UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
Commission file number 1-12297
United Auto Group, Inc.
Registrant’s telephone number, including area code:
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þNo o
Indicate by check mark whether the registrant is an accelerated filer (as defined Rule 12b-2 of the Exchange Act) Yes þNo o
As of May 3, 2004, there were 46,149,995 shares of voting common stock outstanding.
TABLE OF CONTENTS
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UNITED AUTO GROUP, INC.
See Notes to Consolidated Condensed Financial Statements
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The information presented as of March 31, 2004 and December 31, 2003 and for the three month periods ended March 31, 2004 and 2003 is unaudited, but includes all adjustments (consisting only of normal and recurring adjustments) which the management of United Auto Group, Inc. (the “Company”) believes to be necessary for the fair presentation of results for the periods presented. The results for the interim periods are not necessarily indicative of results to be expected for the year. These consolidated condensed financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2003, which were included as part of the Company’s Annual Report on Form 10-K. In order to maintain consistency and comparability of financial information between periods presented, certain reclassifications have been made to the Company’s prior year consolidated condensed financial statements to conform to the current year presentation.
The Company periodically enters into transactions to sell or otherwise dispose of non-core or unprofitable dealerships. Such transactions typically result in treating such dealerships as discontinued operations. Combined financial information of the dealerships accounted for as discontinued operations follows:
In March 2003, the Financial Accounting Standards Board’s (“FASB”) Emerging Issues Task Force (“EITF”) finalized Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Cash Consideration Received from a Vendor” (“EITF 02-16”). EITF 02-16 addresses the accounting treatment for vendor allowances and provides that cash consideration received from a vendor should be presumed to be a reduction of the price of the vendors’ product and should therefore be shown as a reduction in the purchase price of the merchandise. To the extent that the cash consideration represents a reimbursement of a specific incremental and identifiable cost, then those vendor allowances should be used to offset such costs. Historically, the company recorded non-refundable floor plan credits and certain other non-refundable credits when received. As a result of EITF 02-16, these credits are now presumed to be reductions in the cost of
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
purchased inventory and are deferred until the related vehicle is sold. In accordance with EITF 02-16, the Company recorded a cumulative effect of accounting change as of January 1, 2003, the date of adoption, that decreased net income for 2003 by $3.1 million, net of tax, or $0.07 per diluted share.
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.
The Company’s principal intangible assets relate to its franchise agreements with vehicle manufacturers, which represent the estimated value of franchises acquired in business combinations consummated subsequent to July 1, 2001, and goodwill, which represents the excess of cost over the fair value of tangible and identified intangible assets acquired in connection with business combinations.
Following is a summary of the changes in the carrying amount of goodwill and franchise value for the three months ended March 31, 2004:
Full-time employees of the Company and its subsidiaries and affiliates are eligible to receive stock based compensation pursuant to the terms of the Company’s 2002 Equity Compensation Plan (the “Plan”). The Plan originally allowed for 2,100 shares available for future issuance of awards including; stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares and other awards to key employees, outside directors, consultants and advisors of the Company. As of March 31, 2004, 1,779 shares of common stock were available for grant under the Plan. In addition, 144 shares of common stock are available for the grant of equity compensation pursuant to a prior plan.
Pursuant to Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, the Company accounts for option grants using the intrinsic value method. Accordingly, no compensation expense has been recorded in the consolidated condensed financial statements with respect to option grants. The Company has adopted the disclosure only provisions of SFAS 123, “Accounting for Stock Based Compensation”, as amended by SFAS 148, “Accounting for Stock Based Compensation — Transition and Disclosure, an Amendment of FASB Statement No. 123”. Had the Company elected to recognize compensation expense for option grants using the fair value method, pro forma income available to common
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stockholders, basic earnings per common share and diluted earnings per common share would have been as follows:
During the three months ended March 31, 2003, the Company granted options to acquire 5 shares of common stock, respectively. The weighted average fair value of the option grants of $6.12 was calculated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: no dividend yield; expected volatility of 61%; risk free interest rate of 4% and expected lives of five years. No options were granted in 2004.
Inventories consisted of the following:
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. In the U.S., the Company typically 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. In the U.K., principal balances outstanding for 90 days must be repaid whether the vehicle has been sold or not. The floor plan agreements grant a security interest in substantially all of the assets of the Company’s dealership subsidiaries. Interest rates on the floor plan agreements are variable and increase or decrease based on movements in prime or LIBOR borrowing rates.
The Company completed one acquisition during each of the three month periods ended March 31, 2004 and 2003 which have been accounted for using the purchase method of accounting. As a result, the
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Company’s financial statements include the results of operations of the acquired dealerships from the date of acquisition.
On March 26, 2004, the Company sold an aggregate of 4,050 shares of common stock to Mitsui & Co., Ltd. and Mitsui & Co. (U.S.A.), Inc. for $119,435, or $29.49 per share. The proceeds of the sale were used for general corporate purposes which included reducing outstanding indebtedness under the Company’s credit agreements.
Basic earnings per common share is computed using the weighted average number of common shares outstanding. Diluted earnings per common share is based on the weighted average number of common shares outstanding, adjusted for the dilutive effect of stock options, restricted stock and a stock price guarantee in connection with an acquisition consummated in 2000. For the three month period ended March 31, 2003, 969 shares issuable upon the exercise of outstanding options were excluded from the calculation of diluted earnings per common share because the effect of such securities was antidilutive. A reconciliation of the number of shares used in the calculation of basic and diluted earnings per common share is as follows:
The following table presents certain supplementary information to the consolidated condensed statements of cash flow:
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Long-term debt consisted of the following:
The Company is party to a credit agreement with DaimlerChrysler Services North America LLC and Toyota Motor Credit Corporation, dated December 22, 2000, as amended (the “U.S. Credit Agreement”), which provides for up to $700,000 in revolving loans to be used for acquisitions, working capital, letters of credit, the repurchase of common stock and general corporate purposes. The Company is also party to an additional $50,000 standby letter of credit agreement provided by DaimlerChrysler Services North America LLC (the “Additional Facility”). Revolving loans mature on August 3, 2005. Loans under the U.S. Credit Agreement bear interest between U.S. LIBOR plus 2.00% and U.S. LIBOR plus 3.00%. The U.S. Credit Agreement is fully and unconditionally guaranteed on a joint and several basis by the Company’s domestic automotive dealership subsidiaries and contains a number of significant covenants that, among other things, restrict the Company’s 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. The Company is also required to comply with specified ratios and tests defined in the U.S. Credit Agreement. The U.S. Credit Agreement also contains typical events of default, including change of control and non-payment of obligations. Availability under the revolving portion of the U.S. Credit Agreement is subject to a collateral-based borrowing limitation, which is determined based on allowable domestic tangible assets. Substantially all of the Company’s domestic assets not pledged as security under the floor plan arrangements in the U.S. are subject to security interests granted to lenders under the U.S. Credit Agreement. The U.S. Credit Agreement, the subordinated notes discussed below and borrowings under floor plan financing arrangements have cross-default provisions that trigger a default in the event of an uncured default under other material indebtedness. As of March 31, 2004, outstanding borrowings and letters of credit under the U.S. Credit Agreement amounted to $238,000 and $9,500, respectively, and outstanding letters of credit amounted to $35,000 under the Additional Facility. As of March 31, 2004 the Company was in compliance with all financial covenants under the U.S. Credit Agreement.
