-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U1+/g96QT0MRRaL9mLdllOGuSE0fXd1x8bDoNLqcj0NyAtIXb42NoaLcsTZjGuQb Y+tm1v5Z24tepEiSpHbK0A== 0000912057-96-016054.txt : 19960805 0000912057-96-016054.hdr.sgml : 19960805 ACCESSION NUMBER: 0000912057-96-016054 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19960802 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED AUTO GROUP INC CENTRAL INDEX KEY: 0001019849 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 223086739 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-09429 FILM NUMBER: 96602755 BUSINESS ADDRESS: STREET 1: 375 PARK AVE STREET 2: 22ND FL CITY: NEW YORK STATE: NY ZIP: 10152 BUSINESS PHONE: 2122233300 MAIL ADDRESS: STREET 1: 375 PARK AVENUE STREET 2: 22ND FL CITY: NEW YORK STATE: NY ZIP: 10152 S-1 1 S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 2, 1996 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ UNITED AUTO GROUP, INC. (Exact name of registrant as specified in its charter) DELAWARE 5511 22-3086739 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation or Classification Code Number) Identification organization) No.)
------------------------ 375 PARK AVENUE NEW YORK, NEW YORK 10152 (212) 223-3300 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ------------------------ CARL SPIELVOGEL CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER UNITED AUTO GROUP, INC. 375 PARK AVENUE NEW YORK, NEW YORK 10152 (212) 223-3300 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------ COPIES TO: Laurence D. Weltman, Esq. Gerald S. Tanenbaum, Esq. Willkie Farr & Gallagher Cahill Gordon & Reindel One Citicorp Center 80 Pine Street 153 East 53rd Street New York, New York 10005 New York, New York 10022 (212) 701-3000 (212) 821-8000
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE. ------------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / ------------------------ CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM AGGREGATE AMOUNT OF TITLE OF EACH CLASS OF OFFERING REGISTRATION SECURITIES TO BE REGISTERED PRICE (1) FEE Common Stock, par value $0.0001 per share.................... $172,500,000 $59,483
(1) Estimated solely for purposes of determining the registration fee pursuant to Rule 457(c) under the Securities Act of 1933. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any State. Prospectus Subject to Completion Dated August 2, 1996 SHARES [UNITED AUTO GROUP LOGO] COMMON STOCK (PAR VALUE $0.0001 PER SHARE) All of the shares of Voting Common Stock, par value $0.0001 per share (the "Common Stock"), offered hereby is being offered by United Auto Group, Inc., a Delaware corporation (the "Company"). Prior to this offering (the "Offering"), there has been no public market for the Common Stock. It is currently anticipated that the initial public offering price will be between $ and $ per share. See "Underwriting" for information relating to the factors to be considered in determining the initial public offering price of the Common Stock. The Company intends to apply for the listing of the Common Stock on the New York Stock Exchange ("NYSE") under the symbol "UAG." SEE "RISK FACTORS" COMMENCING ON PAGE8 FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - --------------------------------------------------------------------------------
Price to Underwriting Proceeds to Public Discount (1) Company (2) - ------------------------------------------------------------------------------------------------------------ Per Share $ $ $ - ------------------------------------------------------------------------------------------- Total(3) $ $ $ - -------------------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). See "Underwriting." (2) Before deducting expenses of the Offering payable by the Company estimated at $ . (3) The Company has granted the Underwriters an option, exercisable within 30 days after the date of this Prospectus, to purchase up to an additional shares of Common Stock on the same terms as set forth above, solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." The shares of Common Stock being offered by this Prospectus are offered by the Underwriters, subject to prior sale, when, as and if delivered to and accepted by the Underwriters, and subject to approval of certain legal matters by Cahill Gordon & Reindel, counsel for the Underwriters. It is expected that delivery of the shares of Common Stock offered hereby will be made against payment therefor on or about , 1996 at the offices of J.P. Morgan Securities Inc., 60 Wall Street, New York, New York. J.P. Morgan & Co. Montgomery Securities Smith Barney Inc. , 1996 [Artwork] IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE OVER-THE- COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 No person has been authorized to give any information or to make any representations not contained in this Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Company or any Underwriter. This Prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, the Common Stock in any jurisdiction to any person to whom it is unlawful to make such offer or solicitation. Neither the delivery of this Prospectus nor any sale made hereunder shall under any circumstances create any implication that there has been no change in the affairs of the Company subsequent to the date hereof. Table of Contents
Page Prospectus Summary.............................. 4 Risk Factors.................................... 8 The Company..................................... 14 Use of Proceeds................................. 16 Dividend Policy................................. 16 Capitalization.................................. 17 Dilution........................................ 18 Pro Forma Condensed Consolidated Financial Data........................................ 19 Selected Consolidated Financial Data............ 25 Management's Discussion and Analysis of Financial Condition and Results of Operations.................................. 26 Page Business........................................ 34 Management...................................... 48 Certain Relationships and Related Transactions.. 55 Principal Stockholders.......................... 56 Description of Capital Stock.................... 57 Shares Eligible for Future Sale................. 60 Underwriting.................................... 62 Legal Matters................................... 63 Experts......................................... 63 Additional Information.......................... 64 Index to Financial Statements................... F-1
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. The Company intends to furnish stockholders with annual reports containing financial statements audited by its certified public accountants and with quarterly reports containing unaudited financial statements for each of the first three quarters of each fiscal year. This Prospectus includes statistical data regarding the automotive retailing industry. Unless otherwise indicated, such data is taken or derived from information published by the Industry Analysis Division of the National Automobile Dealers Association ("NADA") in its NADA DATA 1995, Crain Communications Inc. in its AUTOMOTIVE NEWS 100-YEAR ALMANAC AND 1996 MARKET DATA BOOK and ADT Automotive, Inc. in its 1996 USED CAR MARKET REPORT or provided to the Company by CNW Marketing/Research. No Manufacturer (as defined in this Prospectus) has been involved, directly or indirectly, in the preparation of this Prospectus or in the Offering being made hereby. No Manufacturer has made any statements or representations in connection with the Offering or has provided any information or materials that were used in connection with the Offering, and no Manufacturer has any responsibility for the accuracy or completeness of this Prospectus. 3 Prospectus Summary THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND HISTORICAL AND PRO FORMA FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES HEREIN TO THE "COMPANY" OR "UAG" INCLUDE UNITED AUTO GROUP, INC. AND ITS SUBSIDIARIES, AND REFERENCES HEREIN TO "COMMON STOCK" REFERS TO THE COMPANY'S VOTING COMMON STOCK, PAR VALUE $0.0001 PER SHARE. UNLESS OTHERWISE INDICATED, ALL INFORMATION PRESENTED IN THIS PROSPECTUS ASSUMES THAT (I) THE ACQUISITION (THE "CONTEMPORANEOUS ACQUISITION") OF THE SUN AUTOMOTIVE GROUP (THE "SUN GROUP") HAS BEEN CONSUMMATED, (II) THE EXCHANGE OF THE MINORITY INTERESTS IN CERTAIN OF THE COMPANY'S SUBSIDIARIES FOR AN AGGREGATE OF SHARES OF COMMON STOCK PLUS CERTAIN OTHER CONSIDERATION (THE "MINORITY EXCHANGE"), ASSUMING AN INITIAL PUBLIC OFFERING PRICE OF $ PER SHARE, HAS BEEN EFFECTED, (III) THE CONVERSION OF THE COMPANY'S CLASS A PREFERRED STOCK INTO COMMON STOCK AT THE RATE OF ONE SHARE OF COMMON STOCK FOR EACH SHARE OF CLASS A PREFERRED STOCK (THE "PREFERRED STOCK CONVERSION") HAS BEEN EFFECTED, (IV) AN AMENDMENT OF THE COMPANY'S CERTIFICATE OF INCORPORATION RELATING TO THE COMPANY'S CAPITALIZATION HAS BEEN EFFECTED AND (V) THE UNDERWRITERS' OVER-ALLOTMENT OPTION HAS NOT BEEN EXERCISED. THE CLOSING OF THE CONTEMPORANEOUS ACQUISITION WILL OCCUR CONTEMPORANEOUSLY WITH THE CLOSING OF THE OFFERING AND IS A CONDITION TO THE CLOSING OF THE OFFERING. IN ADDITION, UNLESS OTHERWISE INDICATED, ALL PRO FORMA FINANCIAL INFORMATION ASSUMES THAT ALL ACQUISITIONS CONSUMMATED SUBSEQUENT TO JANUARY 1, 1995, INCLUDING THE CONTEMPORANEOUS ACQUISITION, WERE CONSUMMATED ON JANUARY 1, 1995. The Company UAG is a leading acquirer, consolidator and operator of franchised automobile and light truck dealerships and related businesses. The Company believes that, after giving effect to the Contemporaneous Acquisition, it will be the fourth largest retailer of new motor vehicles in the United States, operating 38 franchises located in Arizona, Arkansas, Connecticut, Georgia, New Jersey and New York and representing 25 American, Asian and European brands. As an integral part of its dealership operations, UAG sells used vehicles. In addition, the Company has recently established four stand-alone used car retail centers. All of UAG's dealerships include integrated service and parts operations, which are an important source of recurring revenues. The Company also owns Atlantic Auto Finance Corporation ("Atlantic Finance"), an automobile finance company engaged in the purchase, sale and servicing of prime credit quality automobile loans originated by both UAG and third-party dealerships. For 1995, on a pro forma basis, UAG had revenues in excess of $1.27 billion and sold 36,947 new and 18,353 used vehicles. The Company was formed to capitalize on consolidation opportunities within the highly fragmented $660 billion automotive retailing industry. In 1995, approximately 22,000 dealerships representing more than 48,000 franchises sold 14.8 million new vehicles and 15.7 million used vehicles for sales of $290 billion and $180 billion, respectively. Yet, the Company estimates that the largest 100 dealership groups generated less than 10% of these total revenues and control less than 5% of all franchised dealerships. As capital requirements to operate dealerships continue to increase and many owners who were granted franchises in the 1950s and 1960s approach retirement age, many individual dealers are seeking exit opportunities. These conditions present attractive consolidation opportunities for larger automobile retailers such as UAG. Since its initial acquisition in 1992, the Company has completed 11 additional acquisitions, including the Contemporaneous Acquisition. Management believes that UAG is well-positioned to continue capitalizing on the consolidation trend in the automotive retailing industry due to its proven acquisition history, diverse geographic presence, substantial size and financial resources. The Company believes that it enjoys significant competitive advantages. The Company's diverse product portfolio reduces the risks associated with changes in consumer preferences and dependence on any single brand or market segment. Geographic diversity mitigates the Company's exposure to regional economic and weather conditions. In addition, the Company's large size allows it to centralize certain administrative functions and negotiate favorable pricing on certain automotive parts, aftermarket products, supplies and advertising. Furthermore, the Company benefits from superior access to capital as compared to smaller dealerships. 4 Growth Strategy UAG seeks to lead the consolidation of the automotive retailing industry and increase stockholder value through a growth strategy focused on (i) acquiring profitable dealership operations, (ii) leveraging its new car franchises to grow higher-margin businesses and (iii) generating incremental revenue from its automobile finance business. ACQUIRE PROFITABLE DEALERSHIP OPERATIONS. UAG seeks to capitalize on continuing consolidation in the U.S. automotive retailing industry by selectively acquiring profitable dealerships. The Company targets dealerships or dealership groups with established records of profitability and customer satisfaction as well as experienced management willing to remain in place. The Company focuses on opportunities in geographic markets with above-average projected population and job growth. Of the approximately 22,000 dealerships in the United States, the Company believes that at least 2,000 dealerships, some of which are members of dealership groups, meet its acquisition criteria. GROW HIGHER-MARGIN BUSINESSES. UAG is leveraging its new car franchises and applying its financial resources to grow higher-margin businesses such as the retail sale of used vehicles, aftermarket products and service and parts. UAG receives a steady supply of used cars through trade-ins, vehicles coming off lease ("off-lease vehicles") and used car auctions open only to new car dealers. In addition, only new car dealers are able to sell used cars certified by Manufacturers. Through these programs, UAG is able to provide customers Manufacturer-backed extended warranties and attractive lease financing on their used car purchases. UAG also has the opportunity on each new or used vehicle sold to generate incremental revenue from the sale of aftermarket products, including accessories such as radios, cellular phones and alarms as well as agency services such as extended service contracts, credit insurance policies and financing and lease contracts. Finally, each UAG new car dealership offers an integrated service and parts department, which provides an important recurring revenue stream to the Company's dealerships. The Company has initiatives in place designed to grow each of these higher-margin businesses. GENERATE INCREMENTAL REVENUE FROM AUTOMOBILE FINANCE BUSINESS. To further increase the incremental profit achievable through its auto sales, the Company established Atlantic Finance, an automobile finance company engaged in the purchase, sale and servicing of prime credit quality automobile loans originated by both UAG and third-party dealerships. Atlantic Finance's strategy is to grow by (i) increasing its business with existing UAG dealerships, including those with which it has yet to commence financing activities, (ii) commencing financing activities with dealerships acquired by UAG in the future and (iii) using its presence in its local operating markets to cultivate relationships with additional unaffiliated dealerships. Operating Strategy The Company's operating strategy is designed to provide a high level of customer service and professional management. Central to UAG's overall philosophy is customer-oriented service designed to meet the needs of an increasingly sophisticated and demanding automotive consumer. The Company strives to cultivate lasting relationships with its customers, which it believes enhance its reputation in the community and create the opportunity for significant repeat and referral business. In addition, the Company employs professional management practices throughout its business organization primarily through implementing "best practices" as well as investing in sophisticated operational controls. Recent Acquisitions UAG has completed the following dealership acquisitions in 1996 to date (the "Recent Acquisitions"). See "The Company -- Acquisition History." Effective January 1, 1996, the Company acquired Atlanta Toyota, Inc. ("Atlanta Toyota"), located in Duluth, Georgia, for a purchase price consisting of $9.1 million in cash and $2.4 million in notes. In 1995, Atlanta Toyota had $112.2 million in sales. On May 1, 1996, the Company acquired United Nissan, Inc. ("United Nissan") (formerly Steve Rayman Nissan, Inc.), located in Morrow, Georgia, for a purchase price of $11.5 million in cash. In 1995, United Nissan had $60.3 million in sales. Effective July 1, 1996, the Company acquired Peachtree Nissan, Inc. ("Peachtree Nissan") (formerly Hickman Nissan, Inc.), located in Chamblee, Georgia, for a purchase price consisting of $11.0 million in cash and a $2.0 million note. In 1995, Peachtree Nissan had $85.3 million in sales. 5 Contemporaneous Acquisition Contemporaneously with the consummation of the Offering, the Company will acquire the Sun Group, located in Phoenix and Scottsdale, Arizona, for a purchase price of $30.9 million in cash. Such acquisition is a condition to the consummation of the Offering. The Sun Group holds franchises for Acura, Audi, Aston Martin, BMW, Jaguar, Land Rover, Lexus and Porsche and, in 1995, had $154.5 million in sales. The Offering Common Stock Offered........................ shares Common Stock Outstanding after the Offering shares (1)........................................ Use of Proceeds............................. The net proceeds from the Offering are estimated to be $ million, of which approximately $31.0 million will be used to pay the consideration and related transaction costs for the Contemporaneous Acquisition, approximately $43.6 million to repay outstanding indebtedness and approximately $15.0 million to fund the expansion of its automobile finance business. The balance will be used for working capital and general corporate purposes, including other potential acquisitions. See "-- Contemporaneous Acquisition" and "Use of Proceeds." Dividend Policy............................. The Company anticipates that it will not pay dividends on the Common Stock for the foreseeable future. See "Dividend Policy." Proposed NYSE Symbol........................ "UAG"
- ------------------------ (1) Does not include 873,000 and 260,000 shares of Common Stock issuable at an exercise price per share of $10.00 and the public offering price set forth on the cover page of this Prospectus, respectively, upon the exercise of outstanding stock options or 1,016,099 shares issuable at a nominal exercise price upon the exercise of outstanding warrants. See "Management -- Spielvogel Employment Agreement," "Management -- Stock Option Plan," "Description of Capital Stock -- Warrants" and "Shares Eligible for Future Sale." 6 Summary Historical and Pro Forma Financial Data The following table presents (i) summary historical consolidated financial and other data of the Company as of the dates and for the periods indicated, including the results of operations of Landers Auto and Atlanta Toyota from August 1, 1995 and January 1, 1996, respectively, the dates of their acquisition, and (ii) summary pro forma financial and other data of the Company as of the date and for the periods indicated giving effect to the events described in the Pro Forma Condensed Consolidated Financial Statements included elsewhere in this Prospectus as though they had occurred on the dates indicated therein. The summary pro forma data are not necessarily indicative of operating results or financial position that would have been achieved had these events been consummated on the date indicated and should not be construed as representative of future operating results or financial position. The summary historical and pro forma financial data should be read in conjunction with the financial statements and related notes thereto of UAG, Landers Auto, Atlanta Toyota, Steve Rayman Nissan, Hickman Nissan and Sun Automotive Group, with the Pro Forma Condensed Consolidated Financial Statements and with "Management's Discussion and Analysis of Financial Condition and Results of Operation."
------------------------------------------------------------------------------- Three Months Ended Years Ended December 31, March 31, -------------------------------------------- --------------------------------- Pro Forma Pro Forma DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA 1993 1994 1995 1995 1995 1996 1996 ---------- --------- --------- ---------- ---------- --------- ---------- Statements of Operations Data: Auto Dealerships Total revenues $ 606,091 $ 731,629 $ 805,621 $1,271,718 $ 162,598 $ 261,719 $ 341,765 Gross profit 68,403 83,986 85,277 149,176 16,544 29,217 40,829 Operating income (loss) 1,493 3,571 (5,309) 15,569 (4,285) 1,599 4,812 Auto Finance Loss before income taxes (616) (1,382) (1,382) (354) (264) (264) Total Company Income (loss) before minority interests and provision for income taxes 260 (804) (5,921) 13,115 (4,104) 1,207 4,451 Net income (loss) 96 (1,691) (3,466) 6,633 (3,231) 171 2,407 Net income (loss) per common share $ .07 $ (.51) $ (.67) $ $ (.87) $ .03 $
------------------------------------------------------------------------------- As of March 31, As of December 31, --------------------------------- -------------------------------- Pro Forma DOLLARS IN THOUSANDS 1993 1994 1995 1995 1996 1996 ---------- --------- --------- ---------- --------- ---------- Balance Sheet Data: Auto Dealerships Current assets $ 120,061 $ 118,534 $ 141,649 $ 124,731 $ 172,292 $270,801 Current liabilities 117,494 125,825 139,447 135,498 169,364 200,941 Property and equipment, net 8,845 12,072 12,146 11,615 13,910 21,269 Intangible assets, net 22,832 23,018 48,774 22,673 55,846 132,205 Long-term debt 4,122 6,735 24,073 6,039 29,722 13,467 Auto Finance Net assets 291 3,501 4,527 6,933 21,933 Total Company Total assets 154,218 170,342 236,027 182,434 277,752 457,137 Minority interests subject to repurchase 7,338 7,962 13,608 6,599 14,112 Stock purchase warrants 1,020 1,330 Total stockholders' equity 25,264 28,785 49,240 32,380 55,958 235,463
------------------------------------------------------------------------------- As of December 31, As of March 31, -------------------------------------------- --------------------------------- Pro Forma Pro Forma 1993 1994 1995 1995 1995 1996 1996 ---------- --------- --------- ---------- ---------- --------- ---------- Other Auto Dealerships Data: Gross profit margin 11.3% 11.5% 10.6% 11.7% 10.2% 11.2% 11.9% Operating margin 0.2% 0.5% (0.7)% 1.2% (2.6)% 0.6% 1.4% New cars sold at retail 18,608 22,464 25,138 36,947 5,058 7,490 9,214 Used cars sold at retail 7,891 8,340 8,953 18,353 1,758 4,025 5,043
7 Risk Factors Prospective investors should consider carefully the matters set forth below as well as the other information set forth in this Prospectus in evaluating the Company and its business before purchasing the shares of Common Stock offered hereby. Influence of Automobile Manufacturers Each of the Company's dealerships operates pursuant to a franchise agreement between the applicable automobile manufacturer (or authorized distributor thereof, referred to herein as the "Manufacturer") and the subsidiary of the Company that operates such dealership, and the Company is dependent to a significant extent on its relationship with such Manufacturers. Manufacturers exercise a great degree of control over dealerships, and the franchise agreement provides for termination or non-renewal for a variety of causes. The Company from time to time has been in non-compliance with certain provisions of certain of its franchise agreements, such as the obligation to obtain prior Manufacturer approval of changes in dealership management. Actions taken by Manufacturers to exploit their superior bargaining position could have a material adverse effect on the Company. See "-- Stock Ownership/Issuance Limits" and "Business -- Franchise Agreements." For example, prior Manufacturer approval is required with respect to acquisitions of automobile dealerships, and a Manufacturer may deny the Company's application to make an acquisition or seek to impose further restrictions on the Company as a condition to granting approval of an acquisition. See "-- Risks Associated with Acquisitions." Many Manufacturers attempt to measure customers' satisfaction with their sales and warranty service experiences through systems, which vary from Manufacturer to Manufacturer, generally known as the consumer satisfaction index ("CSI"). These Manufacturers may use a dealership's CSI scores as a factor in evaluating applications for additional dealership acquisitions and other matters. Certain dealerships of the Company have had difficulty from time to time meeting their Manufacturers' CSI standards. The components of CSI have been modified from time to time in the past, and there is no assurance that such components will not be further modified or replaced by different systems in the future. Failure of the Company's dealerships to comply with the standards imposed by Manufacturers at any given time may have a material adverse effect on the Company. The success of each of the Company's franchises is, in large part, dependent upon the overall success of the applicable Manufacturer. Accordingly, the success of the Company is linked to the financial condition, management, marketing and production capabilities of the Manufacturers of which the Company is a franchisee. Accordingly, events, such as labor strikes, that may adversely affect a Manufacturer may also adversely affect the Company. Moreover, any event that causes adverse publicity involving such Manufacturers may have an adverse effect on the Company regardless of whether such event involves any of the Company's dealerships. Stock Ownership/Issuance Limits Standard automobile franchise agreements prohibit transfers of any ownership interests of the dealership and its parent, such as UAG, and, therefore, often do not by their terms accommodate public trading of the capital stock of the dealership or its parent. While, prior to the Offering, all of the relevant Manufacturers of which the Company is a franchisee will have agreed to permit the Offering and trading in the Common Stock, a number of Manufacturers will continue to impose restrictions upon the transferability of the Common Stock. The most prohibitive restriction, which has been imposed by various Manufacturers, provides that, under certain circumstances, the Company may lose its franchise if a person or entity acquires a 20% ownership interest in the Company and does not obtain the approval of the applicable Manufacturer. Violations by stockholders or prospective stockholders of the Company of such restrictions are generally outside the control of the Company and may result in the termination or non-renewal of one or more franchises, which could have a material adverse effect on the Company. Such restrictions also may prevent or deter prospective acquirers from acquiring control of the Company and, therefore, may adversely impact the value of the Common Stock. Similarly, a number of Manufacturers, including Chrysler Corporation ("Chrysler"), have consented to the Offering but continue to prohibit transactions which may affect management control of the Company. Chrysler has agreed that it will not consider the issuance of up to 40% of the Common Stock in the Offering to be a change of control. However, acquisitions or sales of substantial amounts of shares in the market may, after the Offering, affect 8 management control and thereby require the Company to obtain Chrysler's consent. Upon consummation of the Offering, % of the Common Stock will be publicly owned (assuming full exercise of the Underwriters' over-allotment option). It may be necessary for the Company to seek additional Manufacturer approvals before selling additional Common Stock. This may impede the Company's ability to raise required capital. See "-- Capital Requirements." Risks Associated with Acquisitions The Company's growth will depend in large part on its ability to manage expansion, control costs in its operations and consolidate dealership acquisitions, including the Recent Acquisitions and the Contemporaneous Acquisition, into existing operations. This strategy will entail reviewing and potentially reorganizing acquired dealership operations, corporate infrastructure and systems and financial controls. Unforeseen expenses, difficulties, complications and delays frequently encountered in connection with the rapid expansion of operations could inhibit the Company's growth. Although there are many potential acquisition candidates that fit the Company's acquisition criteria, there can be no assurance that the Company will identify those candidates that would result in the most successful combinations or that acquisitions will be able to be consummated on acceptable terms. The magnitude, timing and nature of future acquisitions will depend upon various factors, including the availability of suitable acquisition candidates, the negotiation of acceptable terms, the Company's financial capabilities, the availability of skilled employees to manage the acquired companies and general economic and business conditions. In addition, the Company's future growth via acquisition of automobile dealerships will depend on its ability to obtain the requisite Manufacturer approvals. There can be no assurance that Manufacturers will grant such approvals. Management believes that certain Manufacturers, such as Ford Motor Company, which represents approximately 25% of the U.S. automotive retailing industry, would not now approve acquisitions by the Company because they have expressed opposition to diffuse corporate ownership of their dealerships. It is also possible that one or more Manufacturers might object to ownership by one company of many of its franchises. For example, it is currently the policy of Toyota Motor Sales ("Toyota") to restrict any company from holding more than seven Toyota or more than three Lexus franchises and to impose restrictions based on the number of franchises held within certain geographic areas. After giving effect to the Contemporaneous Acquisition, the Company will hold 38 franchises, including seven General Motors Corporation ("GM") franchises (of which two are Saturn), six Chrysler franchises, six Toyota franchises (of which two are Lexus) and three Nissan franchises. The Company is among the largest Chrysler, Toyota and Nissan dealers in the United States. See "-- Influence of Automobile Manufacturers." Alternatively, in connection with acquisitions by the Company, one or more Manufacturers may seek to impose further restrictions on the Company in connection with their approval of an acquisition. For example, each of GM and Chrysler conditioned its approval of the acquisition of Landers Auto (as defined herein) upon the Company's agreement to implement certain measures at its existing GM and Chrysler dealerships, respectively, to provide certain additional training to the employees at such dealerships and to achieve and maintain higher CSI scores. If such goals are not attained, the Company may be precluded from acquiring, whether directly from GM or Chrysler or through acquisitions, additional GM or Chrysler franchises and it may lead GM or Chrysler to conclude that it has a basis pursuant to which it may seek to terminate or refuse to renew the Company's existing GM or Chrysler franchises. Moreover, factors outside the Company's control may cause a Manufacturer to reject the Company's application to make acquisitions. See "-- Influence of Automobile Manufacturers." Capital Requirements The Company will require substantial additional capital in order to continue to acquire automobile dealerships. Such capital may be raised through additional public or private financings, as well as borrowings and other available sources. The Company does not have any commitments with respect to any acquisition financing, and there can be no assurance that additional or sufficient financing will be available, or, if available, that it will be available on acceptable terms. Moreover, the Company may be impeded by certain Manufacturers from accessing the public equity markets. See "-- Stock Ownership/Issuance Limits." If additional funds are raised by issuing equity securities of the Company, dilution to then existing stockholders may result. If adequate funds are not available, the Company may be required to significantly curtail its acquisition program. 9 In addition, the Company is dependent to a significant extent on its ability to finance the purchase of inventory, which in the automotive retail industry involves significant sums of money in the form of floor plan financing. As of March 31, 1996, the Company had approximately $125.3 million of floor plan indebtedness. Substantially all the assets of the Company's dealerships are pledged to secure such indebtedness, which may impede the Company's ability to borrow from other sources. The Company currently has floor plan facilities with General Motors Acceptance Corporation, Chrysler Credit Corporation, World Omni Financial Corp. and Nissan Motor Acceptance Corporation. Each of these lenders is associated with a Manufacturer with whom the Company has franchise agreements. Consequently, deterioration of the Company's relationship with a Manufacturer could adversely affect its relationship with the affiliated floor plan lender and vice versa. See "-- Influence of Automobile Manufacturers." The operations of Atlantic Finance also require substantial borrowings. See "-- Risks Associated with Auto Finance Subsidiary -- Capital Requirements; Interest Rate Fluctuations." During the first half of 1996, the Company sought and obtained waivers of non-compliance with, and amendments to, certain covenants under its Securities Purchase Agreements and Credit Agreement (as such terms are defined under "Use of Proceeds"), including covenants regarding fixed charge coverage ratios and delivery of certain collateral to secure the indebtedness thereunder. Cyclicality Unit sales of motor vehicles, particularly new vehicles, historically have been cyclical, fluctuating with general economic cycles. During economic downturns, the automotive retailing industry tends to experience similar periods of decline and recession as the general economy. The Company believes that the industry is influenced by general economic conditions and particularly by consumer confidence, the level of personal discretionary spending, interest rates and credit availability. Although there has been a general trend of increasing sales since 1992, there can be no assurance that the industry will not experience sustained periods of decline in vehicle sales in the future, and that such decline would not have a material adverse effect on the Company. Dependence on Key Personnel The Company believes that its success will depend to a significant extent upon the efforts and abilities of the executive management of the Company and its subsidiaries. The loss of the services of one or more of these key employees could have a material adverse effect on the Company. The Company's business will also be dependent upon its ability to continue to attract and retain qualified personnel, including key management in connection with future acquisitions. Seasonality The Company's business is seasonal, with a disproportionate amount of sales occurring in the second or third fiscal quarters. The DiFeo Group (as defined herein), which is located in the New York metropolitan area, is the division of the Company most affected by seasonality. Competition The automotive retailing industry is highly competitive with respect to price, service, location and selection. The Company competes with numerous automobile dealerships in each of its market segments, many of which are large and have significant financial and marketing resources. The Company also competes with private market buyers and sellers of used cars, used car dealers, other franchised dealers, service center chains and independent shops for service and repair business. In recent years, automobile dealers have also faced increased competition in the sale of vehicles from automobile rental agencies and independent leasing companies. Some of these recent market entrants are capable of operating on smaller gross margins than those on which the Company is capable of operating because they have lower overhead and sales costs. See "Business -- Competition." Imported Products Certain motor vehicles retailed by the Company, as well as certain major components of vehicles retailed by the Company, are of foreign origin. Accordingly, the Company is subject to the import and export restrictions of various jurisdictions and is dependent to some extent upon general economic conditions in and political relations with a number of foreign countries, including Japan, Germany, South Korea and the United Kingdom. 10 Risks Associated with Auto Finance Subsidiary CAPITAL REQUIREMENTS; INTEREST RATE FLUCTUATIONS Atlantic Finance, a wholly owned subsidiary of the Company, requires substantial borrowings to fund the purchase of retail installment contracts from automobile dealerships. Consequently, Atlantic Finance's profitability is affected by the difference, or "spread," between the rate of interest paid on the funds it borrows and the rate of interest charged on the installment contracts it purchases, which rate in most states is limited by law. In addition, since the interest rate at which Atlantic Finance borrows is variable and the interest rate at which Atlantic Finance purchases the retail installment contracts is fixed, Atlantic Finance assumes the risk of interest rate increases prior to the time contracts are sold. There can be no assurance that Atlantic Finance will be able to extend its present revolving credit facility or enter into new warehouse financing facilities on reasonable terms in the future or that interest rate increases will not adversely affect its ability to maintain profitability with respect to the retail installment contracts it holds. DEPENDENCE ON SECURITIZATION TRANSACTIONS Atlantic Finance relies on a strategy of periodically selling retail installment receivables on a securitized basis. The securitization proceeds are utilized to repay borrowings under its revolving credit facility, thereby making such facility available to acquire additional retail installment contract receivables. The terms of any securitization transaction are affected by a number of factors, some of which are beyond Atlantic Finance's control and any of which could cause substantial delays. These factors include, among other things, conditions in the securities markets in general, conditions in the asset-backed securitization market and approval by all parties to the terms of the transaction. Gains from the sale of receivables in securitized transactions generate a significant portion of Atlantic Finance's revenues. If Atlantic Finance were unable to securitize loans in a given financial reporting period, Atlantic Finance could incur a significant decline in total revenues and profitability for such period. CREDIT RISK Payments by consumers on a number of the retail installment contracts purchased by Atlantic Finance become delinquent from time to time and some end up in default. See "Business -- Atlantic Finance" for detailed information on Atlantic Finance's delinquency and default rates. There can be no assurance that the credit performance of Atlantic Finance's customers will be maintained or that general economic conditions will not worsen and lead to higher rates of delinquency and default. In addition, Atlantic Finance commenced operations in the first quarter of 1995, and there can be no assurance that the rates of future delinquency and defaults will be consistent with prior experience or at levels that will allow Atlantic Finance to maintain overall profitability. REGULATION Atlantic Finance is subject to regulation under various federal, state and local laws and in some jurisdictions is required to be licensed by the state banking authority. Most states in which Atlantic Finance operates limit the interest rate, fees and other charges that may be imposed by, or prescribe certain other terms of, the contracts that Atlantic Finance purchases and restrict its right to repossess and sell collateral. An adverse change in those laws or regulations could have a material adverse effect on Atlantic Finance's profitability by, among other things, limiting the states in which Atlantic Finance may operate or the interest rate that may be charged on retail installment contracts or restricting Atlantic Finance's ability to realize the value of the collateral securing the contracts. Reliance by Company on Dividends and Other Payments From Operating Subsidiaries The Company is a holding company, the principal assets of which are the shares of the capital stock of its subsidiaries. As a holding company without independent means of generating operating revenues, the Company depends on dividends and other payments, including payments of management fees and pursuant to tax sharing arrangements, from its subsidiaries to fund its obligations and meet its cash needs. Certain subsidiaries of the Company are subject to restrictions on the payment of dividends, which are described in "Dividend Policy." Such restrictions limit the Company's ability to apply profits generated from one subsidiary for use in other subsidiaries. Expenses of the Company include salaries of its executive officers, insurance, professional fees and service of certain indebtedness that may be outstanding from time to time. See "Management -- Summary Compensation Table." 