SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): FEBRUARY 6, 2002
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UNITED AUTO GROUP, INC.
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(Exact Name of Registrant as Specified in its Charter)
DELAWARE 1-12297 22-3086739
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(State or Other Jurisdiction of Incorporation) (Commission File Number) (IRS Employer Identification Number)
13400 OUTER DRIVE WEST 48239
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DETROIT, MI (Including Zip Code)
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(Address of Principal Executive
Offices)
313-592-7311
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(Registrant's Telephone Number, Including Area Code)
ITEM 5. FINANCIAL STATEMENTS AND EXHIBITS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those discussed in
the forward-looking statements as a result of various factors, including but not
limited to those described under "Risk Factors" and included in our filings with
with the Commission.
GENERAL
We are the third largest publicly-held automotive retailer in the United
States as measured by total revenues. As of December 31, 2001, we owned and
operated 127 franchises located primarily in major metropolitan areas in 19
states, Puerto Rico and Brazil. As an integral part of our dealership
operations, we retail new and used automobiles and light trucks, operate service
and parts departments, operate collision repair centers and sell various
aftermarket products, including finance, warranty, extended service and other
insurance contracts.
New vehicle revenues include sales to retail and fleet 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. We generate
finance and insurance revenues from sales of warranty policies, extended service
contracts, other insurance policies, and accessories, as well as from fees for
placing finance and lease contracts. Service and parts revenues include fees
paid for repair and maintenance service, the sale of replacement parts and body
shop repairs.
Our gross profit tends to vary with the mix of revenues we derive from new
vehicle sales, used vehicle sales, finance and insurance revenues, and service
and parts revenues. Our gross profit generally varies across product lines, with
new vehicle sales usually resulting in lower gross profits and our other
products resulting in higher gross profits. Factors such as seasonality,
weather, cyclicality and manufacturers' advertising and incentives may impact
the mix of our revenues, and therefore influence our gross margin.
Our 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, legal
and general management personnel, depreciation, amortization, rent, insurance,
utilities and other outside services. A significant portion of our selling
expenses are variable (such as sales commissions), and a significant portion of
our general and administrative expenses are subject to our control (such as
advertising costs), allowing our costs to adapt to trends in the market.
Floor plan interest expense relates to floor plan financing. Other interest
expense consists of interest charges on all of our interest-bearing debt, other
than interest relating to floor plan financing.
We have made a number of dealership acquisitions in each year since 1999.
Each of these acquisitions has been accounted for using the purchase method of
accounting. As a result, our financial statements include the results of
operations of the acquired dealerships from the date of acquisition.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Revenues. Retail revenues, which exclude revenues relating to fleet and
wholesale transactions, increased by $1.3 billion, or 28.5%, from $4.4 billion
to $5.7 billion. The overall increase in retail revenues is due primarily to:
(1) a $328.9 million, or 9.1%, increase in retail revenues at dealerships owned
prior to January 1, 2000, and (2) dealership acquisitions made subsequent to
January 1, 2000, partially offset by a decrease in revenues resulting from the
divestiture of certain dealerships. The overall increase in retail revenues at
dealerships owned prior to January 1, 2000 reflects 10.3%, 6.2%, 19.4% and 4.2%
increases in new retail vehicle, used retail vehicle, finance and insurance and
service and parts revenues, respectively. Revenues of $520.1 million from fleet
and wholesale transactions represent a 16.6% increase versus the
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prior year. The increase in fleet and wholesale revenues is due to acquisitions
subsequent to January 1, 2001.
Retail sales of new vehicles, which exclude fleet transactions, increased
by $865.9 million, or 30.5%, from $2.8 billion to $3.7 billion. The increase is
due primarily to: (1) a $237.9 million, or 10.3%, increase at dealerships owned
prior to January 1, 2000 and (2) acquisitions made subsequent to January 1,
2000, partially offset by a decrease resulting from the divestiture of certain
dealerships. The increase at dealerships owned prior to January 1, 2000, is due
primarily to a 7.6% increase in new retail unit sales and an increase in
comparative average selling prices per vehicle. Aggregate retail unit sales of
new vehicles increased by 25.2%, due principally to: (1) the net increase at
dealerships owned prior to January 1, 2000 and (2) acquisitions made subsequent
to January 1, 2000, partially offset by the decrease due to divested
dealerships. We retailed 141,056 new vehicles (67.1% of total retail vehicle
sales) during the year ended December 31, 2001, compared with 112,676 new
vehicles (65.9% of total retail vehicle sales) during the year ended December
31, 2000. Fleet revenues increased $29.4 million, or 22.5%, versus the
comparable prior year period. The increase in fleet revenues is due primarily
to: (1) a $10.9 million, or 8.7%, increase in fleet sales revenues at
dealerships owned prior to January 1, 2000 and (2) acquisitions made subsequent
to January 1, 2000, partially offset by a decrease resulting from the
divestiture of certain dealerships.
Retail sales of used vehicles, which exclude wholesale transactions,
increased by $216.0 million, or 23.7%, from $912.0 million to $1.1 billion. The
increase is due primarily to: (1) a $47.4 million, or 6.2%, increase at
dealerships owned prior to January 1, 2000 and (2) acquisitions made subsequent
to January 1, 2000, partially offset by a decrease resulting from the
divestiture of certain dealerships. The increase at dealerships owned prior to
January 1, 2000, is due primarily to a 5.2% increase in used retail unit sales
and an increase in comparative average selling prices per vehicle. Aggregate
retail unit sales of used vehicles increased by 19.0%, due principally to: (1)
the net increase at dealerships owned prior to January 1, 2000, and (2)
acquisitions made subsequent to January 1, 2000, partially offset by the
decrease due to divested dealerships. We retailed 69,302 used vehicles (32.9% of
total retail vehicle sales) during the year ended December 31, 2001, compared
with 58,252 used vehicles (34.1% of total retail vehicle sales) during the year
ended December 31, 2000. Wholesale revenues increased $44.5 million, or 14.1%,
versus the comparable prior year period. The increase in wholesale revenues is
due primarily to: acquisitions made subsequent to January 1, 2000; partially
offset by (1) a $13.1 million, or 5.1%, decrease at dealerships owned prior to
January 1, 2000 and (2) a decrease resulting from the divestiture of certain
dealerships.
Finance and insurance revenues increased by $60.6 million, or 31.4%, from
$193.1 million to $253.7 million. The increase is due primarily to: (1) a $26.8
million, or 19.4%, increase at dealerships owned prior to January 1, 2000 and
(2) acquisitions made subsequent to January 1, 2000, partially offset by a
decrease resulting from the divestiture of certain dealerships.
Service and parts revenues increased by $120.4 million, or 24.5%, from
$491.8 million to $612.2 million. The increase is due primarily to: (1) a $16.8
million, or 4.2%, increase at dealerships owned prior to January 1, 2000 and (2)
acquisitions made subsequent to January 1, 2000, partially offset by a decrease
resulting from the divestiture of certain dealerships.
Gross Profit. Retail gross profit, which excludes gross profit on fleet
and wholesale transactions, increased $176.0 million, or 26.0%, from $675.5
million to $851.5 million. The increase in gross profit is due to: (i) a $45.9
million, or 8.5%, increase in retail gross profit at stores owned prior to
January 1, 2000, and (2) acquisitions made subsequent to January 1, 2000,
partially offset by a decrease resulting from the divestiture of certain
dealerships. Gross profit as a percentage of revenues on retail transactions
decreased from 15.2% to 14.9%. Gross profit as a percentage of revenues for new
vehicle retail, used vehicle retail, finance and insurance and service and parts
revenues was 8.3%, 10.6%, 58.5%, and 44.9%, respectively, compared with 8.8%,
10.7%, 58.7% and 43.8% in the comparable prior year period. The decrease in
gross profit as a percentage of revenues on retail transactions is primarily
attributable to: (1) an increase in the relative proportion of lower margin new
vehicle sales revenues to total retail vehicle revenues, (2) a decrease in the
percentage of higher margin finance and insurance and service and parts revenues
to total retail revenues, (3) decreased gross profit margins on new retail
vehicle revenues, and (4) decreased gross
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profit margins on used retail vehicle revenues, partially offset by increased
gross profit margins on service and parts revenues. Aggregate gross profit on
fleet and wholesale transactions decreased by $2.8 million to a loss of $0.3
million.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $153.6 million, or 28.5%, from $539.7
million to $693.3 million. Such expenses as a percentage of total revenue were
11.1%, which is consistent with the prior year, and increased as a percentage of
gross profit from 79.6% to 81.5%. The aggregate increase in selling, general and
administrative expenses is due principally to: (1) a $45.6 million, or 11.0%,
increase at dealerships owned prior to January 1, 2000, and (2) acquisitions
made subsequent to January 1, 2000, partially offset by a decrease resulting
from the divestiture of certain dealerships. The increase in selling, general
and administrative expenses at stores owned prior to January 1, 2000 is due in
large part to increased selling expenses, including increased variable
compensation, as a result of the 8.5% increase in retail gross profit over the
prior year.
Floor Plan Interest Expense. Floor plan interest expense decreased by $2.0
million, or 4.4%, from $44.4 million to $42.4 million. The decrease in floor
plan interest expense is due to (1) a $10.1 million, or 29.4%, decrease at
stores owned prior to January 1, 2000 and (2) a decrease relating to the
divestiture of certain dealerships, partially offset by acquisitions made
subsequent to January 1, 2000. The decrease at stores owned prior to January 1,
2000 is due primarily to a decrease in inventory at dealerships owned prior to
January 1, 2001, coupled with a decrease in our weighted average borrowing rate
on floor plan indebtedness during 2001.