The Company is party to a credit agreement with the Royal Bank of Scotland dated February 28, 2003 (the “U.K. Credit Agreement”), which provides for up to £45,000 (approximately $82,200 as of March 31, 2004) in revolving loans to be used for acquisitions, working capital, and general corporate purposes. The U.K. Credit Agreement also provides for an additional seasonally adjusted overdraft line of credit up to a maximum
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of £10,000 (approximately $18,200 as of March 31, 2004). Loans under the U.K. Credit Agreement bear interest between U.K. LIBOR plus 0.85% and U.K. LIBOR plus 1.25%. The borrowing capacity under the U.K. Credit Agreement will be reduced by £2,000 every six months, with the first reduction having occurred on January 1, 2004. The remaining £35,000 of revolving loans mature on January 31, 2006. The U.K. Credit Agreement is fully and unconditionally guaranteed on a joint and several basis by the Company’s subsidiaries in the U.K. (the “U.K. Subsidiaries”), and contains a number of significant covenants that, among other things, restrict the ability of the U.K. Subsidiaries to pay dividends, 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 U.K. Subsidiaries are required to comply with specified ratios and tests defined in the U.K. Credit Agreement. The U.K. Credit Agreement also contains typical events of default, including change of control and non-payment of obligations. Substantially all of the U.K. Subsidiaries’ assets not pledged as security under floor plan arrangements in the U.K. are subject to security interests granted to lenders under the U.K. Credit Agreement. The U.K. Credit Agreement also has cross-default provisions that trigger a default in the event of an uncured default under other material indebtedness of the U.K. Subsidiaries. As of March 31, 2004, outstanding borrowings under the U.K. Credit Agreement amounted to approximately £16,800 ($30,714), and the Company was in compliance with all financial covenants under the U.K. Credit Agreement.
In March 2002, the Company issued $300,000 aggregate principal amount of 9.625% Senior Subordinated Notes due 2012 (the “Notes”). The Notes are unsecured senior subordinated notes and rank behind all existing and future senior debt, including debt under our credit agreements and floor plan indebtedness. The Notes are guaranteed by substantially all domestic subsidiaries on a senior subordinated basis. The Company can redeem all or some of the Notes at its option beginning in 2007 at specified redemption prices. In addition, until 2005 the Company is allowed to redeem up to 35% of the Notes with the net cash proceeds from specified public equity offerings. Upon a change of control, each holder of Notes will be able to require the company to repurchase all or some of the Notes at a redemption price of 101% of the principal amount of the Notes. The Notes also contain customary negative covenants and events of default.
Effective March 2004, the Company terminated a swap agreement pursuant to which a notional $350,000 of its U.S. floating rate debt was exchanged for fixed rate debt. This swap was designated as a cash flow hedge of future interest payments of the LIBOR based U.S. floor plan borrowings. The fair value of the swap upon termination was not significant. During January 2000, the Company entered into a swap agreement of five years duration pursuant to which a notional $200,000 of its U.S. floating rate debt was exchanged for fixed rate debt. The fixed rate interest was 7.15%. In October 2002, the terms of this swap were amended pursuant to which the interest rate was reduced to 5.86% and the term of the agreement was extended for an additional three years.
The following tables include condensed consolidating financial information as of March 31, 2004 and December 31, 2003 and for the three month periods ended March 31, 2004 and 2003 for United Auto Group, Inc. (as the issuer of the Notes), wholly-owned subsidiary guarantors, non-wholly owned guarantors, and non-guarantor subsidiaries (primarily representing foreign entities). The condensed consolidating financial information includes certain allocations of balance sheet, income statement and cash flow items, which are
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not necessarily indicative of the financial position, results of operations and cash flows of these entities on a stand-alone basis. In accordance with the SEC’s Rule 3-10 of Regulation S-X, separate financial statements for each of the entities that constitute the non-wholly owned guarantors are presented within.
Condensed Consolidating Balance Sheet
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Condensed Consolidating Statement of Income
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Condensed Consolidating Statement of Cash Flow
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Condensed Consolidating Statement of Cash Flows
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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. See “Forward Looking Statements”.
Overview
We are the second largest automotive retailer in the United States as measured by total revenues. As of March 31, 2004, we owned and operated 136 franchises in the United States and 83 franchises internationally, primarily in the United Kingdom. We offer a full range of vehicle brands. In addition to selling new and used vehicles, we generate higher-margin revenue at each of our dealerships through maintenance and repair services and the sale of higher margin products, such as third party finance and insurance products, third-party extended service contracts and replacement and aftermarket automotive products.
New vehicle revenues include sales to retail customers and to leasing companies providing consumer automobile leasing. Used vehicle revenues include amounts received for used vehicles sold to retail customers, leasing companies providing consumer leasing and other dealers. We generate finance and insurance revenues from sales of third-party extended service contracts, other third-party insurance policies, and accessories, as well as from fees for placing third-party finance and lease contracts. Service and parts revenues include fees paid for repair and maintenance service, the sale of replacement parts and collision repairs.
Our gross profit tends to vary with the mix of revenues we derive from the sale of new vehicles, used vehicles, finance and insurance products, and service and parts services. Our gross profit generally varies across product lines, with new vehicle sales usually resulting in lower gross profit margins and our other products resulting in higher gross profit margins. Factors such as seasonality, weather, cyclicality and manufacturers’ advertising and incentives may impact the mix of our revenues, and therefore influence our gross profit margin.
Our selling expenses consist of advertising and compensation for sales personnel, including commissions and related bonuses. General and administrative expenses include compensation for administration, finance, legal and general management personnel, rent, insurance, utilities and other outside services. A significant portion of our selling expenses are variable, and a significant portion of our general and administrative expenses are subject to our control, allowing us to adjust them over time to reflect economic trends.
Floor plan interest expense relates to indebtedness incurred in connection with the acquisition of new and used vehicle inventories. Other interest expense consists of interest charges on all of our interest-bearing debt, other than interest relating to floor plan financing.
We have acquired a number of dealerships each year since our inception. 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.
The future success of our business will likely be dependent on, among other things, our ability to consummate and integrate acquisitions, our ability to increase sales of higher margin products, especially service and parts sales, our ability to realize returns on our significant capital investment in new and upgraded dealerships, and the success of our international operations. See “Forward Looking Statements.”
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting standards generally accepted in the United States of America requires the application of accounting policies that often involve making estimates and employing judgment. Such judgments influence the reported amounts of the assets, liabilities, revenues and expenses in the Company’s consolidated financial statements. Management, on an ongoing basis, reviews these estimates and assumptions. Management’s determination that modifications in assumptions and estimates are appropriate may result in a material change in our future results of operations or financial position as reported in the consolidated financial statements.