11 Environmental Matters The Company is subject to federal, state and local laws, ordinances and regulations which establish various health and environmental quality standards, and liability related thereto, and provide penalties for violations of those standards. Under certain laws and regulations, a current or previous owner or operator of real property may be liable for the costs of removal and remediation of hazardous or toxic substances or wastes on, under, in or emanating from such property. Such laws typically impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances or wastes. Certain laws, ordinances and regulations may impose liability on an owner or operator of real property where onsite contamination discharges into waters of the state, including groundwater. Under certain other laws, generators of hazardous or toxic substances or wastes that send such substances or wastes to disposal, recycling or treatment facilities may be liable for remediation of contamination at such facilities. Other laws, ordinances and regulations govern the generation, handling, storage, transportation and disposal of hazardous and toxic substances or wastes, the operation and removal of underground storage tanks, the discharge of pollutants into surface waters and sewers, emissions of certain potentially harmful substances into the air and employee health and safety. Past and present business operations of the Company subject to such laws, ordinances and regulations include the use, handling and contracting for recycling or disposal of hazardous or toxic substances or wastes, including environmentally sensitive materials such as motor oil, waste motor oil and filters, transmission fluid, antifreeze, freon, waste paint and lacquer thinner, batteries, solvents, lubricants, degreasing agents, gasoline and diesel fuels. The Company is subject to other laws, ordinances and regulations as the result of the past or present existence of underground storage tanks at many of the Company's properties. In addition, soil and groundwater contamination has been known to exist at certain properties leased by the Company and there can be no assurance that other properties have not been contaminated by any leakage from such tanks or any spillage of hazardous or toxic substances or wastes. Certain laws and regulations, including those governing air emissions and underground storage tanks, have been amended so as to require compliance with new or more stringent standards as of future dates. The Company cannot predict what other environmental legislation or regulations will be enacted in the future, how existing or future laws or regulations will be administered or interpreted or what environmental conditions may be found to exist in the future. Compliance with new or more stringent laws or regulations, stricter interpretation of existing laws or the future discovery of environmental conditions may require additional expenditures by the Company, some of which may be material. See "Business -- Environmental." Control by Principal Stockholders; Anti-takeover Provisions Upon completion of the Offering, Trace International Holdings, Inc. ("Trace"), Aeneas Venture Corporation ("Aeneas"), an affiliate of Harvard Private Capital Group, Inc. ("Harvard Private Capital"), and AIF II, L.P. ("AIF," an affiliate of Apollo Advisors, L.P. ("Apollo")), will own %, % and % of the outstanding Common Stock, respectively. As a result, such persons will have the ability to control the Company and direct its affairs and business. Such concentration of ownership, as well as certain provisions of the Company's franchise agreements, its Certificate of Incorporation and the Delaware General Corporation Law (the "DGCL"), could have the effect of delaying or preventing a change in control of the Company. These provisions include the stock ownership limits imposed by various Manufacturers, the classified structure of the Company's Board of Directors, the Company's ability to issue "blank check" preferred stock and the "interested stockholder" provisions of Section 203 of the DGCL. See "-- Stock Ownership/Issuance Limits" and "Description of Capital Stock." Shares Eligible for Future Sale Upon consummation of the Offering, the Company will have outstanding shares of Common Stock. All of the shares of Common Stock to be sold in the Offering will be eligible for immediate sale in the public market without restriction unless held by affiliates of the Company. Of the remaining outstanding shares of Common Stock, including the shares to be issued in the Minority Exchange (the "Restricted Shares"), 4,254,208 shares will be available for resale beginning 180 days after the date of this Prospectus upon expiration of the applicable lock-up agreements described below and subject to compliance with Rule 144 under the Securities Act and shares, including the shares to be issued in the Minority Exchange, will become eligible for sale 12 under Rule 144 at various dates thereafter as the holding provisions of Rule 144 are satisfied; provided, however, that all of the Restricted Shares are entitled to certain registration rights. Further, upon consummation of the Offering, 873,000 and 260,000 shares of Common Stock will be issuable at a price per share of $10.00 and the public offering price set forth on the cover page of this Prospectus, respectively, upon the exercise of outstanding stock options, 258,700 of which are immediately exercisable, and 1,016,099 shares of Common Stock will be issuable at a nominal exercise price upon the exercise of outstanding warrants, all of which are immediately exercisable and entitled to certain registration rights. See "Management -- Spielvogel Employment Agreement," "Management -- Stock Option Plan," "Description of Capital Stock -- Warrants" and "Shares Eligible for Future Sale." Sales of substantial amounts of Common Stock, or the perception that such sales could occur, could adversely affect prevailing market prices of the Common Stock. The Company has agreed not to sell any shares of its capital stock (or any rights, options or warrants to purchase, or any securities convertible or exchangeable into or exercisable for, capital stock), with certain limited exceptions, for a period of 180 days following the date of this Prospectus without the prior written consent of J.P. Morgan Securities Inc. In addition, the holders of all the Restricted Shares (representing approximately % of the Common Stock outstanding after giving effect to the Offering) have agreed not to sell, directly or indirectly, any of their shares, with certain limited exceptions, for a period of 180 days following the date of this Prospectus. Further, certain holders of options and the holders of the Warrants have agreed to similar restrictions with respect to the shares of Common Stock issuable upon exercise of such options and Warrants for a period of 180 days following the date of this Prospectus. See "Underwriting." No Prior Market for the Common Stock There is presently no established public market for securities of companies that own and operate automobile dealerships, and, prior to the Offering, there has been no public market for the Company's Common Stock. There can be no assurance that an active public market for the Common Stock will develop or be sustained after the Offering. The initial public offering price of the Common Stock will be determined by negotiation between the Company and the representatives of the Underwriters based on the factors described under "Underwriting." The price at which the Common stock will trade in the public market after the Offering may be less than the initial public offering price. See "Underwriting." Dilution to New Investors Purchasers of Common Stock in the Offering will experience immediate and substantial dilution in the amount of $ per share in net tangible book value per share. See "Dilution." 13 The Company General UAG is a leading acquirer, consolidator and operator of franchised automobile and light truck dealerships and related businesses. The Company believes that, after giving effect to the Contemporaneous Acquisition, it will be the fourth largest retailer of new motor vehicles in the United States, operating 38 franchises located in Arizona, Arkansas, Connecticut, Georgia, New Jersey and New York and representing 25 American, Asian and European brands. As an integral part of its dealership operations, UAG sells used vehicles. In addition, the Company has recently established four stand-alone used car retail centers. All of UAG's dealerships include integrated service and parts operations, which are an important source of recurring revenues. The Company also owns Atlantic Finance, an automobile finance company engaged in the purchase, sale and servicing of prime credit quality automobile loans originated by both UAG and third-party dealerships. For 1995, on a pro forma basis, UAG had revenues in excess of $1.27 billion and sold 36,947 new and 18,353 used vehicles. The Company was incorporated in the State of Delaware in December 1990 and commenced dealership operations in October 1992. The Company's executive offices are located at 375 Park Avenue, New York, New York 10152, and its telephone number is (212) 223-3300. Acquisition History Trace established the Company to acquire, consolidate and operate large automobile retailers and related businesses. A history of automotive experience enabled Trace to be among the first to recognize and capitalize on the opportunities created by the industry's rapid consolidation. This consolidation offered UAG a means to quickly establish significant market presence and realize economies of scale through professional operation of dealerships. The following table sets forth information with respect to each dealership that will be owned at the time of consummation of the Offering:
------------------------------------------------------------------------------- Date Acquiree Acquired Locations Franchises Presently Held - ---------------------- ----------- -------------- -------------------------------------------------- DiFeo Group DiFeo Automotive 10/92 Danbury, CT Chevrolet-Geo, Hyundai, Isuzu, Saturn(1), Suzuki Group Watertown, CT Saturn(1) Bound Brook, Lexus NJ Englewood, NJ Saturn Jersey City, Jeep-Eagle, Hyundai, Oldsmobile, Toyota NJ Tenafly, NJ BMW Nyack, NY Mitsubishi, Toyota DiFeo Nissan 11/92 Jersey City, Nissan NJ DiFeo 12/92 Jersey City, Chrysler-Plymouth Chrysler-Plymouth NJ DiFeo Chevrolet-Geo 12/92 Jersey City, Chevrolet-Geo NJ Fair Honda 1/93 Danbury, CT Honda Fair Dodge 2/93 Danbury, CT Dodge Gateway 8/93 Toms River, NJ Mitsubishi, Toyota Landers Auto 8/95 Benton, AK Chrysler-Plymouth, Dodge, GMC Truck, Jeep-Eagle, Oldsmobile Atlanta Toyota 1/96 Duluth, GA Toyota United Nissan 5/96 Morrow, GA Nissan Peachtree Nissan 7/96 Chamblee, GA Nissan Sun Group (2) Phoenix, AZ BMW, Land Rover Scottsdale, AZ Acura, Audi, Aston Martin, Jaguar, Land Rover, Lexus, Porsche
- ------------------------------ (1) The Company's Saturn dealerships in Danbury and Watertown operate under a single Saturn franchise. (2) To be acquired contemporaneously with the consummation of the Offering. 14 On October 1, 1992, the Company acquired a 70% interest in the DiFeo Automotive Group (the "DiFeo Group") for a purchase price of $16.0 million in cash. At the time, the DiFeo Group was comprised of 29 franchises. Since then, the Company has added nine franchises in the division's primary marketing area through acquisition or expansion and has eliminated a total of 17 unprofitable franchises by voluntarily terminating 12 franchises and effectively ceasing to be the controlling or majority owner of five additional franchises. In 1995, the DiFeo Group had sales of $689.2 million. Operating 21 franchises from eight locations in the New York metropolitan area, the DiFeo Group is one of the largest automobile dealership groups in the Northeast in terms of sales and number of franchises. Among its dealerships is the sixth largest Toyota franchise in the United States. Immediately prior to the consummation of the Offering, the Company will acquire the 30% minority interest in the DiFeo Group in the Minority Exchange. See "Certain Relationships and Related Transactions." Effective August 1, 1995, the Company acquired an 80% interest in Landers Auto Sales, Inc. ("Landers Auto"), located in Benton, Arkansas, for a purchase price consisting of $20.0 million in cash and $4.0 million in notes. The acquisition agreement provides for additional contingent purchase price payments to the sellers based on the future profitability of the acquired dealerships. In 1995, Landers Auto, the largest full-line Chrysler dealer in the United States, had $280.8 million in sales. Immediately prior to the consummation of the Offering, the Company will acquire the 20% minority interest in Landers Auto in the Minority Exchange. See "Certain Relationships and Related Transactions." Effective January 1, 1996, the Company acquired a 100% interest in Atlanta Toyota, located in Duluth, Georgia, for a purchase price consisting of $9.1 million in cash and $2.4 million in notes. In 1995, Atlanta Toyota had $112.2 million in sales, making it the largest Toyota dealer in the Atlanta metropolitan area and the seventh largest in the United States. Pursuant to an agreement, 5% of the capital stock of Atlanta Toyota was purchased by its general manager for a $300,000 note. Immediately prior to the consummation of the Offering, the Company will reacquire such capital stock in the Minority Exchange. See "Certain Relationships and Related Transactions." On May 1, 1996, the Company acquired a 100% interest in United Nissan, located in Morrow, Georgia, for a purchase price of $11.5 million in cash. In 1995, United Nissan had $60.3 million in sales. Effective July 1, 1996, the Company acquired a 100% interest in Peachtree Nissan, located in Chamblee, Georgia, for a purchase price consisting of $11.0 million in cash and a $2.0 million note. In 1995, Peachtree Nissan had $85.3 million in sales. Contemporaneously with the consummation of the Offering, pursuant to a stock purchase agreement dated as of June 6, 1996 with the Sun Group, located in Phoenix and Scottsdale, Arizona, the Company will acquire a 100% interest in the Sun Group for $30.9 million in cash. The Sun Group holds franchises for Acura, Audi, Aston Martin, BMW, Jaguar, Land Rover, Lexus and Porsche and, in 1995, had $154.5 million in sales. 15 Use Of Proceeds The net proceeds to the Company from the sale of the Common Stock offered hereby are estimated to be approximately $ million ($ million if the Underwriters' over-allotment option is exercised in full) after deducting underwriting discounts and estimated offering expenses. Of such net proceeds, (i) approximately $31.0 million will be used to pay the consideration for the Contemporaneous Acquisition and related transaction costs, (ii) approximately $38.6 million will be used to repay all the Company's outstanding Senior Notes ($3.6 million of which represents a required prepayment premium, which will be reflected in the Company's financial statements as a charge against earnings in the quarter in which such prepayment occurs), (iii) approximately $5.0 million will be used to repay all the loans under the Company's revolving credit agreement, (iv) approximately $15.0 million will be used to fund the expansion of the Company's automobile finance business and (v) the balance will be used for working capital and other general corporate purposes, including other potential acquisitions. Pending such uses, the net proceeds will be invested in short-term, investment grade securities or used to temporarily reduce floor plan indebtedness. The Senior Notes were issued in several series pursuant to Securities Purchase Agreements, dated as of September 22, 1995, between the Company and the investors named therein (the "Securities Purchase Agreements"). They bear interest at a weighted average interest rate of 11.94% and mature on September 15, 2003. The proceeds of the Senior Notes were used primarily to finance acquisitions and for investments in Atlantic Finance. The revolving loans were made under the Credit Agreement, dated February 28, 1996, between the Company and Morgan Guaranty Trust Company of New York ("Morgan Guaranty"), as amended (the "Credit Agreement"). They bear interest at the higher of the prime rate plus 2.0% or the federal funds rate plus 2.5% (an effective rate of 10.25% at July 15, 1996) and mature on September 30, 1996. The holder of a majority of the Senior Notes and Morgan Guaranty are affiliates of J.P. Morgan Securities Inc. Dividend Policy The Company has never declared or paid dividends on its Common Stock. The Company intends to retain future earnings, if any, to finance the development and expansion of its business and, therefore, does not anticipate paying any cash dividends on its Common Stock in the foreseeable future. The decision whether to pay dividends will be made by the Board of Directors of the Company in light of conditions then existing, including the Company's results of operations, financial condition and requirements, business conditions and other factors. Pursuant to support agreements by the Company in favor of subsidiaries of Atlantic Finance entered into in connection with securitization transactions or sales of automobile loan receivables, the Company is prohibited from paying dividends in excess of 50% of its cumulative net income measured over specified periods. Pursuant to financing agreements with floor plan lenders, many of the Company's dealerships are required to maintain a certain minimum working capital and a certain aggregate net worth and/or are prohibited from making substantial disbursements outside the ordinary course of business. In addition, pursuant to the automobile franchise agreements to which the Company's dealerships are subject, all dealerships are required to maintain a certain minimum working capital, and some dealerships are also required to maintain a certain minimum net worth. These requirements may restrict the ability of the Company's operating subsidiaries to make dividend payments, which in turn may restrict the Company's ability to make dividend payments. 16 Capitalization The following table sets forth the short-term debt and consolidated capitalization of the Company as of March 31, 1996, and pro forma to give effect to the Preferred Stock Conversion, the Minority Exchange, the acquisitions of United Nissan and Peachtree Nissan, the private placement of additional equity and repayment of $4.0 million of short-term debt on July 10, 1996, the Contemporaneous Acquisition and the Offering. This table should be read in conjunction with the consolidated historical and pro forma financial statements of the Company and the notes thereto appearing elsewhere in this Prospectus.
---------------------- As of March 31, 1996 IN THOUSANDS, EXCEPT PER SHARE DATA Actual Pro Forma --------- ----------- Short-term debt, excluding floor plan (1) $ 16,115 $ 7,115 Current portion of long-term debt 2,488 2,917 --------- ----------- Total short-term debt $ 18,603 $ 10,032 --------- ----------- --------- ----------- Long-term debt (excluding current portion): Senior Notes (2) $ 22,102 $ Other 7,620 13,467 --------- ----------- Total long-term debt 29,722 13,467 --------- ----------- Minority interests subject to repurchase 14,112 --------- ----------- Stock purchase warrants 1,330 --------- ----------- Stockholders' equity: Class A convertible preferred stock, $0.0001 par value; 4,911 shares authorized, 4,015 shares issued and outstanding, actual; no shares authorized, issued or outstanding, as adjusted 1 Preferred stock, $0.0001 par value; no shares authorized, actual; 100 shares authorized, no shares issued and outstanding, as adjusted Voting common stock, $0.0001 par value; 15,100 shares authorized, 2,972 shares issued and outstanding, actual; shares authorized, shares issued and outstanding, as adjusted (3) 1 1 Non-voting common stock, $0.0001 par value; 1,025 shares authorized, no shares issued and outstanding, actual; 1,125 shares authorized, shares issued and outstanding, as adjusted Additional paid-in capital 61,295 244,092 Accumulated deficit (5,339) (8,630) --------- ----------- Total stockholders' equity 55,958 235,463 --------- ----------- Total capitalization $ 101,122 $ 248,930 --------- ----------- --------- -----------
- ------------------------ (1) As of March 31, 1996, an aggregate of $125.3 million was outstanding under the Company's floor plan facilities. (2) As of July 31, 1996, there were Senior Notes outstanding in the aggregate principal amount of $33.3 million, net of unamortized discount of $1.7 million. (3) Does not include 873,000 and 260,000 shares of Common Stock issuable at an exercise price per share of $10.00 and the public offering price set forth on the cover page of this Prospectus, respectively, upon the exercise of outstanding stock options or 1,016,099 shares issuable at a nominal exercise price upon the exercise of outstanding warrants. See "Management -- Spielvogel Employment Agreement," "Management -- Stock Option Plan," "Description of Capital Stock -- Warrants" and "Shares Eligible for Future Sale." 17 Dilution As of March 31, 1996, the pro forma net tangible book value of the Common Stock, after giving effect to the Preferred Stock Conversion, the Minority Exchange, the acquisitions of United Nissan and Peachtree Nissan and the applicable anti-dilution adjustments of all outstanding warrants and the assumed exercise thereof, was approximately $ million, or approximately $ per share. Net tangible book value per share represents the amount of total tangible assets less total liabilities, divided by the number of shares of Common Stock outstanding. After giving effect to the Offering (assuming an initial public offering price of $ per share and after deducting estimated offering expenses) and the Contemporaneous Acquisition, the pro forma net tangible book value of the Company at March 31, 1996 would have been approximately $ million, or approximately $ per share. This represents an immediate dilution of approximately $ per share to stockholders purchasing shares at the initial public offering price. The following table illustrates this per share dilution: Assumed initial public offering price per share $ --------- Pro forma net tangible book value per share at March 31, 1996 after giving effect to the Preferred Stock Conversion, the Minority Exchange, the acquisitions of United Nissan and Peachtree Nissan and the applicable anti-dilution adjustments of all outstanding warrants and the assumed exercise thereof $ --------- Increase in pro forma net tangible book value per share attributable to new investors in the Offering --------- Pro forma net tangible book value per share as further adjusted for the Offering and the Contemporaneous Acquisition --------- Dilution per share to new investors in the Offering $ --------- ---------
The following table sets forth on a pro forma basis at March 31, 1996 the difference between the existing holders of Common Stock (including the shares of Common Stock issued pursuant to the Minority Exchange and upon the assumed exercise of all outstanding warrants after giving effect to the applicable anti-dilution adjustments thereof) and the new investors in the Offering with respect to the number of shares of Common Stock purchased (assuming an initial public offering price of $ per share), the total consideration paid and the average price per share paid:
--------------------------------------------------------------- Shares Total Purchased Consideration (1) Average ------------------------- ----------------------- Price Number Percent Amount Percent Per Share ----------- ------------ --------- ------------ ----------- Existing stockholders % $ % $ New investors in the Offering -- -- ----------- --------- Total 100% $ 100% -- -- -- -- ----------- --------- ----------- ---------
- ------------------------------ (1) The shares of Common Stock issuable upon the exercise of the Warrants to purchase 1,016,099 shares and the Additional Warrants to purchase 93,747 shares (as such terms are defined herein) are deemed to have a purchase price, including a nominal exercise price, of $1.81 and $10.00 per share, respectively. See "Description of Capital Stock -- Warrants." 18 Pro Forma Condensed Consolidated Financial Statements The following unaudited pro forma condensed consolidated financial statements give effect to the following: (i) the acquisitions of 80% of Landers Auto (August 1, 1995) and 100% of each of Atlanta Toyota (January 1, 1996), Steve Rayman Nissan (May 1, 1996), Hickman Nissan (July 1, 1996) and Sun Automotive Group (Contemporaneous Acquisition); (ii) the DiFeo Restructuring (as defined herein); (iii) the purchase of a 5% equity interest in Atlanta Toyota by its current general manager in exchange for a note; (iv) the acquisition of the minority interest in each of the DiFeo Group, Landers Auto and Atlanta Toyota in exchange for Common Stock plus certain other consideration in the Minority Exchange; (v) the Offering; (vi) the repayment of $35.0 million aggregate principal amount of Senior Notes, plus a related $3.6 million prepayment premium, and $5.0 million of loans outstanding under the Credit Agreement; (vii) the Preferred Stock Conversion; (viii) the reclassification of the common stock warrants to stockholders' equity; (ix) the private placement of additional equity and repayment of $4.0 million of short-term debt on July 10, 1996; and (x) the increase of rental expense under amended leases relating to facilities in the DiFeo Group. The pro forma condensed consolidated statements of operations assume these events occurred on January 1, 1995, and the pro forma condensed consolidated balance sheet assumes these events, except for the Landers Auto and Atlanta Toyota acquisitions, which are included in the historical balance sheet, occurred on March 31, 1996. The pro forma condensed consolidated financial statements are not necessarily indicative of operating results or financial position that would have been achieved had these events been consummated on the dates indicated and should not be construed as representative of future operating results or financial position. These pro forma condensed consolidated financial statements should be read in conjunction with the historical financial statements and related notes thereto included in this Prospectus. 19 United Auto Group, Inc. Pro Forma Condensed Consolidated Statement of Operations For the Year Ended December 31, 1995 (In thousands except per share data)
Sun Landers Atlanta Steve Rayman Hickman Automotive Pro Forma UAG Auto(1) Toyota(1) Nissan(1) Nissan(1) Group(1) Adjustments Pro Forma --------- ---------- --------- ------------- --------- ---------- -------------- ---------- Auto Dealerships Total revenues $805,621 $164,368 $112,162 $60,268 $85,336 $154,502 $(100,086) (2) $1,271,718 (10,453) (3) Cost of sales 720,344 147,566 98,969 50,166 76,588 133,980 (95,893) (2) 1,122,542 --------- ---------- --------- ------------- --------- ---------- ---------- (9,178) (3) Gross profit 85,277 16,802 13,193 10,102 8,748 20,522 149,176 Selling, general and administrative expenses 90,586 10,132 11,182 8,989 7,619 18,469 (11,286) (2) 133,607 --------- ---------- --------- ------------- --------- ---------- ---------- (580) (3) 797 (5) (82) (6) (1,063) (7) 1,390 (8) (3,121) (9) 575 (11) Operating income (loss) (5,309) 6,670 2,011 1,113 1,129 2,053 15,569 Related party interest income 3,039 (3,039) (5) Other income (expense), net (1,438) 242 17 1 (161) (31) (550) (4) (1,072) 848(10) Equity in loss of uncombined investees (831) 831 (5) --------- ---------- --------- ------------- --------- ---------- ---------- Income (loss) before income taxes -- Auto Dealerships (4,539) 6,912 2,028 1,114 968 2,022 14,497 Auto Finance Loss before income taxes -- Auto Finance (1,382) (1,382) --------- ---------- --------- ------------- --------- ---------- ---------- Total Company Income (loss) before minority interests and provision for income taxes (5,921) 6,912 2,028 1,114 968 2,022 13,115 --------- ---------- --------- ------------- --------- ---------- ---------- Minority interests 366 (366) (5) Benefit (provision) for income taxes 2,089 (449) (8,122) (12) (6,482) --------- ---------- --------- ------------- --------- ---------- ---------- Net income (loss) $(3,466) $6,463 $2,028 $1,114 $968 $2,022 $ 6,633 --------- ---------- --------- ------------- --------- ---------- ---------- --------- ---------- --------- ------------- --------- ---------- ---------- Net income (loss) per common share $(.67) $ --------- ---------- --------- ---------- Weighted average number of common shares outstanding 5,201 --------- ---------- --------- ----------
See footnotes on following pages 20 United Auto Group, Inc. Pro Forma Condensed Consolidated Statement of Operations For the Three Months Ended March 31, 1996 (In thousands except per share data)
Hickman Sun Steve Rayman Nissan Automotive Pro Forma Auto Dealerships UAG Nissan (1) (1) Group (1) Adjustments Total ---------- ------------- --------- ---------- ----------- --------- Total revenue $261,719 $14,655 $19,907 $45,484 $ $341,765 Cost of sales 232,502 11,962 17,288 39,184 300,936 ---------- ------------- --------- ---------- --------- Gross profit 29,217 2,693 2,619 6,300 40,829 Selling, general and administrative expenses 27,618 2,182 2,139 4,649 (450)(2) 36,017 199 (5) 236 (8) (700)(7) 144(11) ---------- ------------- --------- ---------- --------- Operating income 1,599 511 480 1,651 4,812 Related party interest income 774 (774)(4) Other income (expense), net (914) 110 2 (45)(4) (97) 750(10) Equity in loss of uncombined investees 12 (12)(5) ---------- ------------- --------- ---------- --------- Income (loss) before income taxes -- Auto Dealerships 1,471 511 590 1,653 4,715 Auto Finance Loss before income taxes -- Auto Finance (264) (264) ---------- ------------- --------- ---------- --------- Total Company Income (loss) before minority interests and provision for income taxes 1,207 511 590 1,653 4,451 Minority interests (500) 500 (5) Benefit (provision) for income taxes (536) (1,508)(12) (2,044) ---------- ------------- --------- ---------- --------- Net income $171 $511 $590 $1,653 $2,407 ---------- ------------- --------- ---------- --------- ---------- ------------- --------- ---------- --------- Net income per common share $.03 $ ---------- --------- ---------- --------- Weighted average number of common shares outstanding 6,616 ---------- --------- ---------- ---------
See footnotes on following pages 21 Footnotes to Pro Forma Condensed Consolidated Statements of Operations (1) Represents the results of operations of such entities prior to their respective dates of acquisition by UAG. (2) Represents adjustments related to the DiFeo Restructuring (as defined herein). Of the $11,286 reduction in selling, general and administrative expenses for the year ended December 31, 1995, $8,122 was directly related to 17 unprofitable franchises which were eliminated and $3,164 was related to the elimination of a level of senior management and a reduction of personnel at the continuing franchises of the DiFeo Group. (3) Represents adjustments to eliminate the results of operations of dealerships not acquired. (4) Represents additional interest expense from the issuance of notes payable to sellers as part of the acquisitions. (5) Represents adjustments that give effect to the proposed acquisition of the minority interest in each of the DiFeo Group, Landers Auto and Atlanta Toyota in exchange for Common Stock plus certain other consideration in the Minority Exchange. These adjustments include amortization expense for the excess of cost over net assets acquired, the elimination of related party interest income on assets to be exchanged, the elimination of equity in operations of assets to be exchanged and the elimination of minority interest in results of operations acquired. (6) Represents reduction in facility expenses at acquired dealerships due to revised lease agreements upon acquisition. (7) Represents reduction in compensation expense at acquired dealerships related to former owners and employees to contractual amounts. (8) Represents amortization of excess of cost over net assets acquired for the acquired dealerships. (9) Represents reduction for management fees paid to owners of acquired dealerships. (10)Represents reduction in historical interest expense due to the repayment of the Senior Notes and loans under the Credit Agreement with a portion of the net proceeds from the Offering. (11)Represents adjustment for increase in rental expense under amended leases relating to facilities in the DiFeo Group. (12)Represents tax adjustment to statutory rate adjusted for non-deductible amortization of cost over net assets acquired. 22 United Auto Group, Inc. Pro Forma Condensed Consolidated Balance Sheet As of March 31, 1996 (Dollars in thousands)
Sun Steve Rayman Hickman Automotive Pro Forma UAG Nissan Nissan Group Adjustments Pro Forma ---------- ------------- --------- ---------- ----------- ---------- ASSETS Auto Dealerships Cash and cash equivalents $4,914 $267 $1,683 $ $12,033 (1) $51,198 (11,850)(1) 11,913 (2) (11,350) (2) 135,000 (3) (31,500)(4) (38,600)(5) (5,000)(6) (15,000)(7) (600)(9) 4,000 (12) (4,000)(12) (712)(13) Accounts receivable 38,662 2,153 1,984 7,815 50,614 Inventories 120,438 7,467 7,818 18,765 446 (1) 158,148 2,340 (2) 874 (4) Deferred income taxes 5,333 104 1,959 (5) 7,631 110 (8) 125 (13) Other current assets 2,945 136 29 100 (8) 3,210 ---------- ------------- --------- ---------- ---------- Total current assets 172,292 9,991 11,621 26,609 270,801 Property and equipment, net 13,910 188 506 11,335 175 (1) 21,269 (4,845)(4) Intangible assets, net 55,846 525 1,147 10,575 (1) 132,205 9,556 (2) 21,240 (4) 33,316 (9) Due from related parties 15,148 (15,148)(9) Other assets 9,787 61 765 200 (8) 7,093 (3,720)(9) ---------- ------------- --------- ---------- ---------- Total Auto Dealership assets 266,983 10,704 12,188 39,856 431,368 ---------- ------------- --------- ---------- ---------- Auto Finance Cash and cash equivalents 1,333 15,000 (7) 16,333 Finance assets, net 2,231 2,231 Other assets 7,205 7,205 ---------- ------------- --------- ---------- ---------- Total Auto Finance assets 10,769 25,769 ---------- ------------- --------- ---------- ---------- Total assets $277,752 $10,704 $12,188 $39,856 $457,137 ---------- ------------- --------- ---------- ---------- ---------- ------------- --------- ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Auto Dealerships Floor plan notes payable $125,279 $6,073 $8,725 $16,169 $156,246 Short-term debt 13,797 (5,000)(6) 4,797 (4,000)(12) Accounts payable 16,930 1,401 927 1,695 20,953 Accrued expenses 10,870 308 869 4,381 (400)(13) 16,028 Current portion of long-term debt 2,488 185 42 1,202 (1,000)(4) 2,917 ---------- ------------- --------- ---------- ---------- Total current liabilities 169,364 7,967 10,563 23,447 200,941 Long-term debt 29,722 616 53 13,443 6,120 (1) 13,467 7,480 (2) (10,265)(4) (33,702)(5) Due to related party 1,151 1,151 Deferred income taxes 2,279 2,279 ---------- ------------- --------- ---------- ---------- Total Auto Dealership liabilities 202,516 8,583 10,616 36,890 217,838 ---------- ------------- --------- ---------- ----------
23 United Auto Group, Inc. Pro Forma Condensed Consolidated Balance Sheet As of March 31, 1996 (continued) (Dollars in thousands)
Sun Steve Rayman Hickman Automotive Pro Forma UAG Nissan Nissan Group Adjustments Pro Forma ---------- ------------- --------- ---------- ----------- ---------- Auto Finance Short-term debt 2,318 2,318 Accounts payable and other liabilities 1,518 1,518 ---------- ---------- Total Auto Finance liabilities 3,836 3,836 ---------- ---------- Minority interests subject to repurchase 14,112 575(8) (14,687)(9) ---------- ---------- Stock purchase warrants 1,330 (1,330)(10) ---------- ---------- Commitments and contingent liabilities Stockholders' equity Convertible Preferred Stock 1 (1)(11) Common Stock 1 500 50 7,179 (500)(1) 1 (50)(2) (7,179)(4) Non-voting Common Stock Additional paid-in capital 61,295 100 1 7,380 (1) 244,092 (100)(1) (1)(2) 6,551 (2) 135,000 (3) 28,535 (9) 1,330 (10) 1 (11) 4,000 (12) Retained earnings (accumulated deficit) (5,339) 1,521 1,521 (4,213) (1,521)(1) (8,630) (1,521)(2) 4,213 (4) (2,939)(5) (165)(8) (187)(13) ---------- ------------- --------- ---------- ---------- Total stockholders' equity 55,958 2,121 1,572 2,966 235,463 ---------- ------------- --------- ---------- ---------- Total liabilities, minority interests subject to repurchase, stock purchase warrants and stockholders' equity $277,752 $10,704 $12,188 $39,856 $457,137 ---------- ------------- --------- ---------- ---------- ---------- ------------- --------- ---------- ----------
- --------------- (1) Represents the acquisition of Steve Rayman Nissan for cash, including expenses of $350, the related preliminary purchase price allocations to inventories, property and equipment and excess of cost over net assets acquired and the elimination of historical equity accounts. Also reflects the issuance of debt and equity to finance the acquisition and working capital. (2) Represents the acquisition of Hickman Nissan for cash and debt, including expenses of $350, the related preliminary purchase price allocations to inventories and excess of cost over net assets acquired and the elimination of historical equity accounts. Also reflects the issuance of debt and equity to finance the acquisition and working capital. (3) Represents the net proceeds from the Offering. (4) Represents the acquisition of Sun Automotive Group for cash, including estimated expenses of $650, and the related preliminary purchase price allocations to inventories, property and equipment and excess of cost over net assets acquired, payments of long-term debt and the elimination of historical equity accounts. (5) Represents the repayment for cash of senior notes and related prepayment penalty charged to retained earnings and related defered tax effect. (6) Represents the repayment of loans under the Credit Agreement. (7) Represents contribution of a portion of the proceeds of the Offering to Atlantic Finance to finance expansion. (8) Represents the purchase of a 5% equity interest in Atlanta Toyota by its current general manager in exchange for a note. (9) Represents adjustments to give effect to the proposed acquisition of the minority interest in each of the DiFeo Group, Landers Auto and Atlanta Toyota in exchange for Common Stock plus certain other consideration in the Minority Exchange. (10) Represents a reclassification of the stock purchase warrants to stockholders' equity since, following the Offering, the stock purchase warrants will no longer be convertible into contingent value obligations. (11) Represents the Preferred Stock Conversion. (12) Represents the issuance of additional equity and the repayment of short-term debt in July 1996. (13) Represents adjustment for retroactive increase in rental expense under amended leases relating to facilities in the DiFeo Group. 24 Selected Consolidated Financial Data The following table sets forth selected consolidated financial and other data of the Company for the three months ended December 31, 1992, each of the three years in the period ended December 31, 1995 and the three months ended March 31, 1995 and March 31, 1996 and the Predecessor Company financial data as of December 31, 1991 and for the year ended December 31, 1991 and the nine months ended September 30, 1992. The balance sheet data as of December 31, 1993, 1994 and 1995 and the statements of operations data for the years ended December 31, 1993, 1994 and 1995 have been derived from the financial statements of the Company which have been audited by Coopers & Lybrand L.L.P., the Company's independent accountants. The selected consolidated financial data set forth below for the Predecessor Company and the Company for the three months ended December 31, 1992, March 31, 1995 and March 31, 1996 are unaudited but have been prepared on the same basis as the audited consolidated financial statements and contain all adjustments, consisting of only normal recurring accruals, that the Company considers necessary for a fair presentation of the financial position and results of operations for the periods presented. Operating results for the three months ended March 31, 1996 are not necessarily indicative of the results that may be expected for the year ending December 31, 1996. The selected financial data should be read in conjunction with the consolidated financial statements and related notes and Pro Forma Condensed Consolidated Financial Statements of the Company.