Other Interest Expense. Other interest expense increased by $2.0 million,
or 6.1%, from $32.8 million to $34.8 million. The increase is due primarily to
increased acquisition related indebtedness, offset in part by (1) a decrease in
our weighted average borrowing rate during 2001, (2) the effect of refinancing
our 11.0% senior subordinated notes due 2007 and certain other indebtedness with
lower interest borrowings under our amended and restated credit agreement, dated
as of December 22, 2000 and (3) the paydown of indebtedness with proceeds from
equity offerings subsequent to December 31, 2000.
Income Taxes. Income taxes increased by $8.5 million from $26.6 million to
$35.1 million. The increase is due to an increase in pre-tax income compared
with 2000.
Extraordinary Item. The 2000 extraordinary loss of $4.0 million, net of
$3.1 million of tax, represents a loss resulting from the redemption premium
paid for the subordinated notes and the write-off of unamortized deferred
financing costs relating thereto.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Revenues. Retail revenues, which exclude revenues relating to fleet and
wholesale transactions, increased by $855.7 million, or 23.9%, from $3.6 billion
to $4.4 billion. The overall increase in retail revenues is due primarily to:
(1) a $196.1 million, or 6.2%, increase in retail revenues at dealerships owned
prior to January 1, 1999 and (2) dealership acquisitions made subsequent to
January 1, 1999, partially offset by a decrease in revenues resulting from the
divestiture of some dealerships. The overall increase in retail revenues at
dealerships owned prior to January 1, 1999, reflects 6.3%, 5.1%, 7.3% and 7.9%
increases in new retail vehicle, used retail vehicle, finance and insurance and
service and parts revenues, respectively. Revenues of $446.2 million from fleet
and wholesale transactions were consistent with the prior year.
Retail sales of new vehicles, which exclude fleet sale transactions,
increased by $593.0 million, or 26.4%, from $2.2 billion to $2.8 billion. The
increase is due primarily to: (1) a $125.0 million, or 6.3%, increase at
dealerships owned prior to January 1, 1999, and (2) acquisitions made subsequent
to January 1, 1999, partially offset by a decrease resulting from the
divestiture of some dealerships. The increase at dealerships owned prior to
January 1, 1999, is due primarily to a 4.0% increase in new retail unit sales
and an increase in comparative average selling prices per vehicle. Aggregate
retail unit sales of new vehicles increased by 20.8%, due principally to: (1)
the net increase at dealerships owned prior to January 1, 1999, and (2)
acquisitions made subsequent to January 1, 1999, partially offset by the
decrease due to divested dealerships. We retailed 112,676 new vehicles (65.9% of
total retail vehicle sales) during
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the year ended December 31, 2000, compared with 93,259 new vehicles (64.2% of
total retail vehicle sales) during the year ended December 31, 1999. Fleet sales
decreased $39.5 million, or 23.2%, compared to the comparable prior year period
due primarily to a 31.9% decrease in fleet unit sales.
Retail sales of used vehicles, which exclude wholesale transactions,
increased by $142.3 million, or 18.5%, from $769.6 million to $912.0 million.
The increase is due primarily to: (1) a $35.2 million, or 5.1%, increase at
dealerships owned prior to January 1, 1999, and (2) acquisitions made subsequent
to January 1, 1999, partially offset by a decrease resulting from the
divestiture of certain dealerships. The increase at dealerships owned prior to
January 1, 1999, is due primarily to a 1.5% increase in used retail unit sales
and an increase in comparative average selling prices per vehicle. Aggregate
retail unit sales of used vehicles increased by 12.0%, due principally to: (1)
the net increase at dealerships owned prior to January 1, 1999, and (2)
acquisitions made subsequent to January 1, 1999, partially offset by the
decrease due to divested dealerships. We retailed 58,252 used vehicles (34.1% of
total retail vehicle sales) during the year ended December 31, 2000, compared
with 52,027 used vehicles (35.8% of total retail vehicle sales) during the year
ended December 31, 1999. Wholesale revenues increased $45.2 million, or 16.7%,
compared to the comparable prior year period. The increase in wholesale revenues
is due primarily to: acquisitions made subsequent to January 1, 1999, offset in
part by (1) an $8.2 million, or 3.5%, decrease at dealerships owned prior to
January 1, 1999, and (2) a decrease resulting from the divestiture of some
dealerships.
Finance and insurance revenues increased by $27.4 million, or 16.5%, from
$165.8 million to $193.1 million. The increase is due primarily to: (1) an $8.8
million, or 7.3%, increase at dealerships owned prior to January 1, 1999, and
(2) acquisitions made subsequent to January 1, 1999, partially offset by a
decrease resulting from the divestiture of certain dealerships.
Service and parts revenues increased by $93.0 million, or 23.3%, from
$398.8 million to $491.8 million. The increase is due primarily to: (1) a $27.1
million, or 7.9%, increase at dealerships owned prior to January 1, 1999, and
(2) acquisitions made subsequent to January 1, 1999, partially offset by a
decrease resulting from the divestiture of some dealerships.
Gross Profit. Retail gross profit, which excludes gross profit on fleet
and wholesale transactions, increased $125.9 million, or 22.9%, from $549.6
million to $675.5 million. The increase in gross profit is due to: (1) a $30.6
million, or 6.5%, increase in retail gross profit at stores owned prior to
January 1, 1999, and (2) acquisitions made subsequent to January 1, 1999,
partially offset by a decrease resulting from the divestiture of some
dealerships. Gross profit as a percentage of revenues on retail transactions
decreased from 15.3% to 15.2%. Gross profit as a percentage of revenues for new
vehicle retail, used vehicle retail, finance and insurance and service and parts
revenues was 8.8%, 10.7%, 58.7%, and 43.8%, respectively, compared with 8.6%,
11.1%, 58.8% and 43.4% in the comparable prior year period. The decrease in
gross profit as a percentage of revenues on retail transactions is primarily
attributable to: (1) an increase in the relative proportion of lower margin new
vehicle sales revenues to total retail revenues during 2000 and (2) decreases in
gross profit margins on used retail vehicle revenues; partially offset by
increases in gross profit margins on new retail vehicle and service and parts
revenues and an increase in service and parts revenues as a percentage of total
revenues. Aggregate gross profit on fleet and wholesale transactions increased
$2.6 million to $2.4 million.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $94.6 million, or 21.2%, from $445.1
million to $539.7 million. These expenses as a percentage of total revenues were
11.1%, which is consistent with the prior year, and decreased as a percentage of
gross profit from 81.0% to 79.6%. The aggregate increase in selling, general and
administrative expenses is due principally to: (1) a $26.6 million, or 7.3%,
increase at stores owned prior to January 1, 1999 and (2) acquisitions made
subsequent to January 1, 1999, partially offset by a decrease resulting from the
divestiture of some dealerships. The increase in selling, general and
administrative expense at stores owned prior to January 1, 1999 is due in large
part to increased selling expenses, including increased variable compensation,
as a result of the 6.5% increase in retail gross profit over the prior year.
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Floor Plan Interest Expense. Floor plan interest expense increased by
$15.7 million, or 54.9%, from $28.7 million to $44.4 million. The increase in
floor plan interest expense is due to: (1) a $6.0 million, or 24.3%, increase at
stores owned prior to January 1, 1999 and (2) acquisitions made subsequent to
January 1, 1999, offset in part by decreases relating to (1) the effect of our
interest rate swaps hedging floor plan interest rates and (2) the divestiture of
certain dealerships. The increase at stores owned prior to January 1, 1999 is
due to an increase in inventory levels compared to 1999 and an increase in our
weighted average borrowing rate during 2000.
Other Interest Expense. Other interest expense increased by $3.4 million,
or 11.7%, from $29.3 million to $32.8 million. The increase is due primarily to
increased acquisition related indebtedness, offset in part by (1) the effect of
refinancing the subordinated notes and certain other indebtedness with lower
interest borrowings under our credit agreement and (2) the paydown of
indebtedness with proceeds from equity offerings during 1999.
Income Taxes. Income taxes increased by $5.1 million from $21.4 million to
$26.6 million. The increase is due to an increase in pre-tax income compared
with 1999, offset in part by a decrease in our estimated annual effective income
tax rate. The decrease in the comparative effective rate is due primarily to a
decrease in our estimated effective state tax rate resulting from certain tax
planning initiatives and a change in the geographic mix of our earnings.
Extraordinary Item. The $4.0 million extraordinary item in 2000 represents
a loss resulting from the redemption premium paid for the subordinated notes and
the write-off of unamortized deferred financing costs relating to the
subordinated notes. The $0.7 million extraordinary item in 1999 represents the
after tax gain arising from the retirement of $49.0 million of subordinated
notes, offset in part by the write-off of a portion of the deferred financing
costs relating to the subordinated notes.
QUARTERLY FINANCIAL DATA
The following table shows selected income statement data for the last eight
quarters:
THREE MONTHS ENDED
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MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
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(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
2001
Total revenues.................................. $1,395.0 $1,615.2 $1,595.8 $1,614.7
Gross profit.................................... 191.8 219.0 221.1 219.3
Net income...................................... 6.6 13.4 13.5 11.3
Net income per diluted common share............. $ 0.21 $ 0.40 $ 0.38 $ 0.32
THREE MONTHS ENDED
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MARCH 31 JUNE 30(1) SEPTEMBER 30 DECEMBER 31
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(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
2000
Total revenues.................................. $1,110.8 $1,204.1 $1,331.2 $1,237.9
Gross profit.................................... 152.1 166.8 182.6 176.5
Net income...................................... 5.6 7.1 11.2 6.1
Net income per diluted common share............. $ 0.19 $ 0.24 $ 0.40 $ 0.21
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(1) We recorded a $4.0 extraordinary loss in the second quarter of 2000
resulting from the redemption premium paid for the subordinated notes and
the write-off of unamortized financing costs relating to the subordinated
notes.