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Following is a summary of the accounting policies applied in the preparation of our consolidated condensed financial statements that management believes are most dependent upon the use of estimates and assumptions.
We record revenue when vehicles are delivered and title has passed to the customer, when vehicle service or repair work is performed and when parts are delivered. Sales promotions that we offer to customers are accounted for as a reduction to the sales price at the time of sale. Incentives, rebates and holdbacks offered by manufacturers directly to us are recognized at the time of sale if they are vehicle specific, or as earned in accordance with the manufacturer program rules.
We arrange financing for customers through various financial institutions and receive a commission from the lender equal to the difference between the interest rates charged to customers and the interest rates set by the financing institution. We also receive commissions from the sale of various third-party insurance products to customers, including credit, life, and health insurance policies and extended service contracts. These commissions are recorded as revenue at the time the customer enters into the contract. We are not the obligor under any of these contracts. In the case of finance contracts, a customer may prepay or fail to pay their contract, thereby terminating the contract. Customers may also terminate extended service contracts, which are fully paid at purchase, and become eligible for refunds of unused premiums. In these circumstances, a portion of the commissions we receive may be charged back to us based on the relevant terms of the contracts. The revenue we record relating to commissions is net of an estimate of the ultimate amount of chargebacks we will be required to pay. Such estimate of chargeback exposure is based on our historical chargeback experience arising from similar contracts, including the impact of refinance and default rates on retail finance contracts and cancellation rates on extended service contracts and other insurance products.
Our principal intangible assets relate to our franchise agreements with vehicle manufacturers, which represent the estimated value of franchises acquired in business combinations consummated subsequent to July 1, 2001, and goodwill, which represents the excess of cost over the fair value of tangible and identified intangible assets acquired in connection with business combinations. We believe the franchise value of our dealerships have an indefinite life based on the following facts:
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Intangible assets are reviewed for impairment on at least an annual basis. Franchise value impairment is assessed through a comparison of the fair value of the asset with its carrying value. If the carrying value of a franchise exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. We also evaluate the remaining useful life of our franchises in connection with the annual impairment testing to determine whether events and circumstances continue to support an indefinite useful life. Goodwill impairment is assessed at the “reporting unit” level. We have three “regions”, each of which has been determined to be a reporting unit due to the fact that discrete financial information is available for each region and each region’s operating results are regularly reviewed by our Chief Executive Officer and executive management team. If the carrying amount of a reporting unit is determined to exceed its fair value, an impairment loss is recognized.
Investments include marketable securities and investments in businesses accounted for under the equity method. Marketable securities include investments in debt and equity securities. Marketable securities held by us are typically classified as available for sale and are stated at fair value in our balance sheet with unrealized gains and losses included in other comprehensive income, a separate component of stockholders’ equity. Declines in investment values that are deemed to be other than temporary would result in an impairment charge reducing the investments’ carrying value to fair value. A majority of our investments are in joint venture relationships that are more fully described in “Joint Ventures” in this Management’s Discussion and Analysis. Such joint ventures are accounted for under the equity method, pursuant to which we record our proportionate share of joint venture income each period.
We retain risk relating to certain of our general liability insurance, workers’ compensation insurance and employee medical benefits in the United States. As a result, we are likely to be responsible for a majority of the claims and losses incurred under these programs. The amount of risk we retain varies by program, but we typically pay per occurrence deductibles and have pre-determined maximum exposure limits for each insurance period. The majority of losses, if any, above the pre-determined exposure limits are typically paid by third-party insurance carriers. Our estimate of future losses is prepared by management using the Company’s historical loss experience and industry based development factors.
Tax regulations may require items to be included in the tax return at different times than the items are reflected in the financial statements. Some of these differences are permanent, such as expenses which are not deductible on our tax return, and some are timing differences, such as the timing of depreciation expense. Timing differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in our tax return in future years for which we have already recorded the tax effect in our financial statements. Deferred tax liabilities generally represent expenses recognized in our financial statements for which payment has been deferred or deductions taken on our tax return which have not yet been recognized as expense in our financial statements. We establish valuation allowances for our deferred tax assets if the amount of expected future taxable income is not likely to allow for the use of the deduction or credit.
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Results of Operations
Total Retail Data
Retail data includes new vehicle, used vehicle, finance and insurance and service and parts transactions. Retail unit sales of vehicles increased by 6,937, or 12.0%, from 2003 to 2004. The increase is due to: (1) a 1,941 unit, or 3.4%, increase in same store retail unit sales and (2) a 4,996 unit increase from net dealership acquisitions during the period. We believe that the same store increase is due in part to our favorable brand mix, which includes a higher concentration of foreign and luxury nameplates.
Retail sales revenue increased $399.9 million, or 22.8%, from 2003 to 2004. The increase is due to: (1) a $190.9 million, or 11.0%, increase in same store revenues and (2) a $209.0 million increase from net dealership acquisitions during the period. The same store revenue increase is due to (1) a 3.4% increase in retail unit sales, which increased revenue by $61.7 million, (2) a $1,811, or 6.3%, increase in average new vehicle revenue per unit, which increased revenue by $67.0 million, (3) a $1,539 or 7.4% increase in average used vehicle revenue per unit, which increased revenue by $31.1 million (4) a $24, or 3.0%, increase in average finance and insurance revenue per unit, which increased revenue by $1.4 million and (5) a $29.7 million, or 14.5%, increase in service and parts revenues. Retail revenues were positively affected by approximately $74.2 million by foreign currency exchange rates in 2004.
Retail gross profit increased $67.3 million, or 24.4%, from 2003 to 2004. The increase is due to (1) the 12.0% increase in retail unit sales, which increased gross profit $23.0 million, (2) a $247, or 10.2%, increase in average gross profit per new vehicle retailed, which increased gross profit by $9.2 million, (3) a $171, or 8.9%, increase in average gross profit per used vehicle retailed, which increased gross profit by $3.6 million, (4) a $14, or 1.7%, increase in average finance and insurance revenue per unit, which increased gross profit by $0.8 million and (5) a $30.7 million, or 30.9%, increase in service and parts gross profit.
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New Vehicle Data
Retail unit sales of new vehicles increased 4,748, or 12.7%, from 2003 to 2004. The increase is due to: (1) a 2,017 unit, or 5.4%, increase in same store retail unit sales and (2) a 2,731 unit increase from net dealership acquisitions during the period. We believe that the same store increase is due in part to our favorable brand mix, which includes a concentration of foreign and luxury nameplates.
New vehicle retail sales revenue increased $239.8 million, or 22.3%, from 2003 to 2004. The increase is due to: (1) a $128.8 million, or 12.1%, increase in same store revenues and (2) a $111.0 million increase from net dealership acquisitions during the period. The same store revenue increase is due to a 5.4% increase in retail unit sales, which increased revenue by $61.8 million, and a $1,811, or 6.3%, increase in comparative average selling prices per unit, which increased revenue by $67.0 million.
