with employees are considered by the Company to be satisfactory. The
Company's policy is to motivate its key managers through, among other things,
grants of stock options.
ENVIRONMENTAL MATTERS
As with automobile dealerships generally, and service parts and body shop
operations in particular, the Company's business involves the use, handling and
contracting for recycling or disposal of hazardous or toxic substances or
wastes, including environmentally sensitive materials such as motor oil, waste
motor oil and filters, transmission fluid, antifreeze, refrigerant, waste paint
and lacquer thinner, batteries, solvents, lubricants, degreasing agents,
gasoline and diesel fuels. The Company's business also involves the past and
current operation and/or removal of aboveground and underground storage tanks
containing such substances or wastes. Accordingly, the Company is subject to
regulation by federal, state and local authorities that establish health and
environmental quality standards and impose penalties for violations of those
standards. The Company is also subject to laws, ordinances and regulations
governing remediation of contamination at facilities it operates or to which it
sends hazardous or toxic substances or wastes for treatment, recycling or
disposal.
The Company believes that it does not have any material environmental
liabilities and that compliance with environmental laws, ordinances and
regulations will not, individually or in the aggregate, have a material adverse
effect on the Company's results of operations or financial condition. However,
soil and groundwater contamination has been known to exist at certain properties
leased by the Company. Furthermore, environmental laws and regulations are
complex and subject to frequent change. There can be no assurance that
compliance with amended, new or more stringent laws or regulations, stricter
interpretations of existing laws or the future discovery of environmental
conditions will not require additional expenditures by the Company, or that such
expenditures would not be material.
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ITEM 2. PROPERTIES
The Company seeks to structure its operations so as to avoid the ownership of
real property. As a result, the Company leases or subleases substantially all of
its facilities, including dealerships and office space used for corporate
activities. As of December 31, 1998, the Company has leases at the majority of
its dealerships, which can include facilities for (i) new and used vehicle
sales, (ii) vehicle service operations, (iii) retail and wholesale parts
operations, (iv) body shop operations, (v) storage and (vi) general office use.
Such leases are generally for a period of between five and twenty years and
typically include renewal options for an additional five to ten years in favor
of the Company. In addition, the Company leases office space in New York, NY,
Purchase, NY and Rochester, NY for the Company's corporate headquarters and
other corporate related activities.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is listed on the New York Stock Exchange ("NYSE") under the
symbol "UAG." There were 114 holders of record of the Common Stock and one
holder of record of the Non-voting Common Stock as of March 24, 1998. There is
no established market for the Company's Non-voting Common Stock, but such stock
is convertible into an equal number of shares of Voting Common Stock at any
time, subject to certain conditions, for no cost at the option of the holder
thereof.
The following table sets forth the high and low sales prices as reported on the
NYSE during each fiscal quarter during 1998 and 1997.
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1998 1997
QUARTER ENDED HIGH LOW HIGH LOW
- - ------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
March 31 24 1/8 10 1/4 31 3/4 19 1/4
June 30 21 7/8 13 5/8 19 7/8 16
September 30 26 5/16 11 5/16 27 7/8 19 1/4
December 31 15 8 7/8 26 13/16 13 3/4
</TABLE>
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The Company has not declared or paid dividends on its Common Stock during 1998
or 1997. The Company intends to retain future earnings, if any, to finance the
development and expansion of its business and, therefore, does not anticipate
paying any cash dividends on its Common Stock in the foreseeable future. The
decision whether to pay dividends will be made by the Board of Directors of the
Company in light of conditions then existing, including the Company's results of
operations, financial condition and requirements, business conditions and other
factors.
The Credit Agreement (as hereinafter defined) restricts the Company from paying
dividends in excess of $5.0 million in the aggregate. In addition, the
indentures governing the Notes (as hereinafter defined) 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.
Pursuant to the automobile franchise agreements to which the Company's
dealerships are subject, all dealerships are required to maintain a certain
minimum working capital, and some dealerships are also required to maintain a
certain minimum net worth. These requirements may restrict the ability of the
Company's operating subsidiaries to make dividend payments, which in turn may
restrict the Company's ability to make dividend payments.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical consolidated financial and
other data of the Company as of and for the five years in the period ended
December 31, 1998. Such financial information has been derived from the
Company's consolidated financial statements. During the five year period, the
Company made a number of acquisitions, each of which has been accounted for
using the purchase method of accounting. Accordingly, the Company's financial
statements include the results of operations of the acquired dealerships only
from the date of acquisition. As a result, the Company's period to period
results of operations vary depending on the dates of such acquisitions. The
selected consolidated financial data should be read in conjunction with the
Company's consolidated financial statements and related footnotes included
elsewhere herein.
SELECTED CONSOLIDATED FINANCIAL DATA (1) (2)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(Dollars in thousands, except per share data)
1998 (3) (4) 1997 (5) (6) 1996 (7) 1995 (8) 1994
------------- ------------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
AUTO DEALERSHIPS
Total revenues $3,343,147 $2,092,593 $1,302,031 $805,621 $731,629
Gross profit 426,899 257,062 145,572 84,987 85,432
Income (loss) from continuing
operations 13,378 (7,936) 8,928 (2,825) 125
Net income (loss) (797) (10,140) 3,047 (3,654) (245)
Income (loss) from continuing
operations per diluted common
share 0.64 (0.44) 0.82 (0.52) 0.03
Net income (loss) per diluted
common share (0.04) (0.56) 0.28 (0.67) (0.06)
OTHER AUTO DEALERSHIP DATA:
Gross profit margin 12.8% 12.3% 11.2% 10.5% 11.7%
New cars sold at retail 77,403 50,985 36,802 25,138 22,464
Used cars sold at retail 46,724 31,253 18,344 8,953 8,340
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AS OF DECEMBER 31,
(Dollars in thousand)
1998 1997 1996 1995 1994
-------------- ------------ ---------- ------------ ---------------
BALANCE SHEET DATA:
Intangible assets, net $482,049 $326,774 $177,194 $48,774 $23,018
Total assets 1,184,194 971,064 525,373 235,146 174,922
Long-term debt, including
current portion 313,021 248,531 16,565 27,242 8,640
Total stockholders' equity 341,650 300,557 284,501 51,699 31,432
</TABLE>
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(1) The Company made a decision to discontinue the auto finance business of
its wholly owned subsidiary, United Auto Finance, Inc. ("UAF"). As a
result, UAF will no longer engage in the purchase or sale of automotive
loans; however, it will continue to service its securitized portfolios in
accordance with contractual commitments. Consequently, UAF has been
reported as a discontinued operation in the accompanying consolidated
statements of operations. The Company has restated its prior financial
statements to present the results of UAF as a discontinued operation for
all periods presented.
(2) During 1997, the Company changed its method of accounting for new vehicle
inventory from LIFO to the specific identification method. The effect of
the change in accounting for new vehicle inventories was to increase net
income and income before extraordinary item by $573 ($0.05 per diluted
share) in 1996, decrease net income and income before extraordinary item
by $188 ($0.03 per diluted share) in 1995 and increase net income and
income before extraordinary item by $1,446 ($0.38 per diluted share) in
1994.
(3) Includes a $12.6 million pre-tax charge for estimated future repair costs
under the terms of approximately 51,000 warranty and extended service
contracts sold by UAC from January 1, 1997 to October 31, 1998. See
footnotes to consolidated financial statements.
(4) Includes the results of the Skelton Group, the Young Group, the Classic
Group, Graceland Dodge, Pioneer Ford, the San Diego dealerships and
Citrus Dodge from their respective dates of acquisition.
(5) Includes a $31.7 million charge recorded during 1997 to realign certain
elements of the Company's business. See footnotes to consolidated
financial statements.
(6) Includes the results of Crown Automotive, Hanna Nissan, the Staluppi
Automotive Group, the Gene Reed Automotive Group, the Lance Landers
dealerships, Stone Mountain Jeep Eagle, Shreveport Dodge, Central Ford,
Covington Pike Dodge and the Triangle Group from their respective dates
of acquisition
(7) Includes the results of Atlanta Toyota, United Nissan (GA), Peachtree
Nissan, the Sun Automotive Group, the Evans Group and United Nissan (TN)
from their respective dates of acquisition.
(8) Includes the results of Landers Auto from its date of acquisition.
ITEM 7. 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.
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. UAG dealerships market a complete line of
aftermarket automotive products and services through UAC. Service and parts
revenues include fees paid for repair and maintenance service and the sale of
replacement parts. The Company also derives revenue from fees paid by financial
institutions which purchase installment contracts from customers at the
Company's dealerships.
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.
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The Company has been informed by Trace International Holdings, Inc. ("Trace")
and its subsidiary Alpha Automotive, Inc. ("Alpha") that they are in the process
of evaluating their ability to meet their obligations with respect to the cost
of future repairs under the terms of approximately 51,000 warranty and extended
service contracts sold by UAC between January 1, 1997 and October 31, 1998. The
repair obligations for these contracts had been contractually assumed by Trace
and Alpha. As a result of the uncertainty about Trace and Alpha's ability to
perform their contractual obligations, the Company has entered into an insurance
agreement with Virginia Surety Company, Inc. ("Virginia Surety") and certain of
its affiliates. Virginia Surety is a subsidiary of Aon Corporation, an insurance
services holding company. Under the terms of the agreement, affiliates of
Virginia Surety have agreed to assume the repair obligations on the 51,000
warranty and extended service contracts in exchange for a fixed premium payable
over time. The Company has recorded a $12.6 million pre-tax charge (the "Alpha
Charge"), which represents the estimated present value of those premium
payments. Such charge has been reflected in cost of goods sold in the
accompanying financial statements. The Company has no further financial
obligations related to these contracts other than to make the specified premium
payments.
The Company has terminated the contract with Trace and Alpha with respect to
warranty or extended service contracts sold by UAC subsequent to October 31,
1998, and has entered into an agreement with affiliates of Virginia Surety
pursuant to which these affiliates will assume the repair obligations on all
warranty and extended service contracts sold and to be sold by UAC subsequent to
October 31, 1998 in exchange for specified insurance premiums. Trace and Alpha
will remain liable with respect to warranty or extended service contracts sold
prior to November 1, 1998. Future recoveries from Trace and Alpha will reduce
the cost of the Virginia Surety insurance agreement.
The Company made a decision to discontinue its auto finance business. As a
result, UAF will no longer engage in the purchase or sale of automotive loans;
however, it will continue to service its securitized portfolios in accordance
with contractual commitments. Consequently, UAF has been reported as a
discontinued operation in the accompanying consolidated statements of
operations. The Company has restated its prior financial statements to present
the results of UAF as a discontinued operation for all periods presented.
Based on its most recent Schedule 13-D filed with the Securities and Exchange
Commission, Trace is the beneficial owner of 4,016,110 shares of common stock
of the Company, which represents approximately 20.5% of the Company's
outstanding common stock. Marshall S. Cogan, Chairman and Chief Executive
Officer of the Company, is also Chairman and Chief Executive Officer of Trace.
During 1997, the Company recorded a pre-tax charge of $31.7 million (the "1997
Charge"). The charge included costs associated with (i) the divestiture of
automotive franchises, (ii) the closure of three stand-alone used vehicle
satellite locations in Arkansas and the disposal of related inventory, (iii) the
implementation of a new policy to more efficiently manage the Company's working
capital invested in retail inventory, (iv) excess real estate, (v) the write-off
of non-performing assets and (vi) certain corporate consulting agreements. Costs
associated with the 1997 Charge amounting to $9.8 million and $20.9 million have
been reflected in cost of goods sold and selling, general and administrative
expenses, respectively, in the accompanying financial statements.
In addition, $1.0 million has been reflected in discontinued operations.
Also, the Company changed its method of accounting for new vehicle inventory
from LIFO to the specific identification method during 1997. All results of
operations and related comparisons in this Management's Discussion and Analysis
of Financial Condition and Results of Operations have been restated to reflect
such change in accounting principle.
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Also, the Company made a number of dealership acquisitions in 1998, 1997 and
1996. 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
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues. Revenues increased by $1.3 billion, or 59.8%, from $2.1 billion to
$3.3 billion. The overall increase in revenues is due primarily to (i)
dealership acquisitions made subsequent to January 1, 1997 and (ii) an overall
5.2% increase in retail revenues at dealerships owned prior to January 1, 1997,
partially offset by (i) a decrease in retail vehicle sales revenues and finance
and insurance revenues at dealerships in the Atlanta marketplace and (ii) a
decrease in revenues at dealerships which were divested during 1998. The overall
increase in retail revenues at dealerships owned prior to January 1, 1997
reflects 4.4%, 19.5% and 7.7% increases in retail vehicle sales, finance and
insurance and service and parts revenues, respectively.