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LIQUIDITY AND CAPITAL RESOURCES
Our cash requirements are primarily for working capital, the acquisition of
new dealerships, the improvement and expansion of existing facilities and the
construction of new facilities. Historically, these cash requirements have been
met through borrowings under our credit agreement, the issuance of debt
securities, including floor plan notes payable, the issuance of equity
securities and cash flow from operations. At December 31, 2001, we had working
capital of $135.2 million.
We finance the majority of our new and a portion of our used vehicle
inventory under revolving floor plan financing arrangements which our
subsidiaries have entered into with various lenders. We make monthly interest
payments on the amount financed, but are generally not required to make loan
principal repayments prior to the sale of new and used vehicles. The floor plan
agreements grant a security interest in the financed vehicles and related sales
proceeds and require repayment after a vehicle's sale. Interest rates on the
floor plan arrangements are variable and increase or decrease based on movements
in the prime rate or LIBOR. As of December 31, 2001, our outstanding borrowings
under floor plan arrangements amounted to $620.0 million.
Our credit agreement with Chrysler Financial Company LLC and Toyota Motor
Credit Corporation provides for revolving loans to be used for acquisitions,
working capital, the repurchase of common stock and general corporate purposes.
Pursuant to an amendment dated October 29, 2001, our borrowing capacity under
the revolving portion of the credit agreement increased from $520.0 million to
$770.0 million. Our credit agreement also provides for a term loan of $161.0
million, all of which was used during 1999 and 2000 to repurchase our senior
subordinated notes. Loans under the credit agreement bear interest between LIBOR
plus 2.00% and LIBOR plus 3.00%. The credit agreement is fully and
unconditionally guaranteed on a joint and several basis by our automotive
dealership subsidiaries (and will be guaranteed by automotive dealership
subsidiaries acquired or established by us in the future) and contains a number
of significant covenants that, among other things, restrict our ability to
dispose of assets, incur additional indebtedness, repay other indebtedness,
create liens on assets, make investments or acquisitions and engage in mergers
or consolidations. In addition, we are required to comply with specified ratios
and tests, including debt to equity, debt service coverage and minimum working
capital covenants. Our credit agreement also contains typical events of default
including change of control, material adverse change and non-payment of
obligations. Substantially all of our assets not subject to security interests
granted to floor plan lending sources are subject to security interests granted
to lenders under the credit agreement. The availability under the revolving
portion of the credit agreement is limited by a collateral-based borrowing base
which is calculated based on our net tangible assets. Revolving loans mature on
August 3, 2005. With respect to the $161.0 million of term loans, $25.0 million
must be repaid on December 23, 2003, $25.0 million must be repaid on December
23, 2005, and the remainder must be repaid on December 23, 2007. As of December
31, 2001, our outstanding borrowings under the credit agreement amounted to
$541.5 million, $161.0 million of which was incurred in connection with the
repurchase of notes.
In October 2001, we entered into swap agreements of approximately four
years duration pursuant to which a notional $400.0 million of our floating rate
debt was exchanged for fixed rate debt. The fixed rate interest to be paid by us
is based on LIBOR and amounts to approximately 4.23%. During 2000, we entered
into a swap agreement of five years duration pursuant to which a notional $200.0
million of our floating rate debt was exchanged for fixed rate debt for five
years. The fixed rate interest to be paid by us is based on LIBOR and amounts to
approximately 7.1%.
In 1997, we issued $200.0 million of 11.0% senior subordinated notes due
2007. In 1999, we redeemed $49.0 million of the notes. In 2000 we completed a
tender offer in which we repurchased $147.3 million of the notes at a redemption
price of 101% of the principal amount of the subordinated notes. The indentures
governing the subordinated notes require us to comply with specified debt
service coverage ratio levels in order to incur incremental indebtedness. Such
indentures also limit our ability to pay dividends based on a formula that takes
into account, among other things, our consolidated net income, and contain other
covenants which restrict our ability to purchase capital stock, incur liens,
sell assets and enter into other transactions. The subordinated notes are fully
and unconditionally guaranteed on a joint and several basis
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by our auto dealership subsidiaries. As of December 31, 2001, $3.7 million of
subordinated notes remain outstanding.
On April 12, 1999, we entered into a securities purchase agreement with
International Motor Cars Group I, L.L.C. and International Motor Cars Group II,
L.L.C., Delaware limited liability companies controlled by Penske Capital
Partners, L.L.C. (together, the "PCP Entities"), pursuant to which the PCP
Entities agreed to purchase (1) an aggregate of 7,903.124 shares of our Series A
convertible preferred stock, par value $0.0001 per share, (2) an aggregate of
396.876 shares of our Series B convertible preferred stock, par value $0.0001
per share, and (3) warrants to purchase (a) 3,898,665 shares of common stock and
(b) 1,101,335 shares of our non-voting common stock, par value $0.0001 per
share, for $83.0 million.
The shares of Series A preferred stock and Series B preferred stock entitle
the PCP Entities to dividends at a rate of 6.5% per year. The dividends were
payable in kind for the first two years after issuance and are currently payable
in cash. The Series A preferred stock is convertible into an aggregate of
8,794,171 shares of common stock and the Series B preferred stock is convertible
into an aggregate of 648,588 shares of non-voting common stock (in each case,
after giving effect to payable in kind dividends). We are entitled under some
circumstances to redeem the preferred stock after May 3, 2002, for an amount per
share equal to the liquidation preference. The liquidation preference is
currently $10,000 per share plus accrued and unpaid dividends. Actual cash
dividends payable relating to dividends earned during fiscal 2001 in connection
with the preferred stock totaled $3.1 million. Beginning in fiscal 2002, the
aggregate annual cash dividends payable by us are expected to total $6.1
million. Funding for such dividends is expected to come from cash flow from
operations and working capital borrowings under our credit agreement.
The warrants, as originally issued to the PCP Entities, were exercisable at
a price of $12.50 per share until February 3, 2002, and $15.50 per share
thereafter until May 2, 2004. Pursuant to the anti-dilution provisions of the
warrants and as a result of the sale of equity to Mitsui & Co. in 2001, (a) the
number of warrants to purchase common stock was increased from 3,898,665 shares
to 3,915,580 shares, (b) the number of warrants to purchase non-voting common
stock was increased from 1,101,335 shares to 1,106,113 shares, and (c) the
warrant exercise price was lowered from $12.50 to $12.45. On February 1, 2002,
the PCP Entities exercised the warrants in full and paid us the full exercise
price of $62.5 million. The proceeds of the warrant exercise will be used for
general working capital purposes which may include acquisitions. Pending such
use, the proceeds will be used to pay down indebtedness.
In December 2000, we issued 2,139,535 shares of common stock to Penske
Corporation for $10.75 per share. Aggregate proceeds, amounting to $23.0
million, were used to reduce debt. In February 2001, we issued 1,302,326 shares
of voting common stock to Mitsui & Co., Ltd. and Mitsui & Co. (U.S.A.), Inc. in
a private placement for $10.75 per share (the "Mitsui Transaction"). Aggregate
proceeds, amounting to $14.0 million, were used to reduce debt.
In September 2001, we announced that our board of directors authorized the
repurchase of up to three million shares of our outstanding common stock.
Pursuant to that authorization, we repurchased 387,092 shares through open
market purchases and negotiated transactions at an aggregate cost of $5.8
million during 2001.
During 2001, net cash provided by operations amounted to $72.4 million. Net
cash used in investing activities during 2001 totaled $221.8 million, of which
$83.4 million related to capital expenditures and $138.4 million was for
acquisitions. Net cash provided by financing activities during 2001 totaled
$147.3 million, relating to: (1) net borrowings of $134.3 million for capital
expenditures and acquisitions and (2) $18.8 million relating to the issuance of
voting common stock, partially offset by $5.8 million used to repurchase common
stock.
We have a number of capital projects planned or underway relating to the
expansion and renovation of our retail automotive operations. Gross cash
expenditures relating to such projects are estimated to aggregate to $100.0
million. Historically, we have financed such capital expenditures with
borrowings under
8
our credit agreement and cash flow from operations. In the past, we have
entered into sale leaseback transactions relating to capital expenditures on
certain capital projects with Automotive Group Realty, LLC ("AGR"), a wholly
owned subsidiary of Penske Corporation. We sold certain properties to AGR in
2001 for consideration of $20.9 million and made lease payments to AGR totalling
$5.8 million during 2001 which payments relate to properties we lease from AGR.
We believe we will continue to finance certain capital expenditures in this
fashion during 2002. As a result we anticipate that the net cash we will fund
for capital expenditures will amount to $70.0 million.
In addition, we have entered into a number of arrangements to acquire
retail automotive franchises from unaffiliated third parties. Funding for the
cash element of these acquisitions, expected to approximate $19.0 million, is
expected to come from cash flow from operations and borrowings under our credit
agreement. We also have obligations with respect to past acquisitions totaling
$32.0 million over the next four years.
In connection with one of the acquisitions consummated during 2001, we
agreed to make a contingent payment in cash to the extent the 289,240 shares of
common stock issued in connection with the acquisition have a market value at
the time of sale of less than $17.29 per share. In addition, we agreed to make a
contingent payment in cash to the extent the 841,476 shares of common stock
issued in connection with an acquisition completed in 2000 have a market value
at the time of sale of less than $12.00 per share.
As of December 31, 2001, we had approximately $5.4 million of cash available
to fund operations and future acquisitions. In addition, a maximum of $427.0
million was available for borrowing under our credit agreement as of February 5,
2002, which availability is limited by the credit agreement's borrowing base
collateral requirements (in general, the borrowing base equals our net tangible
assets plus $300.0 million). The borrowing base limitations currently limit our
ability to access the full availability under our credit agreement.
We are a holding company whose assets consist primarily of the direct or
indirect ownership of the capital stock of our operating subsidiaries.
Consequently, our ability to pay dividends is dependent upon the earnings of our
subsidiaries and their ability to distribute earnings and other advances and
payments to us.