Predecessor Company(1) --------------------------- The Company ------------------------------------------------------------------- ------------------------------------------------------------------------------------------------ Year Nine Months Three Months Ended Ended Ended Three Months Ended DOLLARS IN THOUSANDS, EXCEPT December 31, September 30, December 31, Years Ended December 31, March 31, PER SHARE DATA 1991 1992 1992 1993 1994 1995(2) 1995 1996(3) ------------ ------------- ------------ --------- --------- --------- --------- --------- Statements of Operations Data: Auto Dealerships Total revenues $404,319 $297,010 $98,040 $ 606,091 $ 731,629 $ 805,621 $ 162,598 $ 261,719 Cost of sales, including floor plan interest 361,961 257,845 85,712 537,688 647,643 720,344 146,054 232,502 Gross Profit 42,358 39,165 12,328 68,403 83,986 85,277 16,544 29,217 Selling, general and administrative expenses 45,120 40,873 12,929 66,910 80,415 90,586 20,829 27,618 Operating income (loss) (2,762) (1,708) (601) 1,493 3,571 (5,309) (4,285) 1,599 Other interest expense 1,233 860 1,438 156 914 Auto Finance Loss before income taxes (616) (1,382) (354) (264) Total Company Minority interests 152 (117) (887) 366 873 (500) Benefit (provision) for income taxes (337) (197) (47) 2,089 (536) Net income (loss) (3,099) (1,905) (449) 96 (1,691) (3,466) (3,231) 171 Net income (loss) per common share $ .07 $ (.51) $ (.67) $ (.87) $ .03
------------------------------------------------------------------------------------- The Company Predecessor Company ---------------------------------------------------------------- ------------------- As of As of December 31, As of March 31, DOLLARS IN THOUSANDS December 31, 1991 1992 1993 1994 1995 1995 1996 ------------------- --------- --------- --------- --------- --------- --------- Balance Sheet Data: Auto Dealerships Current assets $53,579 $ 72,045 $ 120,061 $ 118,534 $ 141,649 $ 124,731 $ 172,292 Current liabilities 60,568 75,127 117,494 125,825 139,447 135,498 169,364 Property and equipment, net 4,121 5,598 8,845 12,072 12,146 11,615 13,910 Intangible assets, net 667 20,665 22,832 23,018 48,774 22,673 55,846 Long-term debt 3,801 3,092 4,122 6,735 24,073 6,039 29,722 Auto Finance Net assets 291 3,501 4,527 6,933 Total Company Total assets 58,487 100,794 154,218 170,342 236,027 182,434 277,752 Minority interests subject to repurchase 7,024 7,338 7,962 13,608 6,599 14,112 Stock purchase warrants 1,020 1,330 Total stockholders' equity (6,316) 15,551 25,264 28,785 49,240 32,380 55,958
--------------------------------------------------------------------------------------- The Company Predecessor Company ---------------------------------------------------------- --------------------------- Three Year Nine Months Three Months Months Ended Ended Ended Years Ended December 31, Ended December 31, September 30, December 31, March 31, 1991 1992 1992 1993 1994 1995(2) 1995 ------------ ------------- ------------ --------- --------- ----------- --------- Other Auto Dealerships Data: Gross profit margin 10.5% 13.2% 12.6% 11.3% 11.5% 10.6% 10.2% Operating margin (0.7)% (0.6)% (0.6)% 0.2% 0.5% (0.7 )% (2.6)% New cars sold at retail 14,597 11,677 4,150 18,608 22,464 25,138 5,058 Used cars sold at retail 5,195 3,335 1,535 7,891 8,340 8,953 1,758 1996(3) ----------- Other Auto Dealerships Data: Gross profit margin 11.2% Operating margin 0.6% New cars sold at retail 7,490 Used cars sold at retail 4,025
- ------------------------------ (1) Predecessor Company represents the combined historical results of the DiFeo Group acquired by the Company on October 1, 1992. (2) Includes the results of Landers Auto from August 1, 1995. (3) Includes results of Atlanta Toyota from January 1, 1996. 25 Management's Discussion and Analysis of Financial Condition and Results of Operations General UAG is a leading acquirer, consolidator and operator of franchised automobile and light truck dealerships and related businesses. The Company believes that, after giving effect to the Contemporaneous Acquisition, it will be the fourth largest retailer of new motor vehicles in the United States, operating 38 franchises located in Arizona, Arkansas, Connecticut, Georgia, New Jersey and New York and representing 25 American, Asian and European brands. As an integral part of its dealership operations, UAG sells used vehicles. In addition, the Company has recently established four stand-alone used car retail centers. All of UAG's dealerships include integrated service and parts operations, which are an important source of recurring revenues. The Company also owns Atlantic Finance, an automobile finance company that purchases prime credit quality automotive loans originated by both UAG and third-party dealerships. The Company's principal source of growth has come, and is expected to continue to come, from acquisitions of automobile dealerships. Therefore, the Company's period to period results of operations vary depending on the dates of such acquisitions. In addition, results of operations fluctuate due the cyclicality of unit sales of motor vehicles, particularly new vehicles. Such fluctuation is generally influenced by general economic conditions. See "-- Cyclicality." New vehicle revenues include sales to retail customers and to leasing companies providing consumer leasing. Used vehicle revenues include amounts received for used vehicles sold to retail customers, leasing companies providing consumer leasing, other dealers and wholesalers. Finance and insurance revenues come from sales of accessories such as radios, cellular phones, alarms, custom wheels, paint sealants and fabric protectors, as well as amounts received as fees for placing extended service contracts, credit insurance policies, financing and lease contracts. In the case of arranging financing, the Company receives a fee from the lender for originating the loan but is assessed a chargeback by the lender if the contract terminates, in certain cases before its scheduled maturity, and in other cases within 90 days of the making of the loan, which in either case can result from early repayment because of refinancing the loan, selling or trading in the vehicle or default on the loan. The Company establishes a reserve based on historical chargeback experience to anticipate future chargebacks. Revenues from finance and insurance products contribute a disproportionate share of operating profits. Service and parts revenues include fees paid by consumers for repair and maintenance service and the sale of replacement parts. In addition, through its automobile finance subsidiary, Atlantic Finance, the Company derives revenues from the purchase, sale and servicing of motor vehicle installment contracts originated by both UAG and third-party dealerships. The Company's selling expenses consist of compensation for sales department personnel, including commissions and related bonuses. General and administrative expenses include compensation for administration, finance and general management personnel, rent, insurance and utilities. Interest expense consists of interest charges on all of the Company's interest-bearing debt other than floor plan inventory financing. Interest expense on floor plan debt is included in cost of sales. The Company has accounted for each of its acquisitions by the purchase method of accounting and, as a result, the Company's financial statements include only the results of operations of the acquired dealerships from the effective date of acquisition. The financial information included in this Prospectus may not necessarily reflect the results of operations, financial position and cash flows of the Company in the future or what the results of operations, financial position and cash flows would have been had the acquisitions and Offering occurred during the period presented in the financial statements. 26 Results of Operations The following table sets forth, for the periods indicated, the percentage of applicable revenues represented by certain items contained in the Company's consolidated historical statements of operations:
----------------------------------------------------- Three Months Ended Year Ended December 31, March 31, 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- Auto Dealerships: Vehicle sales 87.2% 88.1% 88.9% 87.2% 89.1% Finance and insurance 4.1 3.8 3.7 4.2 3.8 Service and parts 8.7 8.2 7.4 8.7 7.1 --------- --------- --------- --------- --------- Total revenues 100.0 100.0 100.0 100.0 100.0 Cost of sales, including floor plan interest 88.7 88.5 89.4 89.8 88.8 --------- --------- --------- --------- --------- Gross profit 11.3 11.5 10.6 10.2 11.2 Selling, general and administrative expenses 11.0 11.0 11.2 12.8 10.6 --------- --------- --------- --------- --------- Operating income (loss) 0.2 0.5 (0.7) (2.6) 0.6 Related party interest income 0.0 0.0 0.4 0.5 0.3 Other interest expense (0.2) (0.1) (0.2) (0.1) (0.3) Equity in loss of uncombined investees 0.0 (0.4) (0.1) (0.1) 0.0 --------- --------- --------- --------- --------- Income (loss) before income taxes 0.0 0.0 (0.6) (2.3) 0.6 Auto Finance: Revenues 100.0 100.0 100.0 100.0 Interest expense 32.8 20.9 Operating and other expenses * 327.9 * 143.2 --------- --------- --------- --------- --------- Loss before income taxes * (260.8) * (64.1) Total Company: Income (loss) before minority interests and provision for income taxes 0.0 (0.1) (0.7) (2.5) 0.5 Minority interests 0.0 (0.1) 0.0 0.5 (0.2) Benefit (provision) for income taxes 0.0 0.0 0.3 0.0 (0.2) --------- --------- --------- --------- --------- Net income (loss) 0.0% (0.2)% (0.4)% (2.0)% 0.1% --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
- ------------------------ * Not meaningful due to early stage of operations. The following discussion and analysis includes the Company's consolidated historical results of operations for 1993, 1994 and 1995 and for the three months ended March 31, 1995 and 1996. THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995 AUTO DEALERSHIPS DIFEO RESTRUCTURING. In an effort to increase profitability of the DiFeo Group, the Company commenced a broad restructuring program in the first quarter of 1995 (the "DiFeo Restructuring"). First, the Company eliminated a total of 17 unprofitable franchises, or 45% of the DiFeo Group's total number of franchises, by voluntarily terminating 12 franchises and effectively ceasing to be the controlling or majority owner of five additional franchises. Second, the Company eliminated a level of senior management and shifted greater authority and responsibility to the general manager of each dealership. Third, the Company reduced personnel by over 20% of the pre-restructuring total, and implemented pay plans linked to net profits and customer satisfaction. Fourth, the Company liquidated outdated inventory in order to lower inventory carrying costs and improve the utilization of space. REVENUES. Revenues increased by $99.1 million, or 61.0%, from $162.6 million to $261.7 million due primarily to the acquisitions of Landers Auto in August 1995, which contributed $71.6 million, and Atlanta Toyota in January 1996, which contributed $38.5 million. While revenues at the continuing franchises of the DiFeo Group 27 increased by $22.0 million, or 17.0%, from $129.6 million to $151.6 million, such increase was more than offset by a decrease of $33.0 million in revenues due to the elimination of unprofitable franchises as part of the DiFeo Restructuring. Sales of new and used vehicles increased by $91.4 million, or 64.5%, from $141.7 million to $233.1 million. The acquisition of Landers Auto contributed $66.5 million, and the acquisition of Atlanta Toyota contributed $35.3 million. While sales at the continuing franchises of the DiFeo Group increased by $18.2 million, or 16.1%, from $113.1 million to $131.3 million, such increase was more than offset by a decrease of $28.6 million in sales due to the elimination of unprofitable franchises as part of the DiFeo Restructuring. Unit sales of new and used vehicles increased by 48.1% and 129.0%, respectively, due to the acquisitions of Landers Auto and Atlanta Toyota and increased sales volume at the continuing franchises of the DiFeo Group. Sales of new and used vehicles at the continuing franchises of the DiFeo Group increased by 5.7% and 26.0%, respectively. New vehicle selling prices increased approximately 4.1% due primarily to changes in Manufacturer pricing. Used vehicle selling prices increased approximately 24.1% due to changes in market demand which resulted in a change in the mix of used vehicles sold. Sales of finance and insurance products increased by $3.2 million, or 47.7%, from $6.7 million to $9.9 million, principally as a result of the acquisitions of Landers Auto and Atlanta Toyota. Sales of such products at the continuing franchises of the DiFeo Group increased by $1.6 million, or 27.1%, from $5.9 million to $7.5 million. Service and parts revenues increased by $4.5 million, or 31.9%, from $14.1 million to $18.6 million due principally to the acquisitions of Landers Auto and Atlanta Toyota. While revenues at the continuing franchises of the DiFeo Group increased by $2.1 million, or 19.8%, from $10.6 million to $12.7 million, such increase was more than offset by the elimination of unprofitable franchises as part of the DiFeo Restructuring. GROSS PROFIT. Gross profit increased by $12.7 million, or 77.0%, from $16.5 million to $29.2 million due principally to the acquisitions of Landers Auto and Atlanta Toyota. Gross profit at the continuing franchises of the DiFeo Group increased by $4.6 million, or 33.1%, from $13.9 million to $18.5 million. Gross profit as a percentage of revenues increased from 10.2% to 11.2% reflecting higher margins resulting from improved inventory controls, enhanced training of sales personnel and a change in marketing philosophy from a price strategy to a customer service strategy. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased by $6.8 million, or 32.7%, from $20.8 million to $27.6 million due to the acquisitions of Landers Auto and Atlanta Toyota. Such expenses at the continuing franchises of the DiFeo Group increased by $2.3 million, or 13.9%, from $16.5 million to $18.8 million, and such expenses as a percentage of revenues decreased overall by 17.2%, from 12.8% to 10.6%, due principally to the DiFeo Restructuring. RELATED PARTY INTEREST INCOME. Related party interest income remained unchanged at $0.8 million. Such income is related to certain amounts owed the Company from minority partners and certain of their related entities on which the Company is contractually permitted to charge interest. The amounts owed arose from advances for certain business acquisitions and working capital advances for dealerships in which the Company has no interest. OTHER INTEREST EXPENSE. Interest expense other than floor plan increased by $0.7 million from $0.2 million to $0.9 million as a result of increased borrowings to finance the acquisitions of Landers Auto and Atlanta Toyota and the issuance of certain promissory notes as part of the consideration paid for Landers Auto. EQUITY IN LOSS OF UNCOMBINED INVESTEES. During the three months ended March 31, 1995, equity in loss of uncombined investees was $0.1 million, and there was a minimal gain during the three months ended March 31, 1996. Such loss represents a minority interest in a group of dealerships located in Jersey City, New Jersey. INCOME (LOSS) BEFORE INCOME TAXES. Pretax income from dealership operations increased by $5.3 million from a loss of $3.8 million to a profit of $1.5 million as a result of the factors described above, including the DiFeo Restructuring. AUTO FINANCE LOSS BEFORE INCOME TAXES. The pretax loss from operations at Atlantic Finance decreased by $0.1 million from $0.4 million to $0.3 million. Atlantic Finance was formed in the first quarter of 1994 and commenced loan operations in January 1995. 28 TOTAL COMPANY MINORITY INTERESTS. Minority interests changed by $1.4 million from a credit of $0.9 million to a charge of $0.5 million as a result of the factors described above. INCOME TAXES. The Company has provided for federal and state income taxes on its period earnings at appropriate rates. The 1996 effective tax rate exceeds the statutory rate due to the non-deductibility of the amortization of the excess of cost over net assets acquired. No benefit was recorded for the losses in 1995 since realization was deemed less likely than not at that time. NET INCOME (LOSS). Net income increased by $3.4 million from a loss of $3.2 million to a profit of $0.2 million due to the factors described above. 1995 COMPARED TO 1994 AUTO DEALERSHIPS REVENUES. Revenues increased by $74.0 million, or 10.1%, from $731.6 million to $805.6 million due to the acquisition of Landers Auto in August 1995. Revenues at Landers Auto, acquired in August 1995, contributed $116.3 million. Revenues at the continuing franchises of the DiFeo Group increased by $6.2 million, or 1.0%, from $592.5 million to $598.7 million. Such increase was more than offset by a decrease of $48.5 million in revenues due to the elimination of unprofitable franchises as part of the DiFeo Restructuring. Sales of new and used vehicles increased by $72.0 million, or 11.2%, from $644.4 million to $716.4 million. The acquisition of Landers Auto contributed $109.2 million of such increase. While revenues at the continuing franchises of the DiFeo Group increased by $5.0 million, or 0.9%, from $524.0 million to $529.0 million, such increase was more than offset by a decrease of $42.3 million in sales due to the elimination of unprofitable franchises as part of the DiFeo Restructuring. Unit sales of new and used vehicles increased by 11.9% and 7.4%, respectively, due principally to the acquisition of Landers Auto. Sales of new vehicles increased by 5.6% and sales of used vehicles decreased by 10.3% at the continuing franchises of the DiFeo Group, offset by the elimination of unprofitable franchises as part of the DiFeo Restructuring. New vehicle selling prices increased by 4.4% due primarily to changes in Manufacturer pricing. Used vehicle selling prices increased by 17.2% due to changes in market conditions which resulted in a change in the mix of used vehicles sold. Sales of finance and insurance products increased by $2.3 million, or 8.3%, from $27.5 million to $29.8 million due to the acquisition of Landers Auto. Sales of such products increased by $2.5 million, or 10.8%, from $23.2 million to $25.7 million at the continuing franchises of the DiFeo Group, offsetting in part the $2.3 million decrease in sales due to the elimination of unprofitable franchises as part of the DiFeo Restructuring. Service and parts revenues decreased by $0.3 million, or 0.5%, from $59.7 million to $59.4 million due to the DiFeo Restructuring, offset by increased service and parts revenues attributable to Landers Auto. GROSS PROFIT. Gross profit increased by $1.3 million, or 1.5%, from $84.0 million to $85.3 million. The acquisition of Landers Auto added $10.6 million during the five months the Company owned it. Gross profit at the continuing franchises of the DiFeo Group decreased by $3.3 million, or 4.7%, from $70.2 million to $66.9 million. Gross profit as a percentage of revenues decreased 7.8% from 11.5% to 10.6% as the Company implemented the DiFeo Restructuring. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased by $10.2 million, or 12.7%, from $80.4 million to $90.6 million due principally to the acquisition of Landers Auto. Such expenses as a percentage of revenues increased from 11.0% to 11.2% of revenues. Selling, general and administrative expenses at the continuing franchises of the DiFeo Group increased by $3.9 million from $66.1 million to $70.0 million. RELATED PARTY INTEREST INCOME. Related party interest income was $3.0 million in 1995. There was no such income in 1994. 29 OTHER INTEREST EXPENSE. Interest expense other than floor plan increased by $0.5 million, or 55.6%, from $0.9 million to $1.4 million as a result of increased borrowings to finance the acquisitions of Landers Auto and Atlanta Toyota and the issuance of certain promissory notes as part of the consideration paid for Landers Auto, offset in part by a reduction in other interest-bearing debt. EQUITY IN LOSS OF UNCOMBINED INVESTEES. Equity in loss of uncombined investees decreased by $2.1 million, or 72.4%, from $2.9 million to $0.8 million due to improved performance of certain dealerships in which the Company retains a minority interest. LOSS BEFORE INCOME TAXES. The pretax loss from dealership operations increased from $0.2 million to $4.5 million, including the costs incurred in connection with the DiFeo Restructuring. The deterioration in the performance of the DiFeo Group during the first quarter of 1995 led management to undertake the DiFeo Restructuring. AUTO FINANCE LOSS BEFORE INCOME TAXES. The pretax loss from operations at Atlantic Finance increased by $0.8 million from $0.6 million to $1.4 million, reflecting the early stage of its operations. Atlantic Finance was formed in the first quarter of 1994. TOTAL COMPANY MINORITY INTERESTS. Minority interests changed by $1.3 million from a charge of $0.9 million to a credit of $0.4 million as a result of the factors described above. PROVISION FOR INCOME TAXES. An income tax credit of $2.1 million was recorded in 1995. The credit was taken as the Company determined in the fourth quarter that it was more likely than not that, due to the DiFeo Restructuring, future taxable income from operations would be sufficient to fully recognize a net deferred tax asset at December 31, 1995. Such net deferred tax asset was provided as a result of tax basis operating losses sustained in 1994 and 1995. NET INCOME (LOSS). Net income decreased by $1.8 million from a loss of $1.7 million to a loss of $3.5 million due to the factors described above. 1994 COMPARED TO 1993 AUTO DEALERSHIPS REVENUES. Revenues increased by $125.5 million, or 20.7%, from $606.1 million to $731.6 million. This increase was due to the full-year contributions of dealerships acquired during 1993 by the DiFeo Group that were located within its trading area and volume increases at the existing locations. Sales of new and used vehicles increased by $115.9 million, or 21.9%, from $528.5 million to $644.4 million. Unit sales of new and used vehicles increased by 20.7% and 5.7%, respectively, due to the factors listed above. New vehicle prices increased by 4.0% due primarily to changes in Manufacturer pricing. Used vehicle prices increased by 17.1% due to changes in market conditions which resulted in a change in the mix of used vehicles sold. Sales of finance and insurance products increased by $2.8 million, or 11.3%, from $24.7 million to $27.5 million due principally to the Company's successful effort to increase the sale of such products. Service and parts revenues increased by $6.8 million, or 12.8%, from $52.9 million to $59.7 million reflecting both the additional dealerships acquired by the DiFeo Group and an increase in service and parts activity at its existing franchises. GROSS PROFIT. Gross profit increased by $15.6 million, or 22.8%, from $68.4 million to $84.0 million due to the full-year contributions of dealerships acquired during 1993 and a significant increase in gross profit from finance and insurance products and, to a lesser extent, service and parts operations. Gross profit as a percentage of revenues increased from 11.3% to 11.5% due to an increase in the sale of finance and insurance products offset by a decline in vehicle profitability. 30 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased by $13.5 million, or 20.2%, from $66.9 million to $80.4 million due to the full-year contributions of dealerships acquired during 1993 and additions to overhead, principally personnel. Such expenses as a percentage of revenues remained constant at 11.0%. OTHER INTEREST EXPENSE. Interest expense other than floor plan declined by $0.3 million, or 25.0%, from $1.2 million to $0.9 million due to a decrease in outstanding indebtedness resulting from the placement of shares of Class A Preferred Stock for an aggregate price of $15.7 million and of shares of Common Stock for an aggregate price of $0.5 million at the end of December 1993. EQUITY IN LOSS OF UNCOMBINED INVESTEES. Equity in loss of uncombined investees was $2.9 million in 1994. INCOME (LOSS) BEFORE INCOME TAXES. Pretax income from dealership operations declined from a profit of $0.3 million to a loss of $0.2 million due the factors described above. AUTO FINANCE LOSS BEFORE INCOME TAXES. During the first quarter of 1994, the Company formed a wholly owned automobile finance subsidiary, Atlantic Finance, located in Rochester, New York. Losses from its early stage operations totaled $0.6 million in 1994. TOTAL COMPANY MINORITY INTERESTS. Minority interests charge changed by $0.8 million from $0.1 million to $0.9 million due to the factors described above. INCOME TAXES. The provision for income taxes was reduced from $0.1 million to $0.0 in 1994. NET INCOME (LOSS). Net income decreased by $1.8 million from $0.1 million to a loss of $1.7 million due to the factors described above. Liquidity and Capital Resources The cash requirements of the Company are primarily for acquisition of new dealerships, working capital, including inventory, and expansion of existing facilities. Historically, these cash requirements have been met through issuances of equity under the Equity Facility (as defined herein) and issuances of Senior Notes (with Warrants) under the Securities Purchase Agreements, neither of which currently has any availability, borrowings under the Credit Agreement, which will have terminated prior to or upon consummation of the Offering, floor plan facilities and warehouse facilities at Atlantic Finance. At March 31, 1996, the Company had working capital of $2.9 million, including accounts receivable of $38.7 million and inventory of $120.4 million, offset by $27.8 million in accounts payable and accrued expenses and $125.3 million in revolving floor plan financing arrangements. The Company's floor plan lenders limit the aggregate amount of such borrowings by formulas based on the cost of vehicles in inventory. During the first quarter of 1996, operating activities resulted in net cash provided by operations of $4.6 million, principally from income generated by operations and an increase in trade credit. For the first quarter of 1996, the Company used $9.5 million in investing activities, principally for the acquisition of Atlanta Toyota, the net cash cost of which was $8.1 million and capital expenditures of $1.1 million. Net cash provided by financing activities during the first quarter of 1996 totaled $6.0 million, principally from the issuance of capital stock under the Equity Facility (as defined herein) for an aggregate price of $8.6 million and the issuance of additional Senior Notes (with Warrants) in the aggregate principal amount of $7.1 million, net of the repayment of certain short-term debt, principally floor plan. For 1995, operating activities for the automobile dealerships provided cash of $0.7 million. This was due principally to significantly lower inventories due to the implementation of certain controls and procedures designed to maximize inventory turnover, offset by a reduction in floor plan lending available for used car financing. Net cash used by Atlantic Finance operating activities was $8.0 million during 1995 due principally to the origination and warehousing of automobile loans. 31 During 1995, the Company used $25.8 million in investing activities, principally in the acquisition of Landers Auto, the cash cost of which was $20.0 million, and capital expenditures of $1.7 million. Net cash provided by financing activities in 1995 totaled $37.6 million resulting principally from the issuance of capital stock under the Equity Facility for an aggregate price of $25.2 million, the issuance of Senior Notes (with Warrants) in the aggregate principal amount of $16.3 million and a borrowing in the amount of $8.0 million under a short-term credit facility with Morgan Guaranty, net of a reduction in floor plan borrowings of $11.9 million, net borrowings of $4.2 million on the warehouse credit line at Atlantic Finance and certain other costs associated with the issuance of debt and equity securities. In September 1995, the Company entered into the Securities Purchase Agreements providing for the issuance and sale of up to $35 million aggregate principal amount of Senior Notes due 2003 and Warrants to purchase Common Stock. See "Use of Proceeds" and "Description of Capital Stock -- Warrants." The permitted uses of proceeds from the sale of the Senior Notes are to finance acquisitions, to make capital contributions to Atlantic Finance, to make capital expenditures and to provide working capital. As of December 31, 1995 and March 31, 1996, $16.3 million and $23.4 million aggregate principal amount of Senior Notes, respectively, were outstanding. In December 1993, the Company entered into the Equity Facility providing for the issuance and sale of Class A Preferred Stock and Common Stock for an aggregate price of $77.8 million. The initial closing under the Equity Facility occurred in December 1993 and provided aggregate net proceeds of $15.2 million. In addition, in connection with the initial closing under the Equity Facility, shares of then outstanding common stock were converted into shares of Common Stock valued at $10.3 million. Proceeds from subsequent closings under the Equity Facility during 1994, 1995 and 1996 equaled $5.5 million, $25.2 million and $22.5 million, respectively. In addition, proceeds from additional offerings of equity and the Additional Warrants (as defined herein) during July 1996 equaled $4.1 million. The Company finances substantially all of its new and used vehicle inventory under revolving floor plan financing arrangements with General Motors Acceptance Corporation, Chrysler Credit Corporation, World Omni Financial Corp. and Nissan Motor Acceptance Corporation. The floor plan lenders pay the Manufacturer directly with respect to new vehicles. The Company makes monthly interest payments on the amount financed but is not required to make loan principal repayments prior to the sale of new and used vehicles. Substantially all of the assets of the Company's dealerships are subject to security interests granted to their floor plan lending sources. The Company believes that its existing capital resources, including the net proceeds of the Offering, will be sufficient to meet anticipated cash requirements, including those relating to the Contemporaneous Acquisition, through at least the end of 1997. To the extent the Company pursues other significant acquisitions, it will need to raise additional capital either through the issuance of equity or debt securities or through borrowings. There can be no assurance that such required additional capital will be available on reasonable terms, if at all, at such times as required by the Company. Cyclicality The Company's business, as well as the entire automotive retailing industry, is dependent on a number of factors relating to general economic conditions, including the price and availability of fuel, interest rate fluctuations, economic recessions and consumer business cycles. The Company believes its geographic diversity, expansion into automobile financial services and emphasis on service and repair operations help to reduce the overall impact of these general economic factors on the Company. The Company's business, however, may be materially adversely affected by severe adverse economic conditions. Seasonality The Company's combined business is modestly seasonal overall. The greatest seasonalities exist in the DiFeo Group, which operates in the New York metropolitan area. At the DiFeo Group, the second and third quarters are the strongest with the fourth and first quarters the weakest with respect to sales and profits relating to vehicle sales. The service and parts business at all dealerships experiences relatively modest seasonal fluctuations. At Landers Auto and at Atlanta Toyota, seasonality in all business sectors is modest. 32 Effects of Inflation The Company believes that the relatively moderate rates of inflation over the last few years have not had a significant impact on revenue or profitability. The Company does not expect inflation to have any near-term material effects on the sale of its products and services. However, there can be no assurance that there will be no such effect in the future. The Company finances substantially all of its inventory through various revolving floor plan arrangements with interest rates which vary based on the prime rate or LIBOR. Such rates have historically increased during periods of increasing inflation. The Company does not believe that it would be at a competitive disadvantage should interest rates increase due to increased inflation since most other automobile dealers have similar floating rate borrowing arrangements. Recent Accounting Pronouncements In October 1995, The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation ("SFAS 123"). SFAS 123 establishes financial and reporting standards for stock based compensation plans. The Company anticipates adopting the disclosure only provisions of this standard during 1996. In June 1996, The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" ("SFAS 125"). SFAS 125 establishes financial and reporting standards for derecognition of certain liabilities. The Company is currently assessing the impact that this standard may have on its financial position and results of operations. 33 Business Overview UAG is a leading acquirer, consolidator and operator of franchised automobile and light truck dealerships and related businesses. The Company believes that, after giving effect to the Contemporaneous Acquisition, it will be the fourth largest retailer of new motor vehicles in the United States, operating 38 franchises located in Arizona, Arkansas, Connecticut, Georgia, New Jersey and New York and representing 25 American, Asian and European brands. As an integral part of its dealership operations, UAG sells used vehicles. In addition, the Company has recently established four stand-alone used car retail centers. All of UAG's dealerships include integrated service and parts operations, which are an important source of recurring revenues. The Company also owns Atlantic Finance, an automobile finance company engaged in the purchase, sale and servicing of prime credit quality automobile loans originated by both UAG and third-party dealerships. For 1995, on a pro forma basis, UAG had revenues in excess of $1.27 billion and sold 36,947 new and 18,353 used vehicles. The Company was formed to capitalize on consolidation opportunities within the highly fragmented $660 billion automotive retailing industry. In 1995, approximately 22,000 dealerships representing more than 48,000 franchises sold 14.8 million new vehicles and 15.7 million used vehicles for sales of $290 billion and $180 billion, respectively. Yet, the Company estimates that the largest 100 dealership groups generated less than 10% of these total revenues and control less than 5% of all franchised dealerships. As capital requirements to operate dealerships continue to increase and many owners who were granted franchises in the 1950s and 1960s approach retirement age, many individual dealers are seeking exit opportunities. These conditions present attractive consolidation opportunities for larger automobile retailers such as UAG. Since its initial acquisition in 1992, the Company has completed 11 additional acquisitions, including the Contemporaneous Acquisition. Management believes that UAG is well-positioned to continue capitalizing on the consolidation trend in the automotive retailing industry due to its proven acquisition history, diverse geographic presence, substantial size and financial resources. The Company believes that it enjoys significant competitive advantages. The Company's diverse product portfolio reduces the risks associated with changes in consumer preferences and dependence on any single brand or market segment. Geographic diversity mitigates the Company's exposure to regional economic and weather conditions. In addition, the Company's large size allows it to centralize certain administrative functions and negotiate favorable pricing on certain automotive parts, aftermarket products, supplies and advertising. Furthermore, the Company benefits from superior access to capital as compared to smaller dealerships. Growth Strategy UAG seeks to lead the consolidation of the automotive retailing industry and increase stockholder value through a growth strategy focused on (i) acquiring profitable dealership operations, (ii) leveraging its new car franchises to grow higher-margin businesses and (iii) generating incremental revenue from its automobile finance business. ACQUIRE PROFITABLE DEALERSHIP OPERATIONS UAG seeks to capitalize on continuing consolidation in the U.S. automotive retailing industry by selectively acquiring profitable dealerships. The Company targets dealerships or dealership groups with established records of profitability and customer satisfaction as well as experienced management willing to remain in place. The Company focuses on opportunities in geographic markets with above-average projected population and job growth. Of the approximately 22,000 dealerships in the United States, the Company believes that at least 2,000 dealerships, some of which are members of dealership groups, meet its acquisition criteria. The Company's acquisition program has been specifically tailored to address dealers' desire to retain a management role in their businesses while achieving personal liquidity. Owners of acquired dealerships typically continue in their role as dealership manager and some also participate in overall Company operations through their roles on UAG's Operating Committee. The Company believes it provides dealership managers additional management tools as its economies of scale, marketing expertise and corporate resources act as a catalyst for continual dealership growth. In addition, the owner may retain an equity interest in the business through the ownership of capital stock and/or stock options of UAG. 34 GROW HIGHER-MARGIN BUSINESSES UAG is leveraging its new car franchises and applying its financial resources to grow higher-margin businesses such as the retail sale of used vehicles, aftermarket products and service and parts. USED VEHICLES. Used vehicle sales by franchised dealers, with average prices approximately 58% of new vehicle prices, typically generate higher gross margins than new cars because of limited comparability among them and the somewhat subjective nature of their valuation. Consumer acceptance of used vehicle purchasing has grown due principally to the following factors: (i) the availability of late-model, low-mileage used automobiles has increased due to the large supply of cars coming off short-term leases and from rental company fleets; (ii) the quality of motor vehicles has generally improved; and (iii) the prices of new cars have risen. The Company has taken advantage of this trend by recently opening four stand-alone used vehicle operations. UAG believes that by virtue of its new vehicle franchises it enjoys significant advantages over both independent and chain used-car companies in sourcing used vehicles. Specifically, the Company has access to (i) a steady supply of used cars accepted as trade-ins for new vehicle purchases, (ii) off-lease vehicles that were originally leased through the new vehicle franchise and (iii) used car auctions open only to new car dealers. In addition, only new car franchises are able to sell used cars certified by the Manufacturer under newly introduced programs in which the Manufacturer supports specific high-quality used cars with extended warranties and attractive financing options. AFTERMARKET PRODUCTS. Each sale of a new or used vehicle provides the opportunity for the Company to sell aftermarket products. A substantial portion of the gross profit on the sale of a vehicle generally is earned from the sale of aftermarket products. Aftermarket products include accessories such as radios, cellular phones, alarms, custom wheels, paint sealants and fabric protectors, as well as agency services such as extended service contracts and credit insurance policies. In addition, the Company receives fees for placing financing and lease contracts. In order to meet customers' needs and help create a "one-stop" shopping experience, management continues to expand aftermarket product offerings. SERVICE AND PARTS. Each of UAG's dealerships offers a fully integrated service and parts department. The service and parts business provides an important recurring revenue stream to the Company's dealerships, which may help to mitigate the effects of downturns in the automobile sales cycle. Unlike independent service shops or used car dealerships with service operations, UAG is qualified to perform work covered by Manufacturer warranty. Since warranty service work is paid for by the Manufacturer, consumers are motivated to service their vehicles at a dealership for the warranty period. In recent years, Manufacturers have generally lengthened standard warranty coverage on new cars to three years/36,000 miles and introduced warranty coverage on used cars, further enhancing customer retention opportunities in the service area. To grow their service and parts businesses, UAG dealerships have implemented programs to track maintenance records of customers and contact them regarding dealer promotions and maintenance schedules. In addition, the Company is actively marketing warranty-covered services to potential customers such as municipalities and corporations with large fleets of automobiles located near certain of its dealerships. The Company is able to offer repair services to such customers on a more efficient and less costly basis than such customers generally can perform themselves. The Company believes that its market share will grow at the expense of independent mechanics' shops, which may be unable to address the increased mechanical and electronic sophistication of today's motor vehicles and the increased expenses of compliance with more stringent environmental regulations. GENERATE INCREMENTAL REVENUE FROM AUTOMOBILE FINANCE BUSINESS In 1995, industry wide, approximately 71% of new and 60% of used automobile purchases were financed. To capitalize on this market, the Company established Atlantic Finance, its own automobile finance subsidiary. Atlantic Finance purchases, sells and services prime credit quality automobile loans originated by both UAG and third-party dealerships. Based in Rochester, New York, Atlantic Finance commenced loan operations in January 1995 and currently serves approximately 127 dealerships in Connecticut, New Jersey and New York. Atlantic Finance provides the Company with another opportunity to earn incremental revenue on its vehicle sales. Atlantic Finance's strategy is to grow by (i) increasing its business with existing UAG dealerships, including those with which it has yet to commence financing activities, (ii) commencing financing activities with dealerships acquired by 35 UAG in the future and (iii) using its presence in its local operating markets to cultivate relationships with additional unaffiliated dealerships. Atlantic Finance's goal is to ultimately purchase up to 50% of its finance contracts from non-UAG dealers. Operating Strategy EMPHASIZE CUSTOMER SERVICE Central to UAG's overall philosophy is customer-oriented service designed to meet the needs of an increasingly sophisticated and demanding automotive consumer. The Company seeks to provide its customers with a satisfying, pleasant and informative retailing experience, which entails "one-stop" shopping convenience, competitive pricing and a sales staff that is knowledgeable about product offerings and responsive to a customer's particular needs. The Company's goal is to establish lasting relationships with its customers, which it believes enhance its reputation in the community and create the opportunity for significant repeat and referral business. The quality of customer service provided by dealerships' sales and service departments are measured by CSI scores, which are derived from data accumulated by Manufacturers through individual customer surveys. UAG relies on this data to improve dealership operations and uses it as a factor in determining the compensation of general managers and sales and service personnel in all its dealerships. CSI coordinators are responsible for ensuring top quality customer service at the Company's dealerships. Training of the sales force focuses on providing skills that improve its interaction with the customer. Additional training is provided by organizations with superior reputations for customer service, which the Company has engaged in its ongoing effort to refine the automobile purchasing experience. The Company's most recent CSI scores indicate that substantially all of its dealerships ranked at or above the average CSI scores for their regions. EMPLOY PROFESSIONAL MANAGEMENT TO IMPROVE OPERATIONS The Company implements professional management practices throughout its business operations. To ensure "best practices" are promoted throughout the organization, the Company has established an Operating Committee comprised of the Company's Chairman and Chief Executive Officer and select dealership managers, which meets monthly to share business experiences and ideas. See "Management -- Operating Committee." The Company applies financial controls which exceed those required by Manufacturers and those customarily found at the typical dealership. Currently, the Company's dealerships' management information systems collect operational data such as customer records, invoicing, payroll and inventory, as well as routine accounting information. The dealerships also maintain customer data bases that track information such as showroom traffic, aftermarket product purchases and service and parts usage, which are utilized in pursuing follow-on sales opportunities. Industry Overview With more than $660 billion in 1995 sales, automotive retailing is the third largest domestic industry group in the United States, representing nearly 5% of U.S. gross domestic product. The industry is highly fragmented and largely privately held with approximately 22,000 automobile dealerships representing more than 48,000 franchises. In 1995, U.S. franchised automobile dealers sold 14.8 million new vehicles and 15.7 million used vehicles for sales of approximately $290 billion and $180 billion, respectively. Manufacturers originally established franchised dealer networks for the distribution of their vehicles as single-dealership, single-owner operations. In return for exclusive distribution rights within specified territories, Manufacturers exerted significant influence over such matters as a dealer's location, inventory size and composition and merchandising programs, as well as the identity of owners and managers. This strict control contributed to the proliferation of small dealerships, which at their peak in the late 1940s numbered in excess of 49,000. Several Manufacturers went out of business in the 1950s, and the number of dealerships decreased to 36,000 by 1960. Significant industry changes took place in the 1970s when the oil embargo forced dramatic increases in gasoline prices and foreign Manufacturers increased their penetration of the U.S. market with fuel-efficient, low-cost vehicles. These competitive pressures offered dealers a platform for stronger negotiating positions with Manufacturers thereby fostering a change in the traditional distribution system. Dealers began to add foreign franchises and the phenomenon of the multi-franchise automobile dealer, or "megadealer," emerged, prompting both significant acquisition activity 36 and the consolidation activities of the 1980s. The easing of restrictions against megadealers combined with continual competitive pressures upon undercapitalized dealerships has led to further consolidation of the industry. Since 1960, the number of dealerships has declined 39% to the current 22,000 level. As the industry has evolved, so has the dealership profile. Over the past three decades, there has been a trend toward fewer, but larger, dealerships. In 1995, each of the largest 100 dealer groups had more than $140 million in revenues. Although significant consolidation has taken place since its inception, the industry today remains highly fragmented, with the largest 100 dealer groups generating less than 10% of total revenues and controlling less than 5% of all franchised dealerships. Dealership Operations The Company's management structure is designed to support and encourage entrepreneurial drive and individual responsibility. Each dealership is operated as a distinct profit center, where dealership managers are given a high degree of autonomy. The Company believes that its dealership managers, as long-time members of the local community, are best able to judge how to conduct day-to-day operations in a manner consistent with the established character and needs of the local community. A general manager oversees the operations, personnel and financial performance of the dealership, which is typically staffed by a sales manager, a parts manager, a service manager, sales representatives, technicians and parts employees. The sales staff of each UAG dealership is compensated primarily on a commission basis, while the general manager, service manager and parts manager receive a combination of salary and performance bonus. General managers prepare monthly forecasts based on historical information and projected trends, and a component of each general manager's compensation is determined by meeting or exceeding these operating plans. During the year, general managers regularly review their dealerships' progress with senior management and make appropriate adjustments as needed. To promote communication and efficiency in operating standards, general managers and members of senior management attend several Company-wide strategy sessions each year. In addition, management attends various industry-sponsored leadership and management seminars and receive continuing education in product, marketing strategies and management information systems. The Company's dealerships engage in a number of interrelated businesses: new vehicle sales; used vehicle sales; sales of aftermarket products; and service and parts operations. 37 NEW VEHICLES On a pro forma basis, in 1995, UAG sold at retail 36,947 new vehicles, generating $823.6 million in revenues, or 64.7% of total auto dealership revenues. The Company sells 25 American, Asian and European brands ranging from economy cars to luxury cars and sport utility vehicles. The following table sets forth, on a pro forma basis for 1995, certain information relating to new vehicles sold at retail by the Company:
