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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, 1997
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:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Voting Common Stock, par value $0.0001 per share New York Stock Exchange
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 voting common stock held by non-affiliates as of
March 24, 1998 was $286,862,693.
As of March 24, 1998, there were 19,178,180 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 21,
1998, are incorporated by reference in Part III of this Form 10-K.
TABLE OF CONTENTS
PART I
PAGE
1. Business........................................................................................ 2
2. Properties...................................................................................... 8
3. Legal Proceedings............................................................................... 9
4. Submission of Matters to a Vote of Securityholders.............................................. 9
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters........................... 9
6. Selected Consolidated Financial Data............................................................ 11
7. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 13
8. Financial Statements and Supplementary Data..................................................... 20
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............ 21
PART III
10. Directors and Executive Officers of the Registrant.............................................. 21
11. Executive Compensation.......................................................................... 21
12. Security Ownership of Certain Beneficial Owners and Management.................................. 21
13. Certain Relationships and Related Transactions.................................................. 21
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................ 21
1
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 1997, the
Company operated franchises located in Arizona, Arkansas, Connecticut,
Florida, Georgia, 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. The Company also owns UnitedAuto Finance Inc.
("UnitedAuto Finance"), an automobile finance company engaged in the purchase,
sale and servicing of primarily prime credit quality automobile loans
originated by both UAG and third-party dealerships. In addition, UAG
dealerships market a complete line of aftermarket automotive products and
services through UnitedAuto Care, an aftermarket products and services
subsidiary.
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 the dealerships
acquired by the Company during 1997:
2
DATE
ACQUIREE ACQUIRED LOCATIONS FRANCHISES
- -------- -------- --------- ----------
Crown Automotive 3/97 Houston, TX Chrysler-Plymouth, Dodge, Jeep-Eagle
Hanna Nissan 4/97 Las Vegas, NV Nissan
Staluppi Group 4/97 Long Island, NY Nissan, Toyota
W. Palm Beach, FL Chrysler-Plymouth, Infiniti, Jeep-Eagle, Nissan,
Toyota
Reed Group 5/97 Fayetteville, NC Chevrolet
North Charleston, SC Chevrolet
Summerville, SC Chevrolet-Geo, Oldsmobile
Lance Landers 6/97 Benton, AR Buick, Isuzu, Pontiac
Stone Mountain 8/97 Stone Mountain, GA Chyrsler-Plymouth, Jeep-Eagle
Shreveport Dodge 9/97 Shreveport, LA Dodge
Covington Pike Dodge 11/97 Memphis, TN Dodge
Central Ford 11/97 Little Rock, AK Ford
Triangle Dealers 12/97 San Juan, Puerto Rico Chrysler, Honda, Toyota, Daewoo
Mayaguez, Puerto Rico Chrysler, Honda, Acura, Daewoo
Ponce, Puerto Rico Honda, Acura, Suzuki
Management believes that UAG is well-positioned to continue capitalizing on
the consolidation trend in the automotive retailing industry due to its proven
acquisition history, diverse geographic presence, substantial size and
financial resources. Since December 31, 1997, the Company has entered into
agreements to purchase five franchises. Also during the first quarter of 1998,
the Company has completed the acquisition, pending manufacturer approval
relating to certain franchises, of four dealer groups operating 32 franchises
in seven states, including the Young Automotive Group and the Classic
Automotive Group.
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.
GROWTH STRATEGY
UAG seeks to be a leader in the consolidation of the automotive retailing
industry and to increase stockholder value through a growth strategy that
includes the following principal elements:
3
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. Of the approximately 20,000
dealerships in the United States, the Company believes that at least 2,000
dealerships, some of which are members of dealership groups, meet its
acquisition criteria. The Company may also target dealerships in North
American Markets outside the United States. The Company is also creating
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 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.
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.
4
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 and credit insurance policies. 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 its
UnitedAuto Care subsidiary.
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
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.
Generate Incremental Revenue from Automobile Finance Business
The majority of new and used automobiles purchased from franchised dealerships
and independent businesses are financed. To further increase the incremental
profit achievable through its vehicle sales by capturing some of this
financing business, the Company established UnitedAuto Finance, its own
automobile finance subsidiary. UnitedAuto Finance purchases, sells and
services primarily prime credit quality automobile loans originated by both
UAG and third-party dealerships. Additionally, UnitedAuto Finance receives
fees from financial institutions which purchase installment contracts from
customers referred to them by UnitedAuto Finance. Based in Rochester, New
York, UnitedAuto Finance commenced loan operations in January 1995 and, as of
December 31, 1997, served approximately 250 dealerships in Arizona, Arkansas,
Connecticut, Georgia, New Jersey, New York, Tennessee and Texas.
5
OPERATING STRATEGY
Implement "Best Practices"
The Chairman's Committee, comprised of senior executives and key managers,
meets regularly 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.
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 improve dealership operations and uses it
as a factor in determining the compensation of general managers and sales and
service personnel in all 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.
6
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.
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.
UnitedAuto Finance
UnitedAuto Finance faces competition from a variety of lenders in the
fragmented auto finance market: captive finance companies, banking
institutions and independent finance companies. Captive finance companies such
as General Motors Acceptance Corporation, Ford Motor Credit Company and
Chrysler Financial Corporation primarily focus on increasing dealer sales
volume by offering low-yield rates when promoting certain products. In
general, captive finance companies provide standardized products with fixed
market rates, and are not as flexible in the marketplace. Independent auto
finance companies focus on unconventional segments of the market with some
lending to lower credit borrowers in exchange for higher yields. The Company
believes that the principal competitive factors in offering financing are
convenience, interest rates and contract terms. Certain larger competitors of
UnitedAuto Finance are able to borrow at lower interest rates and, therefore,
are at a competitive advantage. While market shares shift over time, the trend
in the banking market share is toward fewer and larger super-regional
competitors, reflecting the ongoing consolidations in that industry. As in the
case of UnitedAuto Finance, some finance companies are organized by large
dealership groups as part of a vertical integration strategy.
7
EMPLOYEES AND LABOR RELATIONS
As of December 31, 1997, UAG employed approximately 4,000 people,
approximately 145 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 establishing health and
environmental quality standards, and liability related thereto, and imposing
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.
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 all of its
facilities, including dealerships and office space used for corporate
activities. As of December 31, 1997, the Company has leases at each 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
and Rochester, NY for the Company's corporate headquarters and the corporate
offices of UnitedAuto Finance.
8
ITEM 3. LEGAL PROCEEDINGS
In May and June, 1997, three complaints were filed in the United States
District Court for the Southern District of New York on behalf of a purported
class consisting of all persons who purchased the Company's Voting Common
Stock issued in connection with and/or traceable to the Company's initial
public offering (the "IPO") at any time up to and including February 26, 1997
(the "Lawsuits"). The complaints name as defendants the Company, Carl
Spielvogel, Marshall S. Cogan, J.P. Morgan Securities Inc., Montgomery
Securities and Smith Barney Inc. The plaintiffs in the Lawsuits seek
unspecified damages in connection with their allegations that the prospectus
and the related registration statement disseminated in connection with the IPO
contained material misrepresentations and omissions in violation of Sections
11, 12(a)(2) and 15 of the Securities Act of 1933, as amended (the "Securities
Act"). They also seek to have their actions certified as class actions under
Federal Rules of Civil Procedure. On August 5, 1997, the Lawsuits were ordered
consolidated for all purposes. On October 3, 1997, the plaintiffs filed a
consolidated amended class action complaint. On November 17, 1997, the Company
filed a motion to dismiss the consolidated amended class action complaint. The
court has not yet ruled on this motion. The Company believes that the
plaintiffs' claims are without merit and intends to defend the Lawsuits
vigorously.
Additionally, the Company and its subsidiaries are involved in litigation that
has arisen in the ordinary course of business. None of these matters, either
individually or in the aggregate, are expected to have a material adverse
effect on the Company's results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of 1997.
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 119 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 since the Company's Common Stock began
trading on the NYSE after its initial public offering in October 1996.