Our principal source of growth has come from acquisitions of automotive
dealerships. We believe that our existing capital resources, including the
liquidity provided by our credit agreement and floor plan financing, together
with the proceeds of this equity offering and the concurrent debt offering,
which will be used to repay existing indebtedness, will be sufficient to fund
our current operations and commitments for the next twelve months. To the extent
we pursue additional significant acquisitions, we may need to raise additional
capital either through the public or private issuance of equity or debt
securities or through additional bank borrowings. In certain circumstances, a
public equity offering could require the prior approval of several automobile
manufacturers. There is no assurance that we would be able to access the capital
markets or increase our borrowing capabilities on terms acceptable to us, if at
all.
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. We believe that the industry is
influenced by general economic conditions and particularly by consumer
confidence, the level of personal discretionary spending, fuel prices, interest
rates and credit availability.
SEASONALITY
Our business is modestly seasonal overall. Our operations generally
experience higher volumes of vehicle sales in the second and third quarters of
each year due in part to consumer buying trends and the introduction of new
vehicle models. Also, demand for cars and light trucks is generally lower during
the winter months than in other seasons, particularly in regions of the United
States where dealerships may be subject to harsh winters. Accordingly, we expect
our revenues and profitability to be generally lower in our first and fourth
quarters as compared to our second and third quarters. The greatest
seasonalities exist with
9
the dealerships in the northeast United States, for which the second and third
quarters are the strongest with respect to vehicle-related sales. The service
and parts business at all dealerships experiences relatively modest seasonal
fluctuations.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 141, Business Combinations
("SFAS No. 141"), and Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets ("SFAS No. 142"), were issued in final form
in June 2001. The provisions of SFAS No. 141, which require use of the purchase
method of accounting and eliminate the use of the pooling-of-interests method of
accounting for business combinations, apply to all business combinations
completed after June 30, 2001. In addition, SFAS No. 141 includes transition
provisions that apply to business combinations accounted for using the purchase
method which were completed before July 1, 2001.
The provisions of SFAS No. 142, which address the financial accounting and
related reporting for acquired goodwill and other intangible assets, are
effective for fiscal years beginning after December 15, 2001. SFAS No. 142,
which we adopted on January 1, 2002, eliminates goodwill amortization over its
estimated useful life. However, goodwill will be subject to at least an annual
assessment for impairment by applying a fair-value based test. Additionally,
acquired intangible assets should be separately recognized if the benefit of the
intangible asset is obtained through contractual or other legal rights, or if
the intangible asset can be sold, transferred, licensed, rented, or exchanged,
regardless of the acquiror's intent to do so. Intangible assets with definitive
lives will need to be amortized over their useful lives.
By March 31, 2002, companies are required to begin to perform an impairment
analysis of intangible assets. Furthermore, companies must complete the first
step of the goodwill transition impairment test by June 30, 2002. Impairment
charges, if any, that result from the application of the above tests would be
recorded as the cumulative effect of a change in accounting principle in the
first quarter of the year ending December 31, 2002.
We are in the process of evaluating the impact of SFAS No. 142 on our
business. At the present time we cannot determine the ultimate impact of SFAS
No. 142. Amortization of goodwill for the year ended December 31, 2001 was $19.7
million.
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144") was issued in
August 2001. This statement supersedes Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," and establishes accounting standards for
the impairment and disposal of long-lived assets and criteria for determining
when a long-lived asset is held for sale. The statement removes the requirement
to allocate goodwill to long-lived assets to be tested for impairment, requires
that the depreciable life of a long-lived asset to be abandoned be revised in
accordance with Accounting Principals Board Opinion No. 20, "Accounting
Changes," provides that one accounting model be used for long-lived assets to be
disposed of by sale and broadens the presentation of discontinued operations to
include more disposal transactions. SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001. We are currently evaluating the impact of
adopting SFAS No. 144 on our financial statements.
EFFECTS OF INFLATION
We believe that the relatively moderate rates of inflation over the last
few years have not had a significant impact on revenues or profitability. We do
not expect inflation to have any near-term material effects on the sale of our
products and services. However, there can be no assurance that there will be no
such effect in the future.
We finance substantially all of our 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. We do not believe that we would be placed at a competitive
disadvantage
10
should interest rates increase due to increased inflation since most other
automotive dealerships have similar floating rate borrowing arrangements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rates. We are exposed to market risk from changes in the interest
rates on a significant portion of our outstanding indebtedness. Outstanding
balances under our credit agreement bear interest at a variable rate based on a
margin over LIBOR. Based on the amount outstanding as of December 31, 2001, a
100 basis point change in interest rates would result in an approximate $5.4
million change to our annual interest expense. Similarly, amounts outstanding
under floor plan financing arrangements bear interest at a variable rate based
on a margin over LIBOR or Prime. Based on the average aggregate outstanding
amounts under floor plan financing arrangements during the year ended December
31, 2001, a 100 basis point change in interest rates would result in an
approximate $6.6 million change to our annual floor plan interest expense.
In October 2001, we entered into swap agreements of approximately four
years duration pursuant to which a notional $400.0 million of our floating rate
debt was exchanged for fixed rate debt. The fixed rate interest to be paid by us
is based on LIBOR and amounts to approximately 4.23%. During 2000, we entered
into a swap agreement of five years duration pursuant to which a notional $200.0
million of our floating rate debt was exchanged for fixed rate debt for five
years. The fixed rate interest paid by us is based on LIBOR and amounts to
approximately 7.15%. For fixed rate debt including the notes, certain seller
financed promissory notes and obligations under certain capital leases, interest
rate changes effect the fair market value of such debt, but do not impact our
earnings or cash flows.
Foreign Currency Exchange Rates. Substantially all of our business is
conducted in the United States where our revenues and expenses are transacted in
U.S. dollars. As a result, the majority of our results of operations are not
subject to foreign exchange rate fluctuations. We do not hedge against foreign
exchange rate fluctuations due to the limited financial exposure we face with
respect to such risk. In common with other automotive retailers, we purchase
certain of our new vehicle inventories from foreign manufacturers. Our business
in this regard is subject to certain risks, including, but not limited to,
differing economic conditions, changes in political climate, differing tax
structures, other regulations and restrictions and foreign exchange rate
volatility. Our future results could be materially and adversely impacted by
changes in these or other factors.
11
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
UNITED AUTO GROUP, INC.
Independent Auditors' Report................................................ F-2
Consolidated Balance Sheets as of December 31, 2001 and
2000..................................................................... F-3
Consolidated Statements of Income for the years ended
December 31, 2001, 2000, and 1999........................................ F-4
Consolidated Statements of Stockholders' Equity and Comprehensive Income
(Loss) for the years ended December 31, 2001, 2000, and 1999............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000, and 1999........................................ F-6
Notes to Consolidated Financial Statements.................................. F-7
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of United Auto Group, Inc.
Detroit, Michigan
We have audited the accompanying consolidated balance sheets of United Auto
Group, Inc. (the "Company") and subsidiaries as of December 31, 2001 and 2000,
and the related consolidated statements of income, stockholders' equity and
comprehensive income (loss), and cash flows for each of the three years in the
period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company and subsidiaries at
December 31, 2001 and 2000, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States of
America.
/s/ DELOITTE & TOUCHE LLP
New York, New York
February 4, 2002
F-2
UNITED AUTO GROUP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------------
2001 2000
------------- -------------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
ASSETS
Cash and cash equivalents............................... $ 5,416 $ 7,413
Accounts receivable, net................................ 258,266 190,792
Inventories............................................. 641,400 737,942
Other current assets.................................... 16,434 15,469
------------- -------------
Total current assets................................. 921,516 951,616
Property and equipment, net............................... 185,452 107,085
Intangible assets, net.................................... 784,149 664,510
Other assets.............................................. 55,459 39,484
------------- -------------
TOTAL ASSETS......................................... $ 1,946,576 $ 1,762,695
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Floor plan notes payable................................ $ 620,014 $ 689,687
Accounts payable........................................ 76,550 55,344
Accrued expenses........................................ 85,512 72,075
Current portion of long-term debt....................... 4,202 41,456
------------- -------------
Total current liabilities............................ 786,278 858,562
Long-term debt............................................ 551,840 377,721
Other long-term liabilities............................... 92,775 64,742
------------- -------------
TOTAL LIABILITIES.................................... 1,430,893 1,301,025
------------- -------------
Commitments and contingent liabilities
STOCKHOLDERS' EQUITY
Series A Preferred Stock, $0.0001 par value; 10 shares
authorized; 9 issued and outstanding at December 31,
2001; 8 issued and outstanding at December 31, 2000... -- --
Series B Preferred Stock, $0.0001 par value; 10 shares
authorized; 1 issued and outstanding at December 31,
2001 and 2000......................................... -- --
Common Stock, $0.0001 par value, 80,000 shares authorized;
23,540 shares issued, including 3,821 treasury shares, at
December 31, 2001; 21,990 shares issued, including 3,434
treasury shares, at December 31, 2000................. 2 2
Non-voting Common Stock, $0.0001 par value, 7,125
shares authorized; none issued and outstanding at
December, 31, 2001 and 2000........................... -- --
Class C Common Stock, $0.0001 par value, 20,000
shares authorized; none issued and outstanding at
December, 31, 2001 and 2000........................... -- --
Additional paid-in-capital.............................. 445,311 420,166
Retained earnings....................................... 78,750 41,502
Accumulated other comprehensive loss.................... (8,380) --
------------- -------------
TOTAL STOCKHOLDERS' EQUITY........................... 515,683 461,670
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........... $ 1,946,576 $ 1,762,695
============= =============
See Notes to Consolidated Financial Statements.