------------------------------------ Number of New % of New Vehicles Sold at Vehicles Sold at Manufacturer Retail Retail (1) - ---------------------------------- ---------------- ------------------ Toyota 11,456 31.0% Chrysler 7,661 20.7 Nissan 5,693 15.4 General Motors 4,204 11.4 Saturn 2,330 6.3 Honda 1,661 4.5 Mitsubishi 1,087 2.9 BMW 1,042 2.8 Hyundai 862 2.3 Land Rover 378 1.0 Jaguar 201 0.5 Isuzu 159 0.4 Audi 81 0.2 Porsche 75 0.2 Suzuki 57 0.2 ---------------- ------------------ Total 36,947 100.0% ---------------- ------------------ ---------------- ------------------
- ------------------------ (1) Amounts may not add due to rounding. UAG purchases substantially all of its new car inventory directly from Manufacturers. Manufacturers allocate inventory based on the size and location of dealerships, but actual shipments result from negotiations with individual dealers. From time to time, UAG will exchange new vehicles with other dealerships to accommodate customer demand and balance inventory. The Company believes that larger dealers such as UAG are better positioned to secure favorable inventory shipments and optimize Manufacturers' allocations through its retail network. UAG finances its inventory purchases through revolving credit arrangements known in the industry as floor plan facilities. As a result of its size, UAG is able to secure floor plan financing on terms more favorable than those generally available to smaller dealers. As required by law, UAG posts the Manufacturer's suggested retail price, or "MSRP," on every new vehicle. However, as is customary in the industry, the final sales price is generally a negotiated price. The Company continues to evaluate changing consumer preferences for vehicle purchasing. Three of the Company's dealerships currently use "haggle-free" pricing and certain dealerships have implemented "value pricing," where the dealer is given less flexibility to negotiate between the MSRP and wholesale price. New vehicle retail sales are made to individual customers and to leasing companies providing consumer leasing. Industry wide, the percentage of new vehicle retail sales that are leasing transactions has increased from 13.5% in 1990 to 31.5% in 1995. Manufacturers have encouraged this trend through their captive finance companies by supporting residual values in such a way so as to reduce consumers' monthly lease payments, particularly for shorter-term leases. This method has attracted consumers to shorter-term leases, which has the effect of bringing the consumer back to the market sooner than if the purchase were debt financed and providing new car dealerships with a steady source of late-model, off-lease vehicles for their used car inventory. In addition, because the vehicle usually remains under factory warranty for the term of the lease, the dealership has the opportunity to provide repair service to the lessee. 38 USED VEHICLES On a pro forma basis, in 1995, UAG sold at retail approximately 18,353 used vehicles, generating $230.9 million in revenues, or 18.2% of total auto dealership revenues. The used car department is becoming an increasingly significant profit center of a franchised dealership. Used vehicles typically generate higher gross margins than new vehicles because of their limited comparability and the somewhat subjective nature of their valuation. Profits from used cars sales are dependent primarily on the ability to source a low-cost, high-quality supply and effectively manage inventory. UAG's dealerships acquire their used cars through trade-ins, lease expirations and auctions. Off-lease vehicles are regarded as the highest quality in their age class due to their low mileage and good condition relative to fleet and rental vehicles. When a leasing customer declines to purchase the vehicle upon expiration of the lease, industry practice is to offer it to the dealer that originated the transaction before it is offered to other dealers or sold at auction. In addition, UAG purchases a significant portion of its used car inventory at "closed" auctions, which offer off-lease, rental and fleet vehicles. Such auctions can be attended only by new car dealers. The balance of its used car inventory is purchased at "open" auctions, which offer repossessed cars and cars sold by other dealers. The Company has specialized used car managers who attend auctions several times a week and can buy for an entire division. The Company sells used vehicles at its franchised dealerships as well as at four stand-alone used vehicle operations. At its multi-brand dealerships, trade-ins obtained at one location are generally transferred to the location that sells that particular brand of new vehicles, where customer interest for that brand is likely to be stronger and the salespersons' knowledge of that brand is typically greater. A well-stocked used vehicle inventory allows the Company's salespersons to offer high-quality used vehicles not only to customers shopping for a used vehicle, but also to customers who come to the dealership to buy a new vehicle and then realize that they cannot afford one. In order to capitalize further on the increased popularity of used cars, the Company has opened four "stand-alone" used car centers. Two operate in the DiFeo Group under the name "UAG AutoMart" and two operate as part of the Landers Auto division under the "Landers" name. As a result of these and other initiatives, the Company expects its used car sales to increase as a percentage of total vehicle sales in the future. The Company has developed a systematic approach to managing its used car inventory. Poor-quality trade-ins and used cars that have remained unsold for a specific period of time varying generally from 60 to 75 days are sold at auction. In the past, the volume of used cars that UAG has sold to certain auctions has afforded it seller's fee discounts and favorable display locations and times, which tend to maximize the vehicle's sale price. The Company has taken several initiatives to enhance customer confidence in used cars, including offering extended warranties, stocking higher-quality, late-model used cars and participating in Manufacturer certification programs. Under such certification programs, which are available exclusively to new car dealers, Manufacturers support used vehicles with extended factory warranties and attractive financing options. The Company performs the rigorous inspections and reconditioning required for certification. Management believes that its size is an advantage over smaller new car dealers, who may not receive a sufficient supply to justify dedicating resources to the certification process. The Company believes that its status as a franchised new car dealer provides it a distinct competitive advantage over independent used car sellers and superstores in terms of access to the highest-quality and lowest-cost supply of used vehicles. Vehicles traded in for used cars are generally older, of poorer quality and out-of-warranty compared to trade-ins received at a new car franchise. New car dealers generally have the first opportunity to purchase the desirable off-lease vehicles, while independents must bid for the remaining vehicles and subsequently may incur brokerage fees and costs of transporting them to their stores. Auctions of off-lease and fleet vehicles and rental cars with guaranteed Manufacturer buyback are open only to franchised new car dealers. In addition to advantages in sourcing used cars, management believes that its affiliation with Manufacturers and ability to offer certified used cars with factory warranties raises the consumer's level of trust and ultimately their inclination to buy used cars from franchised rather than independent sellers. 39 AFTERMARKET PRODUCTS On a pro forma basis, in 1995, UAG's sales of aftermarket products generated $112.2 million in revenues, or 8.8% of total auto dealership revenues. The reporting of sales of certain products in this category varies among UAG's dealerships with certain dealerships treating the sale of products such as radios and alarms as part of the sale of the vehicle itself. UAG earns a significant portion of the gross profit on the sale of new and used vehicles on the sale of aftermarket products. Aftermarket products include accessories such as radios, cellular phones, alarms, custom wheels, paint sealants and fabric protectors, as well as agency services such as extended service contracts and credit insurance policies. In addition, the Company receives fees for placing financing and lease contracts. The Company believes that working closely with its customers to identify suitable financing products enhances the Company's overall profitability by increasing the percentage of vehicle purchases financed through its dealerships and by reducing the subsequent default rate on such financing contracts. Approximately 80% of customers who purchase or lease new and used vehicles from or through the Company originate financing or lease contracts through the dealership. UAG earns a fee from the finance provider in its diverse network of finance companies and leasing companies that accepts and funds the transaction without recourse to the dealership on the contract principal amount. The Company is, however, typically assessed a chargeback against a portion of the finance fee if the contract is terminated prior to its scheduled maturity for any reason, such as early repayment or default. UAG has relationships with financing sources across the credit quality spectrum. As a result, the Company is able to service practically any customer who requires financing. At the time of a new vehicle sale, the Company offers extended service contracts to supplement warranties offered by Manufacturers. UAG also sells extended service contracts with respect to used vehicles. Currently, the Company sells third-party extended service contracts and recognizes the associated revenue at the time of the vehicle sale. On a pro forma basis, in 1995, the Company sold extended service contracts on 25% and 40% of its new and used vehicle sales, respectively. The Company also offers certain types of credit insurance to customers who finance their vehicle purchases through the Company. Such policies generally provide for repayment of the vehicle loan if the obligor dies before the loan is fully repaid. The Company also sells accident and health insurance policies which provide payment of the monthly loan obligations during any period in which the obligor is disabled. The Company receives a commission upon the sale of a policy and a bonus based on whether payments are made under the policy. SERVICE AND PARTS On a pro forma basis, in 1995, UAG's service and parts operations generated $105.0 million in revenues, or 8.3% of total auto dealership revenues. The Company considers its service and parts business integral to its objective of providing customers with a satisfying and informative dealership experience, thereby creating an opportunity to strengthen customer loyalty. The service and parts business is relatively stable and provides an important recurring revenue stream to the Company's dealerships, which may help to mitigate the effects of downturns in the automobile sales cycle. UAG measures the performance of each dealership's service and parts operations in terms of "absorption rate," which measures the percentage of the dealership's overall fixed costs covered by service and parts gross profit. For the three months ended March 31, 1996, the average absorption rate at the Company's dealerships (not on a pro forma basis) was 47%. The Company currently targets an absorption rate of between 60% and 70%. The Company has a total of 527 service bays and 70 paint bays throughout its network. The Company's service and body shop facilities are equipped with technologically advanced tools and diagnostic equipment and staffed by Manufacturer-trained and certified service technicians. The Company's service technicians perform full-service repairs on all brands of vehicles UAG sells. UAG dealerships feature various combinations of fully equipped service and body shop facilities capable of handling almost any type of vehicle repair on virtually any type of vehicle, from rebuilding entire engines to routine maintenance functions, including tune-ups, oil changes, tire balancing, front-end alignments and inspections. UAG dealerships offer such services in a relaxed and accommodating atmosphere. Most UAG dealerships have lounges equipped with televisions, recliners, sofas, phones and food and beverage machines to allow customers to relax or conduct business while waiting for service to be performed. 40 The Company performs both warranty and non-warranty service work, with the cost of the warranty work being paid by the Manufacturer at retail consumer rates. Manufacturers permit warranty work to be performed only at franchised dealerships. Hence, unlike independent service shops or used car dealerships with service operations, UAG is qualified to perform work covered by Manufacturer warranties. UAG's factory-certified service employees regularly attend Manufacturer-sponsored training programs to remain abreast of current diagnostic and repair and maintenance techniques. The Company employs a compensation program for its service technicians designed to encourage the performance of expedited and high-quality repair and maintenance services and ensure a high degree of customer satisfaction. Rather than paying service technicians on an hourly basis, each technician receives a flat rate for each service or repair performed. If a service or repair is performed incorrectly, the technician making the initial repair or service must correct the situation without additional compensation. This compensation arrangement facilitates the retention of efficient service technicians who can increase their compensation by expeditiously and accurately completing service and repairs and also enhances customer satisfaction for repair jobs that are completed correctly the first time. The Company's body shops, which include multiple paint bays, are fully equipped to make virtually any type of body repair, from complete reconstruction of vehicle frames damaged in accidents to repairs and replacements of hoods, body panels and fenders. UAG dealerships' body shops are also used to refurbish vehicles in need of updating due to changes in industry standards or to satisfy regulatory guidelines. The parts departments support the Company's sales and service functions. The Company utilizes its parts department when performing its repair, maintenance and body shop services, including all parts required to recondition used vehicles for resale. In addition to supporting the Company's service and body shop functions, the Company markets its parts and accessories at its dealerships to those customers who prefer to perform maintenance and repair of vehicles on their own. An important goal of the Company is to retain or convert each purchaser of a vehicle into a customer of the service department. To that end, UAG has implemented a program which tracks maintenance records of customers and contacts them regarding dealer promotions and maintenance schedules. After a repair or service has been completed, the customer is called to determine whether he or she is completely satisfied. In addition, the Company is actively marketing its warranty-covered services business to potential higher-volume service customers such as municipalities and corporations with large motor vehicle fleets located near certain of its dealerships. The Company is able to offer repair services to such customers on a more efficient and less costly basis than such customers generally can perform themselves. Atlantic Finance Atlantic Finance is the Company's automotive finance subsidiary engaged in the purchase, sale and servicing of motor vehicle installment contracts originated by both UAG and third-party dealerships. Based in Rochester, New York, Atlantic Finance commenced loan operations in January 1995 and currently serves approximately 127 dealers in Connecticut, New Jersey and New York. Atlantic Finance derives its revenues from three primary areas: finance charges on its automobile contracts; gains in connection with the sale or securitization of pools of automobile contract receivables; and service fees, late charges and other related income. Atlantic Finance's strategy is to grow by (i) increasing its business with existing UAG dealerships, including those with which it has yet to commence financing activities, (ii) commencing financing activities with dealerships acquired by UAG in the future and (iii) using its presence in its local operating markets to cultivate relationships with additional unaffiliated dealerships. While as of March 31, 1996, 81% of its $32.1 million in finance contracts were originated by UAG dealers, Atlantic Finance is not intended to be a captive finance company. Rather, Atlantic Finance's goal is to ultimately purchase up to 50% of its finance contracts from non-UAG dealers. With over 70 years of collective experience in the consumer finance industry, the three members of Atlantic Finance's senior management expect to expand Atlantic Finance's business by demonstrating commitment to dealer service, achieving cost efficiencies through a centralized operations structure, pursuing cost-effective sources of capital for business growth and focusing on high-quality credit, as described below. DEALER SERVICE. Atlantic Finance's goal is to be a service-oriented and reliable source for financing. Atlantic Finance sales representatives solicit dealers who meet Atlantic Finance's standards and enter into a dealer agreement that 41 outlines contract purchase terms. After a loan application is delivered, usually by fax from the dealer, Atlantic Finance generally responds within two hours. If an application is not initially acceptable, Atlantic Finance's loan officers often suggest modifications to meet Atlantic Finance's standards, such as increasing the down payment or reducing the term of the loan. CENTRALIZED OPERATIONS. Atlantic Finance believes that it can effectively service its dealers from a central site without the cost of duplicating administrative and order processing functions in multiple locations. Atlantic Finance employs local sales representatives who are responsible for different geographic territories and constitute a flexible, cost efficient means for rapid growth. SOURCES OF CAPITAL. Atlantic Finance currently has available an aggregate of $85 million under its revolving credit facilities, known in the industry as warehousing programs, with Citibank, N.A. (and an affiliate thereof) and Morgan Guaranty. Atlantic Finance uses automobile loans as collateral to borrow from such banks. Once the warehoused amount reaches a specified level, Atlantic Finance issues securities to investors at a fixed rate, collateralized by the bundled loans, and continues to service the receivables for a fee. The net proceeds of these securitizations are used by Atlantic Finance to repay outstanding loans under its credit facilities, which enables Atlantic Finance to redeploy its capital for further loans. Atlantic Finance benefits from its affiliation with UAG by receiving favorable lending terms and access to capital markets as a source of financing. On July 19, 1996, Atlantic Finance, through a wholly owned, special-purpose subsidiary, completed a private placement of $45.8 million aggregate principal amount of 6.7% Asset Backed Certificates. Such certificates represent fractional undivided interests in a trust consisting primarily of a pool of automobile loan receivables. Atlantic Finance will service the receivables for an annual fee equal to 1.0% of the principal amount of receivables plus certain supplemental fees. Under certain conditions, Atlantic Finance is obligated to repurchase receivables in the event of breach of certain representations and warranties with respect to the receivables and in the event of breach of certain servicing obligations and covenants of Atlantic Finance. On the basis of a credit enhancement insurance policy issued by Financial Security Assurance Inc. for the benefit of the holders of certificates, the certificates were rated "AAA" by Standard & Poor's Rating Services and "Aaa" by Moody's Investors Service, Inc. HIGH-QUALITY CREDIT. Atlantic Finance finances only prime quality loans and believes its ability to effectively evaluate and monitor the creditworthiness of the dealers' customers is a critical component to this focus. To support its evaluation process, Atlantic Finance uses sophisticated processing systems and controls that include an evaluation of multiple credit bureau reports and a computerized scoring system. Every loan is ultimately reviewed by an experienced loan officer for final approval. In addition to the creditworthiness of the customer, pricing of a finance contract is based on several criteria such as the age of the vehicle, the term of the loan, prevailing interest rates and Atlantic Finance's cost of capital. Most states have maximum chargeable interest rates that vary greatly from state to state. Once the loan is approved, Atlantic Finance monitors customer accounts on a regular basis. If an account is delinquent, Atlantic Finance works with customers to resolve payment problems and bring accounts current at the earliest possible stage of delinquency. In the event of an unremedied default, the finance company will repossess the vehicle and sell it to a dealer, sometimes UAG, or at public auction. 42 Set forth below are tables indicating delinquency experience of Atlantic Finance (which commenced loan operations in January 1995) as of the end of each of the past four fiscal quarters and its loss experience for such periods: Historical Delinquency Experience (1)(2)
-------------------------------------------------------------------------------------------------- June 30, 1995 September 30, 1995 December 31, 1995 March 31, 1996 ------------------------ ------------------------ ---------------------- ---------------------- DOLLARS IN THOUSANDS # of Loans Amount # of Loans Amount # of Loans Amount # of Loans Amount ------------- --------- ------------- --------- ----------- --------- ----------- --------- Portfolio outstanding at period end 244 $ 2,825 553 $ 6,623 1,240 $ 15,799 2,419 $ 32,079 Percent delinquent 31-60 days(3) 0.36% 0.78% 1.13% 1.26% 1.08% 1.23% 61-90 days(3) 0.04% 0.07% over 90 days(3) Repossessions on hand (4) 0.24% 0.33% 0.50% 0.47% -- --------- --- --------- ----- --------- ----- --------- Total 0.36% 0.78% 1.37% 1.58% 1.61% 1.78% -- -- --------- --- --------- ----- --------- ----- --------- --------- --- --------- ----- --------- ----- ---------
- ------------------------ (1) The information in this table includes all loans outstanding and serviced by Atlantic Finance. (2) As all of the Atlantic Finance's loans are simple interest, the dollar amount includes only the principal balance. (3) The period of delinquency is based on the number of days payments are contractually past due. (4) Amounts represent the remaining balance of installment loans relating to reposessed vehicles as a percentage of the total principal amount all loans outstanding and serviced by Atlantic Finance. Historical Loan Loss Experience
-------------------------------------------------------- June 30, September 30, December 31, March 31, DOLLARS IN THOUSANDS 1995 1995 1995 1996 ---------- -------------- -------------- ------------ Average portfolio(1) $1,657 $4,725 $11,211 $23,939 Losses(2) 28.6 Recoveries(3) 0.5 Net losses 28.1 Net losses as a percentage of average portfolio (annualized) 0.47%
- ------------------------ (1) Represents the average of the beginning and ending balance for the period. (2) Represents principal amounts charged off as uncollectible. (3) Represents principal amounts recovered on accounts previously charged off. Competition AUTOMOBILE DEALERSHIPS The automotive retailing industry is extremely competitive. In large metropolitan areas, consumers have a number of choices in deciding where to purchase a new or used vehicle and where to have such a vehicle serviced. In the new vehicle area, the Company competes with other franchised dealers in each of its marketing areas. The Company does not have any cost advantage in purchasing new vehicles from the Manufacturer, and typically relies on advertising and merchandising, sales expertise, service reputation and location of its dealerships to sell new vehicles. In recent years, automobile dealers have also faced increased competition in the sale of new vehicles from independent leasing companies, on-line purchasing services and warehouse clubs. These companies may be capable of operating on smaller gross margins than can franchised dealers because of lower overhead and sales costs. In used cars, the Company competes with other franchised dealers, independent used car dealers, automobile rental agencies, private parties and used car supercenters for supply and resale of used vehicles. The Company believes that it enjoys certain advantages over its competitors that sell only used cars. See "-- Growth Strategy -- Grow Higher-Margin Businesses -- Used Vehicles." The Company believes that the principal competitive factors in vehicle sales are the marketing campaigns conducted by Manufacturers, the ability of dealerships to offer a wide selection of the most popular vehicles, the location of 43 dealerships and the quality of customer service. Other competitive factors include customer preference for particular brands of automobiles, pricing (including Manufacturer rebates and other special offers) and warranties. The Company believes that its dealerships are competitive in all of these areas. The Company competes against franchised dealers to perform warranty repairs and against other automobile dealers, franchised and unfranchised service center chains and independent garages for non-warranty repair and routine maintenance business. The Company competes with other automobile dealers, service stores and auto parts retailers in its parts operations. The Company believes that the principal competitive factors in parts and service sales are price, the use of factory-approved replacement parts, the familiarity with a Manufacturer's brands and models and the quality of customer service. A number of regional or national chains offer selected parts and services at prices that may be lower than the Company's prices. ATLANTIC FINANCE Atlantic Finance faces competition from a variety of lenders in the fragmented auto finance market: captive finance companies, banking institutions and independent finance companies. Captive finance companies such as General Motors Acceptance Corporation, Ford Motor Credit Company and Chrysler Credit Corporation primarily focus on increasing dealer sales volume by offering low-yield rates when promoting certain products. In general, captive finance companies provide standardized products and fixed market rates and are not as flexible in the marketplace. Captive finance companies also provide automobile dealers with floor plan financing. Independent auto finance companies focus on unconventional segments of the market with some lending to lower credit borrowers in exchange for higher yields. The market shares of these companies are as follows: approximately 36% of the total auto loans outstanding are held by captive and independent finance companies, another 46% are controlled by commercial banks and the remaining 18% are held by savings and loan institutions, savings banks, credit unions and specialty finance companies. The Company believes that the principal competitive factors in offering financing are convenience, interest rates and contract terms. While market shares shift over time, the trend in the banking market share is toward fewer and larger super-regional competitors, reflecting the ongoing consolidations in that industry. As in the case of Atlantic Finance, some finance companies are organized by large dealership groups as part of a vertical integration strategy. Franchise Agreements Each of the Company's dealerships operates pursuant to a franchise agreement between the applicable Manufacturer and the subsidiary of the Company that operates such dealership. The typical automotive franchise agreement specifies the locations at which the dealer has the right and the obligation to sell motor vehicles and related parts and products and to perform certain approved services in order to serve a specified market area. The designation of such areas and the allocation of new vehicles among dealerships are subject to the discretion of the Manufacturer, which generally does not guarantee exclusivity within a specified territory. A franchise agreement may impose requirements on the dealer concerning such matters as the showrooms, the facilities and equipment for servicing vehicles, the maintenance of inventories of vehicles and parts, the maintenance of minimum net working capital and the training of personnel. Compliance with these requirements is closely monitored by the Manufacturer. In addition, Manufacturers require each dealership to submit a financial statement of operations on a monthly and annual basis. The franchise agreement also grants the dealer the non-exclusive right to use and display Manufacturer's trademarks, service marks and designs in the form and manner approved by the Manufacturer. Each franchise agreement sets forth the name of the person approved by the Manufacturer to exercise full managerial authority over the dealership's operations and the names and ownership percentages of the approved owners of the dealership and contains provisions requiring the Manufacturer's prior approval of changes in management or transfers of ownership of the dealership. Each of UAG's dealerships is owned, directly or indirectly, by the Company at the subsidiary level, and, prior to the Offering, the Company will have obtained the approval of each relevant Manufacturer to conduct the Offering and for the Common Stock to be publicly traded. A number of Manufacturers, however, will continue to prohibit the acquisition of a substantial ownership interest in the Company or transactions that may affect management control of the Company, in each case without the approval of the Manufacturer. See "Risk Factors -- Stock Ownership/Issuance Limits." Most franchise agreements expire after a specified period of time, ranging from one to five years. The typical franchise agreement provides for early termination or non-renewal by the Manufacturer under certain circumstances 44 such as change of management or ownership without Manufacturer approval, insolvency or bankruptcy of the dealership, death or incapacity of the dealer manager, conviction of a dealer manager or owner of certain crimes, misrepresentation of certain information by the dealership or dealer manager or owner to the Manufacturer, failure to adequately operate the dealership, failure to maintain any license, permit or authorization required for the conduct of business, or material breach of other provisions of the franchise agreement. The dealership is typically entitled to terminate the franchise agreement at any time without cause. The automobile franchise relationship is also governed by various federal and state laws established to protect dealerships from the general unequal bargaining power between the parties. The state statutes generally provide that it is a violation for a Manufacturer to terminate or fail to renew a franchise without good cause. These statutes also provide that the Manufacturer is prohibited from unreasonably withholding approval for a proposed change in ownership of the dealership. Acceptable grounds for disapproval include material reasons relating to the character, financial ability or business experience of the proposed transferee. Accordingly, certain provisions of the franchise agreements, particularly as they relate to a Manufacturer's rights to terminate or fail to renew the franchise, have repeatedly been held invalid by state courts and administrative agencies. 45 Facilities The Company presently leases all its facilities and seeks to structure its acquisitions in a way to avoid the ownership of real property. Set forth in the table below is certain information relating to each of the Company's leases.
--------------------------------------------------------------------- Lessee Location Use Expiration - --------------------- --------------------- ---------------------- ---------------------- DiFeo Group Fair Chevrolet-Geo 102 Federal Road New and used car October 1, 2010 Danbury, CT sales; general office; service Fair 100C Federal Road New and used car October 1, 2010 Hyundai/Isuzu/Suzuki Danbury, CT sales; service Saturn of Danbury 102C Federal Road New and used car October 1, 2010 Danbury, CT sales; service Saturn of Watertown 715 Straits Turnpike New and used car October 1, 2010 Watertown, CT sales; service Fair Used Car 102A and 104 Federal Used car sales October 1, 2010 Corner Road Danbury, CT DiFeo Lexus 1550 Route 22 East New and used car October 1, 2010 Bound Brook, NJ sales; service DiFeo Chevrolet-Geo 599 Route 440W New and used car October 1, 2010 & J&F Oldsmobile Jersey City, NJ sales; service DiFeo Hudson Mall @ Route New and used car October 1, 2010 Chrysler-Plymouth/ 440 sales; service Jeep-Eagle/Hyundai Jersey City, NJ Hudson Toyota 585 Route 440W New and used car October 1, 2010 Jersey City, NJ sales; service; general office DiFeo BMW (a) 301 County Road New and used car sales October 1, 2010 Tenafly, NJ (b) 301 County Road Service October 1, 2010 Tenafly, NJ Rockland Mitsubishi 75 N. Highland Avenue New and used car October 1, 2010 Nyack, NY sales; service Rockland Toyota 115 Route 59 New and used car October 1, 2010 Nyack, NY sales; service DiFeo Nissan (a) 977 Communipaw New and used car sales October 1, 2010 Avenue Jersey City, NJ (b) 909-921 Service October 1, 2010 Communipaw Ave. Jersey City, NJ Fair Honda 102D Federal Road New and used car October 1, 2010 Danbury, CT sales; service Fair Dodge 100B Federal Road New and used car October 1, 2010 Danbury, CT sales; service Gateway Mitsubishi Route 37 & Batchelor New car sales; service October 1, 2010 St. Toms River, NJ Gateway Toyota Route 37 & Batchelor New and used car October 1, 2010 St. sales; service Toms River, NJ Saturn of Englewood 105 Grand Avenue New and used car October 1, 2010 Englewood, NJ sales; service Landers Auto Landers (a) 7800 Alcoa Road New car sales; service August 31, 2005, Jeep-Eagle/Chrysler- Benton, AR renewable to 2015 Plymouth/Dodge (b) 7800 Alcoa Road Used car sales Benton, AR Landers 17821 I-30 New and used car August 31, 2005, Oldsmobile-GMC Benton, AR sales; service renewable to 2015 Truck Landers West 1719 Merrell Drive Used car sales December 31, 1998, Little Rock, AR renewable to 2001 Landers North 6055 Landers Road Used car sales May 31, 1999 North Little Rock, AR Atlanta Toyota 2345 Pleasant Hill New and used car January 31, 2016 Road sales; service Duluth, GA United Nissan 6889 Jonesboro Road New and used car April 30, 2016, Morrow, GA sales; service renewable to 2026
46
--------------------------------------------------------------------- Lessee Location Use Expiration - --------------------- --------------------- ---------------------- ---------------------- Peachtree Nissan (a) 5211 and 5214 New and used car June 30, 2016, Peachtree sales; service renewable to 2026 Industrial Boulevard Chamblee, GA (b) 3393 Malone Drive Storage facility June 30, 2016, Chamblee, GA renewable to 2026 UAG 375 Park Avenue Headquarters June 29, 2000 New York, NY
Employees and Labor Relations As of March 31, 1996, on a pro forma basis, UAG employed approximately 1,900 people, approximately 100 of whom are covered by collective bargaining agreements with labor unions. Relations with employees are considered by the Company to be satisfactory. The Company's policy is to motivate its key managers through, among other things, grants of stock options. See "Management -- Stock Option Plan." Litigation The Company and its subsidiaries are involved in litigation that has arisen in the ordinary course of business. None of these matters, either individually or in the aggregate, are expected to have a material adverse effect on the Company's results of operations or financial condition. Environmental Matters As with automobile dealerships generally, and service parts and body shop operations in particular, the Company's business involves the use, handling and contracting for recycling or disposal of hazardous or toxic substances or wastes, including environmentally sensitive materials such as motor oil, waste motor oil and filters, transmission fluid, antifreeze, freon, waste paint and lacquer thinner, batteries, solvents, lubricants, degreasing agents, gasoline and diesel fuels. The Company's business also involves the past and current operation and/or removal of aboveground and underground storage tanks containing such substances or wastes. Accordingly, the Company is subject to regulation by federal, state and local authorities establishing health and environmental quality standards, and liability related thereto, and providing penalties for violations of those standards. The Company is also subject to laws, ordinances and regulations governing remediation of contamination at facilities it operates or to which it sends hazardous or toxic substances or wastes for treatment, recycling or disposal. The Company believes that it does not have any material environmental liabilities and that compliance with environmental laws, ordinances and regulations will not, individually or in the aggregate, have a material adverse effect on the Company's results of operations or financial condition. However, soil and groundwater contamination has been known to exist at certain properties leased by the Company. Furthermore, environmental laws and regulations are complex and subject to frequent change. There can be no assurance that compliance with amended, new or more stringent laws or regulations, stricter interpretations of existing laws or the future discovery of environmental conditions will not require additional expenditures by the Company, or that such expenditures would not be material. See "Risk Factors -- Environmental Matters." Insurance The Company maintains general liability and property insurance and an umbrella and excess liability policy in amounts it considers adequate and customary for businesses of its kind. However, there can be no assurance that future claims will not exceed insurance coverage. 47 Management Executive Officers and Directors The following information relates to the executive officers and directors of the Company as of July 31, 1996.