Retail gross profit from new vehicle sales increased $21.9 million, or 24.2%, from 2003 to 2004. The increase is due to: (1) a 12.7% increase in new retail unit sales, which increased gross profit by $12.7 million, and a $247, or 10.2%, increase in average gross profit per new vehicle retailed, which increased gross profit by $9.2 million.
Used Vehicle Data
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Retail unit sales of used vehicles increased 2,189, or 10.7%, from 2003 to 2004. The increase is due to a 2,265 unit increase from net dealership acquisitions during the period offset slightly by a 76 unit, or 0.4%, decrease in same store used retail unit sales.
Used vehicle retail sales revenue increased $100.4 million, or 23.7%, from 2003 to 2004. The increase is due to: (1) a $29.4 million, or 7.0%, increase in same store revenues and (2) a $71.0 million increase from net dealership acquisitions during the period. The same store revenue increase is due to a $1,539, or 7.4%, increase in comparative average selling prices per vehicle, which increased revenue by $31.1 million, offset somewhat by a 0.4% decrease in retail unit sales, which decreased revenue by $1.7 million.
Retail gross profit from used vehicle sales increased $8.1 million, or 20.5%, from 2003 to 2004. The increase is due to: (1) a 10.7% increase in used retail unit sales, which increased gross profit by $4.6 million, and (2) a $171, or 8.9%, increase in average gross profit per used vehicle retailed, which increased gross profit by $3.5 million.
Finance and Insurance Data
Finance and insurance revenue increased $6.4 million, or 13.7%, from 2003 to 2004. The increase is due to: (1) a $3.0 million, or 6.5%, increase in same store revenues and (2) a $3.4 million increase from net dealership acquisitions during the period. The same store revenue increase is due to (1) the 3.4% increase in retail unit sales, which increased revenue by $1.6 million and (2) a $24, or 3.0%, increase in comparative average finance and insurance revenue per unit, which increased revenue by $1.4 million.
Service and Parts Data
Service and parts revenue increased $53.2 million, or 25.8%, from 2003 to 2004. The increase is due to: (1) a $29.7 million, or 14.5%, increase in same store revenues and (2) a $23.5 million increase from net dealership acquisitions during the period.
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Service and parts gross profit increased $30.7 million, or 30.9%, from 2003 to 2004. The increase is due to: (1) a $17.7 million, or 18.0%, increase in same store gross profit and (2) a $13.0 million increase from net dealership acquisitions during the period.
We believe that our service and parts business is being positively impacted by increases in retail unit sales at our dealerships and capacity increases in our service and parts operations resulting from our facility improvement and expansion programs.
Fleet Data
Fleet revenues increased $6.6 million, or 25.6%, from 2003 to 2004. We have generally elected to de-emphasize low margin fleet business, however, opportunities to obtain such business are considered on a case by case basis. We may elect to selectively pursue fleet opportunities in circumstances where we believe we will be able to generate higher margin service and parts revenues throughout the life cycle of the fleet vehicle.
Wholesale Data
Wholesale sales increased $54.9 million, or 47.7%, from 2003 to 2004. The increase is due to (1) a $32.7 million or 28.8%, increase in same store wholesale sales revenue and (2) a $22.2 million increase from net dealership acquisitions during the period.
Wholesale gross profit increased $1.7 million, or 170.0%, from 2003 to 2004. The increase is due primarily to a $105, or 158.0%, increase in average wholesale gross profit per vehicle. We believe that the improvement in wholesale gross profit over the periods is due in part to our used car initiatives, including implementing closed bid auctions at certain of our locations.
Selling, General and Administrative
Selling, general and administrative “SG&A” expenses increased $56.3 million, or 25.5%, from $220.6 million to $276.9 million. The aggregate increase is primarily due to (1) a $32.6 million, or 15.0%, increase in same store SG&A and (2) a $23.7 million increase from net dealership acquisitions during the period. The increase in same store selling, general and administrative expenses is due in large part to (1) increased variable selling expenses, including increases in variable compensation, as a result of the 24.4%
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Depreciation and Amortization
Depreciation and amortization increased $1.8 million, or 25.9%, from $7.0 million to $8.8 million. The increase is due to: (1) a $1.4 million, or 21.2%, increase in same store depreciation and amortization and (2) a $0.4 million increase from net dealership acquisitions during the period. The same store increase is due in large part to our facility improvement and expansion program.
Floor Plan Interest Expense
Floor plan interest expense increased $4.6 million, or 52.5%, from $8.7 million to $13.3 million. The increase is due to: (1) a $3.9 million, or 45.2%, increase in same store floor plan interest expense and (2) a $0.7 million increase from net dealership acquisitions during the period. The same store increase is primarily due to (1) $1.8 million of incremental interest resulting from our March 2003 interest rate swap, pursuant to which a notional $350.0 million of our floating rate floor plan debt was exchanged for a 3.15% fixed rate for a five year period, (2) an increase in average inventories during 2004 compared to 2003 and (3) a slight increase in our weighted average borrowing rate during 2004 compared to 2003.
Other Interest Expense
Other interest expense increased $0.5 million, or 4.7%, from $10.3 million to $10.8 million. The increase is due primarily to increased working capital advances.
Income Taxes
Income taxes increased $2.0 million, or 17.7%, from $11.4 million to $13.4 million. The increase is due primarily to an increase in pre-tax income compared with 2003, offset by a reduction in our effective rate resulting from an increase in the relative proportion of our income from our U.K. operations, which are taxed at a lower rate.
Liquidity and Capital Resources
Our cash requirements are primarily for working capital, the acquisition of new dealerships, the improvement and expansion of existing facilities, the construction of new facilities and dividends. Historically, these cash requirements have been met through cash flow from operations, borrowings under our credit agreements (including floor plan arrangements), the issuance of debt securities, sale-leaseback transactions and the issuance of equity securities. As of March 31, 2004, we had working capital of $122.7 million.
As of March 31, 2004, we had approximately $16.1 million of cash available to fund operations and future acquisitions. In addition, as of March 31, 2004, $452.0 million and £26.2 million ($47.8 million) was available for borrowing under our U.S. Credit Agreement and our U.K. Credit Agreement, respectively. Availability under the U.S. Credit Agreement may be limited by a borrowing base collateral requirement (in general, the borrowing base is equal to certain tangible assets plus $300.0 million) and other conditions discussed below. Borrowings used to finance the cost of domestic acquisitions and domestic capital construction projects will typically increase tangible assets, allowing the Company to access borrowing capacity which might not be available due to the base collateral limitation in the U.S. Credit Agreement.
We paid a cash dividend on our common stock on March 1, 2004. The dividend was in the amount of ten cents per share. Future quarterly or other cash dividends will depend upon our earnings, capital requirements, financial condition, restrictions on any then existing indebtedness and other factors considered relevant by our Board of Directors.