F-3
UNITED AUTO GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
--------------------------------------------
2001 2000 1999
------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
New vehicle sales.............................................. $ 3,866,699 $ 2,971,468 $ 2,417,906
Used vehicle sales............................................. 1,488,070 1,227,597 1,040,026
Finance and insurance.......................................... 253,737 193,121 165,751
Service and parts.............................................. 612,157 491,803 398,834
------------- ------------- -------------
Total revenues............................................ 6,220,663 4,883,989 4,022,517
Cost of sales.................................................. 5,369,505 4,206,032 3,473,080
------------- ------------- -------------
Gross profit.............................................. 851,158 677,957 549,437
Selling, general and administrative expenses................... 693,303 539,704 445,142
------------- ------------- -------------
Operating income............................................... 157,855 138,253 104,295
Floor plan interest expense.................................... (42,430) (44,406) (28,676)
Other interest expense......................................... (34,790) (32,777) (29,344)
Other income (expense), net.................................... -- -- 2,617
------------- ------------- -------------
Income before minority interests, income tax provision
and extraordinary item................................. 80,635 61,070 48,892
Minority interests............................................. (815) (512) (722)
Income tax provision........................................... (35,075) (26,558) (21,414)
------------- ------------- -------------
Income before extraordinary item.......................... 44,745 34,000 26,756
Extraordinary item, net of income taxes........................ -- (3,969) 732
------------- ------------- -------------
Net income................................................ $ 44,745 $ 30,031 $ 27,488
============= ============= =============
Basic income before extraordinary item per common share........ $ 1.57 $ 1.46 $ 1.10
============= ============= =============
Basic net income per common share.............................. $ 1.57 $ 1.26 $ 1.14
============= ============= =============
Income before extraordinary item per diluted common share...... $ 1.31 $ 1.16 $ 1.01
============= ============= =============
Net income per diluted common share............................ $ 1.31 $ 1.02 $ 1.04
============= ============= =============
Shares used in computing basic per share data.................. 23,147 20,207 21,950
============= ============= =============
Shares used in computing diluted per share data................ 34,196 29,415 26,526
============= ============= =============
See Notes to Consolidated Financial Statements
F-4
UNITED AUTO GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
CLASS A CLASS B VOTING AND
CONVERTIBLE CONVERTIBLE NON-VOTING
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
--------------- --------------- ------------
ACCUMULATED
OTHER TOTAL COMPRE-
ADDITIONAL RETAINED COMPREHENSIVE STOCK- HENSIVE
ISSUED ISSUED ISSUED PAID-IN EARNINGS INCOME HOLDERS' INCOME
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) (LOSS) EQUITY (LOSS)
------ ------ ------ ------ ------ ------ ------- --------- ------ -------- ------
(DOLLARS IN THOUSANDS)
BALANCES, DECEMBER 31, 1998... -- $ -- -- $ -- 20,738,384 $ 2 $352,591 $(10,943) $ -- $341,650 $ --
Issuance of stock for
acquisitions................ -- -- -- -- 1,261,327 -- (13,960) -- -- (13,960) --
Repurchase of common stock.... -- -- -- -- (118,000) -- (992) -- -- (992) --
Issuance of preferred stock
and warrants................ 7,904 -- 397 -- -- -- 76,679 -- -- 76,679 --
Net income.................... -- -- -- -- -- -- -- 27,488 -- 27,488 --
---- ---- --- ---- -------- --- -------- -------- ------- -------- -------
BALANCES, DECEMBER 31,
1999........................ 7,904 -- 397 -- 21,881,711 2 414,318 16,545 -- 430,865 --
Issuance of common stock...... -- -- -- -- 2,981,011 -- 26,950 -- -- 26,950 --
Repurchase of common stock.... -- -- -- -- (2,872,856) -- (26,176) -- -- (26,176) --
Payment in kind dividends..... 438 -- 124 -- -- -- 5,074 (5,074) -- -- --
Net income.................... -- -- -- -- -- -- -- 30,031 -- 30,031 --
---- ---- --- ---- -------- --- -------- -------- ------- -------- -------
BALANCES, DECEMBER 31,
2000........................ 8,342 -- 521 -- 21,989,866 2 420,166 41,502 -- 461,670 --
Issuance of common stock...... -- -- -- -- 1,593,869 -- 19,041 -- -- 19,041 --
Exercise of options........... -- -- -- -- 343,588 -- 4,781 -- -- 4,781 --
Repurchase of common stock.... -- -- -- -- (387,092) -- (5,790) -- -- (5,790) --
Payment in kind dividends..... 452 -- 128 -- -- -- 7,113 (7,113) -- -- --
Payment of preferred stock
dividends................... -- -- -- -- -- -- -- (384) -- (384) --
Fair value of interest rate
swap agreement.............. -- -- -- -- -- -- -- -- (7,205) (7,205) (7,205)
Foreign currency translation.. -- -- -- -- -- -- -- -- (1,175) (1,175) (1,175)
Net income.................... -- -- -- -- -- -- -- 44,745 -- 44,745 44,745
---- ---- --- ---- -------- --- -------- -------- ------- -------- -------
BALANCES, DECEMBER 31,
2001........................ 8,794 $ -- 649 $ -- 23,540,231 $ 2 $445,311 $ 78,750 $(8,380) $515,683 $36,365
===== ==== === ==== ========== === ======== ======== ======= ======== =======
See Notes to Consolidated Financial Statements.
F-5
UNITED AUTO GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------------------
2001 2000 1999
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
OPERATING ACTIVITIES:
Net income............................................. $ 44,745 $ 30,031 $ 27,488
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization....................... 33,625 24,174 19,131
Deferred income taxes............................... 12,546 10,897 10,007
Minority interests.................................. 815 512 722
Extraordinary item.................................. -- 5,613 --
Non-cash compensation expense....................... -- -- 2,250
Changes in operating assets and liabilities:
Accounts receivable................................. (56,420) (33,144) (11,090)
Inventories......................................... 158,164 (67,942) (73,687)
Floor plan notes payable............................ (124,777) 69,186 59,371
Accounts payable and accrued expenses............... 18,079 24,478 2,690
Other............................................... (14,338) (11,969) 13,526
------------ ------------ ------------
Net cash provided by operating activities......... 72,439 51,836 50,408
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchase of equipment and improvements................. (83,394) (37,384) (22,161)
Dealership acquisitions, net of cash acquired.......... (138,389) (197,148) (28,251)
------------ ------------ ------------
Net cash used in investing activities............. (221,783) (234,532) (50,412)
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from borrowings of long-term debt............. 289,407 339,449 65,000
Payments of long-term debt and capital leases.......... (155,092) (159,863) (159,147)
Proceeds from issuance of common stock, preferred
stock and warrants.................................. 18,822 16,852 76,679
Repurchase of common stock............................. (5,790) (26,176) (992)
Deferred financing costs............................... -- -- (227)
------------ ------------ ------------
Net cash provided by (used in) financing
activities..................................... 147,347 170,262 (18,687)
------------ ------------ ------------
Net decrease in cash and cash equivalents......... (1,997) (12,434) (18,691)
Cash and cash equivalents, beginning of year............. 7,413 19,847 38,538
------------ ------------ ------------
Cash and cash equivalents, end of year................... $ 5,416 $ 7,413 $ 19,847
============ ============ ============
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 AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
United Auto Group, Inc. ("UAG" or the "Company") is engaged in the sale of
new and used motor vehicles and related products and services, including vehicle
service, parts and collision repair, finance and insurance products and other
aftermarket products. The Company operates dealerships under franchise
agreements with a number of automotive manufacturers. In accordance with the
individual franchise agreements, each dealership is subject to certain rights
and restrictions typical of the industry. The ability of the manufacturers to
influence the operations of the dealerships, or the loss of a franchise
agreement, could have a negative impact on the Company's operating results.
Principles of Consolidation
The consolidated financial statements include all majority-owned
subsidiaries. All intercompany accounts and transactions among the consolidated
subsidiaries have been eliminated.
Cash and Cash Equivalents
Cash and cash equivalents include all highly-liquid investments that have an
original maturity of three months or less at the date of purchase.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts
receivable, accounts payable, debt, including floor plan notes payable, and
interest rate swaps used to hedge future cash flows. The carrying amount of all
significant financial instruments, except the interest rate swaps, approximates
fair value due either to length of maturity or the existence of variable
interest rates that approximate prevailing market rates. The net fair value of
the interest rate swaps, based on discounted cash flows, is approximately
$12,752.
Revenue Recognition
The Company records revenue when vehicles are delivered to customers, when
vehicle service work is performed and when parts are delivered.
The Company arranges financing for customers through various financial
institutions and receives a commission from the lender equal to the difference
between the interest rates charged to customers over the predetermined interest
rates set by the financing institution. The Company also receives commissions
from the sale of various insurance contracts to customers. The Company may be
assessed a chargeback fee in the event of early cancellation of a loan or
insurance contract by the customer. Finance and insurance commission revenue is
recorded net of estimated chargebacks at the time the related contract is placed
with the financial institution.
The Company also receives commissions from the sale of non-recourse third
party extended service contracts to customers. Under these contracts the
applicable manufacturer or third party warranty company is directly liable for
all warranties provided within the contract. Commission revenue from the sale
of these third party extended service contracts is recorded net of estimated
chargebacks at the time of sale.
Inventory Valuation
Inventories are stated at the lower of cost or market. Cost for new and used
vehicle inventories is determined using the specific identification method. Cost
for parts, accessories and other inventories is based on factory list prices.
Property and Equipment
Property and equipment are recorded at cost and depreciated over estimated
useful lives, primarily using the straight-line method. Useful lives for
purposes of computing depreciation for assets, other than equipment under
capital lease and leasehold improvements, are between 5 and 10 years. Leasehold
improvements and equipment under capital lease are depreciated over the shorter
of the term of the lease or the estimated useful life of the asset.