9
1997 1996
QUARTER ENDED HIGH LOW HIGH LOW
------------- ---- --- ---- ---
March 31 31 3/4 19 1/4 N/A
June 30 19 7/8 16 N/A
September 30 27 7/8 19 1/4 N/A
December 31 26 13/16 13 3/4 35 1/4 21 3/8
The Company has not declared or paid dividends on its Common Stock during 1997
or 1996. 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 Senior Credit Facility (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 support agreements by the Company in favor of subsidiaries of
UnitedAuto Finance that were entered into in connection with securitization
transactions or sales of automobile loan receivables, the Company is
prohibited from paying dividends in excess of 50% of its cumulative net income
measured over specified periods.
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.
10
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, 1997. 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)
YEARS ENDED DECEMBER 31,
(Dollars in thousands, except per share data)
1997 (2)(3) 1996 (4) 1995 (5) 1994 1993
----------- -------- -------- ---- ----
STATEMENT OF OPERATIONS DATA:
AUTO DEALERSHIPS
Total revenues $2,087,148 $1,302,031 $805,621 $731,629 $606,091
Cost of sales, including floor
plan interest 1,830,086 1,156,459 720,634 646,197 536,542
-------------------------------------------------------------------------------------
Gross profit 257,062 145,572 84,987 85,432 69,549
Selling, general and
administrative expenses 255,066 124,244 90,586 80,415 66,910
-------------------------------------------------------------------------------------
Operating income (loss) 1,996 21,328 (5,599) 5,017 2,639
Other interest expense (14,071) (4,398) (1,438) (860) (1,233)
Other income (expense), net 297 2,506 2,208 (2,899) -
-------------------------------------------------------------------------------------
Income (loss) before income taxes (11,778) 19,436 (4,829) 1,258 1,406
AUTO FINANCE
Loss before income taxes (3,735) (1,490) (1,382) (616) -
-------------------------------------------------------------------------------------
TOTAL COMPANY
Income (loss) before minority
interests, income tax
(provision) benefit and (15,513) 17,946 (6,211) 642 1,406
extraordinary item
Minority interests (138) (3,306) 366 (887) (117)
Income tax (provision) benefit 5,511 (6,606) 2,191 - (47)
-------------------------------------------------------------------------------------
Income (loss) before
extraordinary item (10,140) 8,034 (3,654) (245) 1,242
Extraordinary item - (4,987) - - -
-------------------------------------------------------------------------------------
Net income (loss) $(10,140) $3,047 $(3,654) $(245) $1,242
=====================================================================================
Income (loss) before
extraordinary item per diluted
common share $(0.54) $0.74 $(0.67) $(0.06) $0.65
=====================================================================================
OTHER AUTO DEALERSHIP DATA:
Gross profit margin 12.3% 11.2% 10.5% 11.7% 11.5%
Operating margin 0.1% 1.6% (0.7)% 0.7% 0.4%
New cars sold at retail 50,985 36,802 25,138 22,464 18,608
Used cars sold at retail 31,253 18,344 8,953 8,340 7,891
11
SELECTED CONSOLIDATED FINANCIAL DATA (1)
- --------------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31,
(Dollars in thousand)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
BALANCE SHEET DATA:
AUTO DEALERSHIPS
Intangible assets, net $326,774 $177,194 $48,774 $23,018 $22,832
Long-term debt 238,550 11,121 24,073 6,735 4,122
AUTO FINANCE
Net assets 32,601 14,552 3,501 291 -
TOTAL COMPANY
Total assets 975,662 528,244 240,397 174,922 157,041
Total stockholders' equity 300,557 284,501 51,699 31,432 26,410
- ------------------------------
(1) During 1997, the Company changed its method of accounting for new
vehicle inventory from LIFO to the specific identification method.
Management believes the specific identification method (i) more
accurately matches revenues with costs, (ii) more accurately reflects
the current market value of new vehicle inventories and (iii) will
provide for a more meaningful comparison of the Company's operating
results and financial position with that of its competition. This
change in accounting principle has been applied by retroactively
restating the Company's financial statements for prior years. 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) and $1,099 ($0.60 per diluted share) in 1994
and 1993, respectively.
(2) Includes a $31.7 million charge recorded during 1997 (the "Fourth
Quarter 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 Fourth Quarter 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
Consolidated Statements of Operations. In addition, $1.0 million has
been reflected in the results of UnitedAuto Finance.
(3) 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
(4) 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.
(5) Includes the results of Landers Auto from its date of acquisition.
12
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. The Company also owns UnitedAuto
Finance, an automobile finance company.
New vehicle revenues include sales to retail customers and to leasing
companies providing consumer automobile leasing. Used vehicle revenues include
amounts received for used vehicles sold to retail customers, leasing companies
providing consumer leasing, other dealers and wholesalers. Finance and
insurance revenues are generated from sales of accessories such as radios,
cellular phones, alarms, custom wheels, paint sealants and fabric protectors,
as well as amounts received as fees for placing extended service contracts,
credit insurance policies, and financing and lease contracts. UAG dealerships
market a complete line of aftermarket automotive products and services through
the Company's wholly-owned subsidiary, United AutoCare. Service and parts
revenues include fees paid by consumers for repair and maintenance service and
the sale of replacement parts.
UnitedAuto Finance derives revenues from the purchase, sale and servicing of
motor vehicle installment contracts originated by both UAG and third-party
dealerships, as well as from fees paid by financial institutions which
purchase installment contracts from customers referred to them by UnitedAuto
Finance.
The Company's selling expenses consist of advertising and compensation for
sales department personnel, including commissions and related bonuses. General
and administrative expenses include compensation for administration, finance
and general management personnel, depreciation, amortization, rent, insurance,
utilities and other outside services. Interest expense consists of interest
charges on all of the Company's interest-bearing debt, other than interest
relating to floor plan inventory financing which is included in cost of sales.
During 1997, the Company recorded a pre-tax charge of $31.7 million (the
"Fourth Quarter 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 Fourth
Quarter 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 Consolidated Statements of Operations. In addition, $1.0
million has been reflected in the results of UnitedAuto Finance.
Also, the Company changed its method of accounting for new vehicle inventory
from LIFO to the specific identification method. All prior period 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.
13
Also, the Company made a number of dealership acquisitions in 1997, 1996 and
1995. 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, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Auto Dealerships
Revenues. Revenues increased by $785.1 million, or 60.3%, 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 $25.2
million, or 57.8%, from $43.6 million to $68.8 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 UnitedAuto Care, 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.
14
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.
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 UnitedAuto
Care, offset by the Fourth Quarter 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 Fourth Quarter 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.
Auto Finance
Loss before income taxes. UnitedAuto Finance's loss before income taxes
increased by $2.2 million, from $1.5 million to $3.7 million. The increase is
due principally to (i) an increase in the infrastructure required to manage
the substantial increase in UnitedAuto Finance's operations and planned
expansion of its business in the future, (ii) charges relating to revised loan
loss estimates and (iii) the Fourth Quarter Charge.
15
Total Company
Provision for Income Taxes. During 1997, the Company recorded an income tax
benefit in the amount of $5.5 million, compared with income tax expense of
$6.6 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.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Auto Dealerships
DiFeo Restructuring. The Company undertook a broad restructuring of its DiFeo
Group in 1995 (the "DiFeo Restructuring"). The restructuring included (i) the
elimination of 17 unprofitable franchises, (ii) a significant reduction in
personnel and (iii) the liquidation of outdated inventory. Costs associated
with the DiFeo Restructuring were approximately $0.5 million and $0.7 million
for the years ended December 31, 1996 and 1995, respectively, primarily
related to severance.
Revenues. Revenues increased by $496.4 million, or 61.6%, from $805.6 million
to $1,302.0 million due to the full year contribution of Landers Auto, which
was acquired in August 1995, and the acquisitions made in 1996. Revenues at
Landers Auto were $323.2 million in 1996. Revenues at the continuing
franchises of the DiFeo Group increased by $82.9 million, or 13.8%, from
$598.7 million to $681.6 million. That increase was more than offset by a
decrease of $90.6 million due to the elimination of unprofitable franchises as
part of the DiFeo Restructuring.