Name Age Position - ----------------------------------- ----- ----------------------------------- Carl Spielvogel 67 Chairman of the Board and Chief Executive Officer Marshall S. Cogan 59 Vice Chairman of the Board and Chairman of the Executive and Compensation Committees Arthur J. Rawl 54 Executive Vice President and Chief Financial Officer George G. Lowrance 52 Executive Vice President -- Development and Industry Relations Philip N. Smith, Jr. 53 Vice President, Secretary and General Counsel Robert W. Thompson 45 Vice President -- Finance Robert H. Nelson 51 Director; Vice Chairman of Atlantic Finance Michael R. Eisenson 40 Director John J. Hannan 43 Director Jules Kroll 55 Director John M. Sallay 40 Director Richard Sinkfield 53 Director
The present principal occupation and employment background of each of the executive officers and directors of the Company are set forth below. Carl Spielvogel has served as Chairman and Chief Executive Officer of the Company since October 1994. Mr. Spielvogel has had a 35-year career in management and marketing. Prior to joining the Company, Mr. Spielvogel was Chairman and Chief Executive Officer of Backer Spielvogel Bates Worldwide, Inc., one of the world's largest marketing, advertising and communications companies, with 178 offices in 55 countries, where he worked from 1979 to 1994. During his marketing career, he had extensive experience working with automobile manufacturers and oversaw the introduction of the Hyundai line of motor vehicles into the U.S. market. As part of this program, he worked with 450 automobile dealers. Earlier, Mr. Spielvogel was Vice Chairman of the Interpublic Group of Companies, which serves GM as one of its largest global clients; Interpublic was among the first global marketing communications companies to become publicly owned. He is also a director of Hasbro, Incorporated, Foamex International Inc. and Data Broadcasting Corporation as well a former director of the International Media Fund. Additionally, Mr. Spielvogel serves on the Board of Trustees of The Metropolitan Museum of Art, The Mount Sinai Hospital and Medical Center, Lincoln Center for the Performing Arts, Inc. and The Philharmonic-Symphony Society of New York, Inc. He was appointed in 1996 by President Clinton to serve as a member of the U.S. Broadcasting Board of Governors. Marshall S. Cogan has served as a director of the Company since December 1990. Since 1974, Mr. Cogan has been the principal stockholder, Chairman or Co-Chairman of the Board of Directors and Chief Executive Officer or Co-Chief Executive Officer of Trace. Trace has acquired many companies in various consolidating industries and conceived the concept for UAG, which it founded in December 1990. He has been the Chairman of the Board of Directors and Chairman of the Executive Committee of Foamex International Inc. and its predecessor company since September 1993 and Chief Executive Officer since January 1994. He has also been a director of Recticel s.a. since February 1993. Mr. Cogan served as Chairman and a director of other companies formerly owned by Trace, including General Felt Industries, Inc., Knoll International, Inc. and Sheller-Globe Corporation. Prior to forming Trace Holdings, he was a senior partner at Cogan, Berlind, Weill & Levitt and subsequently CBWL-Hayden Stone, Inc., both predecessor companies to Lehman Brothers Inc. Additionally, Mr. Cogan serves on the Board of Trustees of The Museum of Modern Art, the Boston Latin School and New York University Medical Center and the Board of Directors of the American Friends of the Israel Museum. He also serves on several committees of Harvard University. Arthur J. Rawl has served as Executive Vice President and Chief Financial Officer of the Company since 1994. Prior to joining the Company, Mr. Rawl was Executive Vice President and Chief Financial Officer of Hanlin Group, Inc., a chemical and PVC pipe products manufacturer. Mr. Rawl is a Certified Public Accountant and a retired partner in the firm of Deloitte & Touche, where, in his 23-year tenure with the firm, his practice concentrated on the retail and distribution industries. 48 George G. Lowrance served as Executive Vice President, Secretary and General Counsel of the Company from January 1993 to June 1996 and has served as Executive Vice President -- Development and Industry Relations since June 1996. Prior to joining the Company, Mr. Lowrance was the general manager of Ed Hicks Company, an automobile dealership group, which he joined in January 1991. Prior thereto, he was a dealer principal for 13 years, representing Pontiac, Chevrolet, Volvo, Nissan, Saab, Range Rover, Porsche, Audi, Volkswagen, Peugeot, Rolls Royce and Maserati. He also co-authored the current dealer agreements for Volkswagen and Porsche. Mr. Lowrance served as Chairman of the National Dealer Council for Audi from 1984 to 1987 and served in the same role for Porsche from 1987 to 1990. Philip N. Smith, Jr. has served as Vice President, Secretary and General Counsel of the Company since June 1996. Mr. Smith has also served as Vice President or Senior Vice President and as Secretary and General Counsel of Trace since January 1988 and as Vice President, Secretary and General Counsel of Foamex International Inc. since October 1993. Prior to joining such companies, he was the sole stockholder of a professional corporation that was a partner of the law firm of Akin, Gump, Strauss, Hauer & Feld, L.L.P. Robert W. Thompson has served as Vice President -- Finance of the Company since August 1994. Prior to joining the Company, Mr. Thompson was Vice President and Controller of Hanlin Group, Inc., where he worked for 11 years. Robert H. Nelson has served as a director of the Company since January 1996. He has served as Vice Chairman of Atlantic Finance since March 1996, Chief Financial Officer and Treasurer of Trace since 1987 and Senior Vice President, Chief Operating Officer and a director of Trace since 1994. Michael R. Eisenson has served as a director of the Company since December 1993. He is the President and Chief Executive Officer of Harvard Private Capital, which he joined in 1986. Harvard Private Capital manages the private equity and real estate portfolios of the Harvard University endowment fund. Mr. Eisenson is also a director of Harken Energy Corporation, ImmunoGen, Inc., NHP Incorporated and Somatix Therapy Corporation. John J. Hannan has served as a director of the Company since December 1993. Mr. Hannan is one of the founding principals of Apollo, which together with an affiliate has acted since 1991 as managing general partner of Apollo Investment Fund, L.P., AIF and Apollo Investment Fund III, L.P., private securities investment funds, and of Apollo Real Estate Advisors, L.P., which since 1993 has acted as managing general partner of the Apollo real estate investment funds, and of Lion Advisors, L.P., which since 1991 has acted as financial advisor to and representative for certain institutional investors with respect to securities investments. Mr. Hannan is also a director of Aris Industries, Inc., Converse, Inc., The Florsheim Shoe Company, Inc. and Furniture Brands International, Inc. Jules Kroll has served as a director of the Company since December 1993. He founded Kroll Associates, an international corporate investigation and consulting firm, in 1972 and is presently its Chairman and Chief Executive Officer. Mr. Kroll is also a director of Presidential Life Corporation. John M. Sallay has served as a director of the Company since December 1993. He is a Managing Director of Harvard Private Capital, which he joined in 1990. Mr. Sallay is also a director of E-Z Serve Corporation. Richard Sinkfield has served as a director of the Company since December 1993. He is a Senior Partner with the law firm of Rogers & Hardin in Atlanta, Georgia, which he joined in 1976. Mr. Sinkfield is also a director of Weyerhaeuser Company. Except for Mr. Spielvogel, who was elected pursuant to his employment agreement, the directors were elected pursuant to the provisions of the Stockholders Agreement, dated as of October 15, 1993 (the "Stockholders Agreement"), among the Company and the Initial Stockholders (as defined herein). Pursuant to such Stockholders Agreement, such provisions terminate upon consummation of the Offering. The Board of Directors is divided into three classes. The current terms of the Class I directors, Class II directors and Class III directors expire at the annual meetings of stockholders to be held in 1997, 1998 and 1999, respectively. Messrs. and are members of Class I, Messrs. , and are members of Class II and Messrs. , and are members of Class III. At each annual meeting of the stockholders, directors will be elected for a three-year term to succeed the directors whose terms then expire. 49 Committees of the Board of Directors The Board of Directors of the Company has established Executive, Compensation, Audit and Stock Option Committees, each of which reports to the Board. The Executive Committee consists of Messrs. Cogan, Spielvogel, Eisenson and Hannan and has the authority to oversee the general business and affairs of the Company. The Compensation Committee consists of Messrs. and has the authority to determine all matters relating to compensation of the Company's executive officers and management employees. The Audit Committee consists of Messrs. Hannan, Kroll and Sinkfield and is responsible for meeting with the Company's independent accountants regarding, among other issues, audits and adequacy of the Company's accounting and control systems. The Stock Option Committee consists of Messrs. Spielvogel, Cogan and Eisenson and is responsible for administering the Company's Stock Option Plan and granting options thereunder. Director Compensation Each director who is not an employee of the Company or Trace will receive an annual retainer of $15,000, payable at the option of the director in cash or in Common Stock at the current market price, $1,000 for each Board of Directors meeting attended, $500 for each telephonic Board of Directors meeting attended and $750 for each Board of Directors committee meeting attended. In addition, directors are reimbursed for their reasonable out-of-pocket expenses incurred in attending meetings of the Board of Directors and committees thereof. In accordance with the internal policies of their employers, certain directors will assign their director compensation to the organizations that employ them. Directors who are employees of the Company or Trace will not receive any fees for serving on the Company's Board of Directors or for committee service. Operating Committee The Chairman and Chief Executive Officer has established an Operating Committee made up of key managers of the Company's dealerships. The Operating Committee, which is chaired by Mr. Spielvogel, meets monthly to review and discuss the prior month's operating performance. It also examines important trends in the business and, where appropriate, recommends specific operating improvements. Certain ex officio and rotating members will attend certain meetings depending on the matters under discussion. It is anticipated that the Operating Committee's membership will expand in line with the Company's acquisition program. In addition to Mr. Spielvogel, the members of the Operating Committee are: SAMUEL X. DIFEO Mr. DiFeo serves as Executive Vice President of the operating partnerships of the DiFeo Group. Between 1970 and 1992, he co-managed the operations of the DiFeo Group with his father, Sam C. DiFeo, and his brother, Joseph C. DiFeo. BRUCE DUNKER Mr. Dunker serves as President of United Nissan, which he joined in 1992. He began his career in the automotive retailing industry in 1968. JAMES EVANS Mr. Evans serves as chief financial officer and co-managing director of the Danbury Autopark division of the DiFeo Group, which he joined in 1994. He began his career in the automotive retailing industry in 1985. HARRY GLANTZ Mr. Glantz serves as director of finance and insurance of the DiFeo Group and co-managing director of the Danbury Autopark division of the DiFeo Group, which he joined in 1992. He began his career in the automotive retailing industry in 1968. RICHARD J. HARRISON Mr. Harrison serves as the President of Atlantic Finance. He began his career as a credit analyst in 1969. In 1984, he joined the Rochester Community Savings Bank for the purpose of forming American Credit Services, Inc., a consumer finance company which grew into a business of over $325 million in annual loan purchases. STEVE LANDERS Steve Landers serves as Chief Executive Officer and President of Landers Auto. He began his career in the automotive retailing industry in 1969. In 1972, Mr. Landers, with his father, Bob Landers, opened a used car operation, which was the predecessor to Landers Auto. JOHN SMITH Mr. Smith serves as President of Atlanta Toyota, which he joined in 1988. He began his career in the automotive retailing industry in 1983.
50 STEVEN KNAPPENBERGER Mr. Knappenberger serves as President and Chief Operating Oficer of the Sun Group, which he joined in 1980. He will become a member of the Operating Committee upon consummation of the Contemporaneous Acquisition.
Summary Compensation Table The following Summary Compensation Table sets forth information concerning the compensation for services paid to the officers named below (the "Named Executive Officers") during fiscal years 1995, 1994 and 1993.
----------------------------------------------- Long Term Compensation ------------- Annual Compensation Securities Name and --------------------- Underlying Principal Position Year Salary($) Bonus($) Options(#) - ---------------------------------------- ------- --------- --------- ------------- Carl Spielvogel (1) 1995 750,000 250,000 Chairman of the Board 1994 155,946 70,017(2) and Chief Executive Officer Ezra P. Mager (3) 1995 600,000 Executive Vice Chairman 1994 601,969 1993 703,952 Arthur J. Rawl (4) 1995 255,300 70,000 Executive Vice President 1994 160,000 60,000 and Chief Financial Officer George G. Lowrance 1995 207,677 20,000 Executive Vice President -- 1994 172,244 5,000 Development and Industry Relations 1993 138,254 25,000 Robert W. Thompson (5) 1995 107,600 10,000 Vice President -- Finance 1994 42,619
- ------------------------------ (1) Mr. Spielvogel's employment commenced on October 18, 1994. (2) Represents the number of shares of Common Stock subject to options on October 18, 1994, the date of grant, which number was subject to increase from time to time to a total of 170,095 shares upon the issuance of shares under the Equity Facility. These options were canceled and replaced with new options on April 3, 1996. See "--Stock Option Grants." (3) Mr. Mager resigned from all his positions with the Company on January 18, 1996. In connection with such resignation, the Company agreed to make severance payments to Mr. Mager in the aggregate amount of $500,000 in installments through the end of 1997. In consideration therefor, Mr. Mager agreed to refrain from (i) discussing acquisition transactions with certain specified dealerships until March 1, 1998, (ii) soliciting the employment of UAG employees until March 1, 1998 and (iii) disclosing confidential information relating to the Company. (4) Mr. Rawl's employment commenced on May 1, 1994. (5) Mr. Thompson's employment commenced on August 1, 1994. Spielvogel Employment Agreement The Company has an Employment Agreement with Carl Spielvogel dated as of June 21, 1996 (the "Spielvogel Employment Agreement") which provides that Mr. Spielvogel will serve as Chief Executive Officer and Chariman of the Board of Directors of the Company until December 31, 2000, subject to automatic one-year renewals unless either party delivers notice not to renew. The Spielvogel Employment Agreement provides for a base salary of $750,000 for 1996 and, beginning January 1, 1997, of $1,000,000 per year. In addition, Mr. Spielvogel is entitled to receive an annual bonus in an amount determined by the Company's Compensation Committee. If the Company's established performance targets are met, such bonus must equal at least 50% of Mr. Spielvogel's base salary, but in no event may such bonus exceed his base salary. 51 Pursuant to an amendment to his initial employment agreement, Mr. Spielvogel received options to purchase up to 400,000 shares of Common Stock at an exercise price of $10.00 per share. Such options became exercisable with respect to one-fourth of the option shares on October 18, 1995. The remainder will vest and become exercisable in three equal installments on October 18th in each of 1996, 1997 and 1998. Pursuant to the Spielvogel Employment Agreement, effective upon the effective date of the Offering, Mr. Spielvogel will receive options under the Stock Option Plan to purchase up to an additional 100,000 shares of Common Stock at an exercise price equal to the public offering price set forth on the cover page of this Prospectus, and effective on the first anniversary thereof, Mr. Spielvogel will receive options under the Stock Option Plan to purchase up to 100,000 shares of Common Stock at an exercise price per share equal to the market price per share of Common Stock on the date preceding the date of grant. Such options will vest and become exercisable in four equal annual installments beginning on the first anniversary of the date of grant. All such options are collectively referred to herein as the "Spielvogel Options." The Spielvogel Employment Agreement provides that Mr. Spielvogel's employment may be terminated at any time by the Company or by Mr. Spielvogel. In the event of termination of Mr. Spielvogel's employment by reason of death, by the Company for "Cause" or by Mr. Spielvogel other than for "Good Reason," including a "Change in Control" of the Company (as such terms are defined in the Spielvogel Employment Agreement), or disability, the Spielvogel Options will be forfeited to the extent not yet vested and exercisable. That portion already vested and exercisable on the date of termination may be exercised as follows: (i) in the event of termination by the Company for Cause, for a period of 90 days from the date of termination and (ii) in the event of termination by reason of death, or by Mr. Spielvogel other than for Good Reason or disability, for a period of one year from the date of termination. In the event of termination of Mr. Spielvogel's employment by the Company other than for Cause or by Mr. Spielvogel for Good Reason, in addition to any base salary and bonus earned but not yet received, Mr. Spielvogel is entitled to be paid $83,333 per month for the remainder of the contract term. In the event of termination of Mr. Spielvogel's employment by the Company other than for Cause, by Mr. Spielvogel for Good Reason or by reason of disability, the Spielvogel Options, to the extent not granted or not vested and exercisable on the date of termination, will become immediately granted and vested and exercisable in full for a period equal to the shorter of four years after the date of termination and the remainder of the original term of the respective Spielvogel Options. The Spielvogel Employment Agreement contains customary provisions relating to exclusivity of services, non-competition and confidentiality. It also contains general provisions relating to indemnification of Mr. Spielvogel in accordance with the DGCL. Stock Option Plan The Company's Stock Option Plan (the "Stock Option Plan") has been adopted by the Board of Directors and the stockholders of the Company. The Stock Option Plan provides for the grant of non-qualified options ("NQOs") and incentive stock options ("ISOs") as defined in Section 422 of the Internal Revenue Code of 1986 (the "Code"). The Stock Option Plan is administered by the Stock Option Committee of the Board of Directors (the "Committee"). The Board believes that the Stock Option Plan is important to provide an inducement to obtain and retain the services of employees of the Company, its subsidiaries and affiliates, and to increase their proprietary interest in the Company's success. At present, all full-time employees of the Company and its subsidiaries, as well as employees of its affiliates who perform services for the Company and its subsidiaries, are eligible to participate in the Stock Option Plan. The aggregate number of shares of Common Stock as to which stock options ("Options") may be granted under the Stock Option Plan may not exceed 1,500,838, subject to adjustment as provided in the Stock Option Plan. The number of shares of Common Stock available for grant of Options at any time under the Stock Option Plan shall be decreased by the sum of the number of shares for which Options have been issued and have not yet lapsed or canceled and the number of shares already issued upon exercise of Options. Recipients of Options under the Stock Option Plan ("Optionees") are selected by the Committee, which has sole authority (1) to determine the number of Options to be granted to such recipient, (2) to prescribe the form or forms of the Option agreements, (3) to adopt, amend or rescind rules and regulations for the administration of the Stock Option Plan, (4) to construe and interpret the Stock Option Plan, rules and regulations, (5) to determine the exercise 52 price of shares subject to Options, (6) to determine the dates on which Options become exercisable, (7) to determine the expiration date of each Option (which shall be a ten-year term from the date of grant) and (8) to cancel any Option held with the express written consent of the Optionee to be affected. Options granted under the Stock Option Plan will be evidenced by a written Option agreement between each Optionee and the Company. The exercise price of the shares of Common Stock subject to Options will be fixed by the Committee, in its discretion, at the time Options are granted, provided that the per share exercise price of an ISO may not be less than the fair market value of a share of Common Stock on the date of grant. There are presently NQOs outstanding under the Stock Option Plan to purchase an aggregate of 473,000 shares, each of which is exercisable at a price of $10.00 per share and vests in five equal annual installments beginning on the first anniversary of the later of December 29, 1993 and the date of the Optionee's employment. In addition, as of the effectiveness of the Offering, NQOs to purchase an additional 100,000 shares of Common Stock will be granted to each of Mr. Spielvogel and Mr. Cogan. Such Options will be exercisable at the public offering price set forth on the cover page of this Prospectus and will vest in four equal annual installments beginning on the first anniversary of the date of grant. Optionees will have no voting, dividend or other rights as shareholders with respect to shares of Common Stock covered by Options prior to becoming the holders of record of such shares. All Option grants will permit the exercise price to be paid in cash or by certified check, bank draft or money order or by "cashless" exercise. The number of shares covered by Options will be appropriately adjusted in the event of any merger, recapitalization or similar corporate event (a "Merger Event"). If the Company is the surviving corporation of any Merger Event, the Optionee shall receive substitute Options to purchase shares of the surviving corporation so as to preserve the value, rights and benefits of any Option granted hereunder. If the Company is not the surviving or resulting corporation of any Merger Event, the Committee may elect to pay in cash the difference between the fair market value of the Common Stock on the date of the Merger Event and the exercise price of such Options. If the Committee does not elect to make a cash payment, the surviving corporation will be required, as a condition to the Merger Event, to grant substitute Options to purchase shares of the surviving or resulting corporation so as to preserve the value, rights and benefits of any Option granted hereunder. The Board of Directors may at any time terminate the Stock Option Plan or from time to time make such modifications or amendments to the Stock Option Plan as it may deem advisable, provided that the Board may not, without the consent of the Optionee, take action which would have a material adverse effect on outstanding Options or any unexercised rights under outstanding Options. The following is a brief discussion of the federal income tax consequences of transactions under the Stock Option Plan based on the Code. The Stock Option Plan is not qualified under Section 401(a) of the Code. No taxable income is realized by an Optionee upon the grant or exercise of an ISO. If Common Stock is issued to an Optionee pursuant to the exercise of an ISO, and if no disqualifying disposition of such shares is made by such Optionee within two years after the date of grant or within one year after the transfer of such shares to such Optionee, then (i) upon sale of such shares, any amount realized in excess of the Option price will be taxed to such Optionee as a long-term capital gain and any loss sustained will be a long-term capital loss and (ii) no deduction will be allowed to the Optionee's employer for federal income tax purposes. If the Common Stock acquired upon the exercise of an ISO is disposed of prior to the expiration of either holding period described above, generally (i) the Optionee will realize ordinary income in the year of disposition in an amount equal to the excess (if any) of the fair market value of such shares at exercise (or, if less, the amount realized on the disposition of such shares) over the Option price paid for such shares and (ii) the Company will be entitled to deduct such amount for federal income tax purposes if the amount represents an ordinary and necessary business expense. Any further gain (or loss) realized by the Optionee will be taxed as short-term or long-term capital gain (or loss), as the case may be, and will not result in any deduction by the Company. With respect to NQOs, (i) no income is realized by an Optionee at the time the Option is granted, (ii) generally, at exercise, ordinary income is realized by the Optionee in an amount equal to the difference between the Option price paid for the shares and the fair market value of the shares, if unrestricted, on the date of exercise, and the Company is generally entitled to a tax deduction in the same amount subject to applicable tax withholding requirements and (iii) at sale, appreciation (or depreciation) after the date of exercise is treated as either short-term or long-term 53 capital gain (or loss) depending on how long the shares have been held. Deductions for compensation attributable to NQOs (or disqualified ISOs) granted to the Company's named executive officers may be subject to the deduction limits of Section 162(m) of the Code, unless such compensation qualifies as "performance-based" (as defined therein). Stock Option Grants The following table sets forth information concerning individual grants of options to purchase Common Stock made to the Named Executive Officers during 1996.
---------------------------------------------------------------------- Potential Realizable Value at Assumed Annual Rates of Number of Percent of Stock Price Securities Total Exercise Appreciation for Underlying Options or Option Term(1) Options Granted to Base Price Expiration ---------------------- Name Granted Employees ($/Share) Date 5%($) 10%($) - --------------------------- ---------- ---------- ---------- ---------- ---------- ---------- Carl Spielvogel 400,000(2) 35.3% 10.00 10/18/04 100,000(3) 8.8 (3) (3) Ezra P. Mager Arthur J. Rawl 34,000(4) 3.0 10.00 4/23/06 George G. Lowrance 34,000(5) 3.0 10.00 4/23/06 Robert W. Thompson 3,500(5) 0.3 10.00 4/23/06
- ------------------------------ (1) Amounts reflect certain assumed rates of appreciation set forth in the Commission's executive compensation disclosure rules. Actual gains, if any, on stock option exercises will depend on future performance of the Common Stock. No assurance can be made that the amounts reflected in these columns will be achieved. (2) Options were granted on April 3, 1996 in replacement of options granted on October 18, 1994 and vest and become exercisable in four equal annual installments beginning on October 18, 1995. (3) Options were granted as of the date of this Prospectus at an exercise price per share equal to the public offering price set forth on the cover page of this Prospectus and vest and become exercisable in four equal annual installments beginning on the first anniversary of the date of this Prospectus. Such options terminate on the tenth anniversary of the date of grant. (4) Options were granted on April 23, 1996 and vest and become exercisable in five equal annual installments beginning on May 1, 1995. (5) Options were granted on April 23, 1996 and vest and become exercisable in five equal annual installments beginning on December 29, 1993. 54 Certain Relationships and Related Transactions Jules Kroll, a director of the Company, is Chairman and Chief Executive Officer of Kroll Associates, a corporate investigation and consulting firm which performs services for the Company from time to time. Richard Sinkfield, a director of the Company, is a member of the law firm of Rogers & Hardin, which represents the Company in connection with various business transactions. Pursuant to Stock Purchase Agreements, dated October 15, 1993 (as amended, the "Equity Facility"), among the Company and the investors named therein (the "Initial Stockholders"), the Initial Stockholders purchased an aggregate of 8,504,750 shares of Common Stock in multiple closings and were granted registration rights in respect of such shares. Such registration rights also apply to an additional 306,346 shares of Common Stock subsequently purchased by the Initial Stockholders and to 10,000 shares of Common Stock held by Richard Sinkfield, a director of the Company. See "Shares Eligible for Future Sale." Among the Initial Stockholders are Trace, Aeneas and AIF, each of which is a significant stockholder of the Company, Carl Spielvogel, Chairman of the Board and Chief Executive Officer of the Company, Ezra P. Mager, a former executive officer of the Company, and Jules Kroll, a director of the Company. See "Principal Stockholders." In addition, as of March 31, 1996, the Company owes Trace approximately $1.2 million, which was incurred for working capital purposes. Such indebtedness is subject to offset against a $2 million guaranty by Trace of a third party's indebtedness to the Company. The Company is the tenant under a number of lease agreements with employees of the Company. All such leases are on terms no less favorable to the Company than would be obtained in arm's-length negotiations with unaffiliated third parties. For information regarding the Company's lease agreements, see "Business -- Facilities." Pursuant to agreements with the holders of minority interests (the "Minority Interests") in certain of the Company's subsidiaries, immediately prior to the consummation of the Offering, such holders will exchange (the "Minority Exchange") their Minority Interests for shares of Common Stock. The consideration to be paid by the Company for the Minority Interest in the DiFeo Group will also include (i) an option to purchase up to 60,000 shares of Common Stock at the public offering price set forth on the cover page of this Prospectus, (ii) the settlement of certain advances made by the Company for the benefit of the holders of such Minority Interest for certain business acquisitions and for working capital for dealerships owned solely by such holders and (iii) the minority interests owned by the Company in a group of dealerships in Jersey City, New Jersey. Upon consummation of the Minority Exchange, all of the Company's dealerships will be wholly owned, directly or indirectly, by the Company. The following table sets forth certain information with respect to each division of the Company whose Minority Interest will be exchanged in the Minority Exchange:
-------------------------------- Shares of Common Stock Minority to be Issued in Division Interest Minority Exchange - --------------------------- ----------- ------------------- DiFeo Group 30% Landers Auto 20% Atlanta Toyota 5%
The Company has agreed in principle to grant to the three senior officers of Atlantic Finance options to purchase an aggregate of 5% of the outstanding common stock of Atlantic Finance (as constituted immediately prior to the Offering) at an aggregate exercise price of $400,000. Such options will be immediately exercisable in full and will terminate on the seventh anniversary of the date of grant. Upon the termination date (or upon the termination of an option holder's employment, with respect to such holder's options), the option holders will have the right to sell to the Company, and the Company will have the right to purchase from the option holders, the options (or any shares of common stock issued upon exercise thereof) at the then fair market value thereof, payable in cash or Common Stock of the Company at the option of the Company. The Company has also agreed that up to an additional 5% of the common stock of Atlantic Finance will be issuable to employees of Atlantic Finance under a stock option plan, subject to the discretion of the Board of Directors of Atlantic Finance. 55 Principal Stockholders The table below sets forth the beneficial ownership of Common Stock as of July 31, 1996 after giving effect to the Preferred Stock Conversion, the Minority Exchange and the Offering by (i) all persons who beneficially own 5% or more of the Common Stock, (ii) each of the Named Executive Officers, (iii) each director of the Company and (iv) all directors and Named Executive Officers as a group.
Shares Beneficially Owned ---------------- Beneficial Owner Number(1) Percent - -------------------------------------------------- ------- ------- Trace International Holdings, Inc. ............... 3,531,156 375 Park Avenue New York, New York 10152 Aeneas Venture Corporation........................ 2,843,656 (an affiliate of Harvard Private Capital) 600 Atlantic Avenue Boston, Massachusetts 02210 AIF II, L.P....................................... 1,843,656 c/o Apollo Advisors, L.P. Two Manhattanville Road Purchase, New York 10577 Carl Spielvogel (2)............................... 226,118 Ezra P. Mager..................................... 163,240 Arthur J. Rawl (3)................................ 13,600 * George G. Lowrance (3)............................ 13,600 * Robert W. Thompson (3)............................ 1,400 * Marshall S. Cogan (4)............................. -- * Michael R. Eisenson (5)........................... -- * John J. Hannan (6)................................ -- * Jules Kroll....................................... 104,474 * Robert H. Nelson (3)(7)........................... 13,600 * John M. Sallay (8)................................ -- * Richard Sinkfield................................. 10,000 * All directors and Named Executive Officers (12 546,032 persons).........................................
- ------------------------ * Less than 1%. (1) Pursuant to the regulations of the Commission, shares are deemed to be "beneficially owned" by a person if such person directly or indirectly has or shares the power to vote or dispose of such shares, whether or not such person has any pecuniary interest in such shares, or the right to acquire the power to vote or dispose of such shares within 60 days, including any right to acquire through the exercise of any option, warrant or right. (2) Includes 200,000 shares issuable upon exercise of options granted under the Spielvogel Employment Agreement that are vested and exercisable within 60 days. (3) Represents the shares issuable upon exercise of options granted under the Stock Option Plan that are vested and exercisable within 60 days. (4) Does not include shares held by Trace. Mr. Cogan is the principal stockholder, Chairman of the Board and Chief Executive Officer of Trace. Mr. Cogan disclaims beneficial ownership of all shares held by Trace. (5) Does not include shares held by Aeneas. Mr. Eisenson is the Managing Director, President and Chief Executive Officer of Harvard Private Capital, the investment advisor of Aeneas. Mr. Eisenson disclaims beneficial ownership of all shares held by Aeneas. (6) Does not include shares held by AIF. Mr. Hannan is a director of Apollo Capital Management, Inc., the general partner of Apollo, the managing general partner of AIF. Mr. Hannan disclaims beneficial ownership of all shares held by AIF. (7) Does not include shares held by Trace. Mr. Nelson is Senior Vice President, Chief Operating Officer, Chief Financial Officer, Treasurer and a director of Trace. Mr. Nelson disclaims beneficial ownership of all shares held by Trace. (8) Does not include shares held by Aeneas. Mr. Sallay is a Managing Director of Harvard Private Capital, the investment advisor of Aeneas. Mr. Sallay disclaims beneficial ownership of all shares held by Aeneas. 56 Description of Capital Stock General Upon the consummation of the Offering, the authorized capital stock of the Company will consist of shares of Voting Common Stock, par value $0.0001 per share, 1,125,000 shares of Non-voting Common Stock, par value $0.0001 per share, and 100,000 shares of Preferred Stock, par value $0.0001 per share. References herein to "Common Stock" refers to the Company's Voting Common Stock. Common Stock As of July 31, 1996, as adjusted to reflect the Preferred Stock Conversion, there were 8,821,096 shares of Common Stock outstanding, owned of record by 16 stockholders. Holders of Common Stock have no pre-emptive, redemption, conversion or sinking fund rights. Holders of Common Stock are entitled to one vote per share on all matters submitted to a vote of stockholders and do not have any cumulative voting rights. In the event of a liquidation, dissolution, or winding-up of the Company, the holders of Common Stock are entitled to share equally and ratably in the assets of the Company, if any, remaining after provision for the payment of creditors and after payment of any liquidation preference to holders of Preferred Stock. Upon completion of the Offering, all outstanding shares of Common Stock will be validly issued, fully paid and nonassessable. Holders of Common Stock will receive such dividends, if any, as may be declared by the Board out of funds legally available for such purposes. See "Dividend Policy." Non-voting Common Stock No shares of Non-voting Common Stock have been issued. The Company created the class of Non-voting Common Stock in connection with the Securities Purchase Agreements. The investors party to the Securities Purchase Agreements are subject to various regulations that restrict their ability to own in excess of a given percentage of the voting power of any company or that impose burdensome requirements in respect of investments above a given threshold. Accordingly, the Company granted such investors the right to convert, at any time and from time to time, any number of shares of Voting Common Stock into an equal number of shares of Non-voting Common Stock. Each holder of shares of Non-voting Common Stock is entitled to convert, at any time and from time to time, any number of such shares into an equal number of shares of Voting Common Stock, provided that such holder, as a result of such conversion, would not own shares of the Company's voting securities in excess of the applicable threshold. Holders of Non-voting Common Stock are not entitled to vote on matters submitted to a vote of stockholders, except that they are entitled to vote as a separate class on any modification of the Certificate of Incorporation that adversely affects their rights. Except with respect to such voting rights, the Voting Common Stock and the Non-voting Common Stock are equivalent in every respect. Preferred Stock Pursuant to the Preferred Stock Conversion, upon the date of this Prospectus, all shares of the Company's Class A Preferred Stock, par value $0.0001 per share, outstanding prior to the Offering will convert into an equal number of shares of Common Stock, and such class of Preferred Stock will be retired. Upon consummation of the Offering, the Company will be authorized to issue up to 100,000 shares of Preferred Stock. The Board of Directors will have the authority to issue this Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series or the designation of such series, without further vote or action by the stockholders. The issuance of Preferred Stock may have the effect of delaying, deferring or preventing a change in control of the Company without further action by the stockholders and may adversely affect the voting and other rights of the holders of Common Stock, including the loss of voting control to others. Warrants In connection with the issuance and sale of Senior Notes from time to time pursuant to the Securities Purchase Agreements, the Company issued warrants (the "Warrants") to purchase up to 1,016,099 shares of Common Stock, as adjusted through the date of this Prospectus and subject to further adjustment upon certain events. The Warrants will become exercisable on the date of this Prospectus at a nominal exercise price and expire on September 22, 2003. 57 In addition, the Company issued to the holders of the Warrants additional warrants (the "Additional Warrants") to purchase up to 93,747 shares of Common Stock, subject to adjustment upon certain events. Pursuant to their terms, the Additional Warrants will be exercised on the date of this Prospectus at an exercise price of $0.01 per share. The initial holders of the Warrants and Additional Warrants, under certain conditions, are entitled to participate on the same terms in the sale of Common Stock by the Initial Stockholders if such sale would result in a Change in Control (as defined in the Securities Purchase Agreements) of the Company. The Warrants and Additional Warrants contain registration rights in respect of the shares of Common Stock issuable upon exercise thereof. See "Shares Eligible for Future Sale." Restrictions under Franchise Agreements A number of franchise agreements to which the Company is party impose restrictions on the transfer of the Common Stock. The most prohibitive restriction, which has been imposed by various Manufacturers, provides that, under certain circumstances, the Company may lose its franchise if a person or entity acquires a 20% ownership interest in the Company and does not obtain the approval of the applicable Manufacturer. Similarly, a number of Manufacturers, including Chrysler, prohibit transactions which may affect management control of the Company. Such restrictions may prevent or deter prospective acquirers from obtaining control of the Company. See "Risk Factors -- Stock Ownership/Issuance Limits." Certain Provisions of Certificate of Incorporation and Bylaws The Certificate of Incorporation and Bylaws of the Company provide that the Board of Directors will be divided into three classes of directors, each class to be as nearly equal in number as possible. The term of office of one class of directors expires each year in rotation so that one class is elected at each annual meeting of stockholders for a three-year term. The Certificate of Incorporation provides that the size of the Board of Directors shall be determined as set forth in the Bylaws, which provide for between five and eleven directors, with the precise number to be fixed from time to time by resolution of the Board of Directors. The Board of Directors is currently comprised of eight members. The affirmative vote of the holders of at least two-thirds of the outstanding shares of capital stock entitled to vote thereon is required to amend or repeal these provisions of the Certificate of Incorporation and Bylaws. Accordingly, it would take at least two elections of directors for any outside individual or group to gain control of the Board of Directors. In addition, stockholder action must be taken at duly convened meetings, not by written consent. These provisions could render more difficult or discourage an attempt to obtain control of the Company. Certain Effects of Authorized but Unissued Stock After the completion of the Offering, there will be shares of Common Stock and 100,000 shares of Preferred Stock available for future issuance without stockholder approval. These additional shares may be utilized for a variety of corporate purposes, including future public offerings to raise additional capital or to facilitate corporate acquisitions. The Company currently does not have any plans to issue additional shares of Common Stock or Preferred Stock. One of the effects of the existence of unissued and unreserved Common Stock and Preferred Stock of the Company may be to enable the Board of Directors to issue shares to persons supportive of current management, which could render more difficult or discourage an attempt to obtain control of the Company by means of a merger, tender offer, proxy contest or otherwise, and thereby protect the continuity of the Company's management and possibly deprive the stockholders of opportunities to sell their shares of Common Stock at prices higher than prevailing market prices. Such additional shares also could be used to dilute the stock ownership of persons seeking to obtain control of the Company pursuant to the operation of a shareholders' rights plan or otherwise. Delaware General Corporation Law Pursuant to Section 203 of the DGCL, with certain exceptions, a Delaware corporation may not engage in any of a broad range of business combinations, such as mergers, consolidations and sales of assets, with an "interested stockholder" for a period of three years from the date that such person became an interested stockholder unless (i) the transaction that results in the person's becoming an interested stockholder, or the business combination, is approved by the board of directors of the corporation before the person becomes an interested stockholder, (ii) the interested stockholder acquires 85% or more of the outstanding voting stock of the corporation in the same transaction that makes it an interested stockholder or (iii) on or after the date the person becomes an interested 58 stockholder, the business combination is approved by the corporation's board of directors and by holders of at least two-thirds of the corporation's outstanding voting stock, excluding shares owned by the interested stockholder, at a meeting of the stockholders. Under Section 203, an "interested stockholder" is defined as any person that is (i) the owner of 15% or more of the outstanding voting stock of the corporation or (ii) an affiliate or associate of the corporation and the owner of 15% or more of the outstanding voting stock of the corporation at any time within the three-year period immediately prior to the date on which it is sought to be determined whether such person is an interested stockholder or (iii) an affiliate or associate of such person. Pursuant to an exception within Section 203, no stockholders of the Company existing prior to the Offering are subject to the restrictions of Section 203. Under certain circumstances, Section 203 makes it more difficult for a person who would be an "interested stockholder" to effect various business combinations with a corporation for a three-year period, although the stockholders may elect to exclude a corporation from the restrictions imposed thereunder. The Company's Certificate of Incorporation does not exclude the Company from the restrictions imposed under Section 203. The provisions of Section 203 may encourage companies interested in acquiring the Company to negotiate in advance with the Company's Board, since the stockholder approval requirement would be avoided if a majority of the directors then in office approve either the business combination or the transaction which results in the shareholder becoming an interested shareholder. Such provisions also may have the effect of preventing changes in the management of the Company. It is possible that such provisions could make it more difficult to accomplish transactions which stockholders may otherwise deem to be in their best interests. Limitation of Liability of Directors The Certificate of Incorporation provides that a director of the Company will not be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL, which concerns unlawful payments of dividends, stock purchases or redemption, or (iv) for any transaction from which the director derived an improper personal benefit. While the Certificate of Incorporation provides directors with protection from awards for monetary damages for breaches of their duty of care, it does not eliminate such duty. Accordingly, the Certificate of Incorporation will have no effect on the availability of equitable remedies such as an injunction or rescission based on a director's breach of his duty of care. The provisions of the Certificate of Incorporation described above apply to an officer of the Company only if he is a director of the Company and is acting in his capacity as director, and do not apply to officers of the Company who are not directors. Registration Rights Certain holders of shares of Common Stock are entitled to certain registration rights. See "Shares Eligible for Future Sale." Transfer Agent The transfer agent and registrar of the Common Stock is Bank of Nova Scotia. 