Expenditures relating to recurring repair and maintenance are expensed as
incurred. Expenditures that increase the useful life or substantially increase
the serviceability of an existing asset are capitalized. When equipment is sold
or otherwise disposed of, the cost and related accumulated depreciation are
removed from the accounts, and any resulting gain or loss is reflected in
income.
F-7
Income Taxes
Income taxes are provided in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). 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 $784,149, 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, 2001 amounted to $68,780. Amortization
expense for the years ended December 31, 2001, 2000 and 1999 was $19,705,
$15,408 and $12,996, 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,
indicate that they may be impaired. The Company performs its review by comparing
the carrying amounts of long-lived assets to the estimated undiscounted cash
flows relating to such assets. If any impairment in the value of the long-lived
assets is indicated, the carrying value of the long-lived assets is adjusted to
reflect such impairment based on the discounted cash flows or the fair value of
the impaired assets.
Defined Contribution Plans
The Company sponsors a number of defined contribution plans covering a
significant majority of the Company's employees. Company contributions to such
plans are discretionary and are typically based on the level of compensation and
contributions by plan participants. The Company incurred expense of $1,575,
$1,389 and $1,315 relating to such plans during the years ended December 31,
2001, 2000 and 1999, respectively.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 requiring the use of significant estimates include
accounts receivable, inventories, income taxes, intangible assets and certain
reserves.
Advertising
Advertising costs are expensed as incurred. The Company incurred advertising
costs of $60,952, $51,248 and $43,165 during the years ended December 31, 2001,
2000 and 1999, respectively.
Net Income Per Common Share
Income available to common stockholders used in the computation of basic
earnings per share data was computed based on net income, as adjusted to reflect
dividends accrued relating to outstanding preferred stock. 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 common shares outstanding, adjusted for the dilutive effect of
stock options, preferred stock and warrants.
YEAR ENDED DECEMBER 31,
-----------------------------
2001 2000 1999
-------- -------- --------
Weighted average number of common shares
outstanding................................................. 23,147 20,207 21,950
Effect of stock options, preferred stock and
warrants.................................................... 11,049 9,208 4,576
------- ------- -------
Weighted average number of common shares outstanding,
including effect of dilutive securities..................... 34,196 29,415 26,526
======= ======= =======
F-8
Segment Reporting
The Company follows the provisions of Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information," which establishes standards for reporting information about a
Company's operating segments. The Company operates in one reportable segment.
Derivative Instruments
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended and interpreted ("SFAS
No. 133") establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. Under SFAS 133, all derivatives, whether
designated in hedging relationships or not, are required to be recorded on the
balance sheet at fair value. SFAS 133 defines requirements for designation and
documentation of hedging relationships, as well as ongoing effectiveness
assessments, which must be met in order to qualify for hedge accounting. For a
derivative that does not qualify as a hedge, changes in fair value would be
recorded in earnings immediately. If the derivative is designated in a
fair-value hedge, the changes in the fair value of the derivative and the hedged
item are recorded in earnings. If the derivative is designated in a cash-flow
hedge, effective changes in the fair value of the derivative are recorded in
other comprehensive income and recorded in the income statement when the hedged
item affects earnings. Changes in the fair value of the derivative attributable
to hedge ineffectiveness are recorded in earnings immediately. The Company
adopted SFAS 133 on January 1, 2001 and recorded $10,187 as a cumulative
transition adjustment (reducing other comprehensive income) relating to an
interest rate swap (cash-flow hedge) the Company entered into prior to the
adoption of SFAS 133. Pursuant to SFAS 133, the cumulative transition adjustment
will be amortized and reflected as floorplan interest expense over the remaining
life of the interest rate swap.
Reclassification
In order to maintain consistency and comparability of financial information
between periods presented, certain reclassifications have been made to the
prior year financial statements to conform to the current year presentation.
2. BUSINESS COMBINATIONS
During 2001 and 2000, the Company completed a number of acquisitions. Each
of these acquisitions has been accounted for using the purchase method of
accounting. As a result, the Company's financial statements include the results
of operations of the acquired dealerships from the date of acquisition.
During 2001, the Company acquired 13 automobile dealership franchises. The
aggregate consideration paid in connection with such acquisitions amounted to
$138,900, consisting of approximately $128,350 in cash, the issuance of 289,243
shares of the Company's $0.0001 par value voting common stock ("Common Stock")
and $5,550 of seller financed promissory notes. The consolidated balance sheets
include preliminary allocations of the purchase price relating to these
acquisitions, which are subject to final adjustment. Such allocations resulted
in recording approximately $134,383 of intangibles. In addition, the Company
made an equity investment in a dealership group for approximately $8,000 in
cash. During 2000, the Company acquired 35 automobile dealership franchises. The
aggregate consideration paid in connection with such acquisitions amounted to
$225,623, consisting of approximately $204,975 in cash, the issuance of 841,476
shares of Common Stock and $10,550 of seller financed promissory notes.
In connection with one of the acquisitions consummated during 2001, the
Company agreed to make a contingent payment in cash to the extent the Common
Stock issued in connection with the acquisition has a market value of less than
$17.29 per share during specified future periods. The Company also has
obligations with respect to past acquisitions totaling approximately $32,000
over the next four years. In addition, the Company agreed to make a contingent
payment in cash to the extent the Common Stock issued in connection with an
acquisition completed in 2000 has a market value of less than $12.00 per share
during specified future periods.
During 2000, the Company paid $6,147 in cash in final settlement of its
obligation with respect to a guarantee relating to 375,404 shares of Common
Stock issued in connection with an acquisition that took place prior to 1998.
Pro Forma Results of Operations (Unaudited)
The following unaudited consolidated pro forma results of operations of the
Company for the years ended December 31, 2001 and 2000 give effect to
acquisitions consummated during 2001 and 2000 as if they had occurred on January
1, 2000.
DECEMBER 31,
----------------------------
2001 2000
------------- -------------
Revenues.............................................. $ 6,359,384 $ 5,790,858
Income before minority interests and income taxes..... 87,618 75,922
Net income............................................ 48,691 42,187
Net income per diluted common share................... 1.41 1.39
F-9
3. INVENTORIES
Inventories consisted of the following:
DECEMBER 31,
---------------------------
2001 2000
----------- -----------
New vehicles.......................................... $ 490,445 $ 564,159
Used vehicles......................................... 111,253 136,980
Parts, accessories and other.......................... 39,702 36,803
----------- -----------
Total Inventories.............................. $ 641,400 $ 737,942
=========== ===========
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
DECEMBER 31,
----------------------------
2001 2000
----------- -----------
Furniture, fixtures and equipment..................... $ 77,006 $ 58,069
Equipment under capital lease......................... 823 3,806
Buildings and leasehold improvements.................. 142,698 69,357
----------- -----------
Total.......................................... 220,527 131,232
Less: Accumulated depreciation and
amortization.............................. 35,075 24,147
----------- -----------
Property and equipment, net............... $ 185,452 $ 107,085
=========== ===========
Depreciation and amortization expense for the years ended December 31, 2001,
2000 and 1999 was $13,920, $8,766 and $6,135, respectively. Accumulated
amortization at December 31, 2001 and 2000 on equipment under capital lease,
included in accumulated depreciation and amortization above, amounted to $347
and $1,629, respectively.
5. FLOOR PLAN NOTES PAYABLE
The Company finances the majority of its new and a portion of its used
vehicle inventory under revolving floor plan financing arrangements with various
lenders. 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. Outstanding borrowings under floor plan financing arrangements
amounted to $620,014 and $689,687 as of December 31, 2001 and 2000,
respectively. The floor plan agreements grant a security interest in the
financed vehicles, as well as the related sales proceeds, and require repayment
after a vehicle's sale. Interest rates on the floor plan agreements are variable
and increase or decrease based on movements in prime or LIBOR borrowing rates.
Floor plan interest expense for the years ended December 31, 2001, 2000 and 1999
was $42,430, $44,406 and $28,676, respectively. The weighted average interest
rate on floor plan borrowings was 5.60%, 7.92% and 7.33% for the years ended
December 31, 2001, 2000 and 1999, respectively.
6. LONG-TERM DEBT
Long-term debt consisted of the following:
F-10
DECEMBER 31,
------------------------
2001 2000
----------- ------------
Credit Agreement -- Revolving Loans, weighted average
interest -- 6.25% and 8.39% at December 31, 2001 and
2000, respectively.......................................... $ 380,500 $ 204,595
Credit Agreement -- Term Loans, weighted average
interest -- 7.25% and 9.20% at December 31, 2001 and
2000, respectively.......................................... 161,000 186,000
Seller financed promissory notes payable through 2002,
weighted average interest -- 7.63% and 6.60% at
December 31, 2001 and 2000, respectively.................... 6,634 15,492
Term loans, weighted average interest -- 6.12% and
6.95% at December 31, 2001 and 2000, respectively........... 3,435 5,433
11% Series A and B Senior Subordinated Notes due 2007......... 3,650 3,650
Capitalized lease obligations................................. 823 4,007
----------- -----------
Total long-term debt........................................ 556,042 419,177
Less: Current portion.................................... 4,202 41,456
----------- -----------
Net long-term debt.......................................... $ 551,840 $ 377,721
=========== ===========
Scheduled maturities of long-term debt for each of the next five years and
thereafter are as follows:
2002................................................................ $ 4,202
2003................................................................ 26,753
2004................................................................ 1,404
2005................................................................ 25,995
2006................................................................ 791
2007 and thereafter................................................. 496,897
-----------
Total long-term debt.............................................. $ 556,042
===========
The Company's Credit Agreement, dated as of August 3, 1999, as amended and
restated (the "Credit Agreement"), provides for up to $770,000 in revolving
loans to be used for acquisitions, working capital, the repurchase of common
stock and general corporate purposes. In addition, the Credit Agreement provided
for up to $186,000 to be used to repurchase the Company's 11% Senior
Subordinated Notes due 2007 (the "Notes"). Pursuant to the terms of the Credit
Agreement, the Company repaid $25,000 in 2001, resulting in a permanent
reduction in the term loans under the Credit Agreement relating to the
refinancing of the Notes. Loans under the Credit Agreement bear interest between
LIBOR plus 2.00% and LIBOR plus 3.00%. Outstanding letters of credit under the
Credit Agreement as of December 31, 2001 amounted to $27,824. The Credit
Agreement replaced the Company's previous bank borrowing facility, which was
terminated upon the effective date of the Credit Agreement. The Company incurred
an extraordinary charge during 1999 of $494 ($0.02 per diluted share), net of
income taxes of $396, resulting from the write-off of unamortized deferred
financing costs relating to the Company's previous bank borrowing facility.