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Our principal source of growth has come from acquisitions of automotive dealerships. We believe that our cash flow provided by operating activities and our existing capital resources, including the liquidity provided by our credit agreements and floor plan financing arrangements, 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. We may not have sufficient availability under our credit agreements to finance significant additional acquisitions. In certain circumstances, a public equity offering could require the prior approval of certain 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.
We finance the majority of our new and a portion of our used vehicle inventory under revolving floor plan financing arrangements between our subsidiaries and various lenders. In the U.S., we make monthly interest payments on the amount financed, but are generally not required to make loan principal repayments prior to the sale of the new and used vehicles we have financed. In the U.K., we pay interest only for 90 days, after which we repay the floor plan indebtedness with cash flow from operations or borrowings under our credit agreements. The floor plan agreements grant a security interest in substantially all of the assets of our automotive dealership subsidiaries. Interest rates under the floor plan arrangements are variable and increase or decrease based on movements in the prime rate or LIBOR. Outstanding borrowings under floor plan arrangements amounted to $1,198.9 million as of March 31, 2004, of which $268.9 million related to inventory held by our U.K. subsidiaries.
We are party to a credit agreement with DaimlerChrysler Services North America LLC and Toyota Motor Credit Corporation, dated December 22, 2002, as amended (the “U.S. Credit Agreement”), which provides for up to $700.0 million in revolving loans to be used for acquisitions, working capital, letters of credit, the repurchase of common stock and general corporate purposes. We are also party to an additional $50.0 million standby letter of credit facility provided by DaimlerChrysler Services North America LLC (the “Additional Facility”). Revolving loans under the U.S. Credit Agreement mature on August 3, 2005 and bear interest between U.S. LIBOR plus 2.00% and U.S. LIBOR plus 3.00%. The U.S. Credit Agreement is fully and unconditionally guaranteed on a joint and several basis by our domestic automotive dealership subsidiaries 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. We do not currently believe that such covenants will materially affect our acquisition or operating strategy. We are also required to comply with specified ratios and tests defined in the U.S. Credit Agreement. The U.S. Credit Agreement also contains typical events of default, including change of control and non-payment of obligations. Availability under the revolving portion of the U.S. Credit Agreement is subject to a collateral-based borrowing limitation, which is determined based on our allowable domestic tangible assets. Substantially all of our domestic assets not pledged as security under the floor plan arrangements are subject to security interests granted to lenders under the U.S. Credit Agreement. Our U.S. Credit Agreement, the subordinated notes discussed below and borrowings under floor plan financing arrangements have cross-default provisions that trigger a default in the event of an uncured default under other material indebtedness. As of March 31, 2004, outstanding borrowings and letters of credit under the U.S. Credit Agreement amounted to $238.0 million and $9.5 million, respectively, and outstanding letters of credit amounted to $35.0 million under the Additional Facility. As of March 31, 2004 we were in compliance with all financial covenants under the U.S. Credit Agreement.
We are party to a credit agreement with the Royal Bank of Scotland dated February 28, 2003 (the “U.K. Credit Agreement”), which provides for up to £45.0 million (approximately $82.2 million as of March 31, 2004) in revolving loans to be used for acquisitions, working capital, and general corporate
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In March 2002, we issued $300.0 million aggregate principal amount of 9.625% Senior Subordinated Notes due 2012 (the “Notes”). The Notes are unsecured senior subordinated notes and rank behind all existing and future senior debt, including debt under our credit agreements and floor plan indebtedness. The Notes are guaranteed by substantially all of our domestic subsidiaries on a senior subordinated basis. We can redeem all or some of the Notes at our option beginning in 2007 at specified redemption prices. In addition, until 2005 we are allowed to redeem up to 35% of the Notes with the net cash proceeds from specified public equity offerings. Upon a change of control, each holder of Notes will be able to require us to repurchase all or some of the Notes at a redemption price of 101% of the principal amount of the Notes. The Notes also contain customary negative covenants and events of default.
Effective March 2004, we terminated a swap agreement pursuant to which a notional $350.0 million of our U.S. floating rate debt was exchanged for fixed rate debt. This swap was designated as a cash flow hedge of future interest payments of our LIBOR based U.S. floor plan borrowings. The fair value of the swap upon termination was not significant. During January 2000, we entered into a swap agreement of five years duration pursuant to which a notional $200.0 million of our U.S. floating rate debt was exchanged for fixed rate debt. The fixed rate interest was 7.15%. In October 2002, the terms of this swap were amended pursuant to which the interest rate was reduced to 5.86% and the term of the agreement was extended for an additional three years.
In the past, we have entered into sale-leaseback transactions to finance certain acquisitions and capital expenditures. In these transactions we sell property to a third-party and agree to lease that property back for a certain period of time. We believe we will continue to finance certain acquisitions and capital expenditures in this fashion in the future. Commitments under such leases are included in the table of contractual payment obligations below.
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On March 26, 2004, we sold an aggregate of 4,050,000 shares of our common stock to Mitsui & Co., Ltd. and Mitsui & Co. (U.S.A.), Inc. for $119.4 million, or $29.49 per share. The proceeds of the sale were used for general corporate purposes which included reducing outstanding indebtedness under our credit agreements.
Cash Flows
Cash and cash equivalents increased by $2.7 million and $8.1 million during the three months ended March 31, 2004 and 2003, respectively. The major components of these changes are discussed below.
Cash provided by operating activities was $6.5 million and a use of $1.9 million during the three months ended March 31, 2004 and 2003, respectively. Cash flows from operating activities include net income adjusted for non-cash items and the effects of changes in working capital.
Cash used in investing activities was $48.1 million and $44.4 million during the three months ended March 31, 2004 and 2003, respectively. Cash flows from investing activities consist primarily of cash used for capital expenditures, proceeds from sale-leaseback transactions and net expenditures for dealership acquisitions. Capital expenditures were $49.3 million and $41.6 million during the three months ended March 31, 2004 and 2003, respectively. Capital investments relate primarily to improvements to our existing dealership facilities and the construction of new facilities. Proceeds from sale-leaseback transactions were $3.8 million during the three months ended March 31, 2004. Cash used in business acquisitions, net of cash acquired, was $2.5 million and $2.8 million for the three months ended March 31, 2004 and 2003, respectively.
Cash provided by financing activities was $41.8 million and $47.5 million for the three months ended March 31, 2004 and 2003, respectively. Cash flows from financing activities include net borrowings or repayments of long-term debt, proceeds from issuance of common stock, including proceeds from exercise of stock options, repurchases of common stock and dividends. During the three months ended March 31, 2004, we received proceeds of $125.4 million from the issuance of common stock, including the exercise of stock options. During the three months ended March 31, 2004 we had net repayments of long-term debt of $79.4 million and during the three months ended March 31, 2003 we had net borrowings of long-term debt of $47.5 million. During the three months ended March 31, 2004 we paid $4.1 million of cash dividends to our shareholders.