59 Shares Eligible for Future Sale Of the shares of Common Stock outstanding immediately after the consummation of the Offering, the shares of Common Stock sold in the Offering will be freely transferable without restriction under the Securities Act unless held by "affiliates" of the Company as that term is used under the Securities Act and the regulations promulgated thereunder. The remaining shares of Common Stock outstanding, including the shares to be issued in the Minority Exchange, were sold by the Company in reliance on exemptions from the registration requirements of the Securities Act and are deemed "restricted" securities within the meaning of Rule 144 under the Securities Act and may not be resold without registration under the Securities Act or pursuant to an exemption from registration, including exemptions provided by Rule 144 under the Securities Act. All of the Restricted Shares are subject to lock-up agreements (as described under "Underwriting"). Of the Restricted Shares, 4,254,208 will become eligible for sale beginning 180 days after the date of this Prospectus upon expiration of such lock-up agreements and subject to compliance with Rule 144. The remaining Restricted Shares, including the shares to be issued in the Minority Exchange, will have been held for less than two years upon the expiration of such lock-up agreements and will become eligible for sale under Rule 144 at various dates thereafter as the holding period provisions of Rule 144 are satisfied. In general, under Rule 144 as currently in effect, any person (or persons whose shares are aggregated), including an affiliate of the Company, who has beneficially owned shares for at least a two-year period (as computed under Rule 144) is entitled to sell within any three-month period commencing 90 days after the Offering such number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of Common Stock (approximately shares upon completion the Offering) and (ii) the average weekly trading volume in the Common Stock during the four calendar weeks immediately preceding such sale. Sales under Rule 144 are also subject to certain manner-of-sale provisions, notice requirements and the availability of current public information about the Company. A person who is not deemed to have been an affiliate of the Company at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least three years, is entitled to sell such shares under Rule 144(k) without regard to the volume limitations or other requirements described above. The foregoing summary of Rule 144 is not intended to be a complete description of that rule. The Company has authorized 1,500,838 shares of Common Stock for issuance under the Stock Option Plan. As of the date of this Prospectus, options to purchase up to 673,000 shares of Common Stock have been granted under the Stock Option Plan. In addition, options to purchase up to 400,000 shares of Common Stock have been granted under the Spielvogel Employment Agreement and options to purchase up to 60,000 shares of Common Stock have been granted as part of the consideration for the DiFeo Group Minority Interest. When issued, such shares may only be resold by complying with the two-year holding period under Rule 144 or pursuant to registration under the Securities Act. Prior to the Offering, there has been no public market for securities of the Company. No predictions can be made of the effect, if any, that the sale or availability for sale of shares of additional Common Stock will have on the market price of the Common Stock. Nevertheless, sales of a substantial number of such shares by existing stockholders or by stockholders purchasing in the Offering could have a negative effect on the market price of the Common Stock. The Company, its directors, executive officers, stockholders and certain other persons have agreed not to offer, sell, contract to sell or otherwise dispose of any shares of Common Stock or any securities convertible into or exchangable for shares of Common Stock, for a period of 180 days after the date of this Prospectus, without the prior written consent of J.P. Morgan Securities Inc., with certain limited exceptions. In connection with the Equity Facility, pursuant to a registration rights agreement dated October 15, 1993, the Company granted the Initial Stockholders registration rights in respect of up to 8,504,750 shares of Common Stock to be issued pursuant to the Equity Facility. Each of three specified classes of Initial Stockholders has the right to request one registration, provided that such registration relates to a least 20% of the registrable securities held by the person requesting registration or is expected to have an offering price of $10 million or more. The Initial Stockholders also have the right to request unlimited registrations on Form S-3, provided that the anticipated net aggregate offering price exceeds $500,000. In addition, the Initial Stockholders are entitled to have their registrable securities included in an unlimited number of registrations initiated by the Company, subject to certain customary conditions. 60 The registration rights are presently exercisable, although the Company would not be required to file a registration statement prior to 180 days after the date of this Prospectus, and are subject to customary conditions. In addition to the 8,504,750 shares of Common Stock that have been issued pursuant to the Equity Facility, such registration rights also apply to an additional 316,346 shares of Common Stock issued by the Company. In connection with the acquisition of certain automobile dealerships and the related agreements to exchange shares of Common Stock for the remaining minority interests in such dealerships in the Minority Exchange, the Company granted registration rights in respect of shares of Common Stock pursuant to a registration rights agreement dated as of August 1, 1995. Effective one year after the completion of the Offering, subject to customary conditions, the holders of such shares will be entitled to request one registration and to have their shares included in an unlimited number of Company registrations. The Warrants and Additional Warrants contain registration rights in respect of the shares of Common Stock issuable upon exercise thereof. Such rights entitle the holders thereof to request one registration, plus two registrations on Form S-3, and have their shares included in an unlimited number of Company registrations, subject to customary conditions. Upon the date of this Prospectus, the Warrants will become immediately exercisable for an aggregate of 1,016,099 shares of Common Stock at a nominal exercise price and the Additional Warrants will be exercised for an aggregate of 93,747 shares of Common Stock at an exercise price of $0.01 per share. 61 Underwriting Under the terms and subject to the conditions set forth in an Underwriting Agreement dated the date hereof (the "Underwriting Agreement"), the Underwriters named below, for whom J.P. Morgan Securities Inc., Montgomery Securities and Smith Barney Inc. are acting as representatives (the "Representatives"), have severally agreed to purchase, and the Company has agreed to sell to them, the respective number of shares of Common Stock set forth opposite their names below:
--------------- Number of Underwriters Shares --------------- J.P. Morgan Securities Inc. Montgomery Securities Smith Barney Inc. --------------- Total............................................... --------------- ---------------
The Underwriting Agreement provides that the obligations of the several Underwriters to purchase shares of Common Stock are subject to the approval of certain legal matters by counsel and certain other conditions. The Underwriters are obligated to take and pay for all such shares of Common Stock, if any are taken. The Underwriters propose initially to offer such shares of Common Stock directly to the public at the public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers. After the shares of Common Stock are released for sale to the public, the offering price and such concessions may be changed. The Company has granted to the Underwriters an option, expiring at the close of business on the 30th day after the date of this Prospectus, to purchase up to additional shares of Common Stock at the public offering price, less the underwriting discount. The Underwriters may exercise such option solely for the purpose of covering over-allotments, if any. To the extent that the Underwriters exercise such option, each Underwriter will have a firm commitment, subject to certain conditions, to purchase approximately the same percentage of such additional shares as the number set forth next to such Underwriter's name in the preceding table bears to the total number of shares of Common Stock offered hereby. The Company, its directors, executive officers, stockholders and certain other persons have agreed not to offer, sell, contract to sell or otherwise dispose of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for shares of Common Stock, for a period of 180 days after the date of this Prospectus, without the prior written consent of J.P. Morgan Securities Inc., with certain limited exceptions. At the request of the Company, the Underwriters have reserved up to of the shares of Common Stock offered hereby for sale at the public offering price set forth on the cover page of this Prospectus to employees, officers and directors of the Company. Prior to the Offering, there has been no public market for the Common Stock. The initial public offering price for the Common Stock offered hereby has been determined by agreement between the Company and the Representatives. Among the factors considered in making such determination were the history of and the prospects of the industry in which the Company competes, an assessment of the Company's management, the past and present operations of the Company, the historical results of operations of the Company and the trend of its revenues and earnings, the 62 prospects for future earnings of the Company and the general condition of the securities markets at the time of the Offering. There can be no assurance that an active trading market will develop for the Common Stock or that the Common Stock will trade in the public market subsequent to the offering at or above the initial public offering price. The Representatives have informed the Company that the Underwriters do not intend to sell shares of Common Stock offered hereby to any accounts over which the Underwriters exercise discretionary authority. J.P. Morgan Capital Corporation (or an affiliate thereof), an affiliate of J.P. Morgan Securities Inc., holds $20,000,000 aggregate principal amount of the Senior Notes, Warrants to purchase 580,628 shares of Common Stock at a nominal exercise price and Additional Warrants that will be exercised on the date of this Prospectus for 53,570 shares of Common Stock at an exercise price of $0.01 per share. Morgan Guaranty, an affiliate of J.P. Morgan Securities Inc., provides loans to the Company under the Credit Agreement. J.P. Morgan Securities Inc. has provided financial advisory services to the Company in the past, for which it has received customary fees. Under Rule 2710(c)(8) of the Conduct Rules of the National Association of Securities Dealers, Inc. (the "NASD"), when more than 10% of the net proceeds of a public offering of equity securities is to be paid to members of the NASD or affiliates thereof, the price at which the equity securities are distributed to the public must be no higher than that recommended by a "qualified independent underwriter" meeting certain standards. J.P. Morgan Securities Inc. is an NASD member and its affiliate, J.P. Morgan Capital Corporation, will receive more than 10% of the net proceeds from the Offering as a result of the use of such proceeds to repay the Senior Notes. Therefore, in compliance with such rule, Smith Barney Inc. is assuming the responsibilities of acting as a qualified independent underwriter in pricing the Offering and conducting due diligence. Derek Lemke-von Ammon, Frank Dunlevy and Jerome Markowitz are affiliated with Montgomery Securities and own 2,786, 2,786 and 5,572 shares of Common Stock, respectively, which shares are entitled to registration rights granted to the Initial Stockholders in connection with the Equity Facility. See "Shares Eligible for Future Sale." The aggregate ownership interest in the Company represented by such shares is less than 1%. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, and to contribute to payments which the Underwriters may be required to make in respect thereof. Legal Matters The validity of the Common Stock offered hereby will be passed upon for the Company by Willkie Farr & Gallagher, New York, New York. Certain legal matters in connection with the Offering will be passed upon for the Underwriters by Cahill Gordon & Reindel (a partnership including a professional corporation), New York, New York. Experts The (i) consolidated financial statements of UAG and its subsidiaries as of December 31, 1994 and 1995 and for each of the three years in the period ended December 31, 1995, (ii) financial statements of Landers Auto as of December 31, 1994 and July 31, 1995 and for each of the two years in the period ended December 31, 1994 and the seven-month period ended July 31, 1995, (iii) financial statements of Atlanta Toyota as of December 31, 1994 and 1995 and for each of the three years in the period ended December 31, 1995, (iv) financial statements of United Nissan as of December 31, 1994 and 1995 and for the period from inception (April 5, 1993) to December 31, 1993 and each of the two years in the period ended December 31, 1995 and (v) combined financial statements of the Sun Group as of December 31, 1994 and 1995 and for each of the three years in the period ended December 31, 1995 included in this Registration Statement have been included in reliance upon the reports of Coopers & Lybrand L.L.P., independent accountants, given on the authority of that Firm as experts in accounting and auditing. The financial statements of Peachtree Nissan as of December 31, 1995 and for the year ended December 31, 1995 included in this Registration Statement have been audited by Faucett, Taylor & Associates, P.C., independent accountants, as stated in their report herein, and have been included in reliance upon such report of Faucett, Taylor & Associates, P.C., given on the authority of that Firm as experts in accounting and auditing. 63 Additional Information The Company has filed with the Commission a Registration Statement on Form S-1 (herein, together with all amendments thereto, called the "Registration Statement") under the Securities Act with respect to the Common Stock offered by the Company hereby. This Prospectus, which is part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and the exhibits and financial schedules thereto, to which reference is hereby made. Statements contained in this Prospectus as to the contents of any contract or other document are summaries which are not necessarily complete and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement herein being qualified in all respects by such reference. The Registration Statement, including the exhibits thereto, may be inspected without charge at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Avenue, N.W., Washington, D.C. 20549, and at the Commission's regional offices at Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of such materials can be obtained at prescribed rates from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission also maintains a Website (http://www.sec.gov.) that contains reports, proxy and information statements and other information that is filed electronically with the Commission. 64 Index to Financial Statements United Auto Group, Inc. Report of Independent Accountants................................................... F-3 Consolidated Balance Sheets as of December 31, 1994 and 1995 and March 31, 1996..... F-4 Consolidated Statements of Operations for the years ended December 31, 1993, 1994 and 1995 and the three months ended March 31, 1995 and 1996........................ F-5 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1993, 1994 and 1995 and the three months ended March 31, 1996...................... F-6 Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and the three months ended March 31, 1995 and 1996........................ F-7 Notes to Consolidated Financial Statements.......................................... F-9 Landers Auto Sales, Inc. Report of Independent Accountants................................................... F-20 Balance Sheets as of December 31, 1994 and July 31, 1995............................ F-21 Statements of Operations for the years ended December 31, 1993 and 1994 and the seven months ended July 31, 1995................................................... F-22 Statements of Retained Earnings for the years ended December 31, 1993 and 1994 and the seven months ended July 31, 1995............................................... F-23 Statements of Cash Flows for the years ended December 31, 1993 and 1994 and the seven months ended July 31, 1995................................................... F-24 Notes to Financial Statements....................................................... F-26 Atlanta Toyota, Inc. Report of Independent Accountants................................................... F-31 Balance Sheets as of December 31, 1994 and 1995..................................... F-32 Statements of Operations for the years ended December 31, 1993, 1994 and 1995....... F-33 Statements of Retained Earnings for the years ended December 31, 1993, 1994 and 1995............................................................................... F-34 Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995....... F-35 Notes to Financial Statements....................................................... F-36 Steve Rayman Nissan, Inc. (presently United Nissan, Inc.) Report of Independent Accountants................................................... F-39 Balance Sheets as of December 31, 1994 and 1995 and March 31, 1996.................. F-40 Statements of Operations for the period from inception (April 5, 1993) to December 31, 1993, the years ended December 31, 1994 and 1995 and the three months ended March 31, 1996..................................................................... F-41 Statements of Retained Earnings for the period from inception (April 5, 1993) to December 31, 1993, the years ended December 31, 1994 and 1995 and the three months ended March 31, 1995 and 1996...................................................... F-42 Statements of Cash Flows for the period from inception (April 5, 1993) to December 31, 1993, the years ended December 31, 1994 and 1995 and the three months ended March 31, 1995 and 1996............................................................ F-43 Notes to Financial Statements....................................................... F-44 Hickman Nissan, Inc. (presently Peachtree Nissan, Inc.) Independent Auditor's Report........................................................ F-49 Balance Sheets as of December 31, 1995, and March 31, 1996.......................... F-50 Statements of Income and Retained Earnings for the year ended December 31, 1995 and the three months ended March 31, 1995 and 1996..................................... F-51 Statements of Cash Flows for the year ended December 31, 1995 and the three months ended March 31, 1995 and 1996...................................................... F-52 Notes to Financial Statements....................................................... F-53
F-1 Sun Automotive Group Report of Independent Accountants................................................... F-56 Combined Balance Sheets as of December 31, 1994 and 1995 and March 31, 1996......... F-57 Combined Statements of Operations for the years ended December 31, 1993, 1994 and 1995 and the three months ended March 31, 1995 and 1996............................ F-58 Combined Statements of Stockholders' Equity for the years ended December 31, 1993, 1994 and 1995 and the three months ended March 31, 1996............................ F-59 Combined Statement of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and the three months ended March 31, 1995 and 1996............................ F-60 Notes to Combined Financial Statements.............................................. F-62
F-2 Report of Independent Accountants To the Stockholders of United Auto Group, Inc.: We have audited the accompanying consolidated balance sheets of United Auto Group, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of United Auto Group, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. Princeton, New Jersey June 17, 1996 F-3 UNITED AUTO GROUP, INC. Consolidated Balance Sheets (In thousands except per share data)
--------------------------------- (Unaudited) December 31, March 31, -------------------- ----------- 1994 1995 1996 --------- --------- ----------- ASSETS Auto Dealerships Cash and cash equivalents $ 751 $ 4,697 $ 4,914 Accounts receivable 19,588 27,349 38,662 Inventories 96,065 101,556 120,438 Deferred income taxes 5,153 5,333 Other current assets 2,130 2,894 2,945 --------- --------- ----------- Total current assets 118,534 141,649 172,292 Property and equipment, net 12,072 12,146 13,910 Intangible assets, net 23,018 48,774 55,846 Due from related parties 10,388 14,578 15,148 Other assets 5,754 10,128 9,787 --------- --------- ----------- Total Auto Dealership assets 169,766 227,275 266,983 --------- --------- ----------- Auto Finance Cash and cash equivalents 32 531 1,333 Finance assets, net 7,555 2,231 Other assets 544 666 7,205 --------- --------- ----------- Total Auto Finance assets 576 8,752 10,769 --------- --------- ----------- Total assets $ 170,342 $ 236,027 $ 277,752 --------- --------- ----------- --------- --------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Auto Dealerships Floor plan notes payable $ 92,310 $ 97,823 $ 125,279 Short-term debt 20,050 16,187 13,797 Accounts payable 7,638 12,393 16,930 Accrued expenses 3,922 9,875 10,870 Current portion of long-term debt 1,905 3,169 2,488 --------- --------- ----------- Total current liabilities 125,825 139,447 169,364 Long-term debt 6,735 24,073 29,722 Due to related party 750 1,109 1,151 Deferred income taxes 2,279 2,279 --------- --------- ----------- Total Auto Dealership liabilities 133,310 166,908 202,516 --------- --------- ----------- Auto Finance Short-term debt 4,661 2,318 Accounts payable and other liabilities 285 590 1,518 --------- --------- ----------- Total Auto Finance liabilities 285 5,251 3,836 --------- --------- ----------- Minority interests subject to repurchase 7,962 13,608 14,112 --------- --------- ----------- Stock purchase warrants 1,020 1,330 --------- --------- ----------- Commitments and contingent liabilities Stockholders' Equity Class A Convertible Preferred Stock, $0.0001 par value, shares authorized 4,911; shares issued and outstanding 1,972 and 3,651 at December 31, 1994 and 1995, respectively 1 1 1 Voting Common Stock, $0.0001 par value, shares authorized 15,100; shares issued and outstanding 1,529 and 2,583 at December 31, 1994 and 1995, respectively 1 1 1 Non-voting Common Stock, $0.0001 par value, authorized 1,025; none issued and outstanding Additional paid-in-capital 30,827 54,748 61,295 Accumulated deficit (2,044) (5,510) (5,339) --------- --------- ----------- Total stockholders' equity 28,785 49,240 55,958 --------- --------- ----------- Total liabilities, minority interests subject to repurchase, stock purchase warrants and stockholders' equity $ 170,342 $ 236,027 $ 277,752 --------- --------- ----------- --------- --------- -----------
The accompanying notes are an integral part of these consolidated financial statements. F-4 UNITED AUTO GROUP, INC. Consolidated Statements of Operations (In thousands except per share data)
----------------------------------------------------- (Unaudited) Years ended Three months ended December 31, March 31, ------------------------------- -------------------- 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- Auto Dealerships Vehicle sales $ 528,484 $ 644,380 $ 716,394 $ 141,727 $ 233,139 Finance and insurance 24,666 27,518 29,806 6,791 9,942 Service and parts 52,941 59,731 59,421 14,080 18,638 --------- --------- --------- --------- --------- Total revenues 606,091 731,629 805,621 162,598 261,719 Cost of sales, including floor plan interest for the years ended December 31, 1993, 1994 and 1995 of $3,754, $4,557 and $5,784, respectively 537,688 647,643 720,344 146,054 232,502 --------- --------- --------- --------- --------- Gross profit 68,403 83,986 85,277 16,544 29,217 Selling, general and administrative expenses 66,910 80,415 90,586 20,829 27,618 --------- --------- --------- --------- --------- Operating income (loss) 1,493 3,571 (5,309) (4,285) 1,599 Related party interest income 3,039 800 774 Other interest expense (1,233) (860) (1,438) (156) (914) Equity in loss of uncombined investees (2,899) (831) (109) 12 --------- --------- --------- --------- --------- Income (loss) before income taxes -- Auto Dealerships 260 (188) (4,539) (3,750) 1,471 --------- --------- --------- --------- --------- Auto Finance Revenues 2 530 33 412 Interest expense 174 86 Operating and other expenses 618 1,738 387 590 --------- --------- --------- --------- --------- Loss before income taxes -- Auto Finance (616) (1,382) (354) (264) --------- --------- --------- --------- --------- Total Company Income (loss) before minority interests and provision for income taxes 260 (804) (5,921) (4,104) 1,207 Minority interests (117) (887) 366 873 (500) Benefit (provision) for income taxes (47) 2,089 (536) --------- --------- --------- --------- --------- Net income (loss) $ 96 $ (1,691) $ (3,466) $ (3,231) $ 171 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Net income (loss) per common share $ .07 $ (.51) $ (.67) $ (.87) $ .03 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Weighted average number of common shares outstanding 1,317 3,296 5,201 3,699 6,616 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
The accompanying notes are an integral part of these consolidated financial statements. F-5 UNITED AUTO GROUP, INC. Consolidated Statements of Stockholders' Equity (Dollars in thousands)
------------------------------------------------------------------------------------- Class A Convertible Preferred Stock Common Stock ---------------------- ---------------------- Additional Total Issued Issued Paid-in Accumulated Stockholders' Shares Amount Shares Amount Capital Deficit Equity --------- ----------- --------- ----------- ----------- ----------- ----------- Balances, December 31, 1992 0 1,281,250 $ 1 $ 15,999 $ (449) $ 15,551 Issuance of stock for cash 1,570,000 $ 1 62,500 14,616 14,617 Distribution to stockholder (5,000) (5,000) Net income for 1993 96 96 --------- --- --------- --- ----------- ----------- ----------- Balances, December 31, 1993 1,570,000 1 1,343,750 1 25,615 (353) 25,264 Issuance of stock for cash 401,611 185,486 5,212 5,212 Net loss for 1994 (1,691) (1,691) --------- --- --------- --- ----------- ----------- ----------- Balances, December 31, 1994 1,971,611 1 1,529,236 1 30,827 (2,044) 28,785 Issuance of stock for cash 1,679,118 1,053,549 23,921 23,921 Net loss for 1995 (3,466) (3,466) --------- --- --------- --- ----------- ----------- ----------- Balances, December 31, 1995 3,650,729 1 2,582,785 1 $ 54,748 (5,510) 49,240 Issuance of stock for cash (Unaudited) 364,185 389,692 6,547 6,547 Net income for the three months ended March 31, 1996 (Unaudited) 171 171 --------- --- --------- --- ----------- ----------- ----------- Balances, March 31, 1996 (Unaudited) 4,014,914 $ 1 2,972,477 $ 1 $ 61,295 $ (5,339) $ 55,958 --------- --- --------- --- ----------- ----------- ----------- --------- --- --------- --- ----------- ----------- -----------
The accompanying notes are an integral part of these consolidated financial statements. F-6 UNITED AUTO GROUP, INC. Consolidated Statements of Cash Flows (Dollars in thousands)
-------------------------------------------------------------- (Unaudited) Years ended December 31, Three months ended March 31, ------------------------------------------------------------- ---------------------------------------------- 1993 1994 1995 1995 1996 ----------- ------------------------ ---------------------- ---------------------- ---------------------- Auto Auto Auto Auto Auto Auto Auto Auto Auto Dealerships Dealerships Finance Dealerships Finance Dealerships Finance Dealerships Finance ----------- ----------- ----------- ----------- --------- ----------- --------- ----------- --------- Operating activities: Net income (loss) $ 96 $ (1,075) $ (616) $ (2,084) $ (1,382) $ (2,877) $ (354) $ 435 $ (264) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 924 2,225 20 2,536 284 737 31 746 41 Deferred income tax benefit (2,374) Related party interest income (3,039) (800) (774) Loss on sale of interest in uncombined investee 117 348 Equity in loss of uncombined investee 2,782 483 109 (12) Gain on sales of loans (129) (206) Loans originated (18,769) (575) (19,847) Loans repaid or sold 11,236 45 18,758 Minority interests 117 887 (366) (873) 500 Changes in operating assets and liabilities: Accounts receivable (8,315) (7,042) (1,524) (2,890) (9,137) Inventories (23,982) (12,417) 16,319 (4,558) (8,459) Floor plan notes payable 22,458 14,874 (14,753) 9,099 18,686 Accounts payable and accrued expenses (4,431) (1,239) 288 5,240 302 5,681 (152) 2,065 526 Other 460 (879) (5) (90) 411 (1,246) 10 (260) 1,233 ----------- ----------- ----- ----------- --------- ----------- --------- ----------- --------- Net cash provided by (used in) operating activities (12,673) (1,767) (313) 696 (8,047) 2,382 (995) 4,310 241 ----------- ----------- ----- ----------- --------- ----------- --------- ----------- --------- Investing activities: Purchase of equipment and improvements (1,624) (4,675) (562) (1,496) (243) (652) (12) (1,035) (61) Dealership acquisitions (1,975) (755) (19,921) (8,142) Investment in auto finance subsidiary (907) 907 (4,592) 4,592 (4,593) 4,593 (3,700) 3,700 Funding for subsequent acquisition (1,840) Advances to related parties (1,775) (5,923) (1,496) (390) (31) Investment and advances to uncombined investee (4,087) (799) (152) (245) ----------- ----------- ----- ----------- --------- ----------- --------- ----------- --------- Net cash provided by (used in) investing activities (5,374) (16,347) 345 (30,144) 4,349 (5,787) 4,581 (13,153) 3,639 ----------- ----------- ----- ----------- --------- ----------- --------- ----------- ---------
F-7 UNITED AUTO GROUP, INC. Consolidated Statements of Cash Flows (Continued) (Dollars in thousands) ------------------------------------------------------------------------------------------------------------- Years ended December 31, ------------------------------------------------------------ 1993 1994 1995 ----------- --------------------- ---------------------- Auto Auto Auto Auto Auto Dealerships Dealerships Finance Dealerships Finance ----------- ----------- ------- ----------- -------- Financing activities: Proceeds from issuance of stock 15,209 5,450 25,220 Proceeds from borrowings of long-term debt 2,320 4,299 16,300 Deferred financing costs (2,549) Net borrowings (repayments) of short-term debt 11,023 9,027 (3,863) Payments of long-term debt and capitalized lease obligations (2,680) (1,139) (2,073) Distribution to stockholders and minority interest (5,328) (42) Advances (to) from affiliates 6,162 (7,389) 359 Borrowings of warehouse credit line 14,202 Payments of warehouse credit line (10,005) ----------- ----------- ------- ----------- -------- Net cash provided by financing activities 26,706 10,206 0 33,394 4,197 ----------- ----------- ------- ----------- -------- Net increase (decrease) in cash and cash equivalents 8,659 (7,908) 32 3,946 499 Cash and cash equivalents, beginning of year 0 8,659 0 751 32 ----------- ----------- ------- ----------- -------- Cash and cash equivalents, end of year $ 8,659 $ 751 $ 32 $ 4,697 $ 531 ----------- ----------- ------- ----------- -------- ----------- ----------- ------- ----------- --------
(Unaudited) Three months ended March 31, ---------------------------------------------- 1995 1996 ---------------------- ---------------------- Auto Auto Auto Auto Dealerships Finance Dealerships Finance ----------- -------- ----------- -------- Financing activities: Proceeds from issuance of stock 7,091 8,606 Proceeds from borrowings of long-term debt 7,100 Deferred financing costs Net borrowings (repayments) of short-term debt (3,769) (5,990) Payments of long-term debt and capitalized lease obligations (596) (699) Distribution to stockholders and minority interest Advances (to) from affiliates 1,129 42 Borrowings of warehouse credit line (100) 14,590 Payments of warehouse credit line (17,668) ----------- -------- ----------- -------- Net cash provided by financing activities 3,855 (100) 9,059 (3,078) ----------- -------- ----------- -------- Net increase (decrease) in cash and cash equivalents 450 3,486 217 802 Cash and cash equivalents, beginning of year 751 32 4,697 531 ----------- -------- ----------- -------- Cash and cash equivalents, end of year $ 1,201 $ 3,518 $ 4,914 $ 1,333 ----------- -------- ----------- -------- ----------- -------- ----------- --------
The accompanying notes are an integral part of these consolidated financial statements. F-8 UNITED AUTO GROUP, INC. (Information related to the three months ended March 31, 1995 and 1996 is unaudited) Notes to Consolidated Financial Statements (Dollars in thousands) 1. Organization: United Auto Group, Inc. ("UAG" or the "Company") is engaged in the sale of new and used motor vehicles, finance and insurance products, vehicle service and parts and aftermarket products. Through its wholly-owned consumer finance subsidiary, Atlantic Auto Finance Corporation ("AAFC"), UAG also purchases, sells and services financing contracts on new and used vehicles originated by both UAG and third party dealerships. The Company has through its wholly owned subsidiaries, DiFeo Partnership, Inc. and United Landers, Inc., a 70% interest in the partnerships within the United DiFeo Automotive Group (the "DiFeo Group") and an 80% interest in the corporations of Landers Auto Sales, Inc. ("Landers"), respectively. The DiFeo Group is comprised of twenty-seven automobile dealerships, organized as partnerships, and a management partnership. These partnerships operate in Connecticut, New Jersey and New York and are under common ownership, management and control. Landers is comprised of two automobile dealerships organized as corporations, operating in Arkansas. The Company operates dealerships which hold franchise agreements with a number of automotive manufacturers. In accordance with the individual franchise agreement, 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 operating results of the Company. 2. Summary of Significant Accounting Policies: ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The accounts which require the use of significant estimates are receivables, inventory, taxes, intangibles and accrued expenses. INTERIM FINANCIAL STATEMENTS (UNAUDITED): The interim unaudited financial statements reflect adjustments, consisting only of normal recurring accruals, which are, in the opinion of the Company's management, necessary for a fair presentation of the financial position and results of operations for the periods presented. Operating results for any interim period are not necessarily indicative of the results for a full year. PRINCIPLES OF CONSOLIDATION: These consolidated financial statements include all significant majority-owned subsidiaries and reflect the operating results, assets, liabilities and cash flows for two business segments: auto dealerships and financial services. The assets and liabilities of the auto dealerships segment are classified as current or noncurrent and those of the financial services segment are unclassified. All material accounts and transactions among the consolidated affiliates have been eliminated. Affiliated companies that are 20% to 50% owned are accounted for under the equity method of accounting. RECLASSIFICATIONS: Certain reclassifications have been made to 1993 and 1994 amounts to conform them to the 1995 presentation. 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. F-9 UNITED AUTO GROUP, INC. (Information related to the three months ended March 31, 1995 and 1996 is unaudited) Notes to Consolidated Financial Statements (Continued) (Dollars in thousands) 2. Summary of Significant Accounting Policies: (Continued) REVENUE RECOGNITION -- AUTO DEALERSHIPS: Revenue is recognized by the Company when vehicles are delivered to consumers, finance and insurance income is earned or motor vehicle service work is performed and parts are delivered. An allowance for chargebacks against revenue recognized from Company originated and sold customer finance contracts is established during the period in which the related revenue is recognized. REVENUE RECOGNITION --AUTO FINANCE: Revenue from finance receivables is recognized over the term of the receivable using the interest method. Certain loan origination costs are deferred and amortized over the term of the related receivable as a reduction in financing revenue. Finance receivables are accumulated for eventual sale into a commercial paper conduit (loan warehouse facility). Revenue is recognized upon sale to the conduit. Loan servicing fees on receivables sold to the conduit are recognized as collected. INVENTORY VALUATION: Inventories are stated at the lower of cost or market with cost determined by the following methods:
------------------------ Inventory Component Valuation Method - --------------------------- ------------------------ New vehicles Last in, first out (LIFO) Used vehicles Specific identification Parts, accessories and Factory list price other
New vehicle and parts inventories are purchased primarily from the related vehicle manufacturer. PROPERTY AND EQUIPMENT: Property and equipment are recorded at cost and depreciated over their estimated useful lives, primarily using the straight-line method. Useful lives for purposes of computing depreciation are: Leasehold improvements and -- Economic life or life of equipment under capital the lease, whichever is lease shorter. Equipment, furniture and -- 5 to 7 years fixtures
Expenditures for repairs and maintenance which increase the useful life or substantially increase serviceability of the asset are capitalized. When equipment is sold or otherwise disposed of, the cost and related accumulated depreciation are removed from their respective accounts, and any resulting gain or loss is included in the statement of operations. INCOME TAXES: The Company provides for income taxes in accordance with Statement of Financial Accounting Standard No. 109 "Accounting for Income Taxes" ("SFAS 109") which requires the asset and liability method of accounting for income taxes. Deferred tax assets or liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using enacted tax rates. The Company provides a valuation allowance for net deferred tax assets when it will be more likely than not that taxable income will not be sufficient to realize such assets. F-10 UNITED AUTO GROUP, INC. (Information related to the three months ended March 31, 1995 and 1996 is unaudited) Notes to Consolidated Financial Statements (Continued) (Dollars in thousands) 2. Summary of Significant Accounting Policies: (Continued) INTANGIBLE ASSETS: Intangible assets consists of excess of cost over net assets acquired which is being amortized on a straight-line basis over the estimated benefit period of 40 years. The Company periodically reviews these costs to assess recoverability. Losses in value, if any, are charged to operations in the period such losses are determined to be permanent. Amortization expense was $549, $570 and $904 for the years ended December 31, 1993, 1994 and 1995. The Company's policy with respect to assessing whether there has been a permanent impairment in the value of excess cost over net assets acquired is to compare the carrying value of a business' excess cost over net assets acquired with the anticipated undiscounted future cash flows from operating activities of the business. Factors considered by the Company in performing this assessment include current operating income, trends and other economic factors. FAIR VALUE OF FINANCIAL INSTRUMENTS: The Company's financial instruments consist of cash and cash equivalents and debt. The carrying amount of these financial instruments approximates fair value due either to length of maturity or existence of variable interest rates that approximates prevailing market rates. LONG-LIVED ASSETS: Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" ("SFAS 121") requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset in question may not be recoverable. SFAS 121 was adopted in 1996 and did not have a material effect on the Company's results of operations, cash flows or financial position. AUTO FINANCE -- FINANCE ASSETS: All finance receivables are sold principally into a commercial paper conduit through the issuance of a certificate indicating ownership of the contracts by CXC Incorporated ("CXC"), a Citibank, N. A. related entity. These contracts are carried at the lower of their principal balance outstanding or market value. Market value is estimated based on the characteristics of the finance receivables held for sale and the terms of recent sales of similar finance receivables computed by the Company. While finance receivables are being accumulated for sale into the conduit, they are pledged against a liquidity credit line with Citibank, N.A. Interest on these finance receivables is accrued and credited to interest income based on the daily principal balance outstanding. An allowance for financing losses is provided for the period from the date of purchase to the date of sale. This allowance is shown as a reduction of finance receivables held for sale. As of December 31, 1995, none of the finance receivables qualified as impaired, subject to the terms set forth in Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan." The Company is required to hedge each pool of finance receivables sold to CXC. Swaps against the commercial paper rate have been used to provide protection for the net yield in each pool as required by CXC. The differential to be paid or received as interest rates change is included in the calculation of excess servicing and amortized over the life of the pool. The notional amounts of outstanding hedges were $0 and $10,987 at December 31, 1994 and 1995, respectively. There were no swap agreements outstanding as of December 31, 1994. The fair value of interest rate swap agreements represented an unrecorded liability of $170 as of December 31, 1995. NET INCOME (LOSS) PER COMMON SHARE: The computations of net income (loss) per share are based on the weighted average number of common shares, the weighted average number of preferred shares and warrants outstanding to the extent dilutive. F-11 UNITED AUTO GROUP, INC. (Information related to the three months ended March 31, 1995 and 1996 is unaudited) Notes to Consolidated Financial Statements (Continued) (Dollars in thousands) 3. Acquisition of Landers Auto Sales, Inc.: Effective August 1, 1995, the Company acquired an 80% interest in Landers for $20,000 in cash and $4,014 in notes payable through August 2000. The acquisition was accounted for under the purchase method and the accompanying financial statements reflect the results of operations from the date of acquisition. The excess of purchase price over the underlying estimated fair value of net assets acquired was $25,777. In addition, if Landers achieves certain levels of annual pre-tax earnings, the Company will be obligated to make additional payments during each of the next three years. Any additional purchase price incurred under the terms of this agreement will be recorded as additional cost in excess of net assets acquired. The following unaudited pro forma summary presents the consolidated results of operations of the Company for 1994 and 1995 with pro forma adjustments as if the acquisition had been consummated as of January 1, 1994.