Sales of new and used vehicles increased by $448.2 million, or 62.6%, from
$716.4 million to $1,164.6 million. Dealerships acquired in 1996 contributed
$266.5 million to that increase. New and used vehicle sales at the continuing
franchises of the DiFeo Group increased by $66.2 million, or 12.5%, from
$529.0 million to $595.2 million. That increase was more than offset by a
decrease of $78.2 million in sales due to the elimination of unprofitable
franchises as part of the DiFeo Restructuring. Unit retail sales of new and
used vehicles increased by 46.4% and 104.9%, respectively, due principally to
the 1996 acquisitions and the full year contribution of Landers Auto. During
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). During 1995, the Company
sold 25,138 new vehicles (73.7% of total vehicle sales) and 8,953 used
vehicles (26.3% of total vehicle sales). The increase in the relative
proportion of used vehicle sales to new vehicle sales was due principally to
the expansion of existing used car facilities and the establishment of
stand-alone retail used car centers in response to the increased popularity of
used cars. New vehicle selling prices increased by an average of 5.4% due
primarily to changes in the mix of models sold and changes in manufacturer
pricing. Used vehicle selling prices increased by an average of 13.7% due to
changes in market conditions which resulted in a change in the mix of used
vehicles sold.
16
Finance and insurance revenues (aftermarket product sales) increased by $13.8
million, or 46.3%, from $29.8 million to $43.6 million due to the full year
contribution of Landers Auto and the acquisitions made in 1996. Sales of such
products increased by $6.3 million, or 24.5%, from $25.7 million to $32.0
million at the continuing franchises of the DiFeo Group, offsetting the $2.0
million decrease in sales due to the elimination of unprofitable franchises as
part of the DiFeo Restructuring.
Service and parts revenues increased by $34.5 million, or 58.1%, from $59.4
million to $93.9 million due to the full year contribution of Landers Auto and
the acquisitions made in 1996.
Gross Profit. Gross profit increased by $60.6 million, or 71.3%, from $85.0
million to $145.6 million. The full year contribution of Landers Auto accounts
for $16.2 million of the increase and the remaining $37.5 million increase is
due to the 1996 acquisitions. Gross profit at the continuing franchises of the
DiFeo Group increased by $13.4 million, or 20.0%, from $66.9 million to $80.3
million. Gross profit as a percentage of revenues increased 6.7% from 10.5% to
11.2%. Included in the above gross profit figures is gross profit from finance
and insurance activities, which increased by $8.9 million, or 38.2%, from
$23.4 million to $32.3 million due principally to the full year contribution
of Landers Auto and the 1996 acquisitions.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $33.6 million, or 37.1%, from $90.6
million to $124.2 million due principally to the full year ownership of
Landers Auto and the 1996 acquisitions. Such expenses as a percentage of
revenues decreased from 11.2% to 9.5%.
Other Interest Expense. Interest expense other than floor plan increased by
$3.0 million, or 214.3%, from $1.4 million to $4.4 million as a result of
increased borrowings to finance the acquisitions made in 1995 and 1996
Auto Finance
Loss before Income Taxes. The pretax loss from operations at Atlantic Finance
increased by $0.1 million from a loss of $1.4 million to $1.5 million.
Total Company
Provision for Income Taxes. The 1996 provision for income taxes is $6.6
million, compared to an income tax credit of $2.2 million recorded in 1995.
The credit for 1995 was taken as the Company determined in the fourth quarter
that it was more likely than not that future taxable income from operations
would be sufficient to fully realize the tax benefits of net operating losses
incurred in prior years.
Extraordinary Item, Net of Income Tax Benefits. The extraordinary item, net of
income tax benefits, of $5.0 million represents a loss on the retirement of
long-term debt resulting from a prepayment premium and a write-off of
associated debt issuance costs.
17
LIQUIDITY AND CAPITAL RESOURCES
CASH AND LIQUIDITY REQUIREMENTS
The cash requirements of the Company are primarily for 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,
1997, the Company had working capital of $105.1 million.
During 1997, dealership activities resulted in net cash provided by operations
of $18.3 million. Net cash used by dealerships in investing activities during
the year ended December 31, 1997 totaled $173.0 million, relating primarily to
dealership acquisitions, funding provided to UnitedAuto Finance and capital
expenditures. Dealership financing activities provided $182.3 million of cash
during the year ended December 31, 1997 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, 1997, the Company had approximately $94.4 million of cash
available to fund operations and future acquisitions. In addition, the Company
was party to a $50.0 million Senior Credit Facility, dated March 20, 1997 (as
amended) (the "Senior Credit Facility"), with a group of banks, which was to
be used principally for acquisitions. On February 27, 1998, the Company
replaced the Senior Credit Facility with a new credit agreement, which
provides for up to $75.0 million in term loans, revolving loans and letters of
credit, to be used principally for acquisitions.
During 1997, the Company issued $200.0 million aggregate principal amount of
its 11% Senior Subordinated Notes due 2007 (the "Notes"). Net proceeds from
the sale of the Notes amounted to $189.5 million, of which $50.0 million was
used to repay in full amounts then outstanding under the Senior Credit
Facility. The balance of the proceeds was deposited with the Company's floor
plan lenders, which deposits earn interest at rates designated in the
Company's floor plan agreements with the various floor plan lenders, and
ultimately was used for working capital and to fund acquisitions.
18
The Company's principal source of growth has come, and is expected to continue
to come, from acquisitions of automobile dealerships. The Company believes
that its existing capital resources will be sufficient to fund its current
acquisition commitments. During January and February 1998, the Company
completed the acquisition of several dealerships and dealer groups.
Approximately $98.2 million of the aggregate consideration in connection
therewith was paid in cash, $28.0 million of which was borrowed under the new
credit agreement. To the extent the Company pursues additional significant
acquisitions, it may need to raise additional capital either through the
public or private issuance of equity or debt securities or through additional
bank borrowings. A public equity offering would require the prior approval of
certain automobile manufacturers.
CYCLICALITY
Unit sales of motor vehicles, particularly new vehicles, historically have
been cyclical, fluctuating with general economic cycles. During economic
downturns, the automotive retailing industry tends to experience similar
periods of decline and recession as the general economy. The Company believes
that the industry is influenced by general economic conditions and
particularly by consumer confidence, the level of personal discretionary
spending, interest rates and credit availability.
SEASONALITY
The Company's combined business is modestly seasonal overall. The greatest
seasonalities exist with the dealerships in the New York metropolitan area,
for which the second and third quarters are the strongest with respect to
vehicle related sales. The service and parts business at all dealerships
experiences relatively modest seasonal fluctuations.
EFFECTS OF INFLATION
The Company believes that the relatively moderate rates of inflation over the
last few years have not had a significant impact on revenue or profitability.
The Company does not expect inflation to have any near-term material effects
on the sale of its products and services. However, there can be no assurance
that there will be no such effect in the future.
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 programs use only two digits to identify a year in the
date field and, if not corrected, many computer applications could fail or
generate erroneous results in the year 2000. Based on a recent assessment,
management of the Company believes that its computer systems will not require
any significant modifications in order to properly process date-related
19
information in the year 2000 and thereafter (or be "year 2000 compliant").
However, the Company could be materially adversely affected if the systems of
its significant vendors, including those supplying and maintaining the general
ledger and related accounting systems at each of the Company's dealerships,
will not be year 2000 compliant. The Company has received assurances that such
vendors are adequately addressing this issue. Nevertheless, there can be no
guarantee that the systems provided by such vendors, or that the systems of
other companies with which the Company does business, will be year 2000
compliant and that any such non-compliance will not have a material adverse
effect on the Company.
NEW ACCOUNTING PRONOUNCEMENT
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Financial Reporting for Segments of a Business Enterprise ("FAS No. 131"). FAS
No. 131 establishes standards relating to the means by which business' report
operating segment information in financial information issued to shareholders.
FAS No. 131, effective for interim periods beginning after December 31, 1997,
is not expected to result in significant changes to the financial statements
and related disclosures prepared by the Company.
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 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.
20
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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 filed the following Current Reports on Form 8-K during
the quarter ended December 31, 1997:
1. October 31, 1997, reporting under Items 5 and 7 (Hanna
Nissan and Reed Group financial information).
2. November 6, 1997, reporting under Items 5 and 7
(announcement of Young Automotive acquisition).
3. November 20, 1997, reporting under item 7 (United Auto
Group, Inc. pro forma financial information).