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The table below sets forth our best estimates as to the amounts and timing of future payments for our most significant contractual obligations as of March 31, 2004. The information in the table reflects future unconditional payments and is based upon, among other things, the terms of any relevant agreements. Future events, including the amount of borrowings under our credit agreements and floor plan arrangements and purchases or refinancing of our securities, could cause actual payments to differ significantly from these amounts. See “— Forward-Looking Statements.”
We expect that the amounts above will be funded through cash provided by operations. In the case of balloon payments at the end of the term of our debt instruments, we expect to be able to refinance such instruments as they expire in the normal course of business.
In connection with an acquisition of dealerships completed in October 2000, we agreed to make a contingent payment in cash to the extent 841,476 shares of common stock issued as consideration for the acquisition are sold subsequent to the fifth anniversary of the transaction and have a market value of less than $12.00 per share at the time of sale. We will be forever released from this guarantee in the event the average daily closing price of our common stock for any 90 day period subsequent to the fifth anniversary of the transaction exceeds $12.00 per share. In the event we are required to make a payment relating to this guarantee, such payment would result in the revaluation of the common stock issued in the transaction, resulting in a reduction of additional paid-in-capital. We have further granted the seller a put option pursuant to which we may be required to repurchase no more than 108,333 shares for $12.00 per share on each of the first five anniversary dates of the transaction. To date, no payments have been made by us relating to the put option. As of March 31, 2004, the maximum of future cumulative cash payments we may be required to make in connection with the put option amounted to $2.6 million.
We have entered into an agreement with a third-party to jointly acquire and manage dealerships in Indiana, Illinois, Ohio, North Carolina and South Carolina. With respect to any joint venture established pursuant to this agreement, we are required to repurchase our partner’s interest at the end of the five-year period following the date of the acquisition, in accordance with the terms of the agreement. Pursuant to this arrangement, we have entered into a joint venture agreement with respect to the Honda of Mentor dealership. We are required to repurchase our partners’ interest in this joint venture in July 2008. We expect this payment to be approximately $2.7 million.
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Related Party Transactions
Roger S. Penske, our Chairman of the Board and Chief Executive Officer, is also Chairman of the Board and Chief Executive Officer of Penske Corporation, and through entities affiliated with Penske Corporation, our largest stockholder owning about 41% of our outstanding stock. Mitsui & Co., Ltd. and Mitsui & Co. (USA), Inc. (collectively, “Mitsui”) currently own about 15.6% of our outstanding common stock. Mitsui, Penske Corporation and other affiliates of Penske Corporation (International Motor Cars Group I, LLC and International Motors Cars Group II, LLC (the “PCP Entities”), and Penske Automotive Holdings Corp.) are parties to a stockholders agreement. Under the stockholders agreement, the Penske affiliated companies agreed to vote their shares for one director who is a representative of Mitsui. In turn, Mitsui agreed to vote their shares for up to fourteen directors voted for by the Penske affiliated companies. This agreement terminates in March 2014, upon the mutual consent of the parties or when either party no longer owns any of our common stock.
James A. Hislop, one of our directors, is the President, Chief Executive Officer and a managing member of Penske Capital Partners (who is the managing member of the PCP Entities), a director of Penske Corporation and a managing director of Transportation Resource Partners, an organization affiliated with Roger S. Penske which undertakes investments in transportation related industries. Mr. Penske also is a managing member of Penske Capital Partners. Richard J. Peters, one of our directors, is a director of Penske Corporation and a managing director of Transportation Resource Partners. Robert H. Kurnick, Jr., our Executive Vice President and General Counsel, is also the President and a director of the Penske Corporation and Paul F. Walters, our Executive Vice President — Human Resources serves in a similar human resources capacity for Penske Corporation.
On March 26, 2004, we sold an aggregate of 4,050,000 shares of common stock to Mitsui & Co., Ltd. and Mitsui & Co. (U.S.A.), Inc. for $119,435, or $29.49 per share. The proceeds of the sale were used for general corporate purposes which included reducing outstanding indebtedness under the Company’s credit agreements.
We are currently a tenant under a number of non-cancelable lease agreements with Automotive Group Realty, LLC (“AGR”), a wholly-owned subsidiary of Penske Corporation. From time to time we may sell AGR real property and improvements which are subsequently leased by AGR to us. The sale of each parcel of property is valued at a price which is either independently confirmed by a third party appraiser or at the price for which we purchased the property from an independent third party. In addition, we sometimes pay and/or receive fees from Penske Corporation and its affiliates for services rendered in the normal course of business, including the transactions with AGR, and reimburse payments made to third parties by Penske Corporation on our behalf. Payments made relating to services rendered reflect the provider’s cost or an amount mutually agreed upon by both parties, which we believe represent terms at least as favorable as those that could be obtained from an unaffiliated third party negotiated on an arm’s length basis.
We are currently a tenant under a number of non-cancelable lease agreements with Samuel X. DiFeo and members of his family. Mr. DiFeo is our President and Chief Operating Officer and one of our directors. We believe that the terms of these transactions are at least as favorable as those that could be obtained from an unaffiliated third party negotiated on an arm’s length basis.
We have entered in to joint ventures with certain related parties as more fully discussed below.
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Joint Ventures
From time to time we enter into joint venture arrangements in the ordinary course of business, pursuant to which we acquire dealerships together with other investors. We may also provide these subsidiaries with working capital and other debt financing at costs that are based on our incremental borrowing rate.
An entity controlled by one of our directors, Lucio A. Noto (the “Investor”) owns a 6.5% interest in one of our subsidiaries, UAG Connecticut I, LLC, which entitles the Investor to 20% of the operating profits of UAG Connecticut I. In addition, the Investor has an option to purchase up to a 20% interest in UAG Connecticut I for specified amounts.
We own and operate three BMW dealerships in and around Munich, Germany in which we own a 50% interest. We own and operate Lexus and Toyota dealerships in and around Frankfurt, Germany in which we own a 50% interest. We also own and operate two Toyota dealerships in Mexico in which we own a 48.7% interest and 45% interest.
We own and operate certain Mercedes-Benz, Audi and Porsche dealerships in the U.S. through HBL, LLC. We own a 90% interest in HBL, LLC and Roger Penske, Jr. owns the remaining 10% interest. We own and operate certain dealerships in Brazil in which we own a 90.6% interest. One of our joint venture partners in Brazil is Roger S. Penske, Jr. who owns a 4.7% interest.
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 U.S. 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. The greatest U.S. seasonalities exist with the dealerships we operate in the northeastern and upper mid-western U.S., for which the second and third quarters are the strongest with respect to vehicle-related sales. Our U.K. operations generally experience higher volumes of vehicle sales in the first and third quarters of each year due in part to vehicle registration practices in the U.K. The service and parts business at all dealerships experiences relatively modest seasonal fluctuations.
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 should interest rates increase due to increased inflation since most other automotive dealerships have similar floating rate borrowing arrangements.