---------------------- December 31, ---------------------- 1994 1995 ---------- ---------- Revenues $ 960,541 $ 969,989 Income before minority interests and provision for income taxes 4,921 502
The foregoing pro forma results are not necessarily indicative of results of operations that would have been reported had the acquisition been completed at January 1, 1994. 4. Inventories: Inventories consist of the following:
----------------------------------- December 31, March 31, ---------------------- 1996 1994 1995 (Unaudited) ---------- ---------- ----------- New vehicles $ 83,393 $ 74,789 $ 90,185 Used vehicles 12,098 24,917 28,832 Parts, accessories and other 5,154 6,220 6,291 ---------- ---------- ----------- 100,645 105,926 125,308 Cumulative LIFO reserve (4,580) (4,370) (4,870) ---------- ---------- ----------- $ 96,065 $ 101,556 $ 120,438 ---------- ---------- ----------- ---------- ---------- -----------
For the years ended December 31, 1993, 1994 and 1995 and for the three months ended March 31, 1995 and 1996, the effect of using the LIFO method as compared to the First In, First Out (FIFO) method was to decrease net income by $1,146 in 1993, increase net loss by $1,446 in 1994 and decrease net loss by $290 in 1995, increase net loss by $200 in March 1995 and decrease net income by $500 in March 1996. F-12 UNITED AUTO GROUP, INC. (Information related to the three months ended March 31, 1995 and 1996 is unaudited) Notes to Consolidated Financial Statements (Continued) (Dollars in thousands) 5. Property and Equipment: Property and equipment consists of the following:
-------------------- December 31, -------------------- 1994 1995 --------- --------- Equipment $ 4,516 $ 4,602 Furniture and fixtures 957 1,237 Equipment under capital lease 2,380 2,380 Leasehold improvements 6,696 7,705 --------- --------- Total 14,549 15,924 Less: Accumulated depreciation and amortization 2,477 3,778 --------- --------- Total property and equipment, net $ 12,072 $ 12,146 --------- --------- --------- ---------
Depreciation and amortization expense for the years ended December 31, 1993, 1994 and 1995 was $1,052, $1,497 and $1,632, respectively. Accumulated amortization, included in accumulated depreciation and amortization above, on equipment under capital lease was approximately $747 and $1,072 at December 31, 1994 and 1995, respectively. 6. Other Assets: Auto dealerships other assets consist of the following:
-------------------- December 31, -------------------- 1994 1995 --------- --------- Restricted cash $ $ 1,840 Investment and advances in uncombined subsidiary 2,134 3,228 Security deposits 679 956 Deferred financing costs 1,685 2,934 Other 1,256 1,170 --------- --------- $ 5,754 $ 10,128 --------- --------- --------- ---------
Restricted cash represents the proceeds from capital stock issued for the purpose of financing an acquisition completed in January 1996. Equity in uncombined subsidiary represents net investment, services provided, cash advances and used vehicle transactions with dealerships where the Company does not own a majority interest. 7. Floor Plan Notes Payable: The DiFeo Group vehicle floor plan agreement is with General Motors Acceptance Corporation ("GMAC"). The Landers new vehicle floor plan agreement is with Chrysler Credit Corporation ("Chrysler"). The Landers used vehicle floor plan agreements are with Chrysler and Benton State Bank. F-13 UNITED AUTO GROUP, INC. (Information related to the three months ended March 31, 1995 and 1996 is unaudited) Notes to Consolidated Financial Statements (Continued) (Dollars in thousands) 7. Floor Plan Notes Payable: (Continued) Floor plan notes payable reflects amounts for the purchase of specific vehicle inventory and consists of the following:
-------------------- December 31, -------------------- 1994 1995 --------- --------- GMAC, bearing interest at prime commercial lending rate plus 1%. The borrowing rate was 9.75% at December 31, 1995 $ 92,310 $ 63,728 Chrysler, bearing interest at LIBOR plus 2.75% or prime plus 0.5%, whichever is less. The borrowing rate was 8.75% at December 31, 1995 31,354 Benton State Bank, bearing interest at the prime commercial lending rate. The borrowing rate was 8.75% at December 31, 1995 2,741 --------- --------- $ 92,310 $ 97,823 --------- --------- --------- ---------
The floor plan agreements grant a collateral interest in substantially all of the Company's inventory. In addition, the GMAC floorplan agreement provides the DiFeo Group with additional borrowing facilities beyond the floor plan agreement (see Notes 8 and 9). Included in the Chrysler vehicle floor plan at December 31, 1995 is $6,928 payable to a related party participating in the floor plan agreements. This was repaid in May 1996. The weighted average interest rate on floor plan borrowings was 7.1% and 8.9% for the years ended December 31, 1994 and 1995, respectively. 8. Short-Term Debt: The DiFeo Group and GMAC have entered into additional short-term and long-term debt agreements which share in the collateral interest granted under the floor plan arrangement. One such agreement permitted maximum borrowings of $15,000 at December 31, 1994 and $10,000 at December 31, 1995, subject to a formula based on parts and used vehicle collateral limitations, and includes covenants that require the maintenance of tangible net worth and other financial ratios. At December 31, 1994 and 1995, $15,000 and $8,187, respectively, were outstanding under this agreement. These borrowings are made at the prime rate plus 1.25%. The borrowing rate at December 31, 1995 was 10.0%. The Company has a $9,000 revolving line of credit with Morgan Guaranty Trust Company of New York that expires on September 30, 1996. At December 31, 1995, $8,000 was outstanding under this agreement. The line of credit bears interest at a variable rate, the prime rate plus two or the Federal Funds rate plus two and one half percent, whichever is greater. The borrowing rate at December 31, 1995 was 10.5%. The weighted average interest rate on short term borrowings was 7.1% and 10.25% for the years ended December 31, 1994 and 1995, respectively. In addition, AAFC maintains a $5,000 loan arrangement with Citibank, N.A. for the purpose of purchasing finance receivables. The amount borrowed by AAFC may not exceed 93% of the outstanding principal balance of eligible receivables pledged to secure the loan. The total amount outstanding under this arrangement at December 31, 1994 and 1995 was $0 and $4,197, respectively. F-14 UNITED AUTO GROUP, INC. (Information related to the three months ended March 31, 1995 and 1996 is unaudited) Notes to Consolidated Financial Statements (Continued) (Dollars in thousands) 9. Long-Term Debt: Long-term debt consists of the following:
-------------------- December 31, -------------------- 1994 1995 --------- --------- Series A and B Senior Notes due 2003, net of unamortized discount of $1,007 $ $ 15,293 Landers term notes, payable in monthly installments through August 2000, bearing interest at 8.0% 3,697 GMAC term loan, payable in equal monthly installments of $17 through March 1998 with a final payment of $1,000 in April 1998; interest at the prime rate plus 1.0% 1,650 1,450 GMAC term loan, payable in equal monthly installments of $25 through June 1999 with a final payment of $1,500 in July 1999; interest at the prime rate plus 1.0% 2,850 2,550 Capitalized lease obligations 2,243 1,686 Other installment loans 1,897 2,566 --------- --------- 8,640 27,242 Less: Current portion 1,905 3,169 --------- --------- $ 6,735 $ 24,073 --------- --------- --------- ---------
The GMAC term loans share in the security interest granted to the lender under the floor plan arrangement. Maturities of long-term debt for the next five years and thereafter are as follows:
--------- Amount --------- 1996 $ 3,169 1997 2,166 1998 2,009 1999 2,484 2000 2,121 2001 and thereafter 16,300 --------- $ 28,249 --------- ---------
On September 22, 1995, the Company finalized a placement on $35,000 of Series A and B Senior Notes (collectively referred to as the "Notes") due in 2003 under which Notes are available to be issued through March 1997. The Company initially issued $16,300 of the Notes at 12.0% with an original issue discount of $1,020, which is being amortized to interest expense over the term of the Notes, increasing the effective interest rate on such Notes to 12.8%. Such interest rate will increase by 2.0% if certain franchisor approvals are not obtained by March 1997 and would be effective as of the date of original issuance of the Notes. The Notes are callable by the Company at a premium as determined pursuant to the placement agreement of up to 10% of the principal balance. The Notes also contain covenants that require the maintenance of certain financial ratios and restrict additional indebtedness. The Notes contain detachable warrants, whereby each warrant grants the holder the option to purchase UAG Common Stock at $.01 per share. The warrants become exercisable after certain franchisor approvals are received and were recorded at their fair value at the date issuance. At December 31, 1995 and March 31, 1996, there were 526,039 warrants outstanding. The warrants expire in 2003. If certain franchisor approvals are not received by March 1997, the warrants will convert to contingent value obligations ("CVO's"). The CVO's are intended to provide the holder with economic benefits substantially similar to those that would have been realized upon exercise of the warrants and sale of the underlying Common Stock. F-15 UNITED AUTO GROUP, INC. (Information related to the three months ended March 31, 1995 and 1996 is unaudited) Notes to Consolidated Financial Statements (Continued) (Dollars in thousands) 10. Operating Lease Obligations: The Company leases its dealership facilities and corporate office under operating lease agreements primarily with related parties. These leases are noncancelable and expire on various dates through 2012. The lease agreements are subject to renewal under essentially the same terms and conditions as the original lease. The following is a schedule by year of future minimum rental payments required under the operating leases as of December 31, 1995.
--------- Amount --------- 1996 $ 5,859 1997 6,002 1998 6,391 1999 6,470 2000 5,286 2001 and thereafter 17,093 --------- $ 47,101 --------- ---------
Total rent expense for the years ended December 31, 1993, 1994 and 1995 approximated $6,367, $6,302 and $7,113, respectively. Rental payments to related parties were $4,272 and $4,502 for the years ended December 31, 1994 and 1995, respectively. 11. Minority Interests Subject to Repurchase: As result of the minority ownership of the DiFeo Group and Landers, the Company has recorded minority interests. The minority owners have the right to require repurchase of their interest by UAG at fair value if they are not converted into UAG common stock in connection with an initial public offering or equity offering. The minority interests were recorded at fair value at the dates of acquisition. 12. Other Related Party Transactions: The Company was owed $10,388, $14,578 and $15,148 from the minority shareholders and certain of their related entities as of December 31, 1994 and 1995 and March 31, 1996, respectively, arising out of advances for certain business acquisitions and working capital advances for dealerships in which the Company has no ownership. Related party interest income represents interest on the above mentioned advances and advances to the uncombined investee. The Company owes a stockholder $750, $1,109 and $1,151 as of December 31, 1994 and 1995 and March 31, 1996, respectively, for working capital advances. Such indebtedness is subject to offset against a guarantee of $2,000 third party indebtedness to the Company. 13. Stock Options: Options have been granted to purchase 127,200 shares of the Company's Common Stock under an employment agreement at an exercise price of twelve dollars and fifty cents per share. These options vest over four years. At December 31, 1995, 31,800 options were exercisable. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 "Accounting for Stock Based Compensation" ("SFAS 123"). SFAS 123 establishes financial and reporting standards for stock based compensation plans. The Company anticipates adopting the disclosure only provisions of this standards during 1996. 14. Stockholders' Equity: On December 29, 1993, UAG and certain investors entered into a private placement agreement (the "Agreement") whereby the investors committed to purchase over a period of time an aggregate 4,911,000 shares of Class A Convertible Preferred Stock (the "Preferred Stock") at ten dollars per share. The Preferred Stock can be issued as UAG calls upon the funds committed by the investors pursuant to the Agreement. F-16 UNITED AUTO GROUP, INC. (Information related to the three months ended March 31, 1995 and 1996 is unaudited) Notes to Consolidated Financial Statements (Continued) (Dollars in thousands) 14. Stockholders' Equity: (Continued) If by December 29, 1999 the Company has not (i) redeemed at least 50% of the Preferred Stock, (ii) consummated a Qualified Public Offering (as defined in the Company's Certificate of Incorporation) or (iii) sold all or substantially all of the Company's assets or merged with or into another entity in a transaction in which 50% or more of the voting control of the Company is transferred (collectively a "Triggering Event"), certain rights of the holders of the Company's Preferred Stock (the "Preferred Investors") under the Agreement will be triggered. Specifically, the Preferred Investors will receive warrants to purchase, at a nominal price, 50% of the fully diluted equity of the Company (after exercise of such warrants) in the form of Common Stock. If a Triggering Event does not occur by December 29, 2000, the Preferred Investors will receive warrants to purchase, at a nominal price, an additional 25% of the fully diluted equity of the Company (after exercise of such warrants) in the form of Common Stock. In lieu of such warrants, after December 29, 1999, the Preferred Investors may elect to receive promissory notes evidencing indebtedness of the Company in an amount equal to 50% of the fair market value of the fully diluted equity of the Company. If a Triggering Event does not occur by December 29, 2000, in lieu of warrants, the Preferred Investors may elect to receive promissory notes in an amount equal to an additional 25% of the fair market value of the fully diluted equity of the Company. Upon the occurrence of any of these events, the holders of the warrants, the warrant shares or the CVOs could experience significant diminution of value, although the warrants contain certain anti-dilution protection in the event the above-described warrants are issued. The Preferred Stock has been included as a component of equity as these rights are incremental and the Preferred Shares will remain outstanding. The Agreement also provides a commitment by existing common stockholders to purchase an aggregate 2,250,000 shares of Common Stock at eight dollars per share. Such shares must be purchased in proportion to Preferred Stock. Common Stock dividends are payable only with the approval of the Preferred Investors. 15. Income Taxes: The provision (benefit) for income taxes consists of the following components:
----------------------------------- Years ended December 31, ----------------------------------- 1993 1994 1995 ----- ----- --------- Currently payable: Federal State and local $ 47 $ 285 -- - --------- Total currently payable 0 0 285 -- - --------- Deferred tax liability (asset): Federal (2,374) State and local 47 -- - --------- Total deferred 47 0 (2,374) -- - --------- Total (benefit) provision $ 47 $ 0 $ (2,089) -- - -- - --------- ---------
F-17 UNITED AUTO GROUP, INC. (Information related to the three months ended March 31, 1995 and 1996 is unaudited) Notes to Consolidated Financial Statements (Continued) (Dollars in thousands) 15. Income Taxes: (Continued) The reasons for the differences between the provision for income taxes using the Federal statutory income tax rate and the tax provisions reported by the Company are as follows:
------------------------------- Years ended December 31, ------------------------------- 1993 1994 1995 --------- --------- --------- Tax provisions computed at the Federal statutory income tax rate $ (33) $ 592 $ 1,944 State and local income taxes, net of Federal benefit (186) Valuation allowance (745) 745 Other (14) 153 (414) --- --------- --------- Benefit (provision) for income taxes $ (47) $ 0 $ 2,089 --- --------- --------- --- --------- ---------
The Company accounts for income taxes in accordance with SFAS 109. Under SFAS 109, deferred income taxes reflect the estimated tax effect of temporary differences between assets and liabilities for financial accounting purposes and those amounts as measured by tax laws and regulations. The components of deferred income tax assets and liabilities were as follows:
-------------------- Years ended December 31, -------------------- 1994 1995 --------- --------- Deferred Tax Assets Net operating loss carryforward $ 2,214 $ 4,467 Capital loss carryforwards 201 Organization costs 259 241 All other 244 --------- --------- Total deferred tax assets 2,473 5,153 Valuation allowance (745) --------- --------- Net deferred tax assets 1,728 5,153 Deferred Tax Liabilities Partnership investments (1,728) (2,179) Sale of finance receivables (47) All other (53) --------- --------- Total deferred tax liabilities (1,728) (2,279) --------- --------- Net deferred tax assets (liabilities) $ 0 $ 2,874 --------- --------- --------- ---------
The Company had determined, based upon prior taxable losses, that taxable income would probably not be sufficient to recognize a net deferred tax asset at December 31, 1993 and 1994. Accordingly, a valuation allowance was provided for the net deferred tax assets. Based upon the restructuring of dealerships and other operational measures implemented in 1995 (see Note 16), the Company determined that it was more likely than not that future taxable income would be sufficient to fully recognize the net deferred tax asset at December 31, 1995. At December 31, 1995, the Company has $10,600 of regular tax, net operating loss carryforwards for Federal income tax purposes expiring from 2008 to 2010, of which $3,300 is subject to an annual limitation of approximately $1,300 per year as imposed by Section 382 of the Internal Revenue Code. F-18 UNITED AUTO GROUP, INC. (Information related to the three months ended March 31, 1995 and 1996 is unaudited) Notes to Consolidated Financial Statements (Continued) (Dollars in thousands) 16. Terminated Franchises: During the first quarter of 1995, the Company commenced a restructuring of its then unprofitable DiFeo Group. Such restructuring included the termination of certain unprofitable dealerships, a reduction in personnel of approximately 250 employees, the implementation of pay plans linked to net profit and the liquidation of outdated inventory. 17. Supplemental Cash Flow Information: The following table presents certain supplementary information to the Consolidated Statements of Cash Flows:
----------------------------------------------------------------- 1993 1994 1995 ----------- -------------------------- ------------------------ Auto Auto Auto Auto Auto Dealerships Dealerships Finance Dealerships Finance ----------- ----------- ------------- ----------- ----------- Supplemental information: Cash paid for interest $ 4,901 $ 6,385 $ 8,437 $ 109 Cash paid for income taxes 3 Non-cash financing activities: Stock issuance costs amortized against proceeds from issuance of stock 883 543 910 Dealership acquisition cost financed by long-term debt 4,014 Capitalized lease obligations 1,777 433 Warrants issued 1,020
18. Subsequent Events: Effective January 1, 1996, the Company acquired a 100% interest in Atlanta Toyota, Inc. for a purchase price consisting of $9,100 in cash plus $2,400 in notes. This acquisition was accounted for under the purchase method and the accompanying financial statements reflect the results of operations from the date of acquisition. In order to finance the acquisition, the Company issued additional Preferred Stock and Common Stock in the amount of $6,100 and issued Notes in the amount of $4,400 at an interest rate of 11.60%. On May 1, 1996, the Company acquired a 100% interest in Steve Rayman Nissan, Inc. for a purchase price of $11,500 in cash. This acquisition will be accounted for under the purchase method and the financial statements will reflect the results of operations from the date of acquisition. The dealership has been renamed United Nissan. In order to finance the acquisition, the Company issued additional Preferred Stock and Common Stock in the amount of $7,380 and issued Notes in the amount of $4,620 at an interest rate of 11.95%. The following unaudited pro forma summary presents the consolidated results of operations of the Company, Landers and the aforementioned acquisitions for 1994 and 1995 with pro forma adjustments as if these transactions had been consummated as of January 1, 1994.
-------------------- December 31, -------------------- 1994 1995 --------- --------- Revenues $1,122,463 $1,144,823 Income before minority interests and provision for income taxes 6,678 4,187
The foregoing pro forma results are not necessarily indicative of results of operations that would have been reported had the acquisitions been completed at January 1, 1994. F-19 Report of Independent Accountants To the Stockholders of Landers Auto Sales, Inc. We have audited the accompanying balance sheets of Landers Auto Sales, Inc. as of July 31, 1995 and December 31, 1994 and the related statements of operations, retained earnings and cash flows for the period ended July 31, 1995 and the years ended December 31, 1994 and 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Landers Auto Sales, Inc. as of July 31, 1995 and December 31, 1994 and the results of its operations and its cash flows for the period ended July 31, 1995 and the years ended December 31, 1994 and 1993 in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. Princeton, New Jersey May 31, 1996 F-20 LANDERS AUTO SALES, INC. Balance Sheets (Dollars in thousands)
------------------------ December 31, July 31, 1994 1995 ------------- --------- Assets: Current Assets Cash $ 3,229 $ 2,278 Accounts receivable 6,948 6,593 Inventories 26,871 22,433 Other current assets 29 ------------- --------- Total current assets 37,048 31,333 ------------- --------- Property and equipment, net 871 927 Intangible assets 55 49 ------------- --------- Total assets $ 37,974 $ 32,309 ------------- --------- ------------- --------- Liabilities and stockholders' equity: Current Liabilities Floor plan notes payable $ 26,328 $ 21,384 Current portion of long-term debt 88 115 Due to stockholders 2,669 2,046 Accounts payable 1,374 1,337 Accrued expenses 959 1,313 Income taxes payable 1,623 336 Accrued dividends 1,545 ------------- --------- Total current liabilities 33,041 28,076 ------------- --------- Long-term debt -- net of current portion 187 239 ------------- --------- Total liabilities 33,228 28,315 ------------- --------- Commitments and contingent liabilities Stockholders' equity: Common stock, no par value; authorized 100 shares, issued and outstanding 10 shares 805 805 Retained earnings 3,941 3,189 ------------- --------- Total stockholders' equity 4,746 3,994 ------------- --------- Total liabilities and stockholders' equity $ 37,974 $ 32,309 ------------- --------- ------------- ---------
The accompanying notes are an integral part of the financial statements. F-21 LANDERS AUTO SALES, INC. Statements of Operations (Dollars in thousands)
---------------------------------- Period Years ended ended July December 31, 31, ---------------------- ---------- 1993 1994 1995 ---------- ---------- ---------- Sales $ 163,343 $ 228,912 $ 164,368 Cost of sales, including floor plan interest for the years ended December 31, 1993 and 1994 and for the period ended July 31, 1995 of $274, $1,922 and $1,503, respectively 153,631 208,932 147,566 ---------- ---------- ---------- Gross profit 9,712 19,980 16,802 Selling, general and administrative expenses 9,530 15,445 10,132 ---------- ---------- ---------- Income from operations 182 4,535 6,670 Other income (expense), net 214 209 242 ---------- ---------- ---------- Income before income taxes 396 4,744 6,912 Provision for income taxes 181 1,810 449 ---------- ---------- ---------- Net income $ 215 $ 2,934 $ 6,463 ---------- ---------- ---------- ---------- ---------- ----------
The accompanying notes are an integral part of the financial statements. F-22 LANDERS AUTO SALES, INC. Statements of Retained Earnings (Dollars in thousands) Retained earnings, December 31, 1992 $ 850 Net income for the year 215 ------ Retained earnings, December 31, 1993 1,065 Dividends (58) Net income for the year 2,934 ------ Retained earnings, December 31, 1994 3,941 Dividends (7,215) Net income for the period 6,463 ------ Retained earnings, July 31, 1995 $ 3,189 ------ ------
The accompanying notes are an integral part of the financial statements. F-23 LANDERS AUTO SALES, INC. Statements of Cash Flows (Dollars in thousands)
------------------------------- Period Years ended ended December 31, July 31, -------------------- --------- 1993 1994 1995 --------- --------- --------- Operating activities: Net income $ 215 $ 2,934 $ 6,463 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 177 290 159 Amortization 38 27 7 Net loss (gain) on sale of assets 19 (5) Changes in operating assets and liabilities: Accounts receivable (2,236) (2,390) 353 Inventories (858) (7,534) 4,439 Other current assets (534) 654 (29) Floor plan notes payable 1,862 5,954 (4,944) Accounts payable 523 89 (37) Accrued expenses 583 292 354 Income taxes payable (319) 1,623 (1,287) --------- --------- --------- Net cash provided by (used in) operating activities (549) 1,958 5,473 Investing activities: Acquisition of property and equipment (365) (414) (76) Proceeds from sale of assets 13 21 --------- --------- --------- Net cash used in investing activities (365) (401) (55) Financing activities: Payment on debt (30) (96) (76) Net increase (decrease) in cash overdrafts 1,015 (1,015) Net increase (decrease) in due to stockholders (67) 2,201 (623) Dividends paid (5,670) --------- --------- --------- Net cash provided by (used in) financing activities 918 1,090 (6,369) --------- --------- --------- Net increase (decrease) in cash 4 2,647 (951) Cash, beginning of period 578 582 3,229 --------- --------- --------- Cash, end of period $ 582 $ 3,229 $ 2,278 --------- --------- --------- --------- --------- ---------
The accompanying notes are an integral part of the financial statements. F-24 LANDERS AUTO SALES, INC. Statements of Cash Flows -- Supplemental Information (Dollars in thousands)
------------------------------------------- Period Years ended December 31, ended July ------------------------------ 31, 1993 1994 1995 --------------- ------------- ----------- Supplemental cash flow information: Cash paid during the period: Interest $ 183 $ 1,966 $ 1,525 Income taxes 993 88 1,804
Supplemental Disclosures of Non-Cash Activities: During the years ended December 31, 1993 and 1994 and the period ended July 31, 1995, the Company purchased equipment and vehicles totaling $88, $70 and $125, respectively, through direct financing. During the period ended July 31, 1995, the Company acquired computer equipment totaling $31 through a capital lease. During the year ended December 31, 1993, the Company entered into the capital lease of a computer for $230. During the year ended December 31, 1994, a Company vehicle was destroyed. The note relating to the vehicle in the amount of $20 was subsequently paid off by the insurance company in full. During the year ended December 31, 1994, the Company paid dividends to stockholders in the form of Company owned land with a cost and a fair value of $58. During the period ended July 31, 1995, the Company accrued dividends to stockholders in the amount of $1,545. The accompanying notes are an integral part of the financial statements. F-25 LANDERS AUTO SALES, INC. Notes to Financial Statements (Dollars in thousands) 1. Organization: The December 31, 1993 financial statements of Landers Auto Sales, Inc. (the "Company") were prepared on a consolidated basis and included the accounts of its wholly owned subsidiaries, Landers Oldsmobile-GMC, Inc. and Landers Jeep-Eagle, Inc. As of December 22, 1994, Landers Oldsmobile-GMC, Inc. and Landers Jeep-Eagle, Inc. were merged into Landers Auto Sales, Inc. and operate as divisions of Landers Auto Sales, Inc. under the trade names of Landers Oldsmobile-GMC Trust and Landers Jeep-Eagle/Chrysler-Plymouth-Dodge, respectively. All material divisional accounts and transactions have been eliminated. The Company, operating in Benton, Arkansas, sells and services new Oldsmobile, GMC Trucks, Jeep, Eagle, Chrysler, Plymouth, Dodge cars and trucks and used automobiles, and finance insurance and service contracts thereon. The Company operates dealerships which hold franchise agreements with a number of automotive manufacturers. In accordance with the individual franchise agreement, 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 operating results of the Company. 2. Summary of Significant Accounting Policies: The following is a summary of significant accounting policies followed in the preparation of the financial statements. ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. REVENUE RECOGNITION: Revenue is recognized by the Company when vehicles and parts are delivered to consumers and when service work is performed. INVENTORIES: Inventories are stated at the lower of cost or market with cost determined by the following methods: new vehicles are valued at the last-in, first-out (LIFO) method; used vehicles at the specific identification method; and parts, accessories and other at factory list price. PROPERTY AND EQUIPMENT: Equipment and improvements are recorded at cost and depreciated over their estimated useful lives, using the straight-line and accelerated methods. Useful lives of equipment and improvements for purposes of computing depreciation are: Leasehold improvements -- Economic life or life of the lease, whichever is shorter. Equipment, furniture and -- 5 to 7 years fixtures
Expenditures for repairs and maintenance which increase the useful life or substantially increase serviceability of the asset are capitalized. All others are charged to expense as incurred. When equipment is sold or otherwise disposed of, the cost and related accumulated depreciation are removed from their respective accounts and any resulting gain or loss is included in the statement of operations. AMORTIZATION: Amortization of intangibles is computed on the straight-line method. The period of amortization is based upon the estimated time of benefit assigned to intangible assets when acquired. F-26 LANDERS AUTO SALES, INC. Notes to Financial Statements (Continued) (Dollars in thousands) 3. Concentration of Credit Risk: The Company's significant concentration of credit risk is with its cash. The Company maintains cash balances at several financial institutions located in Arkansas which are at times in excess of federally-insured amounts. 4. Inventories: Inventories consist of the following items as of:
------------------------ December 31, July 31, 1994 1995 ------------- --------- New vehicles $ 18,945 $ 13,001 Used vehicles 7,903 9,517 Parts, accessories and other 1,503 1,435 ------------- --------- 28,351 23,953 Cumulative LIFO reserve 1,480 1,520 ------------- --------- $ 26,871 $ 22,433 ------------- --------- ------------- ---------
If the FIFO method had been used instead of the LIFO method, inventories would have been higher by $1,480 and $1,520 at December 31, 1994 and July 31, 1995, respectively. 5. Property and Equipment: Property and equipment consists of the following as of:
-------------------------- December 31, July 31, 1994 1995 ------------- ----------- Buildings and leasehold improvements $ 249 $ 289 Machinery and shop equipment 707 791 Furniture and fixtures 487 542 Company vehicles 147 148 ------ ----------- Total 1,590 1,770 Less: Accumulated depreciation and amortization 719 843 ------ ----------- Total property and equipment, net $ 871 $ 927 ------ ----------- ------ -----------
The Company has entered into several leases of computer equipment. The leases meet the criteria of a capital lease and, accordingly, have been recorded as such. The leases are noncancelable and expire in September 1998. The following is a schedule of the computer equipment under capital leases at December 31, 1994 and July 31, 1995:
---------------------------- December 31, July 31, 1994 1995 --------------- ----------- Computer equipment $ 230 $ 260 Accumulated depreciation (120) (147) ----- ----- $ 110 $ 113 ----- ----- ----- -----
F-27 LANDERS AUTO SALES, INC. Notes to Financial Statements (Continued) (Dollars in thousands) 6. Floor Plan Notes Payable: The amounts payable to financial institutions under trust receipt transactions are collateralized by liens on inventories of specific new and used vehicles. Floor plan notes payable for new and used vehicles are as follows as of:
---------------------------- December 31, July 31, 1994 1995 ------------- ------------- Chrysler Credit Corporation: Interest rate on new and used vehicles is prime plus 1/2%; collateralized by specific motor vehicles and the personal guarantees of the stockholders $ 19,027 $ 15,091 Interest is at prime plus 1%; collateralized by specific motor vehicles and the personal guarantees of the stockholders 5,416 3,762 Benton Savings Bank: Interest is at prime; collateralized by specific motor vehicles and the personal guarantees of the stockholders 1,885 2,531 ------------- ------------- Total floor plan notes payable -- new and used vehicles $ 26,328 $ 21,384 ------------- ------------- ------------- -------------
The prime rate at December 31, 1994 and July 31, 1995 was 8.5% and 8.75%, respectively. Included in the Chrysler vehicle floor plan at December 31, 1994 and July 31, 1995 is $126 and $0, respectively, payable to a related party participating in the floor plan agreements. 7. Long-Term Debt: Long-term debt consists of the following as of:
---------------------------- December 31, July 31, 1994 1995 --------------- ----------- Benton State Bank: Various notes payable; interest is 7%. Monthly payment of $4 includes principal and interest; collateralized by specific vehicles and various Company assets expiring through June 1998 $ 102 $ 113 Chrysler Credit Corporation: Interest is 7.5%. Monthly principal payment of $2, plus interest; collateralized by specific equipment expiring June 2000 12 76 Capital lease obligations: Interest is 8.4%. Monthly payments are $5. 161 166 --- --- Total 275 355 Less -- current portion 88 116 --- --- Long-term debt $ 187 $ 239 --- --- --- ---
F-28 LANDERS AUTO SALES, INC. Notes to Financial Statements (Continued) (Dollars in thousands) 7. Long-Term Debt: (Continued) Principal maturities of long-term debt in each of the next five years are as follows:
----------- Twelve month period ending July 31, Amount - ------------------------------------------------------------------------------------- ----------- 1996 $ 116 1997 115 1998 99 1999 15 2000 10 --- Total $ 355 --- ---
Interest expense on all indebtedness amounted to $279, $1,989 and $1,504 for the years ended December 31, 1993 and 1994 and for the period ended July 31, 1995, respectively. 8. Related Party Transactions: The Company leases its buildings and lots from Steve Landers, John Landers and Bob Landers, stockholders of the Company. Rent expense for the year ended December 31, 1994 and the period ended July 31, 1995 amounted to $429 and $378, respectively. Effective August 1, 1995, the Company entered into a new twenty year lease agreement with such stockholders. Future minimum lease payments are as follows:
--------- Twelve month period ending July 31, Amount - ------------------------------------------------------------------------------------ --------- 1996 $ 540 1997 540 1998 540 1999 540 2000 540 Thereafter 8,100 --------- Total $ 10,800 --------- ---------
The balance due to stockholders at December 31, 1994 and July 31, 1995 totaled $2,669 and $2,046, respectively. The stockholders are paid interest at a rate of 2% above the current certificate of deposit interest which are adjusted monthly and payable on demand. The balance was repaid on August 15, 1995. 9. Provisions for Income Taxes: Prior to January 1, 1995, the Company was treated as a C Corporation for federal income tax purposes. As of January 1, 1995, the Company elected to be treated as an S Corporation. Under this election, the Company's stockholders were responsible for reporting the Company's federal taxable income on their personal income tax returns. F-29 LANDERS AUTO SALES, INC. Notes to Financial Statements (Continued) (Dollars in thousands) 9. Provisions for Income Taxes: (Continued) The provision for income taxes consists of the following:
----------------------------------- Years Ended December Period Ended 31, July 31, 1993 1994 1995 --------- --------- ------------- Federal $ 166 $ 1,506 $ 449 State 15 304 0 --------- --------- ------ $ 181 $ 1,810 $ 449 --------- --------- ------ --------- --------- ------
Prior to January 1, 1995, deferred income taxes were recognized for tax consequences of temporary difference by applying enacted statutory tax rates, applicable to future years, to differences between the financial reporting and the tax basis of existing assets and liabilities. These differences relate primarily to depreciation and amortization of intangibles which were minimal in 1994 and 1993. Prior to January 1, 1995, the Company's effective income tax rate differed from the Federal statutory tax rate principally due to state income taxes and certain expenses which are not deductible for tax purposes. Such non-deductible expenses were minimal during 1994 and 1993. The provision for income tax in 1995 relates to the recapture of the LIFO reserve upon the Company's S Corporation election. 10. Profit Sharing Plan: The Company maintains a profit sharing plan for all employees over the age of 21 who have completed one year of service. Contributions to the plan are at management's discretion. Contributions for the year ended December 31, 1993 and 1994 and the period ended July 31, 1995 amounted to $190, $300 and $117, respectively. 11. Reclassifications: Certain amounts in the 1994 and 1993 financial statements have been reclassified to conform to the presentation adopted in 1995. 12. Subsequent Event: On August 15, 1995, the stockholders of the Company sold 80% of the stock to United Auto Group, Inc. Upon completion of the sale, two of the original stockholders each had a 10% interest in the Company. The remaining original stockholder held no interest in the Company. F-30 Report of Independent Accountants To the Stockholder Atlanta Toyota, Inc. We have audited the accompanying balance sheets of Atlanta Toyota, Inc. as of December 31, 1994 and 1995 and the related statements of operations, retained earnings, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Atlanta Toyota, Inc. as of December 31, 1994 and 1995 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. Princeton, New Jersey June 30, 1996 F-31 ATLANTA TOYOTA, INC. Balance Sheets (Dollars in thousands)
-------------------- December 31, -------------------- 1994 1995 --------- --------- Assets Current Assets: Cash $ 1,677 $ 555 Accounts receivable, net of allowance for doubtful accounts ($4 and $7 for 1994 and 1995, respectively) 1,069 1,714 Current portion of notes receivable from related parties, net of allowance for doubtful accounts of $219 and $378 in 1994 and 1995, respectively) 622 842 Inventories 8,282 8,123 Other current assets 11 1 --------- --------- Total current assets 11,661 11,235 Property and equipment, net 336 1,150 Notes receivable from related parties, net of allowance for doubtful accounts ($128 and $379 in 1994 and 1995, respectively), non-current portion 357 857 Intangible assets 32 30 Other assets 2 1 --------- --------- Total assets $ 12,388 $ 13,273 --------- --------- Liabilities and Stockholders' Equity Current Liabilities: Floor plan notes payable $ 8,627 $ 8,847 Accounts payable 1,277 1,639 Accrued expenses 510 720 Deferred revenue 2,701 2,762 Reserve for chargebacks of finance and insurance income 243 471 --------- --------- Total Current Liabilities 13,358 14,439 --------- --------- Commitments and contingent liabilities Stockholder's equity: Common stock -- authorized, 10,000 shares of $.10 par value; issued and outstanding 1,000 shares 0 0 Distributions in excess of earnings (970) (1,166) --------- --------- Total stockholder's equity (970) (1,166) --------- --------- Total liabilities and stockholder's equity $ 12,388 $ 13,273 --------- --------- --------- ---------
The accompanying notes are an integral part of the financial statements. F-32 ATLANTA TOYOTA, INC. Statements of Operations (Dollars in thousands)
Years ended December 31, ---------------------------------- 1993 1994 1995 ---------- ---------- ---------- Sales $ 104,080 $ 114,394 $ 112,162 Cost of sales, including floor plan interest for the years ended December 31, 1993, 1994 and 1995 of $440, $540 and $752, respectively 90,556 100,350 98,969 ---------- ---------- ---------- Gross profit 13,524 14,044 13,193 Selling, general and administrative 11,067 11,938 11,182 ---------- ---------- ---------- Income from operations 2,457 2,106 2,011 Other income (expense), net (148) (105) 17 ---------- ---------- ---------- Net income $ 2,309 $ 2,001 $ 2,028 ---------- ---------- ---------- ---------- ---------- ----------
The accompanying notes are an integral part of the financial statements. F-33 ATLANTA TOYOTA, INC. Statements of Retained Earnings (Dollars in thousands)
Distribution in excess of earnings at December 31, 1992 $ (552) Net income for the year 2,309 Distributions to stockholder (2,114) ------ Distribution in excess of earnings at December 31, 1993 (357) Net income for the year 2,001 Distributions to stockholder (2,614) ------ Distribution in excess of earnings at December 31, 1994 (970) Net income for the year 2,028 Distributions to stockholder (2,224) ------ Distribution in excess of earnings at December 31, 1995 $ (1,166) ------ ------
The accompanying notes are an integral part of the financial statements. F-34 ATLANTA TOYOTA, INC. Statements of Cash Flows (Dollars in thousands)