Sales of new and used vehicles increased by $1.1 billion, or 57.8%, from $1.8
billion to $2.9 billion. 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 (i) the decrease in the Atlanta marketplace
and (ii) a decrease at dealerships which were divested during 1998. The increase
at dealerships owned prior to January 1, 1997 is due to an increase in the
comparative average selling price per vehicle, partially offset by a 2.7%
decrease in retail unit sales. Aggregate unit retail sales of new and used
vehicles increased by 51.8% and 49.5%, 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 were divested during
1998. The Company sold 77,403 new vehicles (62.4% of total vehicle sales) and
46,724 used vehicles (37.6% of total vehicle sales) during the year ended
December 31, 1998, compared with 50,985 new vehicles (62.0% of total vehicle
sales) and 31,253 used vehicles (38.0% of total vehicle sales) during the year
ended December 31, 1997.
Finance and insurance revenues increased by $53.2 million, or 71.7%, from $74.2
million to $127.4 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 UAC, offset by (i)
the decrease in the Atlanta marketplace and (ii) a decrease at dealerships which
were divested during 1998.
Service and parts revenues increased by $143.3 million, or 75.1%, from $190.8
million to $334.1 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 were
divested during 1998.
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Gross Profit. Gross profit increased by $169.8 million, or 66.1%, from $257.1
million to $426.9 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 (iii) the
increase in revenues at UAC and (iv) the impact of the 1997 Charge on gross
profit in 1997, offset by (i) the impact of the Alpha Charge on gross profit in
1998 and (ii) a decrease at dealerships which were divested during 1998. Gross
profit as a percentage of revenues increased from 12.3% to 12.8%. The increase
in gross profit as a percentage of revenues is primarily attributable to (i) the
increase in higher margin finance and insurance and service and parts revenues
as a percentage of total revenues, (ii) improved gross profit margins on retail
vehicle sales revenues, (iii) improved gross profit margins on finance and
insurance revenues and (iv) improved gross profit margins on service and parts
revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $120.0 million, or 47.0%, from $255.1
million to $375.0 million. The increase in selling, general and administrative
expense is due principally to (i) acquisitions made subsequent to January 1,
1997, (ii) an increase at stores owned prior to January 1, 1997, offset in part
by the impact of the 1997 Charge on selling general and administrative expense
in 1997. Such expenses as a percentage of revenue decreased from 12.2% to 11.2%.
Other Interest Expense. Other interest expense increased by $17.4 million, from
$14.1 million to $31.5 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 $4.5
million, due primarily to $4.8 million of income earned pursuant to dealership
management agreements during 1998.
Income Tax Provision. The 1998 income tax provision increased $15.5 million from
a benefit of $4.0 million to a provision of $11.6 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.
Loss from Discontinued Operations. Loss from discontinued operations increased
by $10.7 million from $2.2 million to $12.9 million. The increase in loss from
discontinued operations is due primarily to (i) an increase in UAF's 1998
operating loss and (ii) the recording of a $14.4 million loss on disposal,
offset by the impact of the 1997 Charge on loss from discontinued operations in
1997. The increase in UAF's 1998 operating loss was due primarily to (i) losses
incurred on the sale of loans in private non-securitized transactions, (ii)
losses in connection with exiting interest rate management transactions and
(iii) asset impairment relating to finance assets. The loss on disposal consists
of (i) $5.9 million relating to contractual commitments, the write-off of
certain fixed assets, severance and other administrative expenses, (ii) $3.8
million of asset impairment and losses incurred on the sale of loans in private
non-securitized transactions, (iii) $3.9 million of estimated future costs
associated with servicing its securitized portfolio of retail automotive loans
and (iv) $0.8 million relating to the write-off of deferred financing fees in
connection with the closure of UAF's warehouse lines.
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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.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues. Revenues increased by $790.6 million, or 60.7%, from $1.3 billion to
$2.1 billion. The overall increase in revenues is due principally to dealership
acquisitions made in 1997 and the inclusion of a full year's revenues for
dealerships acquired in 1996, offset by a net decrease in sales at dealerships
owned prior to January 1, 1996. The net decrease in revenues at dealerships
owned prior to January 1, 1996 is due primarily to (i) a reduction in revenues
at Atlanta Toyota, impacted by shortages of inventory of certain models and
weakness in the Atlanta market, and (ii) a decrease in sales volume at the
Company's DiFeo division, resulting principally from the closure of unprofitable
dealerships.
Sales of new and used vehicles increased by $663.0 million, or 56.9%, from $1.2
billion to $1.8 billion. The overall increase in vehicle sales is due
principally to dealership acquisitions made in 1997 and the inclusion of a full
year's revenues for dealerships acquired in 1996, offset by the net decrease in
new and used vehicle sales at dealerships owned prior to January 1, 1996 noted
above. Aggregate unit retail sales of new and used vehicles increased by 38.5%
and 70.4%, respectively, due principally to acquisitions, offset by the sales
declines noted above. For the year ended December 31, 1997, the Company sold
50,985 new vehicles (62.0% of total vehicle sales) and 31,253 used vehicles
(38.0% of total vehicle sales). For the year ended December 31, 1996, the
Company sold 36,802 new vehicles (66.7% of total vehicle sales) and 18,344 used
vehicles (33.3% of total vehicle sales). The increase in the relative proportion
of used vehicle sales to total vehicle sales was due primarily to the expansion
of used car operations in response to the popularity of used cars. New vehicle
selling prices increased by an average of 11.4% due primarily to changes in the
mix of models sold and changes in manufacturer pricing. Used vehicle selling
prices increased by an average of 9.2% due to changes in market conditions which
resulted in a change in the mix of used vehicles sold and the increase in sales
of recent model year off-lease vehicles.
Finance and insurance revenues (aftermarket product sales) increased by $30.6
million, or 70.3%, from $43.6 million to $74.2 million. The increase is due
primarily to (i) dealership acquisitions made in 1997, (ii) the inclusion of a
full year's revenues for dealerships acquired in 1996 and (iii) the
establishment of UAC, partially offset by a net decrease in finance and
insurance revenues in the DiFeo Group. The decrease in the DiFeo Group is due
principally to the closure of certain franchises.
Service and parts revenues increased by $96.9 million, or 103.2%, from $93.9
million to $190.8 million. The increase is due primarily to dealership
acquisitions made in 1997 and the inclusion of a full year's revenues for
dealerships acquired in 1996, partially offset by a net decrease in service and
parts revenues in the DiFeo Group. The decrease in the DiFeo Group is due to the
closure of certain franchises.
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<PAGE>
Gross Profit. Gross profit increased by $111.5 million, or 76.6%, from $145.6
million to $257.1 million. Gross profit as a percentage of revenues increased
from 11.2% to 12.3%. The increase in gross profit and in gross profit as a
percentage of revenues is due to (i) dealership acquisitions made in 1997 and
the inclusion of a full year's operations for dealerships acquired in 1996, (ii)
increased dealership finance and insurance and service and parts revenues, which
yield higher margins, as a percentage of total revenues, (iii) improved gross
profit margins on vehicle sales revenues, (iv) improved gross profit margins on
finance and insurance revenues, (v) improved gross profit margins on service and
parts revenues and (vi) the establishment of UAC, offset by the 1997 Charge.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $130.8 million, or 105.3%, from $124.2
million to $255.1 million due principally to (i) dealership acquisitions made in
1997 and the inclusion of a full year's operations for dealerships acquired in
1996, (ii) an increase in the infrastructure required to manage the substantial
increase in the Company's operations and planned expansion of its business in
the future and (iii) the 1997 Charge. Selling, general and administrative
expenses as a percentage of revenue increased to 12.2% from 9.5%.
Other Interest Expense. Other interest expense increased by $9.7 million, from
$4.4 million to $14.1 million. The increase is due to interest expense arising
from (i) borrowings under the Senior Credit Facility, (ii) the issuance of the
Company's Senior Subordinated Notes due 2007 and (iii) the issuance of
acquisition-related debt, offset by a reduction in interest expense due to the
retirement of the Company's Senior Notes in October 1996.
Other Income (Expense), Net. Other income (expense), net decreased by $2.3
million, from $2.6 million to $0.3 million, due principally to a reduction in
related party interest income resulting from the disposition of the minority
interests in certain dealerships in October 1996.
Income Tax Provision. During 1997, the Company recorded an income tax benefit in
the amount of $4.0 million, compared with income tax expense of $7.2 million in
the prior year. The change is due to the Company's experiencing a net operating
loss in 1997 compared with net income in 1996.
Loss from Discontinued Operations. Loss from discontinued operations increased
by $1.3 million from $0.9 million to $2.2 million. The increase in loss from
discontinued operations is due primarily to (i) an increase in infrastructure
spending by UAF in 1997, (ii) charges relating to revised loan loss estimates
during 1997 and (iii) the impact of the 1997 Charge.
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 of existing facilities.
Historically, these cash requirements have been met through issuances of equity
and debt instruments and cash flow from operations. At December 31, 1998, the
Company had working capital of $85.2 million.
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During 1998, dealership activities resulted in net cash provided by operations
of $55.0 million. Net cash used by dealerships in investing activities during
the year ended December 31, 1998 totaled $150.2 million, relating primarily to
dealership acquisitions, funding provided to UAF and capital expenditures.
Dealership financing activities provided $50.6 million of cash during the year
ended December 31, 1998, principally relating to net proceeds from the issuance
of long-term debt.
The Company finances substantially all of its new and used vehicle inventory
under revolving floor plan financing arrangements with various lenders. The
floor plan lenders pay the manufacturer directly with respect to new vehicles.
The Company makes monthly interest payments on the amount financed, but is not
required to make loan principal repayments prior to the sale of new and used
vehicles. Substantially all of the assets of the Company's dealerships are
subject to security interests granted to their floor plan lending sources.
At December 31, 1998, the Company had approximately $38.5 million of cash
available to fund operations and future acquisitions. In addition, the Company
is party to a $75.0 million Credit Agreement, dated February 27, 1998 (as
amended) (the "Credit Agreement"), with a group of banks, which was to be used
principally for acquisitions. As of March 24, 1999, $4.6 million is available
for borrowing under the Credit Agreement.
The Credit Agreement restricts the Company from paying dividends in excess of
$5.0 million in the aggregate. In addition, the indentures governing the 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 was in compliance with the financial covenants in its Credit
Agreement at year end. Nevertheless, the Company anticipates that it may not
meet the more stringent first quarter 1999 net worth covenants contained therein
primarily as a result of the charges described above. The Company has commenced
discussions with its lenders to amend or waive such covenants if necessary;
however, there can be no assurance that if such amendments or waivers are
necessary, they will be obtained.
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 commitments relating to
extended warranty contracts previously assumed by Trace and Alpha. 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.
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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.
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.
The Company finances substantially all of its inventory through various
revolving floor plan arrangements with interest rates that 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 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. To date, the installation of the year 2000 compliant DMS and
DCS systems has been completed at more than ninety percent of the Company's
dealerships. The remaining dealerships are expected to have installed the year
2000 compliant systems by April 30, 1999. In order to test the ability of the
Company's recently upgraded mission critical systems to process date related
information correctly, the Company has established a redundant computer
platform which is being used to evaluate the reliability of such systems. The
majority of such testing is expected to be completed by May 31, 1999. While the
testing of the mission critical systems is still pending, the Company has
received assurances that the vendors supplying such systems have made all
corrections necessary to the systems to ensure date related information is
processed correctly. The cost of the upgraded mission critical systems is
included in the recurring fees paid by the Company to the system providers. As
a result, the implementation of such systems has not resulted in incremental
cost to the Company.
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The Company is also attempting to verify that the critical services provided by
external service providers, such as vehicle and parts manufacturers and
suppliers, public utilities and financial institutions with which the Company
conducts business, will be available without interruption during the transition
to the year 2000. Financial institutions with which the auto dealerships conduct
critical business activities include floorplan lending sources and retail
lending institutions. In the event such service providers are unable to verify
their ability to address year 2000 issues, the Company will explore alternative
sources for such services. If the Company's current service providers fail to
address year 2000 issues, and if the Company is unable to secure such services
from an alternative service provider, then such failure could result in a
material adverse effect on the Company.
In addition to the mission critical systems and critical services noted above,
the dealerships utilize a variety of non-critical devices and systems
containing embedded systems which may fail to process data accurately, before,
during or after the year 2000. Such non-critical devices and systems include
personal computers, software applications, service lifts and certain other
equipment used by service technicians, phone systems and alarms. The Company
has developed a summary list of potential year 2000 issues for its dealerships,
which is based on an industry guide designed to help dealerships address year
2000 issues, as well as on information obtained through in-depth reviews of the
potential impact of year 2000 issues at certain Company dealerships. Each of
the Company's dealerships is scheduled to have completed a thorough review
designed to identify such non-mission critical systems and devices by April 30,
1999. In addition, each dealership is expected to have addressed these
non-mission critical systems by December 31, 1999. The cost of correcting the
non-mission critical systems and devices is not expected to cost in excess of
$2.0 million, which will be paid for from the cash flow from operations of the
individual dealerships.
Despite the Company's efforts and testing, there is a risk that not all
possible problems associated with the year 2000 issue will be corrected.