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Forward Looking Statements
This quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements generally can be identified by the use of terms such as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “intend,” “plan,” “estimate,” “predict,” “potential,” “forecast,” “continue” or variations of such terms, or the use of these terms in the negative. Forward-looking statements include statements regarding our current plans, forecasts, estimates, beliefs or expectations, including, without limitation, statements with respect to:
Forward-looking statements involve known and unknown risks and uncertainties and are not assurances of future performance. Actual results may differ materially from anticipated results due to a variety of factors, including the factors identified in the reports and our other periodic filings with the SEC. Important factors that could cause actual results to differ materially from our expectations include the following:
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Furthermore,
We urge you to carefully consider these risk factors in evaluating all forward-looking statements regarding our business. Readers of this report are cautioned not to place undue reliance on the forward-looking statements contained in this report. All forward-looking statements attributable to us are qualified in their entirety by this cautionary statement. Except to the extent required by the federal securities laws and Securities and Exchange Commission rules and regulations, we have no intention or obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.
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Item 3. 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 U.S. and U.K. credit agreements bear interest at a variable rate based on a margin over LIBOR, as defined. Based on the amount outstanding as of March 31, 2004, a 100 basis point change in interest rates would result in an approximate $2.7 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 defined LIBOR or prime rate. We continually evaluate our exposure to interest rate fluctuations and follow established policies and procedures to implement strategies designed to manage the amount of variable rate indebtedness outstanding at any point in time in an effort to mitigate the effect of interest rate fluctuations on our earnings and cash flows. We are currently party to a swap agreement pursuant to which a notional $200.0 million of our floating rate floor plan debt was exchanged for 5.86% fixed rate debt through January 2008. Based on an average of the aggregate amounts outstanding under our floor plan financing arrangements, a 100 basis point change in interest rates would result in an approximate $6.4 million change to our annual floor plan interest expense.
Interest rate fluctuations affect the fair market value of our fixed rate debt, including the Notes and certain seller financed promissory notes, but, with respect to such fixed rate instruments, do not impact our earnings or cash flows.
Foreign Currency Exchange Rates. The Company currently has operations in the U.K. and Brazil and has investments in Germany and Mexico. In each of these markets, the local currency is the functional currency. Due to the Company’s intent to remain permanently invested in these foreign markets, we do not hedge against foreign currency fluctuations. Other than the U.K., the Company’s foreign operations are not significant. In the event we change our intent with respect to the investment in any of our international operations, the Company would expect to implement strategies designed to manage those risks in an effort to mitigate the effect of foreign currency fluctuations on the Company’s earnings and cash flows.
In common with other automotive retailers, we purchase certain of our new vehicle and parts inventories from foreign manufacturers. Although we purchase the majority of our inventories in the local functional currency, including the U.S. Dollar, our business 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 which may influence such manufacturers’ ability to provide their products at competitive prices in the local jurisdictions. Our future results could be materially and adversely impacted by changes in these or other factors.
We maintain disclosure controls and procedures designed to ensure that both non-financial and financial information required to be disclosed in our periodic reports is recorded, processed, summarized and reported in a timely fashion. Based on the first quarter evaluation, the principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective. In addition, we maintain internal controls designed to provide the Company with the information it requires for accounting and financial reporting purposes. There were no changes in our internal controls over financial reporting that occurred during our first quarter of 2004 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
From time to time, we are involved in litigation relating to claims arising out of our operations in the normal course of business. Such issues may relate to litigation with customers, employment related lawsuits, class action lawsuits, purported class action lawsuits and actions brought by governmental authorities. As of March 31, 2004, we are not a party to any legal proceedings that, individually or in the aggregate, are
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On March 26, 2004, we sold an aggregate of 4,050,000 shares of common stock to Mitsui & Co., Ltd. and Mitsui & Co. (U.S.A.), Inc. for $119,435, or $29.49 per share. The shares were issued pursuant to the exemption from registration requirements of the Securities Act of 1933 provided by Section 4(2).
We held a Special Meeting of Stockholders (the “Special Meeting”) on March 26, 2004 to approve the issuance and sale of 4,050,000 shares of our common stock to Mitsui & Co., Ltd. and Mitsui & Co. (U.S.A.), Inc. Proxies for the Special Meeting were solicited pursuant to regulation 14A under the Securities Exchange Act of 1934, as amended. There were no solicitations in opposition to the proposal. Over 99% of the shares voted were cast in favor of this proposal and the vote was as follows:
For 35,423,999 Against: 71,297 Abstain 3,394
(a) Exhibits
(b) Reports on Form 8-K.
The Company filed the following Current Reports on Form 8-K during the quarter ended March 31, 2004:
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CONDENSED BALANCE SHEETS
See Notes to Condensed Financial Statements
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HBL, LLC
CONDENSED STATEMENTS OF INCOME
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CONDENSED STATEMENTS OF CASH FLOW
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CONDENSED STATEMENT OF MEMBERS’ DEFICIT
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NOTES TO CONDENSED FINANCIAL STATEMENTS
HBL, LLC (the “Company”), is engaged in the sale of new and used motor vehicles and related products and services, including vehicle service and parts, third-party finance and insurance products and other aftermarket products. The Company operates dealerships pursuant to franchise agreements with Mercedes-Benz, Maybach, Audi and Porsche. In March 2003, the Company was awarded an Aston Martin franchise, which began operations during the third quarter of 2003. In accordance with the individual franchise agreements, the dealerships are 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.
The Company is a Delaware limited liability company and is a majority-owned subsidiary of HBL Holdings, Inc. (“Holdings”), which is a Delaware corporation that is a wholly-owned subsidiary of Lantzsch-Andreas Enterprises, Inc. (“LAE”). LAE is a wholly-owned subsidiary of United Auto Group, Inc. (“UAG”). On December 31, 2001, Holdings sold a 10% member interest in the Company to Roger Penske, Jr. The Company is operated pursuant to an operating agreement dated as of December 31, 2001 between UAG and Roger Penske, Jr.
The information presented as of March 31, 2004 and December 31, 2003 and for the three month periods ended March 31, 2004 and 2003 is unaudited, but includes all adjustments (consisting only of normal and recurring adjustments) which the management of the Company believes to be necessary for the fair presentation of results for the periods presented. The results for the interim periods are not necessarily indicative of results to be expected for the year. In order to maintain consistency and comparability of financial information between periods presented, certain reclassifications have been made to the Company’s prior year condensed financial statements to conform to the current year presentation.
Goodwill represents the push down of UAG’s excess of cost over the fair value of tangible and identified intangible assets acquired in connection with the purchase of the Company. Goodwill is not amortized, but is subject to, at a minimum, an annual impairment test. If the carrying value of any of the Company’s intangible assets exceeds its fair market value, an impairment loss would be recorded. The Company uses a discounted cash flow model to determine the fair market value of goodwill.
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NOTES TO CONDENSED FINANCIAL STATEMENTS — (Continued)
The Company finances the majority of its new and a portion of its used vehicle inventory under revolving floor plan financing arrangements. The Company typically 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. The floor plan agreements grant a security interest in substantially all of the Company’s assets. Interest rates on the floor plan agreements are variable and increase or decrease based on movements in LIBOR.