The Credit Agreement is fully and unconditionally guaranteed on a joint and
several basis by the Company's auto dealership subsidiaries and contains a
number of significant covenants that, among other things, restrict the ability
of the Company to dispose of assets, incur additional indebtedness, repay other
indebtedness, create liens on assets, make investments or acquisitions and
engage in mergers or consolidations. In addition, the Company is required to
comply with specified ratios and tests, including debt to equity, debt service
coverage and minimum working capital covenants. The Credit Agreement also
contains typical events of default including change of control, material adverse
change and non-payment of obligations. Substantially all of the Company's assets
not subject to security interests granted to floor plan lending sources are
subject to security interests granted to lenders under the Credit Agreement.
In October 2001, we entered into swap agreements of approximately four years
duration pursuant to which a notional $400,000 of our floating rate debt was
exchanged for fixed rate debt. The fixed rate interest to be paid by us is based
on LIBOR and amounts to approximately 4.23%. During 2000, we entered into a swap
agreement of five years duration pursuant to which a notional $200,000 of our
floating rate debt was exchanged for fixed rate debt for five years. The fixed
rate interest to be paid by us is based on LIBOR and amounts to approximately
7.15%. The swaps have been designated as cash flow hedges of future interest
payments of the Company's LIBOR based borrowings. The swaps have been designated
as hedges of the Company's floor plan borrowings and Credit Agreement.
During 1997, the Company issued $200,000 aggregate principal amount of
Notes. The indentures governing the Notes require the Company to comply with
specified debt service coverage ratio levels in order to incur incremental
indebtedness. Such indentures also 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, and contain other covenants which restrict the
Company's ability to purchase capital stock, incur liens, sell assets and enter
into other transactions. The indentures governing the Notes further require the
Company to offer to purchase all of the then outstanding Notes at a purchase
price in cash equal to 101% of their principal amount in the event of a change
in control, as defined. During 2000, the beneficial interest of Penske Capital
Partners and certain affiliated entities exceeded 40%, which, pursuant to the
indentures, was deemed to be a change in control. As a result, the Company made
an offer to purchase the outstanding Notes. The tender resulted in the
repurchase and retirement of $147,350 face value of Notes. The Company
recorded a $3,969 loss
F-11
($0.14 per diluted share), net of $3,118 of tax, relating to the redemption
premium paid for the Notes and the write-off of unamortized deferred financing
costs. During 1999, the Company repurchased and retired $49,000 of the Notes. As
a result, the Company recorded an extraordinary gain of $1,226 ($0.04 per
diluted share), net of $1,001 of tax. The Notes are fully and unconditionally
guaranteed on a joint and several basis by the Company's auto dealership
subsidiaries.
As noted, the Credit Agreement and the Notes are fully and unconditionally
guaranteed on a joint and several basis by the Company's auto dealership
subsidiaries (the "Note Guarantors"). Separate financial information of the Note
Guarantors has been omitted because the Company is a holding company with no
independent operations.
7. OPERATING LEASE OBLIGATIONS
The Company leases its dealership facilities and corporate offices under
non-cancelable operating lease agreements with expiration dates through 2026,
including all option periods available to the Company. Minimum future rental
payments required under non-cancelable operating leases in effect as of December
31, 2001 follow:
2002....................................................... $ 59,323
2003....................................................... 58,328
2004....................................................... 58,048
2005....................................................... 56,570
2006....................................................... 54,656
2007 and thereafter........................................ 465,574
----------
$ 752,499
==========
Rent expense for the years ended December 31, 2001, 2000 and 1999 amounted
to $47,693, $35,113 and $29,493, respectively. A number of the dealership leases
are with former owners who continue to operate the dealerships as employees of
the Company or with other affiliated entities. Of the total rental payments,
$12,954, $5,575 and $8,466, respectively, were made to related parties during
2001, 2000, and 1999, respectively.
8. RELATED PARTY TRANSACTIONS
As discussed in Note 7, the Company is the tenant under a number of
non-cancelable lease agreements with employees of the Company and certain other
affiliated entities. The terms of the leases with the former owners were
negotiated prior to acquisition and the Company believes all such leases are on
terms no less favorable to the Company than would be obtained through
arm's-length negotiations with unaffiliated third parties. The Company is also a
tenant under a number of non-cancelable lease agreements with Automotive Group
Realty, LLC ("AGR"). AGR is a wholly-owned subsidiary of Penske Corporation. The
Company paid AGR $5,753 and $1,260 under such lease agreements during the years
ended December 31, 2001 and 2000, respectively. In addition, the Company sold
AGR real property and improvements for $20,870 and $23,365 during 2001 and 2000,
respectively, which were subsequently leased by AGR to the Company. The sale of
each parcel of property was valued at a price which was either independently
confirmed by a third party appraiser, or at the price at which the Company
purchased the property from an independent third party. The Company believes
that the terms of these transactions are no less favorable than the terms
available from unaffiliated third parties negotiated on an arm's length basis.
The Company is party to operating agreements with Roger S. Penske, Jr., the
son of Roger S. Penske, the Company's Chairman and Chief Executive Officer,
reflecting (a) the ownership by Mr. Penske, Jr. of 10% of HBL, LLC and the
ownership by the Company of the remaining 90% of HBL, LLC and (b) the ownership
by Mr. Penske, Jr. of 4.7% of United Auto do Brasil, Ltda. and by the Company of
90.6% of United Auto do Brasil, Ltda. In 2000, the Company contributed
approximately $3,571 for its 90.6% interest in United Auto do Brasil, Ltda. and
Mr. Penske, Jr. contributed approximately $185 for his 4.7% interest in United
Auto do Brasil, Ltda. In 2001, Mr. Penske, Jr. contributed approximately $7,229
for his 10% interest in HBL, LLC and the Company contributed $65,064 for its 90%
interest in HBL, LLC. Prior to December 31, 2001, Mr. Penske, Jr. owned 20% of
UAG Cerritos, LLC. On December 31, 2001, the Company purchased Mr. Penske Jr.'s
20% interest in UAG Cerritos, LLC for $1,838. From time to time, the
F-12
Company provides these subsidiaries with working capital and other debt
financing at costs that are comparable to the costs charged by the Company to
its other subsidiaries.
In prior years, the Company entered into management agreements at certain
dealerships for which the closing of the acquisition of such dealerships awaited
final manufacturer approval. Pursuant to such management agreements, the Company
was paid a monthly fee for managing all aspects of the dealerships' operations.
Aggregate income relating to such management fees of $2,571 for the year ended
December 31, 1999 has been included in other income (expense), net in the
accompanying consolidated statement of operations.
From time to time, the Company pays and/or receives fees from Penske
Corporation and its affiliates for services rendered in the normal course of
business, including rents paid to AGR. These transactions reflect the provider's
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 payments relating to such transactions amounted to $9,798, $3,721 and
$311 for the years ended December 31, 2001, 2000 and 1999, respectively.
From time to time, the Company paid and/or received fees from Trace
International Holdings, Inc. and its affiliates for services rendered in the
normal course of business. The Company no longer engages in such transactions.
These transactions reflected the provider's cost or an amount mutually agreed
upon by both parties. It is the Company's belief that the payments relating to
these transactions were on terms at least as favorable as those which would have
been obtained from an unrelated third party. Aggregate payments relating to such
transactions amounted to $131 for the year ended December 31, 1999.
The Company has previously agreed to enter into an operating agreement with
Lucio A. Noto, a director of the Company, which provides that an entity in which
Mr. Noto has an interest will own 20% of UAG Connecticut, LLC. The Company will
own the remaining 80% of UAG Connecticut, LLC. The Company purchased the
operating assets (excluding real property) of UAG Connecticut, LLC in October
2000 for approximately $26,789. Mr. Noto's entity will pay approximately $5,358
for its 20% interest in UAG Connecticut, LLC, which represents 20% of the
consideration paid by the Company inclusive of assets acquired and goodwill
paid. The payment will be made as follows: $1,184 upon closing and the
remaining $4,174 in quarterly payments over twenty years at an interest rate
equal to LIBOR plus 2.25%. The payments due will be offset from permitted
periodic cash distributions to Mr. Noto's entity by UAG Connecticut, LLC. The
transaction is subject to approval by the manufacturers.