Further, despite assurances that the Company has received or will receive,
there can be no guarantee that the systems and services provided by vendors, or
that the systems of other companies with which the Company does business, will
be year 2000 compliant. Any such non-compliance could result in the reduction
or shutdown of the retail sale of automobiles and ancillary products, which
could have a material adverse effect on the Company.
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FORWARD LOOKING STATEMENTS
Certain portions of this Annual 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 Annual 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, some of which are described
in greater detail elsewhere in this Annual Report, 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 Company's 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; and (x) the Company's
business is seasonal. In light of the foregoing, readers of this Annual Report
are cautioned not to place undue reliance on the forward-looking statements
contained herein.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Rates. The Company's business is conducted in the
United States and its revenues and expenses are transacted solely in U.S.
dollars. As a result, the Company's results of operations are not subject to
foreign exchange rate fluctuations and, accordingly, the Company does not hedge
against such fluctuations. In common with other automobile retailers, the
Company purchases certain of its new car inventories from foreign manufacturers.
The Company's business in this regard is subject to certain risks, including,
but not limited to, differing economic conditions, changes in political climate,
differing tax structures, other regulations and restrictions and foreign
exchange rate volatility. The Company's future results could be materially and
adversely impacted by changes in these or other factors.
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Interest Rates. The Company is exposed to market risk from changes in the
interest rates on certain of its outstanding indebtedness. The outstanding
balance under the Credit Agreement bears interest at a variable rate based on a
margin over the prevailing London Interbank Offered Rate ("LIBOR"). Based on the
amount outstanding as of March 24, 1999, a 100 basis point change in interest
rates would result in an approximate $0.7 million change to the Company's annual
interest expense. Similarly, amounts owing under the revolving floor plan
financing arrangements, pursuant to which the Company finances substantially all
of its vehicle inventory, bear interest at a variable rate based on a margin
over LIBOR. Based on the average aggregate outstanding amounts under such
financing arrangements for the year ended December 31, 1998, a 100 basis point
change in interest rates would result in an approximate $3.8 million change to
the Company's annual floor plan interest expense. For fixed rate debt such as
the Notes, certain seller financed promissory notes and obligations under
certain capital leases, interest rate changes effect the fair market value
thereof, but do not impact earnings or cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the consolidated financial statements listed in the accompanying Index to
Consolidated Financial Statements for the information required by this item.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
The information required by Items 10 through 13 is included in the Company's
definitive proxy statement under the captions "The Board of Directors and its
Committees," "Election of Directors," "Executive Officers," "Security Ownership
of Certain Beneficial Owners and Management" and "Certain Relationships and
Related Transactions." Such information is incorporated herein by reference,
pursuant to General Instruction G(3).
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
The consolidated financial statements listed in the accompanying Index
to Consolidated Financial Statements are filed as part of this Annual
Report on Form 10-K.
(b) Reports on Form 8-K.
The Company did not file any Current Reports on Form 8-K during the
three month period ended December 31, 1998.
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(c) Exhibits
<TABLE>
<CAPTION>
<S> <C>
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.
10.1.1(a) Registration Rights Agreement, dated as of October
15, 1993, among the Company and the investors listed
therein, as amended July 31, 1996.
10.1.4(a) Form of Warrant.
10.1.8(a) Stock Option Plan of the Company.
10.1.8.1 Amendment to Stock Option Plan of the Company.
10.1.11(a) Letter, dated July 24, 1996, from Chrysler Corporation to
the Company.
10.1.12(a) Agreement, dated July 24, 1996, between the Company and
Toyota Motor Sales U.S.A., Inc.
10.1.13(a) Non-employee Director Compensation Plan of the Company.
10.1.14(a) Form of Agreement among the Company, certain of its affiliates
and American Honda Motor Co., Inc.
10.1.15(a) Form of Option Certificate of the Company in favor of
Samuel X. DiFeo and Joseph C. DiFeo.
10.1.18(d) Consulting Agreement, dated March 3, 1997, between the Company
and Carl Spielvogel.
10.1.19.1(h) Credit Agreement, dated as of February 27, 1998, among the
Company, various financial institutions and The Bank of
Nova Scotia, as Administrative Agent.
10.1.19.2(h) Pledge Agreement, dated as of February 27, 1998,
among the Company, certain subsidiaries thereof and
The Bank of Nova Scotia, as Administrative Agent.
10.1.19.3(h) Subsidiary Guarantee, dated as of February 27, 1998,
among certain subsidiaries of the Company and The
Bank of Nova Scotia, as Administrative Agent.
10.2.1(a) Honda Automobile Dealer Sales and Service Agreement, including
Standard Provisions.
10.2.2(a) Lexus Dealer Agreement, including Standard Provisions.
10.2.3(a) Mitsubishi Dealer Sales and Services Agreement, including
Standard Provisions.
10.2.4(a) BMW of North America, Inc. Dealer Agreement, including
Standard Provisions.
10.2.5(a) Suzuki Term Dealer Sales and Service Agreement, including
Standard Provisions.
10.2.6(a) Toyota Dealer Agreement, including Standard Provisions.
10.2.7(a) General Motors Dealer Sales and Service Agreement, including
Standard Provisions.
10.2.9(a) Nissan Dealer Term Sales and Service Agreement, including
Standard Provisions.
10.2.10(a) Chrysler Corporation Term Sales and Service Agreement,
including Standard Provisions.
10.2.15(a) Hyundai Motor America Dealer Sales and Service Agreement,
including Standard Provisions.
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10.2.21 and Isuzu Dealer Sales and Service Agreement, including Standard
.22 (a) Provisions.
10.2.26(a) Settlement Agreement, dated as of October 3, 1996,
among the Company and certain of its affiliates, on
the one hand, and Samuel X. DiFeo, Joseph C. DiFeo
and certain of their affiliates, on the other hand.
10.3.1 Ford Sales and Service Agreement, including Standard Provisions.
10.4.5(a) Employment Agreement, dated as of August 1, 1995, between
Landers Auto Sales, Inc. and Steve Landers.
10.5.13(a) Employment Agreement, dated as of January 16, 1996, among the
Company, UAG Atlanta, Inc. and John Smith.
10.8.1(a) Stock Purchase Agreement, dated as of June 6, 1996,
among the Company, UAG West, Inc., Scottsdale
Jaguar, LTD., SA Automotive, LTD., SL Automotive,
LTD., SPA Automotive, LTD., LRP, LTD., Sun BMW,
LTD., Scottsdale Management Group, LTD., 6725
Dealership LTD. and certain parties named therein,
as amended on October 21, 1996 by Amendment No. 1,
Amendment No. 2 and Amendment No. 3.
10.8.3(a) Form of Employment Agreement between the Company, UAG West,
Inc., and Steven Knappenberger.
10.8.5(a) Audi Dealer Agreement, including Standard Provisions.
10.8.6(a) Acura Automobile Dealer Sales and Service Agreement,
including Standard Provisions.
10.8.8(a) Porsche Sales and Service Agreement, including Standard
Provisions.
10.8.9(a) Land Rover North America, Inc. Dealer Agreement, including
Standard Provisions.
10.8.21(e) Rolls-Royce Dealer Agreement.
10.11.1(b) Agreement and Plan of Merger, dated December 16, 1996, among
Crown Jeep Eagle, Inc., Berylson, Inc., Shannon Automotive,
Ltd., Kevin J. Coffey, Paul J. Rhodes, the Company, UAG Texas,
Inc. and UAG Texas II, Inc.
10.13.1(d) Stock Purchase Agreement, dated February 19, 1997,
among the Company, UAG East, Inc., Amity Auto Plaza
Ltd., Massapequa Imports Ltd., Westbury Nissan Ltd.,
Westbury Superstore Ltd., J&S Auto Refinishing Ltd.,
Florida Chrysler Plymouth Jeep Eagle Inc., Palm Auto
Plaza Inc., West Palm Infiniti Inc., West Palm
Nissan Inc., Northlake Auto Finish Inc., John A.
Staluppi and John A. Staluppi, Jr., as amended April
7, 1997 and April 30, 1997.
10.15.1(e) Stock Purchase Agreement, dated April 12, 1997, among the
Company, Gene Reed Chevrolet, Inc., Michael
Chevrolet-Oldsmobile, Inc., Reed-Lallier Chevrolet, Inc., Gene
Reed, Jr., Michael L. Reed, Michael G. Lallier, Deborah B.
Lallier, John P. Jones, Charles J. Bradshaw, Charles J.
Bradshaw, Jr., Julia D. Bradshaw and William B. Bradshaw, as
amended May 31, 1997.
10.18.1(f) Stock Purchase Agreement, dated July 25, 1997 among
The Company, UAG Classic, Inc., Classic Auto Group,
Inc., Cherry Hill Classic Cars, Inc., Classic
Enterprises, Inc., Classic Buick, Inc., Classic
Chevrolet, Inc., Classic Management, Inc., Classic
Turnersville, Inc., Classic Imports, Inc. and Thomas
J. Hessert, Jr. (as amended).
10.19.1.1(f) Stock Purchase Agreement, dated as of September 25,
1997 among The Company, UAG Young, Inc., Dan Young
Chevrolet, Inc., Dan Young, Inc., Parkway Chevrolet,
Inc., Young Management Group, Inc. and certain
parties named therein.
22
<PAGE>
10.19.1.2(f) Agreement and Plan of Merger, dated as of September
25, 1997 among The Company, UAG Kissimmee Motors,
Inc., UAG Paramount Motors, Inc., UAG Century
Motors, Inc., Paramount Chevrolet-Geo, Inc., Century
Chevrolet-Geo, Inc. and certain parties named
therein.
10.19.1.3(g) Amendment To Stock Purchase Agreement, dated January
31, 1998, between and among United Auto Group, Inc.,
UAG Young, Inc., Dan Young Chevrolet, Inc., Dan
Young, Inc., Parkway Chevrolet, Inc., Young
Management Group, Inc. and certain parties named
therein.
10.19.1.4(g) Amendment To Agreement and Plan of Merger, dated
January 31, 1998, between and among United Auto
Group, Inc., UAG Kissimmee Motors, Inc., UAG
Paramount Motors, Inc., UAG Century Motors, Inc.,
Kissimmee Motors, Inc., Paramount Chevrolet-Geo,
Inc., Century Chevrolet-Geo, Inc. and certain
parties named therein.
21.1 Subsidiaries of the Company.
23.1 Consent of PricewaterhouseCoopers LLP
27.1 December 31, 1998 Financial Data Schedule.
27.2 September 30, 1998 Financial Data Schedule, restated to reflect
the treatment of the Company's auto finance business as a
discontinued operation.
27.3 June 30, 1998 Financial Data Schedule, restated to reflect the
treatment of the Company's auto finance business as a
discontinued operation.
27.4 March 31, 1998 Financial Data Schedule, restated to reflect the
treatment of the Company's auto finance business as a
discontinued operation.
27.5 December 31, 1997 Financial Data Schedule, restated to reflect
the treatment of the Company's auto finance business as a
discontinued operation.
27.6 September 30, 1997 Financial Data Schedule, restated to reflect
the treatment of the Company's auto finance business as a
discontinued operation.
27.7 June 30, 1997 Financial Data Schedule, restated to reflect the
treatment of the Company's auto finance business as a
discontinued operation.
27.8 March 31, 1997 Financial Data Schedule, restated to reflect the
treatment of the Company's auto finance business as a
discontinued operation.
27.9 December 31, 1996 Financial Data Schedule, restated to reflect
the treatment of the Company's auto finance business as a
discontinued operation.
- - ------------------------
(a) Incorporated herein by reference to the identically numbered
exhibit to the Company's Registration Statement on Form S-1,
Registration No. 333-09429.
(b) Incorporated herein by reference to the identically numbered
exhibit to the Company's Current Report on Form 8-K filed on
December 24, 1996, File No. 1-12297.
(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.
(d) Incorporated herein by reference to the identically numbered
exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997, File No. 1-12297.
23
<PAGE>
(e) Incorporated herein by reference to the identically numbered
exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997, 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.
(g) Incorporated herein by reference to the identically numbered
exhibit to the Company's Current Report on Form 8-K filed on
February 20, 1998, File No. 1-12297.
(h) Incorporated herein by reference to the identically numbered
exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998, File No. 1-12297.
(d) Schedules - No Financial Statement Schedules are required to be filed
as part of this Annual Report on Form 10-K.
</TABLE>
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in New York, New York
on March 31, 1999.
UNITED AUTO GROUP, INC.