(c) Exhibits
3.1(c) Third Restated Certificate of Incorporation.
3.2(a) Restated Bylaws.
4.1(a) Specimen Common Stock certificate.
4.2(f) Indenture, dated as of July 23, 1997, among the Company, the
Guarantors party thereto and The Bank of New York, as Trustee,
including form of Note and Guarantee.
21
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.
10.1.11(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.
10.2.1(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.
10.2.21 Isuzu Dealer Sales and Service Agreement, including
and .22(a) Standard 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.
22
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.
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.
18.1 Letter from Coopers & Lybrand L.L.P. regarding change in
accounting principle.
21.1 Subsidiaries of the Company.
23.1 Consent of Coopers & Lybrand L.L.P.
27.1 December 31, 1997 Financial Data Schedule.
27.2 September 30, 1997 Financial Data Schedule, restated to reflect
(i) a change in the Company's accounting for new vehicle
inventories from LIFO to the Specific Identification method and
(ii) basic and diluted earnings per share data as required by
SFAS 128.
27.3 June 30, 1997 Financial Data Schedule, restated to reflect (i) a
change in the Company's accounting for new vehicle inventories
from LIFO to the Specific Identification method and (ii) basic and
diluted earnings per share data as required by SFAS 128.
27.4 March 31, 1997 Financial Data Schedule, restated to reflect (i) a
change in the Company's accounting for new vehicle inventories from
LIFO to the Specific Identification method and (ii) basic and
diluted earnings per share data as required by SFAS 128.
27.5 December 31, 1996 Financial Data Schedule, restated to reflect (i)
a change in the Company's accounting for new vehicle inventories
from LIFO to the Specific Identification method and (ii) basic and
diluted earnings per share data as required by SFAS 128.
27.6 September 30, 1996 Financial Data Schedule, restated to reflect (i)
a change in the Company's accounting for new vehicle inventories
from LIFO to the Specific Identification method and (ii) basic and
diluted earnings per share data as required by SFAS 128.
- ------------------------
23
(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.
(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.
(d) Schedules - No Financial Statement Schedules are required to be filed
as part of this Annual Report on Form 10-K.
24
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 April 13, 1998.
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:
Signature Title Date
- --------- ----- ----
/s/ Marshall S. Cogan Chairman of the Board and Chief Executive April 13, 1998
- --------------------------- Officer (Principal Executive Officer)
Marshall S. Cogan
/s/ Samuel X. DiFeo President and Chief Operating Officer April 13, 1998
- --------------------------- and Director
Samuel X. DiFeo
/s/ Karl H. Winters Executive Vice President and April 13, 1998
- --------------------------- Chief Financial Officer
Karl H. Winters (Principal Financial Officer)
/s/ James R. Davidson Executive Vice President - Accounting April 13, 1998
- --------------------------- and Treasurer
James R. Davidson (Principal Accounting Officer)
/s/ Robert H. Nelson Executive Vice President - Operations April 13, 1998
- --------------------------- and Director
Robert H. Nelson
/s/ Richard Sinkfield Executive Vice President - Administration April 13, 1998
- --------------------------- and Director
Richard Sinkfield
/s/ Michael R. Eisenson Director April 13, 1998
- -----------------------
Michael R. Eisenson
/s/ John J. Hannan Director April 13, 1998
- ---------------------------
John J. Hannan
/s/ Jules B. Kroll Director April 13, 1998
- ---------------------------
Jules B. Kroll
/s/ John M. Sallay Director April 13, 1998
- ---------------------------
John M. Sallay
25
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
UNITED AUTO GROUP, INC.
Report of Independent Accountants................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996........ F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995................................. F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995........................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995................................. F-6
Notes to Consolidated Financial Statements.......................... F-7
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of United Auto Group, Inc.:
We have audited the consolidated financial statements of United Auto Group,
Inc. (the "Company") listed in Item 14 of this Form 10-K. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of the Company as of December 31, 1997 and 1996, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Coopers & Lybrand L.L.P.
Princeton, New Jersey
February 27, 1998
F-2
UNITED AUTO GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
ASSETS
DECEMBER 31,
1997 1996
----- ----
AUTO DEALERSHIPS
Cash and cash equivalents $94,435 $66,875
Accounts receivable, net 92,601 52,018
Inventories 324,330 173,983
Deferred tax assets 16,039 7,004
Other current assets 4,374 4,819
----------------------------
Total current assets 531,779 304,699
Property and equipment, net 37,588 22,341
Intangible assets, net 326,774 177,194
Other assets 42,322 6,587
----------------------------
TOTAL AUTO DEALERSHIP ASSETS 938,463 510,821
----------------------------
AUTO FINANCE
Cash and cash equivalents 1,557 1,138
Restricted cash 3,547 1,850
Finance assets, net 30,408 12,476
Other assets 1,687 1,959
----------------------------
TOTAL AUTO FINANCE ASSETS 37,199 17,423
----------------------------
TOTAL ASSETS $975,662 $528,244
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
AUTO DEALERSHIPS
Floor plan notes payable $328,203 $170,170
Short-term debt 6,069 6,069
Accounts payable 30,199 22,187
Accrued expenses 52,180 19,680
Current portion of long-term debt 9,981 5,444
----------------------------
Total current liabilities 426,632 223,550
Long-term debt 238,550 11,121
Due to related party 616 1,334
Deferred tax liabilities 4,709 4,867
----------------------------
TOTAL AUTO DEALERSHIP LIABILITIES 670,507 240,872
----------------------------
AUTO FINANCE
Short-term debt 387 1,001
Accounts payable and other liabilities 4,211 1,870
----------------------------
TOTAL AUTO FINANCE LIABILITIES 4,598 2,871
----------------------------
Commitments and contingent liabilities
STOCKHOLDERS' EQUITY
Voting Common Stock 2 2
Non-voting Common Stock - -
Additional paid-in-capital 310,373 284,502
Retained earnings (accumulated deficit) (9,818) (3)
----------------------------
TOTAL STOCKHOLDERS' EQUITY 300,557 284,501
----------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $975,662 $528,244
============================
See Notes to Consolidated Financial Statements.
F-3
UNITED AUTO GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
YEARS ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
AUTO DEALERSHIPS
Vehicle sales $1,827,609 $1,164,569 $716,394
Finance and insurance 68,754 43,574 29,806
Service and parts 190,785 93,888 59,421
-----------------------------------------
Total revenues 2,087,148 1,302,031 805,621
Cost of sales, including floor plan interest 1,830,086 1,156,459 720,634
-----------------------------------------
Gross profit 257,062 145,572 84,987
Selling, general and administrative expenses 255,066 124,244 90,586
-----------------------------------------
Operating income (loss) 1,996 21,328 (5,599)
Other interest expense (14,071) (4,398) (1,438)
Other income (expense), net 297 2,506 2,208
-----------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES - AUTO DEALERSHIPS (11,778) 19,436 (4,829)
-----------------------------------------
AUTO FINANCE
Revenues 2,615 1,798 530
Interest expense (1,014) (421) (174)
Operating and other expenses (5,336) (2,867) (1,738)
-----------------------------------------
LOSS BEFORE INCOME TAXES - AUTO FINANCE (3,735) (1,490) (1,382)
-----------------------------------------
TOTAL COMPANY
Income (loss) before minority interests, income tax
(provision) benefit and extraordinary item (15,513) 17,946 (6,211)
Minority interests (138) (3,306) 366
Income tax (provision) benefit 5,511 (6,606) 2,191
-----------------------------------------
Income (loss) before extraordinary item (10,140) 8,034 (3,654)
Extraordinary item (net of income tax benefit of $2,685) - (4,987) -
=========================================
Net income (loss) $(10,140) $3,047 $(3,654)
=========================================
Basic income (loss) before extraordinary item per
common share $(0.56) $0.79 $(0.74)
=========================================
Basic net income (loss) per common share $(0.56) $0.30 $(0.74)
=========================================
Income (loss) before extraordinary item per diluted common
share $(0.54) $0.74 $(0.67)
=========================================
Net income (loss) per diluted common share $(0.54) $0.28 $(0.67)
=========================================
Shares used in computing basic per share data 18,227 10,144 4,932
=========================================
Shares used in computing diluted per share data 18,607 10,851 5,482
=========================================
See Notes to Consolidated Financial Statements.