9. STOCK COMPENSATION PLANS
The Company's Board of Directors and stockholders adopted a Stock Option
Plan pursuant to which all full-time employees of the Company and its
subsidiaries and affiliates are eligible to receive stock options. During 2001,
the Company granted options to purchase 466,000 shares of Common Stock at the
fair market value of the Common Stock on the grant date. Options granted under
the Stock Option Plan have a ten year life and typically vest on a pro-rata
basis over three or five years. As of December 31, 2001, the aggregate number of
shares of Common Stock for which stock options may be granted under the Stock
Option Plan is 3,000,838. As of December 31, 2001, 581,080 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 2001, 2000 and 1999:
2001 2000 1999
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
STOCK OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
-------------------------------------------- ----------- --------- ----------- -------- ----------- --------
Options outstanding at beginning of year.... 2,020,147 $ 13.63 1,431,794 $ 15.16 1,227,390 $18.06
Granted..................................... 466,000 9.78 588,353 9.89 332,790 7.23
Exercised................................... 268,588 11.14 -- -- -- --
Forfeited................................... 401,815 18.96 -- -- 128,386 20.25
----------- ------- ----------- ------- --------- -------
Options outstanding at end of year.......... 1,815,744 $ 11.82 2,020,147 $ 13.63 1,431,794 15.16
=========== ======= =========== ======= ========= =======
The following table summarizes the status of stock options outstanding and
exercisable at January 1, 2002:
WEIGHTED WEIGHTED WEIGHTED
RANGE OF STOCK AVERAGE AVERAGE STOCK AVERAGE
EXERCISE OPTIONS REMAINING EXERCISE OPTIONS EXERCISE
PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
----------- ----------- ---------------- -------- ----------- --------
$ 7 to $13 1,243,055 7.97 $ 9.21 353,154 $ 9.10
13 to 30 572,689 6.50 17.49 407,587 17.54
--------- ---------
1,815,744 760,741
========= =========
F-13
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, income before extraordinary item and income before
extraordinary item per diluted common share would have been as follows
(unaudited):
YEAR ENDED DECEMBER 31,
-------------------------------
2001 2000 1999
--------- --------- -------
Income before extraordinary item............................. $ 42,754 $ 32,032 $ 24,516
Income before extraordinary item per diluted common share.... 1.25 1.09 0.92
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: no dividend yield; expected
volatility of 38.5% in 2001, 40.3% in 2000 and 49.7% in 1999; risk-free interest
rate of 5.5% in 2001, 7.75% in 2000 and 8.00% in 1999; and expected lives of
five years. The weighted average fair value of options granted during the years
ended December 31, 2001, 2000 and 1999 is $4.15, $4.67 and $3.85 per share,
respectively.
In connection with the Securities Purchase Agreement, the Company issued
800,000 options during 1999 to purchase Common Stock with an exercise price of
$10.00 per share. The Company recorded $2,250 in compensation expense during
1999 relating to the issuance of such options.
10. STOCKHOLDERS' EQUITY
In September 2001, the Company announced that its Board of Directors
authorized the repurchase of up to three million shares of the Company's
outstanding stock. Pursuant to such authorization, the Company repurchased
387,092 shares during 2001 through open market purchases and negotiated
transactions at an aggregate cost of $5,790. During 2000 and 1999, the Company
completed the repurchase of 2,990,856 shares through open market purchases and
negotiated transactions at an aggregate cost of $27,168.
In February 2001, we issued 1,302,326 shares of voting common stock to
Mitsui & Co., Ltd. and Mitsui & Co. (U.S.A.), Inc. in a private placement for
$10.75 per share (the "Mitsui Transaction"). Aggregate proceeds, amounting to
$14.0 million, were used to reduce debt.
In December 2000, the Company issued 2,139,535 shares of Common Stock to
Penske Corporation in a private placement for $10.75 per share. Aggregate
proceeds, amounting to $23,000, were used to reduce debt. In addition, the
Company's Third Restated Certificate of Incorporation was amended to increase
the number of authorized shares of Common Stock from 40,000,000 shares to
80,000,000 shares in December 2000.
The shares of Series A preferred stock and Series B preferred stock entitle
International Motor Cars Group I, L.L.C. and International Motor Cars Group II,
L.L.C. (collectively, the "PCP Entities") to dividends at a rate of 6.5% per
year. The dividends were payable in kind for the first two years after issuance
and are currently payable in cash. The Series A preferred stock is convertible
into an aggregate of 8,794,171 shares of common stock and the Series B preferred
stock is convertible into an aggregate of 648,588 shares of non-voting common
stock (in each case, after giving effect to payable in kind dividends). We are
entitled under some circumstances to redeem the preferred stock after May 3,
2002, for an amount per share equal to the liquidation preference. The
liquidation preference is currently $10,000 per share plus accrued and unpaid
dividends. Actual cash dividends payable relating to dividends earned during
fiscal 2001 in connection with the preferred stock totaled $3.1 million.
Beginning in fiscal 2002, the aggregate annual cash dividends payable by us are
expected to total $6.1 million. Funding for such dividends is expected to come
from cash flow from operations and working capital borrowings under our credit
agreement.
The warrants, as originally issued to the PCP Entities, were exercisable at
a price of $12.50 per share until February 3, 2002, and $15.50 per share
thereafter until May 2, 2004. Pursuant to the anti-dilution provisions of the
warrants and as a result of the sale of equity to Mitsui & Co. in 2001, (a) the
number of warrants to purchase common stock was increased from 3,898,665 shares
to 3,915,580 shares, (b) the number of warrants to purchase non-voting common
stock was increased from 1,101,335 shares to 1,106,113 shares, and (c) the
warrant exercise price was lowered from $12.50 to $12.45. On February 1, 2002,
the PCP Entities exercised the warrants in full and paid us the full exercise
price of $62.5 million. The proceeds of the warrant exercise will be used for
general working capital purposes which may include acquisitions. Pending such
use, the proceeds will be used to pay down indebtedness.
F-14
11. INCOME TAXES
The income tax provision relating to income from continuing operations
consisted of the following:
YEAR ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
--------- --------- ---------
Current:
Federal..................................................... $ 16,990 $ 11,950 $ 7,091
State and local............................................. 5,535 3,269 3,352
Foreign..................................................... 4 442 964
-------- --------- ---------
Total current............................................ 22,529 15,661 11,407
-------- --------- ---------
Deferred:
Federal..................................................... 10,214 9,397 9,085
State and local............................................. 2,080 1,255 517
Foreign..................................................... 252 245 405
-------- --------- ---------
Total deferred........................................... 12,546 10,897 10,007
-------- --------- ---------
Income tax provision before extraordinary item................ $ 35,075 $ 26,558 $ 21,414
======== ========= =========
The income tax provision varied from the U.S. federal statutory income tax
rate due to the following:
YEAR ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
--------- --------- ---------
Income tax provision at the Federal statutory rate of 35%..... $ 28,222 $ 21,374 $ 17,096
State and local income taxes, net of federal benefit.......... 4,950 2,941 2,516
Non-deductible amortization of goodwill....................... 2,393 1,864 1,330
Other......................................................... (490) 379 472
---------- --------- ---------
Income tax provision relating to continuing operations........ $ 35,075 $ 26,558 $ 21,414
========= ========= =========
The components of deferred tax assets and liabilities at December 31, 2001
and 2000 were as follows:
2001 2000
---------- ----------
DEFERRED TAX ASSETS
Accrued liabilities.............................................................................. $ 8,056 $ 7,567
Derivative instruments........................................................................... 5,547 --
Net operating loss carryforwards................................................................. 1,162 2,565
Capital loss carryforwards....................................................................... 41 3,031
Other............................................................................................ 1,491 3,020
---------- ----------
Total deferred tax assets........................................................................ 16,297 16,183
Valuation allowance.............................................................................. -- (1,490)
---------- ----------
Net deferred tax assets........................................................................ 16,297 14,693
---------- ----------
DEFERRED TAX LIABILITIES
Depreciation and amortization.................................................................... (29,915) (19,021)
Partnership investments.......................................................................... (16,439) (17,440)
---------- ----------
Total deferred tax liabilities................................................................. (46,354) (36,461)
---------- ----------
Net deferred tax liabilities................................................................... $ (30,057) $ (21,768)
========== ==========
At December 31, 2001, the Company has $35,691 of state net operating loss
carryforwards that expire at various dates through 2021.
12. SUPPLEMENTAL CASH FLOW INFORMATION
The following table presents supplementary cash flow information:
2001 2000 1999
--------- --------- -------
Cash paid interest....................................................................... $ 81,385 $ 77,560 $ 57,073
Cash paid income taxes................................................................... 25,481 14,149 9,587
Non-cash financing and investing activities:
Dealership acquisition costs financed by issuance of stock............................. 5,000 10,098 --
Dealership acquisition cost financed by long-term debt................................. 5,550 10,550 1,500
F-15
13. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
2001
Total revenues................................................. $ 1,394,976 $ 1,615,183 $ 1595,783 $ 1,614,721
Gross profit................................................... 191,790 218,996 221,099 219,273
Net income..................................................... 6,570 13,405 13,488 11,282
Net income per diluted common share............................ $ 0.21 $ 0.40 $ 0.38 $ 0.32
FIRST SECOND THIRD FOURTH
QUARTER QUARTER (1) QUARTER QUARTER
------- ----------- ------- -------
2000
Total revenues................................................. $ 1,110,767 $ 1,204,149 $ 1,331,173 $ 1,237,900
Gross profit................................................... 152,113 166,780 182,613 176,451
Net income..................................................... 5,640 7,095 11,179 6,117
Net income per diluted common share............................ $ 0.19 $ 0.24 $ 0.40 $ 0.21
----------
(1) As discussed in Note 6, the Company recorded a $3,969 extraordinary loss in
the second quarter of 2000.
The per share amounts are calculated independently for each of the quarters
presented. The sum of the quarters may not equal the full year per share
amounts.
14. SUBSEQUENT EVENT
In February 2002, the PCP Entities exercised the Warrants for $62,520. As a
result, the Company issued 3,915,580 shares of Common Stock and 1,101,335 shares
of Non-Voting Common Stock. The proceeds of the warrant exercise will be used
for general working capital purposes, which may include acquisitions. Pending
such use, the proceeds will be used to pay down indebtedness.
F-16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: February 6, 2002 UNITED AUTO GROUP, INC.
By: /s/ Robert H. Kurnick, Jr.
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ROBERT H. KURNICK, JR.
Its: EXECUTIVE VICE PRESIDENT
EXHIBIT INDEX
EXHIBIT DESCRIPTION OF EXHIBIT SEQUENTIAL PAGE
NUMBER NUMBER
23 Consent of Independent Auditors'