By: /s/ Marshall S. Cogan
------------------------
Marshall S. Cogan
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on its behalf by the
registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- - --------- ----- ----
<S> <C> <C>
/s/ Marshall S. Cogan Chairman of the Board and Chief Executive March 31, 1999
- - --------------------------- Officer (Principal Executive Officer)
Marshall S. Cogan
/s/ Samuel X. DiFeo President and Chief Operating Officer March 31, 1999
- - --------------------------- and Director
Samuel X. DiFeo
/s/ Karl H. Winters Executive Vice President and March 31, 1999
- - --------------------------- Chief Financial Officer
Karl H. Winters (Principal Financial Officer)
/s/ James R. Davidson Executive Vice President - Accounting March 31, 1999
- - --------------------------- and Treasurer
James R. Davidson (Principal Accounting Officer)
/s/ Robert H. Nelson Executive Vice President - Operations March 31, 1999
- - --------------------------- and Director
Robert H. Nelson
/s/ Richard Sinkfield Director March 31, 1999
- - ---------------------------
Richard Sinkfield
/s/ Michael R. Eisenson Director March 31, 1999
- - ---------------------------
Michael R. Eisenson
/s/ John J. Hannan Director March 31, 1999
- - ---------------------------
John J. Hannan
/s/ Jules B. Kroll Director March 31, 1999
- - ---------------------------
Jules B. Kroll
</TABLE>
25
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
UNITED AUTO GROUP, INC.
Report of Independent Accountants.................................................................. F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997....................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996......... F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and
1996............................................................................................ F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996......... F-6
Notes to Consolidated Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of United Auto Group, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of United
Auto Group, Inc. (the "Company") at December 31, 1998 and 1997, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Princeton, New Jersey
March 29, 1999
F-2
<PAGE>
UNITED AUTO GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997
ASSETS -------------- ------------
<S> <C> <C>
Cash and cash equivalents $38,538 $94,435
Accounts receivable, net 125,460 92,601
Inventories 410,295 324,330
Other current assets 16,420 20,413
----------------------------
Total current assets 590,713 531,779
Property and equipment, net 51,483 37,588
Intangible assets, net 482,049 326,774
Net assets of discontinued operations 23,323 32,601
Other assets 36,626 42,322
----------------------------
Total assets $1,184,194 $971,064
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Floor plan notes payable $397,234 $334,272
Accounts payable 38,435 30,199
Accrued expenses 45,104 40,136
Current portion of long-term debt 24,756 9,981
----------------------------
Total current liabilities 505,529 414,588
Long-term debt 288,265 238,550
Other long-term liabilities 48,750 17,369
----------------------------
Total liabilities 842,544 670,507
----------------------------
Commitments and contingent liabilities
Stockholders' Equity
Voting Common Stock 2 2
Non-voting Common Stock - -
Additional paid-in-capital 352,591 310,373
Accumulated deficit (10,943) (9,818)
----------------------------
Total stockholders' equity 341,650 300,557
----------------------------
Total liabilities and stockholders' equity $1,184,194 $971,064
============================
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
UNITED AUTO GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
----- ----- ----
<S> <C> <C> <C>
Vehicle sales $2,881,678 $1,827,609 $1,164,569
Finance and insurance 127,405 74,199 43,574
Service and parts 334,064 190,785 93,888
----------------------------------------
Total revenues 3,343,147 2,092,593 1,302,031
Cost of sales, including floor plan interest 2,916,248 1,835,531 1,156,459
----------------------------------------
Gross profit 426,899 257,062 145,572
Selling, general and administrative expenses 375,043 255,066 124,244
----------------------------------------
Operating income 51,856 1,996 21,328
Other interest expense (31,462) (14,071) (4,398)
Other income (expense), net 4,800 297 2,506
----------------------------------------
Income (loss) from continuing operations before minority interests,
income tax (provision) benefit and extraordinary item 25,194 (11,778) 19,436
Minority interests (262) (138) (3,306)
Income tax (provision) benefit (11,554) 3,980 (7,202)
----------------------------------------
Income (loss) from continuing operations 13,378 (7,936) 8,928
Loss from discontinued operations, net of income tax benefit (12,940) (2,204) (894)
----------------------------------------
Income (loss) before extraordinary item 438 (10,140) 8,034
Extraordinary item (net of income tax benefit of $859 and $2,685
in 1998 and 1996, respectively) (1,235) -- (4,987)
----------------------------------------
Net income (loss) $(797) $(10,140) $3,047
========================================
Basic income (loss) from continuing operations per common share $0.66 $(0.44) $0.88
========================================
Basic net income (loss) per common share $(0.04) $(0.56) $0.30
========================================
Income (loss) from continuing operations per diluted common share $0.64 $(0.44) $0.82
========================================
Net income (loss) per diluted common share $(0.04) $(0.56) $0.28
========================================
Shares used in computing basic per share data 20,377 18,227 10,144
========================================
Shares used in computing diluted per share data 20,932 18,607 10,851
========================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
UNITED AUTO GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands)
<TABLE>
<CAPTION>
Class A Voting and
Convertible Preferred Non-voting
Stock Common Stock
Additional Total
Issued Issued Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
------ ------ ------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1995 3,650,729 $1 2,582,785 $1 $54,748 $(3,050) $51,699
Issuance of stock,
primarily for acquisitions 1,576,617 - 1,010,965 - 22,854 - 22,854
Preferred stock conversion (5,227,346) (1) 5,227,346 - 1 - 1
Issuance of common stock
in minority exchanges - - 1,113,841 - 34,015 - 34,015
Issuance of stock in initial
public offering - - 6,250,000 1 170,410 - 170,411
Issuance of stock on exercise
of warrants - - 1,109,491 - 2,769 - 2,769
Issuance of stock - exercise
of stock options - - 46,500 - 884 - 884
Repurchase of common stock - - (46,000) - (1,179) - (1,179)
Net income - - - - - 3,047 3,047
---------------------------------------------------------------------------------------------
Balances, December 31, 1996 - - 17,294,928 2 284,502 (3) 284,501
Issuance of stock for
acquisitions - - 1,497,218 - 27,986 - 27,986
Issuance of stock - exercise
of stock options - - 503,000 - 6,706 6,706
Repurchase of common stock - - (397,000) - (8,821) - (8,821)
Unrealized gain on marketable
securities - UnitedAuto Finance - - - - - 325 325
Net loss - - - - - (10,140) (10,140)
---------------------------------------------------------------------------------------------
Balances, December 31, 1997 - - 18,898,146 2 310,373 (9,818) 300,557
Issuance of stock for
acquisitions - - 1,683,638 - 39,632 - 39,632
Issuance of stock - exercise
of stock options - - 156,600 - 2,586 - 2,586
Unrealized gain on marketable
securities - UnitedAuto Finance - - - - - (328) (328)
Net loss - - - - - (797) (797)
---------------------------------------------------------------------------------------------
Balances, December 31, 1998 - $- 20,738,384 $2 $352,591 $(10,943) $341,650
=============================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
UNITED AUTO GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
------------ ----------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(797) $(10,140) $3,047
Adjustments to reconcile net income (loss) to net cash provided by
operating activities from continuing operations:
Depreciation and amortization 16,464 9,100 5,325
Unusual items 12,550 30,660 -
Loss from discontinued operations 12,940 2,204 894
Deferred income taxes 8,561 (9,193) 2,401
Related party interest income - - (2,580)
Minority interests 262 138 3,306
Changes in operating assets and liabilities:
Accounts receivable (4,709) (8,317) (6,480)
Inventories 39,648 (39,280) (10,581)
Floor plan notes payable (29,587) 37,210 25,548
Accounts payable and accrued expenses 9,138 2,433 (60)
Other (9,422) 3,474 2,422
---------------------------------------
Net cash provided by operating activities of continuing
operations 55,048 18,289 23,242
---------------------------------------
INVESTING ACTIVITIES:
Purchase of equipment and improvements (12,085) (11,915) (6,457)
Dealership acquisitions (138,139) (139,639) (98,812)
Other investments - - (3,726)
---------------------------------------
Net cash used in investing activities of continuing (150,224) (151,554) (108,995)
operations
---------------------------------------
FINANCING ACTIVITIES:
Proceeds from borrowings of long-term debt 68,400 252,999 20,092
Payments of long-term debt and capital leases (17,956) (54,850) (43,314)
Deferred financing costs (1,842) (10,689) (1,011)
Proceeds from issuance of stock 2,020 4,772 195,818
Advances from (to) affiliates, net - (718) 225
Repurchase of common stock - (8,821) (1,179)
Net repayments of short-term debt - (400) (10,118)
---------------------------------------
Net cash provided by financing activities of continuing
operations 50,622 182,293 160,513
---------------------------------------
Net cash invested in discontinued operations (11,343) (21,468) (12,582)
---------------------------------------
Net increase (decrease) in cash and cash equivalents (55,897) 27,560 62,178
Cash and cash equivalents, beginning of year 94,435 66,875 4,697
---------------------------------------
Cash and cash equivalents, end of year $38,538 $94,435 $66,875
=======================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, Except Per Share Amounts)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
United Auto Group, Inc. ("UAG" or the "Company") is engaged in the sale of new
and used motor vehicles and related products and services, including vehicle
service and parts, finance and insurance products and other aftermarket
products. The Company operates dealerships under franchise agreements with a
number of automotive manufacturers. In accordance with the individual franchise
agreements, each dealership is subject to certain rights and restrictions
typical of the industry. The ability of the manufacturers to influence the
operations of the dealerships, or the loss of a franchise agreement, could have
a negative impact on the Company's operating results.
As discussed in Note 4, the Company has discontinued its auto finance business.
As a result, the Company's wholly owned subsidiary, United Auto Finance, Inc.
("UAF"), is presented as a discontinued operation in the accompanying financial
statements. Also, as discussed in Note 5, the Company completed a number of
acquisitions during the three years in the period ended December 31, 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 the acquired dealerships only from the date of acquisition.
In October 1996, The Company consummated an initial public offering of 6,250,000
shares of its common stock (the "IPO"). Net proceeds from the IPO amounted to
$170,410, which were used to prepay outstanding indebtedness, fund certain
acquisitions, fund operations of UAF and for working capital purposes.
Principles of Consolidation
The consolidated financial statements include all significant majority-owned
subsidiaries. All material intercompany accounts and transactions among the
consolidated subsidiaries have been eliminated. Affiliated companies that are
20% to 50% owned are accounted for using the equity method of accounting.
Cash and Cash Equivalents
Cash and cash equivalents include all highly-liquid investments that have an
original maturity of three months or less at the date of purchase.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts receivable,
accounts payable and debt, including floor plan notes payable. The carrying
amount of financial instruments approximates fair value due either to length of
maturity or the existence of variable interest rates that approximate prevailing
market rates.
F-7
<PAGE>
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, Except Per Share Amounts)
Revenue Recognition
Revenue is generally recognized when vehicles are delivered to consumers, when
motor vehicle service work is performed, or when parts are delivered. Finance
and insurance revenues are recognized upon the sale of the finance or insurance
contract or other aftermarket products. An allowance for chargebacks against
revenue relating to the sale of customer finance contracts or other aftermarket
products is established when the related revenue is recognized.
Inventory Valuation
Inventories are stated at the lower of cost or market. Cost for new and used
vehicle inventories is determined using the specific identification method. Cost
for parts, accessories and other inventories is based on factory list prices.
Property and Equipment
Property and equipment are recorded at cost and depreciated over estimated
useful lives, primarily using the straight-line method. Useful lives for
purposes of computing depreciation for assets other than equipment under capital
lease and leasehold improvements are between 5 and 10 years. Equipment under
capital lease and leasehold improvements are depreciated over the term of the
lease or the estimated useful life of the asset, whichever is shorter.
Expenditures relating to recurring repair and maintenance are expensed as
incurred. Expenditures that increase the useful life or substantially increase
the serviceability of an existing asset are capitalized. When equipment is sold
or otherwise disposed of, the cost and related accumulated depreciation are
removed from the accounts, and any resulting gain or loss is reflected in
income.
Income Taxes
Income taxes are provided in accordance with Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes ("SFAS 109") which requires an
asset and liability approach to accounting for income taxes. Deferred tax assets
or liabilities are computed based upon the difference between financial
reporting and tax bases of assets and liabilities using enacted tax rates. A
valuation allowance is provided when it is more likely than not that taxable
income will not be sufficient to fully realize deferred tax assets.
Intangible Assets
Intangible assets of $482,049, consisting primarily of excess of cost over the
fair value of net assets acquired in purchase business combinations, are being
amortized on a straight-line basis over periods not exceeding 40 years.
Accumulated amortization at December 31, 1998 amounted to $21,758. Amortization
expense for the years ended December 31, 1998, 1997 and 1996 was $11,560, $6,300
and $1,712, respectively.
Segment Reporting
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("FAS") No. 131, "Disclosures about Segments of an
Enterprise and Related Information". Under FAS No. 131, the Company's
operations are considered one reportable segment. The Company does not allocate
goodwill amortization, interest on corporate indebtedness or general corporate
expenses to its operating subsidiaries. Such items totaled approximately
$53,840, $18,772 and $5,873 during 1998, 1997 and 1996, respectively. In
addition, corporate assets, primarily relating to cash and cash equivalents,
deferred tax assets and intangible assets, totaled approximately $522,183 and
$462,293 as of December 31, 1998 and 1997, respectively.