F-4
UNITED AUTO GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands)
CLASS A VOTING AND
CONVERTIBLE NON-VOTING
PREFERRED STOCK COMMON STOCK
--------------- ------------
RETAINED
ADDITIONAL EARNINGS TOTAL
ISSUED ISSUED PAID-IN (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) EQUITY
------ ------ ------ ----- ------- ------- -----
Balances, December 31, 1994 1,971,611 $1 1,529,236 $1 $30,827 $604 $31,432
Issuance of stock for cash 1,679,118 - 1,053,549 - 23,921 - 23,921
Net loss - - - - - (3,654) (3,654)
---------------------------------------------------------------------------------------
Balances, December 31, 1995 3,650,729 1 2,582,785 1 54,748 (3,050) 51,699
Issuance of stock, primarily for 1,576,617 - 1,010,965 - 22,854 - 22,854
acquisitions
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 - - 6,250,000 1 170,410 - 170,411
offering
Issuance of stock on exercise of warrants - - 1,109,491 - 2,769 - 2,769
Issuance of stock on 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
=======================================================================================
See Notes to Consolidated Financial Statements.
F-5
UNITED AUTO GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
YEARS ENDED DECEMBER 31,
------------------------
1997 1996 1995
----------------------- --------------------- ----------------------
AUTO AUTO AUTO AUTO AUTO AUTO
DEALERSHIPS FINANCE DEALERSHIPS FINANCE DEALERSHIPS FINANCE
----------- ------- ----------- ------- ----------- -------
OPERATING ACTIVITIES:
Net income (loss) $(7,731) $(2,409) $3,989 $(942) $(2,760) $(894)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating
activities:
Depreciation and amortization 9,100 580 5,325 2,472 2,536 284
Fourth quarter charge 30,660 1,000 - - - -
Deferred income tax benefit (9,193) - 2,401 - (2,374) -
Related party interest income - - (2,580) - (3,039) -
Gain on sales of loans - (101) - (800) - (129)
Loans originated - (193,774) - (75,440) - (18,769)
Loans repaid or sold - 175,751 - 72,659 - 11,236
Minority interests 138 - 3,306 - (366) -
Changes in operating assets and liabilities:
Finance subsidiary assets - (2,208) - (3,346) - -
Accounts receivable (8,317) - (6,480) - (1,524) -
Inventories (39,280) - (10,581) - 16,319 -
Floor plan notes payable 37,210 - 25,548 - (14,753) -
Accounts payable and accrued expenses 2,433 906 (60) 385 5,240 302
Other 3,269 318 2,374 (1,566) 1,417 (77)
---------------------------------------------------------------------------
Net cash provided by (used in) operating
activities 18,289 (19,937) 23,242 (6,578) 696 (8,047)
---------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of equipment and improvements (11,915) (246) (6,457) (314) (1,496) (243)
Dealership acquisitions (139,639) - (98,812) - (19,921) -
Investment in auto finance subsidiary (21,468) 21,468 (12,582) 12,582 (4,592) 4,592
Other investments - - (3,726) (1,417) (4,135) -
---------------------------------------------------------------------------
Net cash provided by (used in) investing
activities (173,022) 21,222 (121,577) 10,851 (30,144) 4,349
---------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from issuance of stock 4,772 - 195,818 - 25,220 -
Repurchase of common stock (8,821) - (1,179) - - -
Proceeds from borrowings of long-term debt 252,999 - 20,092 - 16,300 -
Deferred financing costs (10,689) - (1,011) - (2,549) -
Net repayments of short-term debt (400) - (10,118) - (3,863) -
Payments of long-term debt and capital leases (54,850) - (43,314) - (2,073) -
Advances from (to) affiliates, net (718) - 225 - 359 -
Borrowings of warehouse credit line - 51,749 - 56,762 - 14,202
Payments of warehouse credit line - (52,615) - (60,428) - (10,005)
---------------------------------------------------------------------------
Net cash provided by (used in) financing
activities 182,293 (866) 160,513 (3,666) 33,394 4,197
---------------------------------------------------------------------------
Net increase in cash and cash equivalents 27,560 419 62,178 607 3,946 499
Cash and cash equivalents, beginning of year 66,875 1,138 4,697 531 751 32
===========================================================================
Cash and cash equivalents, end of year $94,435 $1,557 $66,875 $1,138 $4,697 $531
===========================================================================
See Notes to Consolidated Financial Statements.
F-6
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, Except Per Share Amounts)
1. ORGANIZATION
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. Through its wholly-owned consumer finance subsidiary, UnitedAuto
Finance Inc. ("UnitedAuto Finance"), UAG also purchases, sells and services
financing contracts on new and used vehicles originated by both UAG and third
party dealerships.
As discussed in Note 5, the Company completed a number of acquisitions during
the three years in the period ended December 31, 1997.
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 the expansion of UnitedAuto Finance and for working
capital purposes.
The Company operates dealerships which hold 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.
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. Management believes
the specific identification method (i) more accurately matches revenues with
costs, (ii) more accurately reflects the current market value of new vehicle
inventories and (iii) will provide for a more meaningful comparison of the
Company's operating results and financial position with that of its
competition. This change in accounting principle has been applied by
retroactively restating the Company's financial statements for 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
and to decrease income before extraordinary item and net income by $188 ($0.03
per diluted share) in 1995.
F-7
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, Except Per Share Amounts)
3. UNUSUAL ITEMS
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 $9,800 and
$20,900 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 the results of
UnitedAuto Finance.
During 1995, the Company undertook a restructuring of its then unprofitable
DiFeo Group. Such restructuring included the termination of certain
unprofitable franchises, a reduction in personnel and the liquidation of
outdated inventory. Costs associated with this restructuring, relating
primarily to severance, were approximately $500 and $680 for the years ended
December 31, 1996 and 1995, respectively.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include all significant majority-owned
subsidiaries and reflect operating results, assets, liabilities and cash flows
for the major aspects of the business: auto dealerships and auto finance.
Assets and liabilities of the auto dealerships are classified as current or
noncurrent and those relating to financial services are unclassified. All
material 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 and payable, finance assets, interest rate hedge agreements 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-8
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, Except Per Share Amounts)
Revenue Recognition - Auto Dealerships
Revenue is recognized when vehicles are delivered to consumers or motor
vehicle service work is performed and 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 recognized from customer finance contracts is established during the
period in which the related revenue is recognized.
Revenue Recognition - Auto Finance
Revenue from finance receivables is recognized over the term of the contract
using the interest method. Certain loan origination costs are deferred and
amortized over the term of the related receivable as a reduction in financing
revenue. Generally, finance receivables are accumulated by the Company and are
periodically sold into a commercial paper conduit or to a financial
institution. Interest income is recognized based on the daily principal
balance of the receivables outstanding. An allowance for financing losses on
receivables may be provided for the period from the date of origination to the
date of sale. Revenue is recognized upon the sale of the finance receivables.
Contractual servicing fees on loans sold are recognized as earned and
ancillary loan fees are recognized as collected.
Inventory Valuation
Inventories are stated at the lower of cost or market with cost determined by
the following methods:
Inventory Component Valuation Method
- ------------------- ----------------
New vehicles Specific identification
Used vehicles Specific identification
Parts, accessories and other Factory list price
New vehicle and parts inventories are purchased primarily from vehicle
manufacturers.
Property and Equipment
Property and equipment are recorded at cost and depreciated over their
estimated useful lives, primarily using the straight-line method. Useful lives
for purposes of computing depreciation are:
Leasehold improvements and equipment under - Economic life or life of the
capital lease whichever is shorter.
Equipment, furniture and fixtures - 5 to 7 years
Expenditures for betterments 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
included in the Consolidated Statements of Operations.
F-9
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, Except Per Share Amounts)
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 $326,774, 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, 1997 amounted to $10,192.
Amortization expense for the years ended December 31, 1997, 1996 and 1995 was
$6,300, $1,712 and $904, respectively.
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,
suggest that it may be impaired. The Company performs its review by comparing
the book value 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 of
the impaired assets or the assets fair value, as appropriate.