The following table presents certain supplementary information to the condensed statements of cash flow:
Long-term debt represents the push down of UAG’s debt incurred when UAG acquired the Company and other advances from UAG. The interest expense included in these financial statements reflects UAG’s weighted average interest rate of 3.11% and 3.23% on this indebtedness during 2004 and 2003, respectively. UAG borrowed these funds under a credit agreement which is fully and unconditionally guaranteed on a joint and several basis by the majority of its domestic automotive dealership subsidiaries, including the Company. Substantially all of the Company’s assets that are not pledged as security under floor plan financing agreements and the Company’s member interests are subject to security interests granted to lenders under UAG’s credit agreement.
UAG has issued $300,000 aggregate principal amount of 9.625% Senior Subordinated Notes due 2012 (the “Notes”). The Notes are unsecured senior subordinated notes and rank behind all of UAG’s existing and future senior debt, including debt under UAG’s credit agreements and floor plan indebtedness. The Notes are fully and unconditionally guaranteed on a joint and several basis by the majority of UAG’s domestic automotive dealership subsidiaries, including the Company.
From time to time, the Company pays and/or receives fees from UAG and its affiliates for services rendered in the normal course of business. 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. In addition,
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management fees of $225 were charged to the Company by UAG or its affiliates during each of the three month periods ended March 31, 2004 and 2003, respectively.
During 2004, the Company received $6,783 from UAG in net support of its facility upgrade, which is included long-term debt in the accompanying condensed balance sheets.
From time to time, the Company is involved in litigation relating to claims arising out of operations in the normal course of business. As of March 31, 2004, the Company is not a party to any legal proceedings that, individually or in the aggregate, are reasonably expected to have a material adverse effect on the Company’s results of operations, financial condition or cash flow.
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UAG CONNECTICUT I, LLC
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44
45
CONDENSED STATEMENT OF MEMBERS’ CAPITAL
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UAG Connecticut I, LLC (the “Company”) is engaged in the sale of new and used motor vehicles and related products and services, including vehicle service and parts, third-party finance and insurance products and other aftermarket products. The Company operates three dealerships pursuant to franchise agreements with Mercedes-Benz, Audi and Porsche. In accordance with the individual franchise agreements, the dealerships are 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.
The Company is a Delaware limited liability company and is a majority-owned subsidiary of UAG Connecticut, LLC, which is a Delaware corporation that is a wholly-owned subsidiary of United Auto Group, Inc. (“UAG”). The remaining interest in the Company is held by Noto Holding, LLC. The Company is operated pursuant to an operating agreement between UAG and Noto Holdings, LLC.
Goodwill represents the push down of UAG’s excess of cost over the fair value of tangible and identified tangible assets acquired in connection with the purchase of the Company. Goodwill is not amortized, but is subject to, at a minimum, an annual impairment test. If the carrying value of any of the Company’s intangible assets exceeds its fair market value, an impairment loss would be recorded. The Company uses a discounted cash flow model to determine the fair market value of goodwill.
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Long-term debt represents the push down of UAG’s debt incurred when UAG acquired the Company. The interest expense included in these financial statements reflects UAG’s weighted average interest rate of 3.11% and 3.23% on this indebtedness during 2004 and 2003, respectively. UAG borrowed these funds under a credit agreement which is fully and unconditionally guaranteed on a joint and several basis by the majority of its domestic automotive dealership subsidiaries, including the Company. Substantially all of the Company’s assets that are not pledged as security under floor plan financing agreements and the Company’s member interests are subject to security interests granted to lenders under UAG’s credit agreement.
From time to time, the Company pays and/or receives fees from UAG and its affiliates for services rendered in the normal course of business. 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. In addition, management fees of $105 and $109 were charged to the Company by UAG or its affiliates during the three month periods ended March 31, 2004 and 2003, respectively.
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In April 2003, Noto Holdings, LLC, and entity controlled by one of UAG’s directors, Lucio A. Noto (the “Investor”), paid approximately $1,800 (including approximately $800 credited from prior earnings retroactive to March 1, 2001) for a 6.5% interest in the Company, which entitles the Investor to 20% of the operating profits of the Company. In addition, the Investor has an option to purchase up to a 20% interest in the Company for specified amounts. The Investor has also guaranteed 20% of the Company’s lease obligation to Automotive Group Realty, LLC (“AGR”), the landlord of the facility at which the dealerships operate and a wholly owned subsidiary of Penske Corporation. In exchange for that guarantee, the Investor will be entitled to 20% of any appreciation of the property, which appreciation would otherwise accrue to AGR at the time of sale, and the Investor is responsible to AGR for any corresponding depreciation of the property at the time of sale, which obligation shall be secured solely by the Investor’s ownership interest in the Company.
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UAG MENTOR ACQUISITION, LLC
50
51
52
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UAG Mentor Acquisition, LLC (the “Company”) is engaged in the sale of new and used motor vehicles and related products and services, including vehicle service and parts, third-party finance and insurance products and other aftermarket products. The Company operates a dealership pursuant to a franchise agreement with the Honda Automobile Division of American Honda Motor Co., Inc. In accordance with the franchise agreement, the dealership is subject to certain rights and restrictions typical of the industry. The ability of the manufacturer to influence the operations of the dealership, or the loss of the franchise agreement, could have a negative impact on the Company’s operating results.
The Company is a Delaware limited liability company and is a majority-owned subsidiary of United Auto Group, Inc. (“UAG”). On July 1, 2003, UAG sold a 30% member interest in the Company to YAG Mentor Investors, LLC. The Company is operated pursuant to an operating agreement between UAG and YAG Mentor Investors, LLC.
In March 2003, the Financial Accounting Standards Board’s (“FASB”) Emerging Issues Task Force (“EITF”) finalized Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Cash Consideration Received from a Vendor” (“EITF 02-16”). EITF 02-16 addresses the accounting treatment for vendor allowances and provides that cash consideration received from a vendor should be presumed to be a reduction of the price of the vendors’ product and should therefore be shown as a reduction in the purchase price of the merchandise. To the extent that the cash consideration represents a reimbursement of a specific incremental and identifiable cost, then those vendor allowances should be used to offset such costs. Historically, the company recorded non-refundable floor plan credits and certain other non-refundable credits when received. As a result of EITF 02-16, these credits are now presumed to be reductions in the cost of purchased inventory and are deferred until the related vehicle is sold. In accordance with EITF 02-16, the Company recorded a cumulative effect of accounting change as of January 1, 2003, the date of adoption, that decreased net income for 2003 by $0.04 million.
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From time to time, the Company pays and/or receives fees from UAG and its affiliates for services rendered in the normal course of business. 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. In addition, management fees of $23 were charged to the Company by UAG or its affiliates during each of the three month periods ended March 31, 2004 and 2003. respectively.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: May 10, 2004
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EXHIBIT INDEX