F-8
<PAGE>
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, Except Per Share Amounts)
Impairment of Long-Lived Assets
The carrying value of long-lived assets, including intangibles, is reviewed if
the facts and circumstances, such as significant declines in revenues, earnings
or cash flows or material adverse changes in the business climate, indicate that
it may be impaired. The Company performs its review by comparing the carrying
amounts of long-lived assets to the estimated undiscounted cash flows relating
to such assets. If any impairment in the value of the long-lived assets is
indicated, the carrying value of the long-lived assets is adjusted to reflect
such impairment calculated based on the discounted cash flows or the fair value
of the impaired assets.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The accounts which require the
use of significant estimates are accounts receivable, inventories, income taxes,
intangible assets, and accrued expenses.
Advertising
Advertising costs are expensed as incurred. The Company incurred advertising
costs of $37,318, $25,075 and $14,217 during the years ended December 31, 1998,
1997 and 1996, respectively.
Net Income (Loss) Per Common Share
Basic earnings per share data was computed based on the weighted average number
of common shares outstanding. Diluted earnings per share data was computed based
on the weighted average number of shares of common stock outstanding, adjusted
for the dilutive effect of stock options, warrants, preferred stock and the
dilutive effect of the minimum share price guarantee on the 1,040,039 shares of
common stock issued in connection with the acquisition of the Young Automotive
Group in 1998 (see Note 5).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
----- ----- ----
<S> <C> <C> <C>
Weighted average number of common shares outstanding 20,377 18,277 10,144
Effect of stock options, warrants and preferred stock 77 330 707
Effect of minimum share price guarantee 478 -- --
============== ============== ==============
Weighted average number of common shares outstanding,
including effect of dilutive securities 20,932 18,607 10,851
============== ============== ==============
</TABLE>
Reclassifications
In order to maintain consistency and comparability of financial information
between periods presented, certain reclassifications have been made to the
Company's December 31, 1997 financial statements to conform to the current year
presentation.
F-9
<PAGE>
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, Except Per Share Amounts)
2. CHANGE IN ACCOUNTING PRINCIPLE
In 1997, the Company changed its method of accounting for new vehicle inventory
from LIFO to the specific identification method. This change in accounting
principle has been applied by retroactively restating the Company's financial
statements for prior years. The effect of the change in accounting principle was
to increase income before extraordinary item and net income by $573 ($0.05 per
diluted share) in 1996.
3. UNUSUAL ITEMS
The Company has been informed by Trace International Holdings, Inc. ("Trace")
and its subsidiary Alpha Automotive, Inc. ("Alpha") that they are in the process
of evaluating their ability to meet their obligations with respect to the cost
of future repairs under the terms of approximately 51,000 warranty and extended
service contracts sold by United Auto Care, Inc. ("UAC") between January 1, 1997
and October 31, 1998. The repair obligations for these contracts had been
contractually assumed by Trace and Alpha. As a result of the uncertainty about
Trace and Alpha's ability to perform their contractual obligations, the Company
has entered into an insurance agreement with Virginia Surety Company, Inc.
("Virginia Surety") and certain of its affiliates. Virginia Surety is a
subsidiary of Aon Corporation, an insurance services holding company. Under the
terms of the agreement, affiliates of Virginia Surety have agreed to assume the
repair obligations on the 51,000 warranty and extended service contracts in
exchange for a fixed premium payable over time. The Company has recorded a
$12,550 pre-tax charge, which represents the estimated present value of those
premium payments. Such charge has been reflected in cost of goods sold in the
accompanying consolidated statement of operations. The Company has no further
financial obligations related to these contracts other than to make the
specified premium payments.
The Company has terminated the contract with Trace and Alpha with respect to
warranty or extended service contracts sold by UAC subsequent to October 31,
1998, and has entered into an agreement with affiliates of Virginia Surety
pursuant to which these affiliates will assume the repair obligations on all
warranty and extended service contracts sold and to be sold by UAC subsequent to
October 31, 1998 in exchange for specified insurance premiums. Trace and Alpha
will remain liable with respect to warranty or extended service contracts sold
prior to November 1, 1998. Future recoveries from Trace and Alpha will reduce
the cost to the Company of the Virginia Surety insurance agreement.
During the fourth quarter of 1997, the Company recorded a $31,660 pre-tax
charge. The charge included costs associated with (i) the divestiture of
automotive franchises, (ii) the closure of three stand-alone used vehicle
satellite locations in Arkansas and the disposal of related inventory, (iii) the
implementation of a new policy to more efficiently manage the Company's working
capital invested in retail inventory, (iv) excess real estate, (v) the write-off
of non-performing assets and (vi) certain corporate consulting agreements. Costs
associated with the pre-tax charge amounting to $9,757 and $20,903 have been
reflected in cost of goods sold and selling, general and administrative
expenses, respectively, in the consolidated statements of operations. In
addition, $1,000 has been reflected in discontinued operations.
F-10
<PAGE>
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, Except Per Share Amounts)
4. DISCONTINUED OPERATIONS
The Company made a decision to discontinue its auto finance business. As a
result, UAF will no longer engage in the purchase or sale of automotive loans;
however, it will continue to service its securitized portfolios in accordance
with contractual commitments. Consequently, UAF has been reported as a
discontinued operation in the accompanying consolidated statements of
operations. In addition, the remaining assets and liabilities of UAF have been
presented as a separate line item in non-current assets on the consolidated
balance sheets. The Company has restated its prior financial statements to
present the results of UAF as a discontinued operation for all periods
presented.
Summarized financial information of UAF follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
----- ----- ----
<S> <C> <C> <C>
Revenues $5,108 $2,615 $1,798
Loss from operations, net of taxes of $2,089, $1,531 and $596
in 1998, 1997 and 1996, respectively. (3,714) (2,204) (894)
Loss on disposal, net of taxes of $5,189 (9,226) -- --
Net loss (12,940) (2,204) (894)
Net loss per diluted common share (0.62) (0.12) (0.08)
AS OF DECEMBER 31,
1998 1997 1996
----- ----- ----
Cash and cash equivalents $3,615 $1,557 $1,138
Restricted cash 1,009 3,547 1,850
Finance assets, net 26,947 30,408 12,476
Other assets 967 1,687 1,959
Short-term debt, accrued liabilites and other liabilities 9,215 4,598 2,871
</TABLE>
The loss on disposal consists of (i) $5,888 relating to contractual commitments,
the write-off of certain fixed assets, severance and other administrative
expenses, (ii) $3,803 of asset impairment and losses incurred on the sale of
loans in private non-securitized transactions, (iii) $3,912 of estimated future
costs associated with servicing its securitized portfolio of retail automotive
loans and (iv) $812 relating to the write-off of deferred financing fees in
connection with the closure of UAF's warehouse lines.
5. BUSINESS COMBINATIONS
During 1998 and 1997, the Company completed a number of acquisitions. 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 the acquired dealerships only from the date of acquisition.
In January 1998, the Company acquired the Skelton Automotive Group, located in
Memphis Tennessee. Consideration for the purchase amounted to $16,500, including
$14,700 in cash and $1,800 of seller financed promissory notes.
F-11
<PAGE>
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, Except Per Share Amounts)
In February 1998, the Company acquired the Young Automotive Group, with
operations in Indiana, Illinois, North Carolina, South Carolina and Florida. The
aggregate consideration for the acquisition amounted to $84,000, consisting of
$50,000 in cash, 1,040,039 shares of UAG common stock and $7,000 of seller
financed promissory notes. The Company agreed to make a contingent payment in
cash or stock to the extent the shares issued in connection with this
transaction have an aggregate market value of less than $27,000 on the dates
they become freely tradable. In February 1999, the Company settled a portion of
this obligation with respect to 444,987 shares by issuing 1,156,689 additional
shares of common stock. The remaining 595,052 shares become freely tradable in
June 1999.
In February 1998, the Company acquired the Classic Automotive Group in New
Jersey. The aggregate consideration for the acquisition was $28,700, consisting
of $28,000 in cash and $700 of UAG common stock. The Company agreed to make a
contingent payment in cash or stock to the extent the shares issued in
connection with this transaction have an aggregate market value of less than
$759 on the date they become freely tradable. In March 1999, the Company settled
its obligation with respect to the share price guarantee by paying $306 in cash.
During the year ended December 31, 1998, the Company also acquired (i) Graceland
Dodge, located in Memphis Tennessee, (ii) Pioneer Ford, located in Phoenix
Arizona, (iii) a group of dealerships which operate Toyota, Lexus, Dodge and
Mazda franchises in San Diego California (the "San Diego dealerships") and (iv)
a 70% interest in Citrus Dodge, located in Dade City Florida. The aggregate
consideration for such acquisitions amounted to $50,859, consisting of $39,059
in cash, $8,400 of UAG common stock and $3,400 of seller financed promissory
notes. The Company has agreed to make contingent payments in cash to the extent
the shares issued in connection with these transactions have an aggregate market
value of less than $8,400 in July 1999.
In December 1997, the Company acquired the Triangle Group, located in Puerto
Rico, for $12,800 in cash. In addition, if the Triangle Group achieves certain
levels of annual pre-tax earnings during any of the next ten years, the Company
will be required to make additional payments. No payments were required based on
1998 earnings.
In May 1997, the Company acquired the Gene Reed Automotive Group, located in
North and South Carolina, for $34,000, consisting of $17,000 in cash, $4,000 of
promissory notes and $13,000 of UAG common stock.
In April 1997, the Company acquired the Staluppi Automotive Group (the "Staluppi
Group"), located in New York and Florida, for $49,614, consisting of $25,450 in
cash, $21,864 of promissory notes and $2,300 of UAG common stock. In addition,
if the Staluppi Group achieves certain levels of annual pre-tax earnings during
any of the next three years, the Company will be required to make additional
payments. In the Company's opinion, it is unlikely that any additional payments
will be required.
F-12
<PAGE>
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, Except Per Share Amounts)
In April 1997, the Company acquired Gary Hanna Nissan, Inc., located in Las
Vegas Nevada, for $13,740, consisting of $7,000 in cash, $1,240 of promissory
notes and $5,500 of UAG common stock.
In February 1997, the Company acquired Shannon Automotive Limited, located in
the Houston area, for $7,000 in cash and 335,329 shares of UAG common stock.
During the year ended December 31, 1997, the Company also acquired (i) Covington
Pike Dodge, located in Memphis Tennessee, (ii) Central Ford, located in Little
Rock Arkansas, (iii) Shreveport Dodge, located in Shreveport Louisiana, (iv)
Stone Mountain Chyrsler-Plymouth Jeep-Eagle, located in Stone Mountain Georgia
and (v) the Lance Landers dealerships, located in Benton Arkansas. The Company
paid $15,500 in cash in consideration for such acquisitions.
In addition, the Company has agreed to make a contingent payment in cash to the
extent that 375,404 shares of common stock issued in connection with an
acquisition that took place prior to 1997 have an aggregate market value of less
than $9,400 in December 1999.
Pro Forma Results of Operations
The following unaudited consolidated pro forma results of operations of the
Company for the years ended December 31, 1998 and 1997 give effect to (i)
acquisitions consummated during 1998 and 1997, (ii) the divestiture of certain
dealerships during 1998, (iii) the discontinuation of the Company's auto finance
operations and (iv) the offering of the Company's Senior Subordinated Notes due
2007 as if they had occurred on January 1, 1997.
<TABLE>
<CAPTION>
YEAR ENDED
1998 1997
----- ----
<S> <C> <C>
Revenues $3,520,594 $3,552,256
Income (loss) from continuing operations before minority interests and income
tax provision 27,371 (579)
Net income (loss) 14,792 (485)
Net income (loss) per diluted common share 0.71 (0.02)
</TABLE>
6. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
------ ---------
<S> <C> <C>
New vehicles $284,343 $232,804
Used vehicles 99,411 74,285
Parts, accessories and other 26,541 17,241
----------------------------
Total Inventories $410,295 $324,330
============================
</TABLE>
F-13
<PAGE>
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, Except Per Share Amounts)
7. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
---------- ----------
<S> <C> <C>
Furniture, fixtures and equipment $30,658 $18,202
Equipment under capital lease 7,191 4,280
Leasehold improvements 28,048 21,546
-------------------------
Total 65,897 44,028
Less: Accumulated depreciation and amortization 14,414 6,440
-------------------------
Property and equipment, net $51,483 $37,588
=========================
</TABLE>
Depreciation and amortization expense for the years ended December 31, 1998,
1997 and 1996 was $4,904, $2,800 and $1,888, respectively. Accumulated
amortization at December 31, 1998 and 1997 on equipment under capital lease,
included in accumulated depreciation and amortization above, amounted to $1,614
and $830, respectively.