Auto Finance - Finance Assets
Finance receivables, consisting of retail vehicle loans purchased by
UnitedAuto Finance, are accumulated in pools and sold either to financial
institutions or into commercial paper conduits. Prior to their sale, these
contracts are carried at the lower of their principal balance outstanding or
their market value. Market value is estimated based on the characteristics of
the finance receivable held for sale and the terms of recent sales of similar
finance receivables. Periodically, UnitedAuto Finance repurchases the pools of
finance receivables from the financial institutions or commercial paper
conduits and sells them in a term securitization through special purpose
subsidiaries (a "Securitization"). In connection with each Securitization,
UnitedAuto Finance retains the servicing rights and an interest in the sold
receivables, and is paid a servicing fee which is recognized as collected over
the remaining term of the receivables.
F-10
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, Except Per Share Amounts)
Pursuant to agreements covering the sale of finance receivables to financial
institutions or into commercial paper conduits, UnitedAuto Finance is required
to hedge each such pool to provide protection relating to the pool's net
yield. The notional amounts of outstanding hedges entered into to hedge pools
of finance receivables were $42,837 and $37,612 at December 31, 1997 and 1996,
respectively. The fair value of such hedge agreements represented unrecorded
liabilities of $721 and $288 as of December 31, 1997 and 1996, respectively.
UnitedAuto Finance has credit and interest rate risk exposure on finance
receivables held for sale. Accordingly, UnitedAuto Finance has a program of
credit review prior to final approval of specific loans and maintains reserves
as appropriate. Interest rate risk is mitigated by the short period of time
that receivables are held. From time to time, while finance receivables are
being accumulated for sale, they may be pledged against a liquidity credit
line established by UnitedAuto Finance.
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, finance assets and accrued expenses.
Advertising
Advertising costs are expensed as incurred. The Company incurred advertising
costs of $25,075, $14,217 and $10,705 for the years ended December 31, 1997,
1996 and 1995, 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 and
preferred stock.
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, 1996 financial statements to conform to the current
year presentation.
F-11
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, Except Per Share Amounts)
5. BUSINESS COMBINATIONS
During 1997 and 1996, the Company completed a number of acquisitions. 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.
Acquisitions Completed During 1997
In December 1997, the Company acquired the Triangle Group, located in Puerto
Rico, for $12,800 in cash.
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. The acquisition agreement
provides for an additional contingent cash payment to the extent that the UAG
common stock has an aggregate market value of less than $13,000 on the date it
becomes freely tradable.
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 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. The acquisition agreement provides for
an additional contingent cash payment to the extent that the UAG common stock
has an aggregate market value of less than $6,000 on the date it becomes
freely tradable.
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.
F-12
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, Except Per Share Amounts)
Acquisitions Completed During 1996
In October 1996, the Company acquired substantially all of the Sun Group,
located in the Phoenix area, for a total of $24,666 payable in cash plus the
assumption of $4,929 of indebtedness. If the Sun Group achieves certain levels
of annual pre-tax earnings for the two-year period ending October 31, 1998,
the Company will be required to make additional payments.
During the year ended December 31, 1996, the Company also acquired (i) the
Evans Group (ii) Standefer Motor Sales, Inc. (iii) Hickman Nissan, Inc. (iv)
Steve Rayman Nissan, Inc. and (v) Atlanta Toyota, each of which is located in
the Atlanta area. The Company issued $4,400 of seller financed notes payable
and paid $61,800 in cash in consideration for such acquisitions.
Pro Forma Results of Operations
The following unaudited consolidated pro forma results of operations of the
Company for the years ended December 31, 1997 and 1996 give effect to (i)
acquisitions consummated during 1997 and 1996 and (ii) the offering of the
Company's Senior Subordinated Notes due 2007 as if they had occurred on
January 1, 1996.
YEAR ENDED
1997 1996
---- ----
Revenues $2,564,164 $2,573,648
Income (loss) before minority interests and income tax provision (22,650) 26,285
Net income (loss) (13,501) 15,471
Net income (loss) per diluted common share (0.71) 0.81
Pending Acquisitions
In December 1997, the Company entered into a definitive agreement to acquire
the New Graceland Dodge ("Graceland"), located in Memphis Tennessee, for
$5,500 in cash. The acquisition of Graceland closed in February 1998.
In November 1997, the Company entered into a definitive agreement to acquire
the Skelton Automotive Group ("Skelton"), located in Memphis Tennessee.
Consideration for the purchase amounts to $16,500, including $14,700 in cash
and $1,800 of seller financed promissory notes. The acquisition of Skelton
closed in January 1998.
In September 1997, the Company entered into a definitive agreement to acquire
the Young Automotive Group ("Young"), with operations in North Carolina, South
Carolina, Florida, Illinois and Indiana. The aggregate consideration for the
acquisition amounts to $68,600, 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 date they become freely tradable. The
acquisition of Young closed in February 1998, pending manufacturer approval
relating to certain franchises.
In July 1997, the Company entered into a definitive agreement to acquire the
Classic Automotive Group ("Classic") 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 acquisition of Classic closed in February 1998, pending
manufacturer approval relating to certain franchises.
F-13
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, Except Per Share Amounts)
6. INVENTORIES
Inventories consisted of the following:
DECEMBER 31,
1997 1996
---- ----
New vehicles $232,804 $114,542
Used vehicles 74,285 50,060
Parts, accessories and other 17,241 9,381
-------------------------------
Total Inventories $324,330 $173,983
===============================
7. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
DECEMBER 31,
1997 1996
---- ----
Furniture, fixtures and equipment $18,202 $9,742
Equipment under capital lease 4,280 2,201
Leasehold improvements 21,546 14,024
-------------------------
Total 44,028 25,967
Less: Accumulated depreciation and amortization 6,440 3,626
-------------------------
Property and equipment, net $37,588 $22,341
=========================
Depreciation and amortization expense for the years ended December 31, 1997,
1996 and 1995 was $2,800, $1,888 and $1,632, respectively. Accumulated
amortization at December 31, 1997 and 1996 on equipment under capital lease,
included in accumulated depreciation and amortization above, amounted to $830
and $1,072, 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:
DECEMBER 31,
1997 1996
---- ----
Chrysler Financial Corporation, interest - 8.26% and 8.16% at December 31, 1997
and 1996, respectively. $215,902 $114,533
World Omni Corp., interest - 8.26% and 7.94% at December 31, 1997 and 1996,
respectively. 91,388 18,512
Other, interest - between 7.87% and 8.97% at December 31, 1997 and between 7.75%
and 9.25% at December 31, 1996. 20,913 37,125
---------------------------
Total floor plan notes payable $328,203 $170,170
===========================
F-14
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, Except Per Share Amounts)
The floor plan agreements grant a security interest in substantially all of
the dealerships assets 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. The weighted
average interest rate on floor plan borrowings was 8.2%, 8.3% and 8.9% for the
years ended December 31, 1997, 1996 and 1995, respectively.
9. SHORT-TERM DEBT
The Company and Chrysler Financial Corporation ("CFC") are party to a
short-term debt agreement which shares in the security interest granted under
the floor plan arrangement at one of the Company's dealerships. The agreement
permits borrowings, subject to a formula based on parts and used vehicle
collateral, up to a maximum of $10,000, and includes covenants that require
the maintenance of tangible net worth and other financial ratios. At December
31, 1997, $6,069 was outstanding under this agreement. Interest on borrowings
under this agreement are based on LIBOR plus 2.25%. The CFC agreement replaced
an agreement with GMAC with similar terms. At December 31, 1996, $6,069 was
outstanding under the GMAC agreement. The borrowing rate at December 31, 1997
and 1996 under these agreements was 8.26% and 9.50%, respectively. The
weighted average interest rate on short-term borrowings was 8.15% and 9.89%
for the years ended December 31, 1997 and 1996, respectively.
In addition, UnitedAuto Finance maintained a $5,000 loan arrangement with a
bank (the "Loan Arrangement") for the purpose of purchasing finance
receivables. Under the terms of the Loan Agreement, the amount borrowed by
UnitedAuto Finance could not exceed 95% of the outstanding principal balance
of eligible receivables pledged to secure the loan. The Loan Arrangement
expired on October 30, 1997. The amount outstanding under the Loan Arrangement
as of December 31, 1996 was $748. On February 26, 1998, UnitedAuto Finance
established a new $5,000 loan arrangement with another bank with terms and
conditions similar to the Loan Arrangement.