8. FLOOR PLAN NOTES PAYABLE
The Company's automobile dealerships have "floor plan" agreements with several
finance companies to finance the purchase of their automobile inventory. Floor
plan notes payable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
---------- -----------
<S> <C> <C>
Chrysler Financial Corporation, interest - 7.55% and 8.26% at December 31, 1998
and 1997, respectively. $216,541 $221,971
World Omni Corp., interest - 7.55% and 8.26% at December 31, 1998 and 1997,
respectively. 57,038 91,388
BancOne, interest - 7.25% at December 31, 1998. 34,006 --
Ford Motor Credit and Primus, interest - 7.55% at December 31, 1998. 39,237 --
Other, interest - between 7.25% and 7.53% at December 31, 1998 and between 7.87%
and 8.97% at December 31, 1997. 50,412 20,913
---------------------------
Total floor plan notes payable $397,234 $334,272
===========================
</TABLE>
The floor plan agreements grant a security interest in substantially all assets
of the dealerships and require the repayment of debt after a vehicle's sale.
Interest rates on the floor plan agreements are variable and increase or
decrease based on movements in prime or LIBOR borrowing rates. Floor plan
interest expense for the years ended December 31, 1998, 1997 and 1996 was
$28,719, $19,296 and $12,578, respectively. The weighted average interest rate
on floor plan borrowings was 7.6%, 8.2% and 8.3% for the years ended December
31, 1998, 1997 and 1996, respectively.
F-14
<PAGE>
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, Except Per Share Amounts)
9. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31,
1998 1997
----------- ----------
<S> <C> <C>
Series A and B Senior Subordinated Notes due 2007, less net unamortized discount of
$1,572 and $1,744 at December 31, 1998 and 1997, respectively. $198,428 $198,256
Credit Agreement, weighted average interest - 9.24% at December 31, 1998. 68,400 --
Seller financed promissory notes payable through 2002, weighted average interest - 7.53%
and 7.22% at December 31, 1998 and 1997, respectively. 28,510 36,096
Term loans, weighted average interest - 8.24% and 8.26% at December 31, 1998 and 1997,
respectively. 5,776 3,266
Capitalized lease obligations 7,908 3,867
Other 3,999 7,046
--------------------------
Total long-term debt 313,021 248,531
Less: Current portion 24,756 9,981
--------------------------
Net long-term debt $288,265 $238,550
==========================
</TABLE>
Scheduled maturities of long-term debt for each of the next five years and
thereafter are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $24,756
2000 49,007
2001 34,280
2002 2,738
2003 1,041
2004 and thereafter 201,199
----------------
Total long-term debt $313,021
================
</TABLE>
In February 1998, the Company entered into a credit agreement with a group of
banks which provides for up to $75,000 in term loans, revolving loans and
letters of credit, to be used principally for acquisitions (as amended, the
"Credit Agreement"). The Credit Agreement bears interest at LIBOR plus 3.75% and
matures in February 2001. Pursuant to the terms of the Credit Agreement, the
Company is required to pay certain fees relating to outstanding letters of
credit and unused commitments. Outstanding borrowings under the Credit Agreement
as of December 31, 1998 amounted to $68,400. In addition, a $1,600 letter of
credit was outstanding as of December 31, 1998.
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, pay dividends, create liens
on assets, make investments or acquisitions and engage in mergers or
consolidations. In addition, the Company is required to comply with specified
ratios and tests, including cash interest expense coverage, debt service
coverage, debt to earnings ratios and a minimum net worth covenant. The Credit
Agreement also contains typical events of defaults including change of control,
material adverse change and non-payment of obligations. The Company was in
compliance with the financial covenants in its Credit Agreement at year end.
Nevertheless, the Company anticipates that it may not meet the more stringent
first quarter 1999 net worth covenants contained therein primarily as a result
of the charges described in Note 3. The Company has commenced discussions with
its lenders to amend or waive such covenants if necessary; however, there can
be no assurance that if such amendments or waivers are necessary, they will be
obtained. The Credit Agreement replaced the Company's previous credit facility,
which was terminated upon the effective date of the Credit Agreement. The
Company incurred an extraordinary charge of $1,235 ($0.06 per diluted share),
net of income taxes of $859, resulting from the write-off of unamortized
deferred financing costs relating to the Company's previous credit facility.
F-15
<PAGE>
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, Except Per Share Amounts)
On July 23, 1997, the Company completed the sale of $150,000 aggregate principal
amount of 11% Senior Subordinated Notes due 2007 (the "Series A Notes"). On
September 16, 1997, the Company completed the sale of an additional $50,000
aggregate principal amount of 11% Senior Subordinated Notes due 2007, Series B
(together with the Series A Notes the "Notes"). The sale of the Notes were
exempt from registration under the Securities Act of 1933 pursuant to Rule 144A
thereunder. Proceeds from the offering of the Notes after issue discount,
discount to initial purchasers and transaction costs amounted to approximately
$189,469.
The Notes are fully and unconditionally guaranteed on a joint and several basis
by the Company's auto dealership subsidiaries (the "Note Guarantors"). Separate
financial information of the Note Guarantors has been omitted because (i) the
Company is a holding company with no independent operations and (ii) financial
information for the Note Guarantors is presented on the face of the Company's
consolidated financial statements.
During 1996, the Company redeemed certain indebtedness with a portion of the
proceeds from the IPO. The redemption of such indebtedness resulted in an
extraordinary pre-tax loss of $7,672. The redeemed indebtedness contained
detachable warrants that granted holders the option to purchase UAG Common Stock
at $0.01 per share. Upon the consummation of the IPO, 1,109,491 shares of UAG
Common Stock were issued in a cash-less exchange for all of the then outstanding
warrants. The settlement of the warrants resulted in a $2,769 increase to the
Company's stockholders' equity.
10. OPERATING LEASE OBLIGATIONS
The Company leases its dealership facilities and corporate office under
non-cancelable operating lease agreements with expiration dates through 2036,
including all option periods available to the Company. Minimum future rental
payments required under non-cancelable operating leases in effect as of December
31, 1998 follow:
<TABLE>
<CAPTION>
<S> <C>
1999 $30,477
2000 30,117
2001 29,606
2002 27,895
2003 26,802
2004 and thereafter 369,788
-------------
$514,685
=============
</TABLE>
Rent expense for the years ended December 31, 1998, 1997, and 1996 amounted to
$26,917, $17,674 and $8,729, respectively. A number of the dealership leases are
with former owners who continue to operate the dealerships as employees of the
Company. Of the total rental payments, $11,140, $10,911 and $5,240,
respectively, were made to related parties during 1998, 1997, and 1996,
respectively.
F-16
<PAGE>
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, Except Per Share Amounts)
11. RELATED PARTY TRANSACTIONS
As noted above, the Company is the tenant under a number of non-cancelable lease
agreements with employees of the Company, all of whom are former owners of
dealerships purchased by the Company. The Company believes all such leases are
on terms no less favorable to the Company than would be obtained through
arm's-length negotiations with unaffiliated third parties.
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.
During 1998, management fee income amounting to $4,800 has been included in
other income (expense), net in the accompanying consolidated statements of
operations.
As discussed in Note 3, the Company was party to an agreement whereby the
Company's exposures with respect to the majority of the extended service
contracts sold by UAC during the period from January 1, 1997 through October 31,
1998 were assumed by Trace and Alpha in exchange for certain fees. During the
period covered by the agreement, the Company remitted approximately $7,729 to
Alpha. Such remittances reflect approximately $10,111 in fees for the assumption
of obligations with respect to the 51,000 warranty and extended service
contracts, offset by approximately $2,383 of claims payments relating such
contracts. As noted, the contract with Trace and Alpha was terminated effective
October 31, 1998.
From time to time, the Company has paid and/or received fees from Trace and its
affiliates for services rendered in the normal course of business. These
transactions reflect the providers' cost or an amount mutually agreed upon by
both parties. It is the Company's belief that the payments relating to these
transactions are on terms at least as favorable as those which could be obtained
from an unrelated third party. Aggregate (income) expense relating to such
transactions of $260, $(2,118) and $225 for the years ending December 31, 1998,
1997 and 1996, respectively, has been reflected in selling, general and
administrative expenses in the accompanying financial statements. As of December
31, 1998 and 1997, the Company owes $200 and $616, respectively, for such
services.
During 1996, the Company recognized $2,580 of income relating to interest on
advances made to minority or former minority shareholders and certain of their
related entities for certain business acquisitions and interest on working
capital advances to dealerships owned by those shareholders in which the Company
had no ownership. Such income has been reflected in other income (expense), net
in the accompanying financial statements.
F-17
<PAGE>
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, Except Per Share Amounts)
12. STOCK COMPENSATION PLANS
During 1996, the Company's Board of Directors and stockholders adopted a Stock
Option Plan. Under the Stock Option Plan, all full-time employees of the Company
and its subsidiaries and affiliates are eligible to participate. During 1998,
the Company granted options to purchase 492,390 shares at the fair market value
of the Company's stock on the date of the grant. Options granted under the Stock
Option Plan have a ten year life and typically vest on a pro-rata basis over
five years. As of December 31, 1998, the aggregate number of shares of Common
Stock for which stock options may be granted under the Stock Option Plan may not
exceed 2,000,838. As of December 31, 1998, 488,023 shares of Common Stock were
available for the grant of options under the Stock Option Plan. Presented below
is a summary of the status of stock options held by eligible employees during
1998 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
--------------------------- -------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
STOCK OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
- - ----------------------------- -------------- ------------- ------------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year 1,078,975 $18.45 1,026,500 $13.90 127,200 $12.50
Granted 492,390 17.67 594,800 18.98 945,800 14.22
Exercised 186,600 11.50 503,000 10.34 46,500 10.00
Forfeited 157,375 25.82 39,325 11.41 -- --
============== ============= ============= ============= ============ ==============
Options outstanding at end
of year 1,227,390 $18.06 1,078,975 $18.45 1,026,500 $13.90
============== ============= ============= ============= ============ ==============
</TABLE>
The following table summarizes the status of UAG's employee stock options
outstanding and exercisable at January 1, 1999:
<TABLE>
<CAPTION>
STOCK OPTIONS
STOCK OPTIONS OUTSTANDING EXERCISABLE
---------------------------------- -------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
SHARES LIFE PRICE SHARES PRICE
- - ------------------ ---------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
150,000 6.7 $30.00 125,000 $30.00
169,800 7.8 10.00 70,656 10.00
285,700 8.6 17.00 75,700 17.00
451,000 9.3 17.50 -- --
170,890 8.8 20.17 25,900 20.38
- - ------------------ ----------------
1,227,390 297,256
================== ================
</TABLE>
The Company has adopted the disclosure only provisions of Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 123, Accounting
for Stock Based Compensation ("SFAS 123"). Had the Company elected to recognize
compensation expense for stock options based on the fair value at the grant
dates of awards, net income and earnings per share would have been as follows:
F-18
<PAGE>
<TABLE>
<CAPTION>
YEAR EBDED DECENBER 31,
1998 1997 1996
----- ----- ----
<S> <C> <C> <C>
Income (loss) from continuing operations $12,253 $ (8,556) 7,988
Income (loss) from continuing operations
per diluted share 0.59 (0.47) 0.74
Net income (loss) (1,922) (10,760) 2,107
Net income (loss) per diluted share (0.09) (0.59) 0.19
</TABLE>
The weighted average fair value of the Company's stock options was calculated
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998 and 1997: no dividend yield; expected
volatility of 30%; a risk-free interest rate of 7% and expected lives of five
years. The weighted average fair value of options granted during the years ended
December 31, 1998, 1997 and 1996 is $6.99, $4.74 and 4.23 per share,
respectively.
13. STOCKHOLDERS' EQUITY
At December 31, 1998 and 1997, the following classes of stock are authorized,
issued or outstanding (share amounts in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
Preferred Stock, $0.0001 par value; 100 shares authorized, none issued and $- $-
outstanding
Voting Common Stock, $0.0001 par value, 40,000 shares authorized; 20,133 shares
issued, including 443 treasury shares, at December 31, 1998; 18,736 shares issued,
including 443 treasury shares, at December 31, 1997. 2 2
Non-voting Common Stock, $0.0001 par value, 1,125 shares authorized; 605 issued and
outstanding at December 31, 1996 and 1995. - -
Class C Common Stock, $0.0001 par value, 20,000 shares authorized; none issued and
outstanding - -
Additional paid-in-capital 352,591 310,373
Accumulated deficit (10,943) (9,818)
--------------------------
Total stockholders' equity $341,650 $300,557
==========================
</TABLE>
14. INCOME TAXES
The income tax (provision) benefit relating to income (loss) from continuing
operations consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
------------ ------------ --------------
<S> <C> <C> <C>
Current:
Federal $(278) $-- $(187)
State and local (3,915) (1,932) (997)
------------------------------------------
Total current (4,193) (1,932) (1,184)
------------------------------------------
Deferred:
Federal (4,733) 3,149 (6,018)
State and local (2,628) 2,763 --
------------------------------------------
Total deferred (7,361) 5,912 (6,018)
------------------------------------------
Income tax (provision) benefit relating to continuing
operations before extraordinary item (11,554) 3,980 (7,202)
Income tax benefit from extraordinary item 859 -- 2,685
------------------------------------------
Income tax (provision) benefit relating to continuing
operations $(10,695) $3,980 $(4,517)
==========================================
</TABLE>
F-19
<PAGE>
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, Except Per Share Amounts)
The income tax (provision) benefit relating to income (loss) from continuing
operations varied from the U.S. federal statutory income tax rate due to the
following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
----------- ------------ -----------
<S> <C> <C> <C>
Income tax (provision) benefit relating to continuing operations at
Federal statutory rate of 35%. $(8,818) $4,122 $(5,663)
State and local income taxes, net of federal benefit (1,994) 496 (982)
Impact of change in effective state rate on temporary differences, net
of federal benefit (1,641) - -
Valuation allowance 1,700 - -
Non-deductible amortization of goodwill (1,412) (750) -
Revision to estimated liabilities 903 - -
Tax on income of minority interests - - (570)
Other (292) 112 13
-------------------------------------
Income tax (provision) benefit relating to continuing operations
before extraordinary item $(11,554) $3,980 $(7,202)
=====================================
</TABLE>
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). Under
SFAS 109, deferred income taxes reflect the estimated tax effect of temporary
differences between assets and liabilities for financial accounting purposes and
those amounts as measured by tax laws and regulations. The components of
deferred tax assets and liabilities at December 31, 1998 and 1997 were as
follows:
<TABLE>
<CAPTION>
1998 1997
DEFERRED TAX ASSETS ------------ ----------
<S> <C> <C>
Net operating loss carryforwards $4,387 $7,751
Accrued liabilities 5,940 4,988
Partnership investments 866 2,038
Capital loss carryforwards 3,990 3,190
Sale of finance receivables and other items 4,527 --
Other 2,423 1,262
-------------------------
Total deferred tax assets 22,133 19,229
Valuation allowance (1,490) (3,190)
-------------------------
Net deferred tax assets $20,643 $16,039
-------------------------
DEFERRED TAX LIABILITIES
Depreciation and amortization $(10,236) $(3,848)
Sale of finance receivables and other items -- (861)
-------------------------
Total deferred tax liabilities (10,236) (4,709)
-------------------------
Net deferred tax assets (liabilities) $10,407 $11,330
=========================
</TABLE>
At December 31, 1998, the Company has $6,974 of federal net operating loss
carryforwards that expire through 2012. In addition, at December 31, 1998, the
Company also has $23,825 of state net operating loss carryforwards that expire
at various dates through 2013.
F-20
<PAGE>
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, Except Per Share Amounts)
15. SUPPLEMENTAL CASH FLOW INFORMATION
The following table presents supplementary cash flow information:
<TABLE>
<CAPTION>
1998 1997 1996
--------- ----------- -----------
<S> <C> <C> <C>
Cash paid interest $26,683 $8,016 $9,912
Cash paid income taxes 3,234 3,321 420
Non-cash financing and investing activities:
Dealership acquisition costs financed by issuance of stock 36,100 28,150 --
Dealership acquisition cost financed by long-term debt 12,200 27,104 4,100
Stock issuance costs amortized against proceeds from issuance of -- -- 775
stock
Minority interests acquired by issuance of stock -- -- 34,015
</TABLE>
16. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
STATEMENTS OF OPERATIONS DATA (1) (2): QUARTER (3) QUARTER QUARTER QUARTER (4)
----------- ------- ------- -----------
<S> <C> <C> <C> <C>
1998 (5)
Total revenues $711,709 $896,419 $897,006 $838,013
Gross profit 89,224 112,562 122,058 103,055
Income (loss) from continuing operations 2,291 8,027 8,060 (5,000)
Net income (loss) 1,064 8,193 8,227 (18,281)
Income (loss) from continuing operations per
diluted common share 0.12 0.39 0.39 (0.22)
Net income (loss) per diluted common share 0.05 0.40 0.40 (0.81)
</TABLE>
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
STATEMENTS OF OPERATIONS DATA (1) (2): QUARTER QUARTER QUARTER QUARTER (4)
------- ------- ------- -----------
<S> <C> <C> <C> <C>
1997 (6)
Total revenues $389,288 $528,374 $627,609 $547,322
Gross profit 47,612 68,650 80,641 60,159
Income (loss) from continuing operations 3,374 7,660 6,563 (25,533)
Net income (loss) 3,317 7,599 5,870 (26,926)
Income (loss) from continuing operations per
diluted common share 0.19 0.42 0.34 (1.34)
Net income (loss) per diluted common share 0.19 0.42 0.31 (1.41)
</TABLE>
(1) As discussed in Note 2, the Company changed its method of accounting for
new vehicle inventory from LIFO to the specific identification method.
(2) As discussed in Note 4, the results of UAF have been recorded as
discontinued operations.
(3) As discussed in Note 9, the Company recorded an extraordinary loss of
$1,235 during the first quarter of 1998.
(4) As discussed in Note 3, the Company recorded $12.7 million and
$31.7 million charges during the fourth quarters of 1998 and 1997,
respectively.
(5) Includes the results of the Skelton Group, the Young Group, the Classic
Group, Graceland Dodge, Pioneer Ford, the San Diego dealerships and
Citrus Dodge from their respective dates of acquisition.
(6) Includes the results of Crown Automotive, Hanna Nissan, the Staluppi
Automotive Group, the Gene Reed Automotive Group, the Lance Landers
dealerships, Stone Mountain Jeep Eagle, Shreveport Dodge, Central Ford,
Covington Pike Dodge and the Triangle Group from their respective dates
of acquisition.
The net income (loss) per common share amounts are calculated independently for
each of the quarters presented. The sum of the quarters may not equal the full
year net income (loss) per common share amounts.
F-21
<PAGE>
Exhibit 10.1.8.1
AMENDMENT ONE TO THE
UNITED AUTO GROUP, INC.
STOCK OPTION PLAN
Effective April 29, 1998, the Board of Directors of the United Auto
Group, Inc. amended the United Auto Group, Inc. Stock Option Plan as follows:
1. The reference to "1,500,838" in the second sentence of Article III
shall be replaced with a reference to "2,000,838"
2. The following shall be added to the end of the first paragraph of
Article III:
The aggregate number of shares of common Stock with respect
to which options may be granted during any calendar year to
any Eligible Employee is 500,000.
3. The first paragraph of Article X shall be deleted and the
following shall be inserted in its place:
The Aggregate and maximum number of shares of Common Stock
which may be purchased or acquired pursuant to Options
granted hereunder, the number of shares of Common Stock to
which each Option relates, the Exercise Price in respect of
such option, and the maximum number of shares which may be
granted to each Eligible Employee during any calendar year
shall be appropriately adjusted for any increase or decrease
in the number of outstanding shares of Common stock
resulting from a stock split or other subdivision or
consolidation of shares of Common Stock or for other capital
distributions or other increases or decreases in the
outstanding shares of Common Stock effected without receipt
of consideration in any form permitted under Delaware Law.
Any adjustment shall be conclusively determined by the
Committee.
<PAGE>
Exhibit 21.1
UNITED AUTO GROUP, INC.
Subsidiaries as of December 31, 1998
<TABLE>
<CAPTION>
NAME OF COMPANY STATE OF INCORPORATION
- - -------------- ----------------------
<S> <C>
Carolinas
Gene Reed Chevrolet, Inc. SC
d/b/a Gene Reed Chevrolet
Michael Chevrolet-Oldsmobile, Inc. SC
d/b/a Michael Chevrolet Oldsmobile
Reed-Lallier Chevrolet, Inc. NC
d/b/a Reed-Lallier Chevrolet
UAG Carolina, Inc. DE
DiFeo-Danbury
Danbury Auto Partnership NJ
d/b/a Fair Honda
Danbury Auto Partnership NJ
d/b/a UnitedAuto Mart
Danbury Chrysler Plymouth Partnership NJ
d/b/a Fair Dodge
DiFeo-Jersey City
DiFeo Chevrolet-Geo Partnership NJ
DiFeo Hyundai Partnership NJ
DiFeo Nissan Partnership NJ
d/b/a DiFeo Nissan
DiFeo Partnership HCT, Inc. DE
DiFeo Partnership RCM, Inc. DE
Page 1
<PAGE>
NAME OF COMPANY STATE OF INCORPORATION
- - -------------- ----------------------
DiFeo Partnership SCT, Inc. DE
DiFeo Partnership X, Inc. DE
DiFeo Partnership, Inc. DE
DiFeo Tenafly Partnership NJ
d/b/a DiFeo BMW
Hudson Motors Partnership NJ
d/b/a Hudson Toyota
UAG Hudson, Inc. NJ
J & F Oldsmobile Partnership NJ
Somerset Motors Partnership NJ
d/b/a DiFeo Lexus
Somerset Motors, Inc. NJ
UAG Northeast (NY), Inc. DE
UAG Northeast, Inc. DE
UAG Northeast Body Shop, Inc. DE
DiFeo-Nyack
County Auto Group Partnership NJ
d/b/a Rockland Toyota
DiFeo Chrysler Plymouth Jeep Eagle Partnership NJ
d/b/a DiFeo Chrysler Plymouth/ Jeep Eagle/ Hyundai
DiFeo Partnership RCT, Inc. DE
Rockland Motors Partnership NJ
d/b/a Rockland Mitsubishi
DiFeo-Toms River NJ
DiFeo Partnership IX, Inc. DE
DiFeo Partnership VIII, Inc. DE
Page 2
<PAGE>
NAME OF COMPANY STATE OF INCORPORATION
- - -------------- ----------------------
OCM Partnership NJ
d/b/a Gateway Mitsubishi
OCT Partnership NJ
d/b/a Gateway Toyota
Georgia
UAG Duluth, Inc. TX
d/b/a Atlanta Toyota
Peachtree Nissan, Inc. GA
d/b/a Peachtree Nissan
UAG Atlanta II, Inc. DE
UAG Atlanta III, Inc. DE
UAG Atlanta IV Motors, Inc. GA
d/b/a United BMW
UAG Atlanta IV, Inc. DE
UAG Atlanta V, Inc. DE
UAG Atlanta VI, Inc. DE
UAG Atlanta, Inc. DE
United Jeep Chrysler Plymouth of Stone Mountain, Inc. GA
d/b/a United Jeep Chrysler Plymouth of Stone Mountain
United Nissan, Inc. (GA) GA
d/b/a United Nissan
Arkansas
BPT Holdings, Inc. AR
Central Ford Center, Inc. AR
d/b/a Landers Ford
Landers Auto Sales, Inc. AR
d/b/a Landers Isuzu
Page 3
<PAGE>
NAME OF COMPANY STATE OF INCORPORATION