10. LONG-TERM DEBT
Long-term debt consisted of the following:
DECEMBER 31,
1997 1996
---- ----
Series A and B Senior Subordinated Notes due 2007, less net unamortized discount of
$1,744 at December 31,1997 $198,256 $ -
Seller financed promissory notes payable through 2002, weighted average interest - 7.22%
and 8.5% at December 31, 1997 and 1996, respectively. 36,096 6,990
Term loans, weighted average interest - 8.26% and 9.25% at December 31, 1997 and
1996, respectively. 3,266 3,458
Capitalized lease obligations 3,867 4,832
Other installment loans 7,046 1,285
--------------------------
Total long-term debt 248,531 16,565
Less: Current portion 9,981 5,444
--------------------------
Net long-term debt $238,550 $11,121
==========================
F-15
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, Except Per Share Amounts)
Scheduled maturities of long-term debt for each of the next five years and
thereafter are as follows:
1998 $9,981
1999 8,807
2000 15,020
2001 1,777
2002 11,644
2003 and thereafter 201,302
-----------
Total long-term debt $248,531
===========
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 (subject to fraudulent
conveyence laws) 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) separate financial information for the
Note Guarantors is presented on the face of the Company's consolidated
financial statements under the caption "Auto Dealerships."
In March 1997, the Company entered into a $50,000 senior credit facility (as
amended, the "Senior Credit Facility"), with a group of banks, which was to be
used principally for acquisitions. The Senior Credit Facility provides for
borrowings on a revolving basis of up to $50,000, bears interest at LIBOR plus
2.75% and matures in March 2000. Pursuant to the terms of the Senior Credit
Facility, the Company is required to pay certain fees relating to outstanding
letters of credit and unused commitments. There were no amounts borrowed
against the Senior Credit Facility as of December 31, 1997.
The Senior Credit Facility 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 Senior
Credit Facility also contains typical events of defaults including change of
control, material adverse change and non-payment of obligations. On February
27, 1998, the Company replaced the Senior Credit Facility with a new credit
agreement (the "Credit Agreement"), which provides for up to $75,000 in term
loans, revolving loans and letters of credit, to be used principally for
acquisitions. The Credit Agreement matures in three years and contains
conditions, covenants and events of default similar to those included in the
terminated Senior Credit Facility.
F-16
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, Except Per Share Amounts)
During 1995, the Company issued indebtedness (the "Old Notes") that was due in
2003, which were redeemed in October 1996 with a portion of the proceeds from
the IPO. The redemption of the Old Notes resulted in an extraordinary pre-tax
loss of $7,672, due to (i) a 10% call premium, (ii) the write-off of original
issue discount and (iii) the write-off of deferred financing costs. The Old
Notes also contained detachable warrants that granted the 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.
11. OPERATING LEASE OBLIGATIONS
The Company leases its dealership facilities and corporate office under
non-cancelable operating lease agreements, which expire on various dates
through 2017. Minimum future rental payments required under non-cancelable
operating leases in effect as of December 31, 1997 are as follow:
1998 $21,567
1999 21,436
2000 20,941
2001 20,789
2002 19,632
2003 and thereafter 198,247
-------------
$302,612
=============
Rent expense for the years ended December 31, 1997, 1996, and 1995 amounted to
$17,674, $8,729 and $7,113, 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, $10,911, $5,240 and $4,502,
respectively, were made to related parties.
12. RELATED PARTY TRANSACTIONS
The Company is the tenant under a number of non-cancelable lease agreements
with employees of 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.
As of January 1, 1997, the Company entered into an agreement whereby the
Company's exposures with respect to the majority of the extended service
contracts sold by UnitedAuto Care are to be assumed by an affiliate of a major
stockholder in exchange for certain fees. It is the Company's belief that the
fees relating to these transactions are on terms at least as favorable as
those which could be obtained from an unrelated third party. Aggregate fees
paid by the Company during 1997 relating to this agreement totaled
approximately $3,154.
F-17
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, Except Per Share Amounts)
At December 31, 1995, the Company was owed $14,578 by minority or former
minority shareholders and certain of their related entities. This indebtedness
to the Company arose from advances to these shareholders for certain business
acquisitions and from working capital advances to dealerships owned by those
shareholders in which the Company has no ownership. Interest income on such
advances, amounting to $2,580 and $3,039 in 1996 and 1995, respectively, has
been reflected in other income (expense), net in the accompanying Consolidated
Statements of Operations.
From time to time, the Company pays and/or receives fees from certain major
stockholders 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 $(2,118), $225 and $359 for the years ending December 31,
1997, 1996 and 1995, respectively, has been reflected in selling, general and
administrative expenses in the accompanying Consolidated Statements of
Operations. As of December 31, 1997 and 1996, the Company owes $616 and $1,334,
respectively, for such services.
13. STOCK COMPENSATION PLANS
During 1996, the Company's Board of Directors and stockholders adopted a Stock
Option Plan and granted options to certain employees. Under the Stock Option
Plan, all full-time employees of the Company and its subsidiaries and
affiliates are eligible to participate. During 1997, the Company granted
options to purchase 594,800 shares at the fair market value of the Company's
stock on the date of the grant. As of December 31, 1997, the aggregate number
of shares of Common Stock for which stock options may be granted under the
Stock Option Plan may not exceed 1,500,838. As of December 31, 1997, 333,413
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 1997 and 1996:
YEAR ENDED DECEMBER 31,
1997 1996
---- ----
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
STOCK OPTIONS SHARES PRICE SHARES PRICE
- ------------------------------------------------------------------------------------
Options outstanding at
beginning of year 1,026,500 $13.90 127,200 $12.50
Granted 594,800 18.98 945,800 14.22
Exercised 503,000 10.34 46,500 10.00
Forfeited 39,325 11.41 - -
-------------------------------------------------------
Options outstanding at end
of year 1,078,975 $18.45 1,026,500 $13.90
=======================================================
F-18
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, Except Per Share Amounts)
A portion of the options granted in 1996 retroactively vested to dates prior
to the date of grant. Prior to the adoption of the Stock Option Plan, options
had been granted to purchase 127,200 shares of the Company's Common Stock
under an employment agreement at an exercise price of twelve dollars and fifty
cents per share. These options were replaced prior to the Company's IPO with
options that vest and become exercisable over four years on a schedule similar
to the previously granted options. In addition, during 1996 the Company
granted 272,800 more options to purchase shares of Common Stock at an exercise
price of ten dollars per share.
The following table summarizes the status of UAG's employee stock options
outstanding and exercisable at January 1, 1998:
STOCK OPTIONS
STOCK OPTIONS OUTSTANDING EXERCISABLE
------------------------------------------- ----------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
SHARES LIFE PRICE SHARES PRICE
- ---------------------------------------------------------------------------------------
250,000 7.7 $30.00 137,500 $30.00
316,400 8.8 10.00 215,700 10.00
512,575 9.6 18.04 75,700 17.00
================== =============
1,078,975 428,900
================== =============
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:
YEAR ENDED DECEMBER 31,
1997 1996
---- ----
Income (loss) before extraordinary item $(10,760) $7,094
Income (loss) before extraordinary item per diluted share (0.59) 0.65
Net income (loss) (10,760) 2,107
Net income (loss) per diluted share (0.59) 0.19
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 1997 and 1996: 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, 1997 and 1996 is $4.74 and $4.23
per share, respectively.
F-19
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, Except Per Share Amounts)
14. STOCKHOLDERS' EQUITY
At December 31, 1997 and 1996, the following classes of stock are authorized,
issued or outstanding (share amounts in thousands):
Class A Convertible Preferred Stock, $0.0001 par value; retired in 1996. $- $-
Preferred Stock, $0.0001 par value; 100 shares authorized, none issued and - -
outstanding
Voting Common Stock, $0.0001 par value, 40,000 shares authorized; 18,736 shares
issued, including 443 treasury shares, at December 31, 1997; 16,736 shares
issued, including 46 treasury shares, at December 31, 1996. 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 310,373 284,502
Retained earnings (accumulated deficit) (9,818) (3)
--------------------------
Total stockholders' equity $300,557 $284,501
==========================
In December 1996, the Board of Directors authorized a program to repurchase
the Company's common stock, spending up to a maximum of $10,000. The
repurchase program was completed during 1997, pursuant to which the Company
repurchased a total of 443,000 shares at an average price per share of $22.57.