- - -------------- ----------------------
Landers Auto Sales, Inc. AR
d/b/a Landers Jeep/Eagle/Chrysler Plymouth/Dodge
Landers Buick-Pontiac, Inc. AR
d/b/a Landers Buick-Pontiac/ GMC Truck
Landers United Auto Group No. 2, Inc. AR
d/b/a Landers Used Cars-North
Landers United Auto Group No. 3, Inc. AR
Landers United Auto Group No. 4, Inc. AR
Landers United Auto Group No. 5, Inc. AR
Landers United Auto Group, Inc. AR
United Landers, Inc. DE
Louisiana
UnitedAuto Dodge of Shreveport, Inc. DE
d/b/a UnitedAuto Dodge of Shreveport
Nevada
UAG Nevada, Inc. DE
United Nissan, Inc. (NV) NV
Puerto Rico
HVP Motor Corporation PR
d/b/a Triangle del Caribe
PVH Motor Corporation PR
d/b/a Triangle Chrysler de Infanteria
S.H.V.P. Motor Corp. PR
d/b/a Triangle el Comandante
UAG-Caribbean, Inc. DE
Page 4
<PAGE>
NAME OF COMPANY STATE OF INCORPORATION
- - -------------- ----------------------
VPH Motor Corporation PR
d/b/a Triangle del Oeste
Sun-Arizona
6725 Agent Partnership AZ
SA Automotive, Ltd. AZ
d/b/a Scottsdale Acura
Scottsdale Audi, Ltd. AZ
Scottsdale Management Group, Ltd. AZ
SK Motors, Ltd. AZ
d/b/a Scottsdale Porsche/Audi/Rolls-Royce/Bentley
SL Automotive, Ltd. AZ
d/b/a Scottsdale Lexus
SPA Automotive, Ltd. AZ
d/b/a Land Rover Scottsdale
Sun Motors, Ltd. AZ
d/b/a Camelback BMW
LRP, Ltd. AZ
d/b/a Land Rover Phoenix
UAG West, Inc. DE
Pioneer Ford Sales Inc. AZ
d/b/a Pioneer Ford
Tennessee
UAG Tennessee, Inc. DE
United Nissan, Inc. (TN) TN
d/b/a United Nissan
Covington Pike Dodge, Inc. DE
d/b/a Covington Pike Dodge
UAG Memphis, Inc. DE
Page 5
<PAGE>
NAME OF COMPANY STATE OF INCORPORATION
- - -------------- ----------------------
UAG Memphis II, Inc. DE
d/b/a Covington Pike Toyota
UAG Memphis III, Inc. DE
d/b/a Covington Pike Hyundai
UAG Memphis IV, Inc. DE
d/b/a Covington Pike Mazda
The New Graceland Dodge, Inc. TN
d/b/a Graceland Dodge
Texas
Shannon Automotive, Ltd. TX
d/b/a Crown Jeep Eagle/Chrysler Plymouth
Shannon Automotive, Ltd. TX
d/b/a Crown Dodge
UAG Texas II, Inc. DE
UAG Texas, Inc. DE
UAG East-North
UAG East, Inc. DE
Westbury Nissan Ltd. NY
d/b/a Westbury Nissan Superstore
Westbury Superstore, Ltd. NY
d/b/a Westbury Toyota
Cherry Hill Classic Cars, Inc. NJ
d/b/a Classic Saab
Classic Auto Group, Inc. NJ
d/b/a Classic BMW and Classic Chevrolet/Buick of
Turnersville
Classic Motor Sales, LLC DE
d/b/a Classic Honda
Page 6
<PAGE>
NAME OF COMPANY STATE OF INCORPORATION
- - -------------- ----------------------
Classic Chevrolet, Inc. NJ
Classic Chevrolet
UAG East-South
Auto Mall Payroll Services, Inc. FL
Auto Mall Storage, Inc. FL
Florida Chrysler Plymouth Jeep Eagle, Inc. FL
d/b/a Florida Chrysler Plymouth/Jeep Eagle
Northlake Auto Finish, Inc. FL
Palm Auto Plaza, Inc. FL
d/b/a Palm Beach Toyota
West Palm Automall, Inc. FL
West Palm Infiniti, Inc. FL
d/b/a West Palm Infiniti
West Palm Nissan, Inc. FL
d/b/a West Palm Nissan
UAG Citrus, Inc. DE
UAG Citrus Motors, LLC DE
California
Kearny Mesa Toyota, Inc. CA
Kearny Mesa Toyota
Tri-City Leasing, Inc. CA
Kearny Mesa Dodge/ Mazda
Relentless Pursuit Enterprises, Inc. CA
Lexus Kearny Mesa
United AutoCare
United AutoCare Products, Inc. DE
United AutoCare, Inc. DE
Page 7
<PAGE>
NAME OF COMPANY STATE OF INCORPORATION
- - -------------- ----------------------
UnitedAuto Care (Bermuda), Ltd. BERMUDA
UnitedAuto Finance
Atlantic Auto Funding Corporation DE
Atlantic Auto Second Funding Corporation DE
Atlantic Auto Third Funding Corporation DE
UnitedAuto Finance Inc. DE
Other
UAG Capital Management, Inc. GA
UAG Finance Company, Inc. DE
UnitedAuto Enterprises, Inc. DE
D. Young Chevrolet, LLC DE
d/b/a Dan Young Chevrolet and Dan Young Isuzu
Dan Young Motors, LLC DE
d/b/a Dan Young Honda
Dan Young Tipton, LLC DE
Dan Young GM Center
UAG Century Motors, Inc. DE
d/b/a Century Chevrolet
UAG Paramount Motors, Inc. DE
d/b/a Paramount Chevrolet, Geo, Oldsmobile
Young Management Group, Inc. IN
d/b/a Heritage Motor Car Company
</TABLE>
Page 8
<PAGE>
Exhibit 23.1
Consent Of Independent Accountants
We consent to the incorporation by reference in the registration statements of
United Auto Group, Inc. on Form S-3 (Registration No. 333-39997) and Form S-8
(Registration Nos. 333-14971 and 333-26219) of our report dated March 29, 1999
on our audits of the consolidated financial statements as of December 31, 1998
and 1997, and for the years ended December 31, 1998, 1997, and 1996, which
report is included in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
Princeton, New Jersey
March 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 38,538
<SECURITIES> 0
<RECEIVABLES> 126,320
<ALLOWANCES> (860)
<INVENTORY> 482,049
<CURRENT-ASSETS> 590,713
<PP&E> 65,897
<DEPRECIATION> (14,414)
<TOTAL-ASSETS> 1,184,194
<CURRENT-LIABILITIES> 505,529
<BONDS> 288,265
0
0
<COMMON> 2
<OTHER-SE> 341,648
<TOTAL-LIABILITY-AND-EQUITY> 1,184,194
<SALES> 3,343,147
<TOTAL-REVENUES> 3,343,147
<CGS> 2,916,248
<TOTAL-COSTS> 3,291,291
<OTHER-EXPENSES> 4,800
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,462
<INCOME-PRETAX> 25,194
<INCOME-TAX> (11,554)
<INCOME-CONTINUING> 13,378
<DISCONTINUED> (12,940)
<EXTRAORDINARY> (1,235)
<CHANGES> 0
<NET-INCOME> (797)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
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<S> <C> <C>
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<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> 1,141,575 971,064
<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> 1,141,575 971,064
<SALES> 2,505,134 2,092,593
<TOTAL-REVENUES> 2,505,134 2,092,593
<CGS> 2,181,290 1,835,531
<TOTAL-COSTS> 2,453,973 2,090,597
<OTHER-EXPENSES> 3,627 297
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 23,381 14,071
<INCOME-PRETAX> 31,407 (11,778)
<INCOME-TAX> (12,903) 3,980
<INCOME-CONTINUING> 18,378 (7,936)
<DISCONTINUED> 341 (2,204)
<EXTRAORDINARY> (1,235) 0
<CHANGES> 0 0
<NET-INCOME> 17,484 (10,140)
<EPS-PRIMARY> 0.86 (0.56)
<EPS-DILUTED> 0.86 (0.56)
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<MULTIPLIER> 1,000
<S> <C> <C>
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<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> JUN-30-1998 DEC-31-1997
<CASH> 36,428 94,435
<SECURITIES> 0 0
<RECEIVABLES> 123,949 93,488
<ALLOWANCES> (553) (887)
<INVENTORY> 399,443 324,330
<CURRENT-ASSETS> 1,117,354 531,779
<PP&E> 55,481 44,028
<DEPRECIATION> (10,638) (6,440)
<TOTAL-ASSETS> 1,166,997 971,064
<CURRENT-LIABILITIES> 482,798 414,588
<BONDS> 301,403 238,550
0 0
0 0
<COMMON> 2 2
<OTHER-SE> 342,217 300,555
<TOTAL-LIABILITY-AND-EQUITY> 1,166,997 971,064
<SALES> 1,608,128 2,092,593
<TOTAL-REVENUES> 1,608,128 2,092,593
<CGS> 1,406,342 1,835,531
<TOTAL-COSTS> 1,577,349 2,090,597
<OTHER-EXPENSES> 1,848 297
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 14,974 14,071
<INCOME-PRETAX> 17,653 (11,778)
<INCOME-TAX> (7,251) 3,980
<INCOME-CONTINUING> 10,318 (7,936)
<DISCONTINUED> 174 (2,204)
<EXTRAORDINARY> (1,235) 0
<CHANGES> 0 0
<NET-INCOME> 9,257 (10,140)
<EPS-PRIMARY> 0.46 (0.56)
<EPS-DILUTED> 0.46 (0.56)
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<MULTIPLIER> 1,000
<S> <C> <C>
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<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> MAR-31-1998 DEC-31-1997
<CASH> 20,524 94,435
<SECURITIES> 0 0
<RECEIVABLES> 117,035 93,488
<ALLOWANCES> (1,506) (887)
<INVENTORY> 453,264 324,330
<CURRENT-ASSETS> 610,822 531,779
<PP&E> 50,698 44,028
<DEPRECIATION> (7,257) (6,440)
<TOTAL-ASSETS> 1,167,635 971,064
<CURRENT-LIABILITIES> 538,430 414,588
<BONDS> 273,797 238,550
0 0
0 0
<COMMON> 2 2
<OTHER-SE> 333,262 300,555
<TOTAL-LIABILITY-AND-EQUITY> 1,167,635 971,064
<SALES> 711,709 2,092,593
<TOTAL-REVENUES> 711,709 2,092,593
<CGS> 622,485 1,835,531
<TOTAL-COSTS> 701,026 2,090,597
<OTHER-EXPENSES> 353 297
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (7,094) 14,071
<INCOME-PRETAX> 3,942 (11,778)
<INCOME-TAX> (1,617) 3,980
<INCOME-CONTINUING> 2,291 (7,936)
<DISCONTINUED> 8 (2,204)
<EXTRAORDINARY> (1,235) 0
<CHANGES> 0 0
<NET-INCOME> 1,064 (10,140)
<EPS-PRIMARY> 0.05 (0.56)
<EPS-DILUTED> 0.05 (0.56)
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<BONDS> 238,550
0
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<COMMON> 2
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<TOTAL-LIABILITY-AND-EQUITY> 971,064
<SALES> 2,092,593
<TOTAL-REVENUES> 2,092,593
<CGS> 1,835,531
<TOTAL-COSTS> 2,090,597
<OTHER-EXPENSES> 297
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,071
<INCOME-PRETAX> (11,778)
<INCOME-TAX> 3,980
<INCOME-CONTINUING> (7,936)
<DISCONTINUED> (2,204)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,140)
<EPS-PRIMARY> (0.56)
<EPS-DILUTED> (0.56)
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> SEP-30-1997 DEC-31-1996
<CASH> 172,638 66,875
<SECURITIES> 0 0
<RECEIVABLES> 82,842 53,241
<ALLOWANCES> (2,472) (1,223)
<INVENTORY> 254,182 173,983
<CURRENT-ASSETS> 516,819 304,699
<PP&E> 39,427 25,967
<DEPRECIATION> (4,949) (3,626)
<TOTAL-ASSETS> 890,034 525,373
<CURRENT-LIABILITIES> 316,704 223,550
<BONDS> 237,356 11,121
0 0
0 0
<COMMON> 2 2
<OTHER-SE> 327,093 284,499
<TOTAL-LIABILITY-AND-EQUITY> 890,034 525,373
<SALES> 1,545,231 1,302,031
<TOTAL-REVENUES> 1,545,231 1,302,031
<CGS> 1,348,368 1,156,459
<TOTAL-COSTS> 1,508,735 1,280,703
<OTHER-EXPENSES> 297 2,506
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 7,249 4,398
<INCOME-PRETAX> 29,584 19,436
<INCOME-TAX> (11,869) (7,202)
<INCOME-CONTINUING> 17,597 8,928
<DISCONTINUED> (811) (894)
<EXTRAORDINARY> 0 (4,987)
<CHANGES> 0 0
<NET-INCOME> 16,786 3,047
<EPS-PRIMARY> 0.91 0.30
<EPS-DILUTED> 0.91 0.28
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> JUN-30-1997 DEC-31-1996
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<SECURITIES> 0 0
<RECEIVABLES> 85,699 53,241
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<INVENTORY> 272,800 173,983
<CURRENT-ASSETS> 404,608 304,699
<PP&E> 37,286 25,967
<DEPRECIATION> (4,346) (3,626)
<TOTAL-ASSETS> 756,858 525,373
<CURRENT-LIABILITIES> 333,731 223,550
<BONDS> 93,722 11,121
0 0
0 0
<COMMON> 2 2
<OTHER-SE> 320,603 284,499
<TOTAL-LIABILITY-AND-EQUITY> 756,858 525,373
<SALES> 917,622 1,302,031
<TOTAL-REVENUES> 917,622 1,302,031
<CGS> 801,400 1,156,459
<TOTAL-COSTS> 897,123 1,280,703
<OTHER-EXPENSES> 297 2,506
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,246 4,398
<INCOME-PRETAX> 18,590 19,436
<INCOME-TAX> (7,459) (7,202)
<INCOME-CONTINUING> 11,034 8,928
<DISCONTINUED> (118) (894)
<EXTRAORDINARY> 0 (4,987)
<CHANGES> 0 0
<NET-INCOME> 10,916 3,047
<EPS-PRIMARY> 0.61 0.30
<EPS-DILUTED> 0.61 0.28
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> MAR-31-1997 DEC-31-1996
<CASH> 36,083 66,875
<SECURITIES> 0 0
<RECEIVABLES> 62,461 53,241
<ALLOWANCES> (1,147) (1,223)
<INVENTORY> 218,576 173,983
<CURRENT-ASSETS> 329,826 304,699
<PP&E> 28,879 25,967
<DEPRECIATION> (4,020) (3,626)
<TOTAL-ASSETS> 573,006 525,373
<CURRENT-LIABILITIES> 268,395 223,550
<BONDS> 11,777 11,121
0 0
0 0
<COMMON> 2 2
<OTHER-SE> 286,537 284,499
<TOTAL-LIABILITY-AND-EQUITY> 573,006 525,373
<SALES> 389,288 1,302,031
<TOTAL-REVENUES> 389,288 1,302,031
<CGS> 341,676 1,156,459
<TOTAL-COSTS> 383,432 1,280,703
<OTHER-EXPENSES> 297 2,506
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (469) 4,398
<INCOME-PRETAX> 5,684 19,436
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0
0
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