Concurrent with the IPO, all 5,227,346 outstanding shares of Class A
Convertible Preferred Stock converted into an equal number of shares of Common
Stock and 1,113,841 shares of Common Stock were issued in an exchange for the
minority interests then outstanding. In addition, the Company became
authorized to issue up to 100,000 shares of a new series of Preferred Stock,
with rights, preferences and privileges thereon to be determined by the Board
of Directors. The Company also became authorized to issue up to 20,000,000
shares of Class C Common Stock. No such Preferred or Class C Common Stock has
been issued as of December 31, 1997.
F-20
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, Except Per Share Amounts)
15. INCOME TAXES
The income tax (provision) benefit consisted of the following:
YEAR ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
Current:
Federal $- $(187) $-
State and local (1,932) (997) (285)
------------------------------------------
Total current (1,932) (1,184) (285)
------------------------------------------
Deferred:
Federal 4,456 (5,422) 2,476
State and local 2,987 - -
------------------------------------------
Total deferred 7,443 (5,422) 2,476
------------------------------------------
Income tax (provision) benefit before extraordinary item 5,511 (6,606) 2,191
Income tax benefit from extraordinary item - 2,685 -
------------------------------------------
Income tax (provision) benefit $5,511 $(3,921) $2,191
==========================================
The income tax (provision) benefit varied from the U.S. federal statutory
income tax rate due to the following:
YEARS ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
Income tax (provision) benefit at Federal statutory rate of 35%. $5,479 $(5,142) $2,046
State and local income taxes, net of federal benefit 720 (892) (186)
Non-deductible amortization of goodwill (750) - -
Valuation allowance - - 745
Tax on income of minority interests - (570) -
Other 62 (2) (414)
-------------------------------------
Income tax (provision) benefit before extraordinary item $5,511 $(6,606) $2,191
=====================================
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, 1997 and
1996 were as follows:
1997 1996
---- ----
DEFERRED TAX ASSETS
Net operating loss carryforwards $7,751 $6,065
Accrued liabilities 4,988 -
Partnership investments 2,038 -
Other 1,262 939
-------------------------
Total deferred tax assets $16,039 $7,004
-------------------------
DEFERRED TAX LIABILITIES
Depreciation and amortization $(3,848) $-
Sale of finance receivables and other items (861) (1,590)
Partnership investments - (3,277)
-------------------------
Total deferred tax liabilities (4,709) (4,867)
-------------------------
Net deferred tax assets (liabilities) $11,330 $2,137
=========================
F-21
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, Except Per Share Amounts)
At December 31, 1997, the Company has $15,693 of net operating loss
carryforwards that expire through 2012. In addition, at December 31, 1997, the
Company also has $33,625 of state net operating loss carryforwards that expire
at various dates through 2012.
16. SUPPLEMENTAL CASH FLOW INFORMATION
The following table presents supplementary cash flow information:
1997 1996 1995
----- ----- ----
AUTO AUTO AUTO AUTO AUTO AUTO
DEALERSHIPS FINANCE DEALERSHIPS FINANCE DEALERSHIPS FINANCE
----------- ------- ----------- ------- ----------- --------
Supplemental information:
Cash paid interest $8,016 $276 $9,912 $420 $8,437 $109
Cash paid income taxes 3,321 56 420 37 - 3
Non-cash financing and
investing activities:
Dealership acquisition
costs financed by
issuance of stock 28,150 - - - - -
Dealership acquisition
cost financed by
long-term debt 27,104 - 4,100 - 4,014 -
Capitalized lease
obligations 1,101 252 1,570 - - -
Stock issuance costs
amortized against
proceeds from issuance
of stock - - 775 - 910 -
Minority interests
acquired by issuance
of stock - - 34,015 - - -
17. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
STATEMENTS OF OPERATIONS DATA (1) : QUARTER QUARTER QUARTER QUARTER (2)
------- ------- ------- -----------
1997 (3)
Auto Dealerships
Total revenues $388,200 $526,958 $625,975 $546,015
Gross profit 47,612 68,650 80,641 60,159
Operating income (loss) 5,856 14,683 15,997 (34,540)
Auto Finance
Loss before income taxes (96) (103) (1,175) (2,361)
Total Company
Income (loss) before minority interests and income
tax (provision) benefit 5,588 12,803 9,819 (43,723)
Net income (loss) 3,317 7,599 5,870 (26,926)
Basic net income (loss) per common share 0.19 0.42 0.31 (1.43)
Net income (loss) per diluted common share 0.19 0.42 0.31 (1.41)
F-22
UNITED AUTO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, Except Per Share Amounts)
FIRST SECOND THIRD FOURTH
STATEMENTS OF OPERATIONS DATA (1): QUARTER QUARTER QUARTER QUARTER
1996 (4) ------- ------- ------- -------
Auto Dealerships
Total revenues $261,719 $336,220 $356,845 $347,247
Gross profit 29,717 37,412 39,892 38,551
Operating income (loss) 2,054 8,055 6,872 4,347
Auto Finance
Loss before income taxes (264) (85) (377) (764)
Total Company
Income (loss) before minority interests and income
tax (provision) benefit 1,706 7,672 5,553 3,015
Income before extraordinary item 449 3,894 2,221 1,470
Extraordinary item - - - (4,987)
Net income (loss) 449 3,894 2,221 (3,517)
Basic income before extraordinary item per common
share 0.07 0.49 0.26 0.10
Income before extraordinary item per diluted common
share 0.06 0.44 0.21 0.09
(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 3, the Company recorded a $31.7 million charge
during the fourth quarter of 1997.
(3) 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
(4) 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.
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 amount.
18. YEAR 2000 RISKS
Many existing computer programs use only two digits to identify a year in the
date field and, if not corrected, many computer applications could fail or
generate erroneous results in the year 2000. Based on a recent assessment,
management of the Company believes that its computer systems will not require
any significant modifications in order to properly process date-related
information in the year 2000 and thereafter (or be "year 2000 compliant").
However, the Company could be materially adversely affected if the systems of
its significant vendors, including those supplying and maintaining the general
ledger and related accounting systems at each of the Company's dealerships,
will not be year 2000 compliant. The Company has received assurances that such
vendors are adequately addressing this issue. Nevertheless, there can be no
guarantee that the systems provided by such vendors, or that the systems of
other companies with which the Company does business, will be year 2000
compliant and that any such non-compliance will not have a material adverse
effect on the Company.
F-23
19. LEGAL PROCEEDINGS
In May and June, 1997, three complaints were filed in the United States
District Court for the Southern District of New York on behalf of a purported
class consisting of all persons who purchased the Company's Voting Common
Stock issued in connection with and/or traceable to the Company's IPO at any
time up to and including February 26, 1997 (the "Lawsuits"). The complaints
name as defendants the Company, Carl Spielvogel, Marshall S. Cogan,
J.P. Morgan Securities Inc., Montgomery Securities and Smith Barney Inc.
The plaintiffs in the lawsuits seek unspecified damages in connection with
their allegations that the prospectus and the related registration statement
disseminated in connection with the IPO contained material misrepresentations
and omissions in violation of Sections 11, 12(a)(2) and 15 of the Securities
Act of 1933, as amended (the "Securities Act"). They also seek to have their
actions certified as class actions under Federal Rules of Civil Procedure.
On August 5, 1997, the Lawsuits were ordered consolidated for all purposes.
On October 3, 1997, the plaintiffs filed a consolidated amended class action
complaint. On November 17, 1997, the Company filed a motion to dismiss the
consolidated amended class action complaint. The court has not yet ruled on
this motion. The Company believes that the plaintiffs' claims are without
merit and intends to defend the Lawsuits vigorously.
Additionally, the Company and its subsidiaries are involved in litigation
that has arisen in the ordinary course of business. None of these matters,
either individually or in the aggregate, are expected to have a material
adverse effect on the Company's results of operations or financial
condition.
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