Years ended December 31, ------------------------------- 1993 1994 1995 --------- --------- --------- Operating activities: Net income $ 2,309 $ 2,001 $ 2,028 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 287 240 215 Net loss (gain) on sales of assets (15) 4 Provision for losses on accounts and notes receivable 323 143 413 Provision for chargebacks on finance and insurance income and warranty claims 393 311 228 Changes in operating assets and liabilities: Accounts and notes receivable (619) (482) (1,776) Inventories (922) 1,043 243 Prepaid expenses (20) 55 10 Other assets (3) 1 1 Floorplan notes payable 2,514 (790) 223 Accounts payable and accrued liabilities (888) 751 635 --------- --------- --------- Net cash provided by operating activities 3,359 3,277 2,220 --------- --------- --------- Investing activities: Refund of deposit 110 Purchases of equipment and leasehold improvements (351) (107) (1,115) Proceeds from sale of assets 53 12 --------- --------- --------- Net cash provided by (used for) investing activities (298) 15 (1,115) --------- --------- --------- Financing activities: Payments on long-term debt (250) Net payments on notes payable on rental vehicles (65) (88) (3) Principal payments on capital lease obligations (121) Distributions to stockholders (2,114) (2,614) (2,224) --------- --------- --------- Net cash used in financing activities (2,550) (2,702) (2,227) --------- --------- --------- Net increase (decrease) in cash 511 590 (1,122) Cash, beginning of year 576 1,087 1,677 --------- --------- --------- Cash, end of year $ 1,087 $ 1,677 $ 555 --------- --------- --------- --------- --------- --------- Supplemental cash flow information: Cash paid during the period for interest $ 432 $ 540 $ 753
The accompanying notes are an integral part of the financial statements. F-35 ATLANTA TOYOTA, INC. Notes to Financial Statements (Dollars in thousands) 1. Organization: Atlanta Toyota, Inc. (the "Company"), a Texas Corporation, operating in Duluth, Georgia, sells and services new Toyota and Buick vehicles and used automobiles, as well as finance, insurance and service contracts thereon. The Company operates two franchise agreements with automotive manufacturers. In accordance with the individual franchise agreement, 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 operating results of the Company. 2. Summary of Accounting Policies: The following is a summary of significant accounting policies followed in the preparation of the financial statements. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. REVENUE RECOGNITION Revenue is recognized by the Company when vehicles and parts are delivered to consumers and when service work is performed. NOTES RECEIVABLE In the ordinary course of business, the Company sells used vehicles on an installment payment basis through a related acceptance corporation installment receivables that generally range from twelve to fifteen months. The related acceptance corporation collects the installment payments and transmits to the Company its portion periodically. The installment receivables are collateralized by the related vehicle sold. Management provides an allowance for estimated uncollectible amounts based on historical experience and an evaluation of specific past-due notes. INVENTORIES Inventories are stated at the lower of cost or market with cost determined by the following methods: new vehicles are valued at the last-in, first-out (LIFO) method; used vehicles at the specific identification method; and parts, accessories and other at factory list price. PROPERTY AND EQUIPMENT Equipment and improvements are recorded at cost and depreciated over their estimated useful lives, principally on a straight-line basis. Leasehold improvements are amortized over the lives of the respective leases or the service lives of the improvements, whichever is shorter. Expenditures for repairs and maintenance which increase the useful life or substantially increase serviceability of the asset are capitalized. All others are charged to expense as incurred. When equipment is sold or otherwise disposed of, the cost and related accumulated depreciation are removed from their respective accounts and any resulting gain or loss is included in the statement of operations. AMORTIZATION Amortization of intangibles is computed on the straight-line method. The period of amortization is based upon the estimated time of benefit assigned to intangible assets when acquired. F-36 ATLANTA TOYOTA, INC. Notes to Financial Statements (Continued) (Dollars in thousands) 2. Summary of Accounting Policies: (Continued) RESERVE FOR CHARGEBACKS OF FINANCE AND INSURANCE INCOME Provisions for chargebacks of finance and insurance income resulting from customer prepayments and repossessions are recorded based on management's estimates and historical experience. LIABILITY FOR SERVICE CONTRACT WARRANTY CLAIMS The Company sells extended service contracts on vehicles. A liability for future repair costs covered by these service contracts and amounts for future contract cancellations is established based on management's estimates and historical experience. INCOME TAXES The income taxes on the net earnings of the Company are payable personally by the stockholder pursuant to an election under Subchapter S of the Internal Revenue Code not to have the Company taxed as a corporation. Accordingly, no provision for income taxes has been made in these financial statements. 3. Concentration of Credit Risk: The Company's significant concentration of credit risk is with its cash and notes receivable from a related party. The Company maintains cash balances at several financial institutions located in Georgia which are at times in excess of federally insured amounts. The notes receivable are from a related acceptance corporation and are supported by installment receivables that generally range from twelve to fifteen months. 4. Inventories: Inventories consist of the following:
-------------------- December 31, 1994 1995 --------- --------- New vehicles $ 8,867 $ 7,517 Used vehicles 872 2,283 Parts, accessories and other 645 625 --------- --------- 10,384 10,425 Cumulative LIFO reserve (2,102) (2,302) --------- --------- $ 8,282 $ 8,123 --------- --------- --------- ---------
If the FIFO method had been used instead of the LIFO method, inventories would have been higher by $2,102 and $2,302 at December 31, 1994 and 1995, respectively. 5. Property and Equipment: Property and equipment consists of the following:
-------------------- December 31, 1994 1995 --------- --------- Furniture, fixtures and equipment $ 995 $ 944 Service vehicles 309 332 Leasehold improvements 29 241 Construction in progress 786 --------- --------- Total 1,333 2,303 Less: Accumulated depreciation and amortization 997 1,153 --------- --------- Total property and equipment, net $ 336 $1,150 --------- --------- --------- ---------
F-37 ATLANTA TOYOTA, INC. Notes to Financial Statements (Continued) (Dollars in thousands) 6. Floor Plan Notes Payable: The amounts payable to financial institutions under trust receipt transactions are collateralized by liens on inventories of specific new and used vehicles. Notes payable for new and used vehicles at December 31 are as follows:
-------------------------- December 31, 1994 1995 ------------ ------------ General Electric Capital Corporation: Interest rate on new and used vehicles is 8.5% and 8.75%, respectively; collateralized by specific motor vehicles $8,547 $8,770 South East Toyota Distributors: Interest is at prime; collateralized by specific motor vehicles and the personal guarantee of the stockholder 80 77 ------------ ------------ Total notes payable -- new and used vehicles $8,627 $8,847 ------------ ------------ ------------ ------------
The prime rate at December 31, 1994 and 1995 was 8.5%. 7. Operating Lease Commitments: The Company conducts its operations in leased facilities under a long-term operating lease agreement with a related party requiring monthly payments of approximately $90 through March 1997. Total rent expense paid was $1,072, $1,089 and $1,085 for 1993, 1994 and 1995, respectively. 8. Related Party Transactions: The Company utilizes an advertising agency which is owned by the Company's stockholder. The agency charges the Company an agency fee of fifteen percent of total advertising costs plus a monthly consulting fee. Such advertising costs were $1,638, $1,673 and $1,624 and total agency and consulting fees were $271, $281 and $274 in 1993, 1994 and 1995, respectively. The Company contracts with a related party which is majority owned by the Company's stockholder to administer extended service contracts sold to customers. A fee of forty-two dollars per contract is charged for administration. Total administration fees were approximately $81, $70 and $62 in 1993, 1994 and 1995, respectively. The Company sells used car notes receivable to an acceptance corporation which is majority owned by the Company's stockholder. The related notes receivable totaled $1,200 and $2,585 at December 31, 1994 and 1995, respectively. 9. Reclassifications: Certain amounts in the 1993 and 1994 financial statements have been reclassified to conform to the presentation adopted in 1995. 10. Subsequent Event: On January 16, 1996, the stockholder of Atlanta Toyota, Inc. sold 100% of the stock to United Auto Group, Inc. F-38 Report of Independent Accountants To the Stockholders of Steve Rayman Nissan, Inc.: We have audited the accompanying balance sheets of Steve Rayman Nissan, Inc. as of December 31, 1995 and 1994, and the related statements of operations, retained earnings and cash flows for each of the two years in the period ended December 31, 1995 and from the date of inception (April 5, 1993) to December 31, 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Steve Rayman Nissan, Inc. as of December 31, 1995 and 1994 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1995 and from the date of inception (April 5, 1993) to December 31, 1993, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. Princeton, New Jersey June 14, 1996 F-39 STEVE RAYMAN NISSAN, INC. Balance Sheets (Dollars in thousands except per share amounts)
--------------------------------- December 31, (Unaudited) -------------------- March 31, 1994 1995 1996 --------- --------- ----------- ASSETS Current assets: Cash $ 187 $ 6 $ 267 Accounts receivable 942 2,522 2,153 Inventories 4,172 4,514 7,467 Prepaid expenses and other assets 12 33 104 --------- --------- ----------- Total current assets 5,313 7,075 9,991 Leasehold improvements, furniture and equipment, net 281 205 188 Intangibles, net 619 543 525 --------- --------- ----------- Total assets $ 6,213 $ 7,823 $ 10,704 --------- --------- ----------- --------- --------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Floor plan notes payable $ 2,954 $ 4,100 $ 6,073 Current portion of long-term debt 100 100 100 Current portion of payable for noncompete agreements 75 75 75 Current portion of obligation under capital lease 71 70 10 Accounts payable 392 734 1,401 Accrued expenses 352 471 308 --------- --------- ----------- Total current liabilities 3,944 5,550 7,967 Long-term debt, net of current portion 225 125 126 Payable for noncompete agreements, non-current 550 475 456 Obligation under capital lease, non-current 133 63 34 --------- --------- ----------- Total liabilities 4,852 6,213 8,583 Commitments and contingent liabilities Stockholders' equity: Common stock, par value $100 per share, authorized issued and outstanding 5,000 shares 500 500 500 Additional paid-in capital 100 100 100 Retained earnings 761 1,010 1,521 --------- --------- ----------- Total stockholders' equity 1,361 1,610 2,121 --------- --------- ----------- Total liabilities and stockholders' equity $ 6,213 $ 7,823 $ 10,704 --------- --------- ----------- --------- --------- -----------
The accompanying notes are an integral part of the financial statements. F-40 STEVE RAYMAN NISSAN, INC. Statements of Operations (Dollars in thousands)
Nine months (Unaudited) ended Years ended Three months ended December 31, December 31, March 31, ------------- -------------------- -------------------- 1993 1994 1995 1995 1996 ------------- --------- --------- --------- --------- Sales $ 27,225 $ 46,036 $ 60,268 $ 13,072 $ 14,655 Cost of sales, including floor plan interest of $164, $262 and $434 for 1993, 1994 and 1995, respectively 22,890 39,435 50,166 11,150 11,962 ------------- --------- --------- --------- --------- Gross profit 4,335 6,601 10,102 1,922 2,693 Selling, general and administrative expenses 3,981 6,045 8,989 1,889 2,182 ------------- --------- --------- --------- --------- Operating income 354 556 1,113 33 511 Other income (expense), net (22) (27) 1 ------------- --------- --------- --------- --------- Net income $ 332 $ 529 $ 1,114 $ 33 $ 511 ------------- --------- --------- --------- --------- ------------- --------- --------- --------- ---------
The accompanying notes are an integral part of the financial statements. F-41 STEVE RAYMAN NISSAN, INC. Statements of Retained Earnings (Dollars in thousands) Retained earnings, April 5, 1993 $ 0 Net income for the year 332 Dividends (100) --------- Retained earnings, December 31, 1993 232 Net income for the year 529 --------- Retained earnings, December 31, 1994 761 Net income for the year 1,114 Dividends (865) --------- Retained earnings, December 31, 1995 1,010 Net income for the period (unaudited) 511 --------- Retained earnings, March 31, 1996 (unaudited) $ 1,521 --------- ---------
The accompanying notes are an integral part of the financial statements. F-42 STEVE RAYMAN NISSAN, INC. Statements of Cash Flows (Dollars in thousands)
Nine months (Unaudited) ended Years ended Three months ended December 31, December 31, March 31, ------------- -------------------- -------------------- 1993 1994 1995 1995 1996 ------------- --------- --------- --------- --------- Operating activities: Net income $ 332 $ 529 $ 1,114 $ 33 $ 511 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 28 37 38 14 23 Amortization 126 145 145 19 19 Changes in operating assets and liabilities: Accounts receivables (702) (241) (1,579) (666) 369 Inventories (696) (234) (343) (1,226) (3,003) Prepaid expenses and other assets (3) 7 (21) (54) (71) Floor plan notes payable 500 (287) 1,146 934 1,973 Accounts payable and accrued expenses 543 204 460 1,026 554 ------ --------- --------- --------- --------- Net cash provided by operating activities 128 160 960 80 375 ------ --------- --------- --------- --------- Investing activities: Purchase of property and equipment (146) (16) (32) (9) (7) Other (16) 0 2 ------ --------- --------- --------- --------- Net cash used in investing activities (162) (16) (30) (9) (7) ------ --------- --------- --------- --------- Financing activities: Cash paid for noncompete agreement (50) (75) (75) (19) (19) Proceeds from the sale of common stock 600 0 0 Principal payments under capital lease (59) (64) (71) (70) (63) Principal payments on long-term borrowings (75) (100) (100) (25) (25) Cash dividends paid (100) 0 (865) ------ --------- --------- --------- --------- Net cash provided by (used in) financing activities 316 (239) (1,111) (114) (107) ------ --------- --------- --------- --------- Net increase (decrease) in cash 282 (95) (181) (43) 261 Cash at beginning of the period 0 282 187 187 6 ------ --------- --------- --------- --------- Cash at end of period $ 282 $ 187 $ 6 $ 144 $ 267 ------ --------- --------- --------- --------- ------ --------- --------- --------- --------- Supplemental schedule of non-cash investing and financing activities: Capitalization of noncompete agreement and related debt $ 750
The accompanying notes are an integral part of the financial statements. F-43 STEVE RAYMAN NISSAN, INC. (Information related to the three months ended March 31, 1995 and 1996 is unaudited) Notes to Financial Statements (Dollars in thousands) 1. Organization: Steve Rayman Nissan, Inc. (the "Company"), operating in Morrow, Georgia, sells and services new Nissan cars and trucks and used vehicles, as well as finance, insurance and service contracts thereon. The Company operates a dealership which holds a franchise agreement with an automotive manufacturer. 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 would have a negative impact on operating results of the Company. 2. Summary of Significant Accounting Policies: The following is a summary of significant accounting policies followed in the preparation of the financial statements. ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. INTERIM FINANCIAL STATEMENTS (UNAUDITED): The interim unaudited financial statements reflect adjustments, consisting only of normal recurring accruals, which are, in the opinion of the Company's management, necessary for a fair presentation of the financial position and results of operations for the periods presented. Operating results for any interim period are not necessarily indicative of the results for a full year. REVENUE RECOGNITION: Revenue is recognized by the Company when vehicles or parts are delivered to consumers and when service work is performed. INVENTORIES: New and used vehicles and parts and accessories inventories are valued at the lower of cost or market. Cost is determined on the last-in, first-out (LIFO) method. LEASEHOLD IMPROVEMENTS, FURNITURE AND EQUIPMENT: Leasehold improvements, furniture and equipment are stated at cost and depreciated over their estimated useful lives, principally by the straight-line method. Computer equipment under a capital lease used in operating the dealership is amortized over the life of the lease (five years). Expenditures for repairs and maintenance which increase the useful life or substantially increase serviceability of the asset are capitalized. All others are charged to expense as incurred. When equipment is sold or otherwise disposed of, the cost and related accumulated depreciation are removed from their respective accounts and any resulting gain or loss included in the statement of operations. INTANGIBLES: Intangibles are being amortized using the straight-line method over ten years. Accumulated amortization of intangibles as of December 31, 1994 and 1995 and March 31, 1996 was $131, $205 and $224, respectively. INCOME TAXES: The income taxes on the net earnings of the Company are payable personally by the stockholder pursuant to an election under Subchapter S of the Internal Revenue Code not to have the Company taxed as a corporation. Accordingly, no provision for income taxes has been made in these financial statements. F-44 STEVE RAYMAN NISSAN, INC. Notes to Financial Statements (Continued) (Dollars in thousands) 2. Summary of Significant Accounting Policies: (Continued) FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying values of cash, contracts in transit, accounts receivable, factory receivables, warranty receivables, notes payable, long-term debt and accounts payable approximate their fair values due to the short-term maturities of those instruments. 3. Concentration of Credit Risk: The Company's significant concentration of credit risk is with its cash. The Company maintains cash balances at several financial institutions located in Georgia which are at times in excess of federally-insured amounts. 4. Inventories: Inventories consist of the following:
------------------------------- March 31, December 31, --------- -------------------- 1996 1994 1995 (Unaudited) --------- --------- --------- New vehicles and demonstrators $ 3,063 $ 3,737 $ 6,222 Used vehicles 686 391 722 Parts and accessories 423 386 523 --------- --------- --------- $ 4,172 $ 4,514 $ 7,467 --------- --------- --------- --------- --------- ---------
The use of the LIFO method of determining the cost of new and used vehicle inventories and parts had the effect of decreasing inventories at December 31, 1994 and 1995 by $273 and $446, respectively, and decreasing net income for the periods ended December 31, 1993, 1994 and 1995 by $121, $152 and $173, respectively, as compared to what they would have been under the specific-identification cost method. 5. Leasehold Improvements, Furniture and Equipment: Leasehold improvements, furniture and equipment consists of:
-------------------- 1994 1995 --------- --------- Computer equipment under capital lease $ 347 $ 347 Machinery and shop equipment 33 44 Furniture and fixtures 73 79 Leasehold improvements 44 53 Service vehicles 10 12 --- --- 507 535 Less: accumulated depreciation and amortization 226 330 --- --- $ 281 $ 205 --- --- --- ---
6. Floor Plan Payable: Floor plan notes payable are collateralized by chattel mortgages on new and used vehicles. Amounts are payable when the collateral is sold. The obligation is guaranteed by the stockholders. Interest was payable at the LIBOR rate on the first day of the month plus 2.5%, and at the prime commercial rate at prime plus 1/2% for the years ended December 31, 1994 and 1995, respectively. The effective rate at December 31, 1995 was 8.4%, and the prime rate was 8.5% for the year ended December 31, 1994. F-45 STEVE RAYMAN NISSAN, INC. Notes to Financial Statements (Continued) (Dollars in thousands) 7. Long-Term Debt: Long-term debt consists of a note payable to a bank, due in monthly installments of $8 plus interest to April 1998. Interest is payable at the bank's prime commercial rate. The bank's prime rate at December 31, 1994 and 1995 was 8.5%. The note is collateralized by all inventories, not otherwise provided as collateral, tools, equipment and receivables and is guaranteed by the stockholders.
-------------------- December 31, -------------------- 1994 1995 --------- --------- Total debt $ 325 $ 225 Less: current maturity of long-term debt 100 100 --- --- Long-term debt $ 225 $ 125 --- --- --- ---
Maturities of long-term debt are as follows:
--- Year Ending December 31, Amount - ----------------------------------- ----------- 1996 $ 100 1997 100 1998 25 --- $ 225 --- ---
Interest expense on all long-term debt amounted to $23, $27 and $25, for the years ended December 31, 1993, 1994 and 1995. 8. Acquisition of Nissan Dealership and Noncompete Agreements: On April 5, 1993, the Company acquired the inventory and equipment of Stovall Nissan, Inc. for approximately $2,284. The debt for new vehicles acquired was assumed by the Company as an addition to the floor plan note payable. On April 5, 1993, in connection with the acquisition, the Company entered into noncompete agreements with the former owners of the Company in which the former owners are precluded from participating in direct or indirect competition related to the sale of new Nissan vehicles for a period of ten years in exchange for $750. During the periods ended December 31, 1993, 1994 and 1995, the Company paid $50, $75 and $75, respectively, in accordance with the noncompete agreements. The maturity of the remaining obligations is as follows:
------------- December 31, 1995 ------------- Total amount due $ 550 Less: current portion of amount due 75 --- Long-term payable for noncompete agreements $ 475 --- ---
9. Lease Transactions: The Company leases its building and land under an operating lease from a stockholder. The lease expires in May 2004 and requires annual rentals plus the payment of property taxes and insurance on the property. The rent expense was $162 for the period ended December 31, 1993 and $226 for each of the years ended December 31, 1994 and 1995. F-46 STEVE RAYMAN NISSAN, INC. Notes to Financial Statements (Continued) (Dollars in thousands) 9. Lease Transactions: (Continued) The following is a schedule by year of future minimum rental payments required unde the operating leases as of December 31, 1995.
--------- Year Ending December 31, Amount - -------------------------------------------------------------------- --------- 1996 $ 228 1997 228 1998 236 1999 248 2000 260 Thereafter 1,132 --------- $ 2,332 --------- ---------
The Company leases certain computer equipment and software used in the operation of the dealership. The leases have been accounted for as capital leases. The assets under capital leases of $347 are being amortized over the lives of the leases on a straight-line basis. Accumulated amortization amounted to $162, $231 and $248 as of December 31, 1994 and 1995 and March 31, 1996, respectively. As of December 31, 1995, minimum future lease payments due under the capital leases are as follows:
----------- Amount ----------- 1996 $ 80 1997 66 --- Total minimum lease payments 146 Less amount representing interest 13 --- Present value of net minimum lease payments 133 Less current principal maturities of obligations under capital lease 70 --- Long-term obligation under capital lease $ 63 --- ---
10. Transactions With Affiliates: Transactions with related parties are as follows:
------------------------------- Period Ended December 31, ------------------------------- 1993 1994 1995 --------- --------- --------- Management fees (paid to company under common control) $ 452 $ 683 $ 1,230 Rent (paid to majority stockholder) 162 226 226 Receivables (from companies under common control) 49 113 Payables (to companies under common control) 3 Sales (to companies under common control, primarily body shops and other auto dealerships)...................................................... 165 363 474 Purchases (from companies under common control, primarily body shops and other auto dealerships) 315 318
F-47 STEVE RAYMAN NISSAN, INC. Notes to Financial Statements (Continued) (Dollars in thousands) 11. President-Stockholder Bonus Arrangement: The Company has agreed to pay a year-end bonus equal to 25% of its net income before the bonus and the LIFO effect on income to its president, who is also a 49% stockholder. The bonus was $609, $913, $1,650, $700 and $700 for the periods ended December 31, 1993, 1994 and 1995 and the three-month periods ended March 31, 1995 and 1996, respectively. 12. Employee Benefit Plan: The Company provides a savings plan under Section 401(k) of the Internal Revenue Code. The savings plan covers all employees who elect to be participants and who have been credited with 1,000 hours of service in the preceding twelve months of the plan year. Employees may contribute to the savings plan up to 20% of their salary. The amount the Company contributes is discretionary. Company contributions vest in varying percentages over six years and Company contributions to those employees with over six years of service vest immediately. Company contributions are charged to expense. Amounts recorded for Company contributions were $0, $10 and $11 for the periods ended December 31, 1993, 1994 and 1995, respectively. 13. Reclassifications: Certain amounts in the 1993 and 1994 financial statements have been reclassified to conform to the presentation adopted in 1995. 14. Subsequent Event: On May 1, 1996, the stockholders of the Company consummated a transaction to sell the outstanding stock of the Company to a third party. The acquisition agreement provides for the Company to lease the land and building on which the dealership is located for a period of 20 years, with an option to extend up to 30 years. F-48 Independent Auditor's Report Hickman Nissan, Inc. Atlanta, Georgia We have audited the accompanying balance sheet of Hickman Nissan, Inc. as of December 31, 1995 and the related statements of income and retained earnings and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Hickman Nissan, Inc. as of December 31, 1995 and the results of its operations and cash flows for the year then ended in conformity with generally accepting accounting principles. As more fully described in Note 8, subsequent to the issuance of the Company's 1995 financial statements and our report thereon dated April 3, 1996, we became aware that those financial statements did not reflect estimated liabilities for finance contract chargebacks. In our original report we expressed an unqualified opinion on the 1995 financial statements, and our opinion on the revised statements, as expressed herein, remains unqualified. /s/ FAUCETT, TAYLOR & ASSOCIATES, P.C. FAUCETT, TAYLOR & ASSOCIATES, P.C. April 3, 1996, except for Note 7 as to which the date is July 12, 1996 Atlanta, Georgia F-49 HICKMAN NISSAN, INC. Balance Sheets (Dollars in thousands except per share data)
-------------------- (Unaudited) December March 31, 31, 1995 1996 --------- --------- ASSETS Current Cash and cash equivalents $ 3,535 $ 1,683 Accounts receivable 1,706 1,984 Inventories (note 3) 4,394 7,818 Prepaid expenses 49 136 --------- --------- Total current assets 9,684 11,621 Property and equipment, at cost Furniture and office equipment 1,077 1,081 Leasehold improvements 746 754 Parts and service equipment 338 342 Company vehicles 150 182 Signs 39 39 --------- --------- Total property and equipment 2,350 2,398 Less: accumulated depreciation 1,869 1,892 --------- --------- Property and equity, net 481 506 Other assets Deposits 61 61 --------- --------- Total assets $ 10,226 $ 12,188 --------- --------- --------- --------- LIABILITIES AND STOCKHOLDER'S EQUITY Current Notes payable (note 4) Bank South, floor plan $ 6,603 $ 8,725 Reyna Financial, current portion 31 42 --------- --------- Total notes payable 6,634 8,767 Accounts payable 1,026 927 Accrued liabilities 910 869 --------- --------- Total current liabilities 8,570 10,563 Long-term portion of notes payable (note 4) 75 53 --------- --------- Total liabilities 8,645 10,616 Stockholder's Equity Common stock, $100 par value, 10,000 shares authorized, 500 shares issued and outstanding 50 50 Paid in capital 1 1 Retained earnings 1,530 1,521 --------- --------- 1,581 1,572 --------- --------- Total liabilities and stockholders' equity $ 10,226 $ 12,188 --------- --------- --------- ---------
The accompanying notes are an integral part of the financial statements. F-50 HICKMAN NISSAN, INC. Statements of Income and Retained Earnings (Dollars in thousands)
---------------------------------- Year Ended (Unaudited) December Three Months Ended 31, March 31, 1995 1995 1996 ---------- ---------- ---------- Net sales New vehicles $ 59,966 $ 13,273 $ 13,491 Used vehicles 15,568 3,241 3,814 Finance, insurance and other revenue 2,182 361 609 Parts and service 7,620 1,864 1,993 ---------- ---------- ---------- Total net sales 85,336 18,739 19,907 Cost of sales 76,588 16,931 17,288 ---------- ---------- ---------- Gross profit 8,748 1,808 2,619 Operating expenses 7,619 1,664 2,139 ---------- ---------- ---------- Operating income 1,129 144 480 Other income net of other (expense) 507 193 283 Interest expense (668) (200) (173) ---------- ---------- ---------- Net income 968 137 590 Retained earnings, beginning of period 562 562 1,531 Distributions (600) ---------- ---------- ---------- Retained earnings, end of period $ 1,530 $ 699 $ 1,521 ---------- ---------- ---------- ---------- ---------- ----------
The accompanying notes are an integral part of the financial statements. F-51 HICKMAN NISSAN, INC. STATEMENTS OF CASH FLOWS (Dollars in thousands)
--------------------------------------- (Unaudited) Year Ended Three Months Ended December March 31, 31, -------------------------- 1995 1995 1996 ----------- ------------ ------------ Cash flows from operating activities: Net income $ 968 $ 137 $ 590 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 212 53 25 Changes in assets and liabilities: (Increase) in accounts receivable (569) (229) (278) (Increase) in inventory (46) (2,808) (3,423) (Increase) in prepaid (11) (15) (87) (Increase) decrease in other assets (267) 18 0 Increase (decrease) in accounts payable 142 (4) (99) Increase (decrease) in accrued expenses 444 (45) (41) ----------- ------------ ------------ Net cash provided by (used in) operating activities 873 (2,893) (3,313) ----------- ------------ ------------ Cash flows from investing activities: Purchase of fixed assets (265) (107) (50) Proceeds from sale of assets (15) ----------- ------------ ------------ Net cash used in investing activities (280) (107) (50) ----------- ------------ ------------ Cash flows from financing activities: Distributions to Owner (600) Proceeds of notes payable -- floor plan 1,228 3,824 2,121 Repayment of note payable (37) (9) (10) ----------- ------------ ------------ Net cash provided by financing activities 1,191 3,815 1,511 ----------- ------------ ------------ Net increase (decrease) in cash and cash equivalents 1,784 815 (1,852) Cash and cash equivalents, beginning of period 1,751 1,751 3,535 ----------- ------------ ------------ Cash and cash equivalents, end of period $ 3,535 $ 2,566 $ 1,683 ----------- ------------ ------------ ----------- ------------ ------------ Supplemental disclosures of cash flow information: Cash paid during the period for interest $ 668 $ 200 $ 173 ----------- ------------ ------------ ----------- ------------ ------------
The accompanying notes are an integral part of the financial statements. F-52 HICKMAN NISSAN, INC. Notes to Financial Statements (Information related to Three Months Ended March 31, 1995 and 1996 is unaudited) (Dollars in thousands) 1. Organization: The Company was organized in the State of Georgia on October 14, 1976 to operate a Nissan automobile dealership in DeKalb County, Georgia. The Company is engaged in the sale of new and used motor vehicles, finance and insurance products, and vehicle service and parts. 2. Accounting Principles Followed: The following summarizes the accounting principles applied to designated items: REVENUE RECOGNITION Revenue is recognized by the Company when vehicles are delivered to consumers, when finance and insurance income is earned, and when motor vehicles service work is performed and parts are delivered. INVENTORY VALUATION All inventories are stated at the lower of cost or market, with cost determined by the last-in, first-out (LIFO) method. See note 3 for inventories summary. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. The Company depreciates its assets using the straight-line method and predominately accelerated methods over lives ranging from three to fifteen years. Depreciation expense for the year ended December 31, 1995 is $212. INCOME TAXES Due to the Company's status as a subchapter S Corporation, net income and investment tax credits flow through to the stockholder and are reported by the stockholder in such stockholder's return. CASH & CASH EQUIVALENTS For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Furthermore, the Company considers contracts in transit to be cash equivalents since these are executed and funds are transferred usually within five days. CREDIT RISK There are funds in excess of federally insured amounts for the Company of approximately $150. However, due to the rating and stability of the financial institution at which these funds are held, the Company considers that credit risk to be minimal. ESTIMATES The preparation of these financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported. Actual results are not expected to, but could, differ from those estimates. The accounts which require the use of estimates are receivables, inventory, and accrued expenses. UNAUDITED FINANCIAL STATEMENTS The financial statements as of March 31, 1996 and 1995 and for the three month periods then ended are unaudited; however, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial statements for the interim periods have been included. F-53 HICKMAN NISSAN, INC. Notes to Financial Statements (Information related to Three Months Ended March 31, 1995 and 1996 is unaudited) (Dollars in thousands) (Continued) FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist of cash and cash equivalents, trade accounts receivable and payable, and debt. The carrying amount of these financial instruments approximates fair value due either to length of maturity or existence of variable interest rates that approximate prevailing market rates. 3. Inventories Summary:
(unaudited) March 31, December 31, -------------------- 1995 1995 1996 -------------- --------- --------- New Kia cars and trucks $ 1,278 New Nissan cars and trucks 3,485 $ 7,195 $ 8,203 Used cars and trucks 1,010 1,033 996 Parts, accessories and other 961 1,094 953 Cumulative LIFO reserve (2,340) (2,166) (2,334) ------ --------- --------- $ 4,394 $ 7,156 $ 7,818 ------ --------- --------- ------ --------- ---------
4. Notes Payable: The Company is obligated on notes payable as follows:
----------- December 31, 1995 ----------- Floor plan notes payable to Bank South, due upon demand, secured by inventory and personal guarantee of Lynda Hickman, interest is LIBOR plus 225 basis points and is adjusted monthly. Interest at December 31 was 8.12% $ 6,603 ----------- ----------- Note payable, $3 monthly including interest at approximately 9%, through March 1999 secured by computer equipment. 103 Note payable $1 monthly including interest at approximately 11%, through March 1996 secured by computer system. 3 ----------- 106 Less current maturities 31 ----------- Long term $ 75 ----------- ----------- Maturities of long-term debt for the year ending December 31, ----------- Amount ----------- 1996 $ 31 1997 31 1998 34 1999 10 2000 -- ----------- $ 106 ----------- -----------
F-54 HICKMAN NISSAN, INC. Notes to Financial Statements (Information related to Three Months Ended March 31, 1995 and 1996 is unaudited) (Dollars in thousands) (Continued) 5. Related Party Transactions: The Company leases the dealership lot and buildings from a stockholder. Rent is $34 per month. Subsequent to December 31, 1995, these related party leases were terminated upon sale of the Company (note 7) and new leases were executed with payments of $35 due monthly, with CPI adjustments beginning January 1, 1998 through June 30, 2016. The Company sells finance contracts which it originates on used automobiles to an entity owned by Lynda Hickman. These finance contracts are sold on an approximate 35% discount to face amount basis. Sales proceeds and the face amount of finance contracts sold during 1995 were $707 and $1,087, respectively. At December 31, 1995, the Company had contract receivables from Peachtree Acceptance Corporation of $95. 6. Operating Leases: The Company leases property and equipment under operating leases expiring in various years through 2016. Minimum future rental payments under non-cancelable operating leases having remaining terms in excess of one year as of December 31, 1995 for each of the next 5 years and in the aggregate are:
Year Ended Amount - -------------------------------------------------------------------------- ----------- 1996 $ 459 1997 458 1998 458 1999 458 2000 447 Thereafter 6,433 ----------- $ 8,713 ----------- -----------
The above table includes the related party leases as described in note 5. 7. Subsequent Events: In 1996, the Company terminated its KIA automobile dealership agreement. The Company did not incur any losses as a result of terminating this dealership agreement. On July 12, 1996 and effective June 30, 1996, the sole stockholder of the Company sold 100% of the common stock of the Company to an affiliate of United Auto Group, Inc. 8. Restatement: Subsequent to the issuance of the Company's financial statements, management determined that estimated liabilities for finance chargebacks had not been included in those financial statements. The effect of including these estimated liabilities in the Company's financial statements is to reduce retained earnings at January 1, 1995 and December 31, 1995 and reduce net income for the year ended December 31, 1995 as disclosed in the following table.
As Previously Reported As Restated ------------- ----------- Retained Earnings, January 1, 1995 $ 705 $ 561 Net Income for the year 1995 1,018 969 Retained Earnings, December 31, 1995 1,724 1,531
F-55 Report of Independent Accountants To Stockholders of Sun Automotive Group: We have audited the accompanying combined balance sheets of Sun Automotive Group as of December 31, 1994 and 1995, and the related combined statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Sun Automotive Group as of December 31, 1994 and 1995, and the results of its combined operations and its combined cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. Princeton, New Jersey June 12, 1996 F-56 SUN AUTOMOTIVE GROUP Combined Balance Sheets (Dollars in thousands)
------------------------------------- (Unaudited) December 31, March 31, 1994 1995 1996 ----------- ----------- ----------- ASSETS: Current assets: Accounts receivable $ 5,160 $ 6,562 $ 7,815 Current portion of notes receivable 475 Inventories 11,747 20,366 18,765 Other current assets 35 30 29 ----------- ----------- ----------- Total current assets 17,417 26,958 26,609 ----------- ----------- ----------- Notes receivable, net of current portion 380 Property and equipment, net 10,329 11,358 11,335 Intangible assets 1,157 1,147 Other assets 206 690 765 ----------- ----------- ----------- Total assets $ 28,332 $ 40,163 $ 39,856 ----------- ----------- ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY: Accounts payable $ 1,624 $ 2,015 $ 1,695 Accrued liabilities 2,636 3,497 4,381 Floor plan note payable 9,732 17,104 16,169 Current portion of long-term debt 647 1,260 1,202 ----------- ----------- ----------- Total current liabilities 14,639 23,876 23,447 ----------- ----------- ----------- Long-Term Liabilities: Long-term debt, net of current portion 11,994 13,708 13,443 ----------- ----------- ----------- Total liabilities 26,633 37,584 36,890 ----------- ----------- ----------- Commitments and contingent liabilities Stockholders' Equity: Common stock, no par value, authorized 50,000 and 70,000 shares, issued and outstanding 3,595 and 5,229 shares, as of December 31, 1994 and 1995, respectively 4,935 6,978 7,179 Retained earnings (deficit) (3,236) (4,399) (4,213) ----------- ----------- ----------- Total stockholders' equity 1,699 2,579 2,966 ----------- ----------- ----------- Total liabilities and stockholders' equity $ 28,332 $ 40,163 $ 39,856 ----------- ----------- ----------- ----------- ----------- -----------
The accompanying notes are an integral part of the financial statements. F-57 SUN AUTOMOTIVE GROUP Combined Statements of Operations (Dollars in thousands)
----------------------------------------------------- (Unaudited) For the For the Years Ended December Three Months Ended 31, March 31, ------------------------------- -------------------- 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- Sales $ 98,130 $ 116,252 $ 154,502 $ 30,932 $ 45,484 Cost of sales, including floor plan interest for the years ended December 31, 1993, 1994 and 1995 of $499, $670 and $1,237, respectively. 83,758 100,125 133,980 26,639 39,184 --------- --------- --------- --------- --------- Gross profit 14,372 16,127 20,522 4,293 6,300 Selling, general and administrative expenses 13,956 14,965 18,469 3,968 4,649 --------- --------- --------- --------- --------- Income from operations 416 1,162 2,053 325 1,651 Other income (expense), net 14 128 (31) 2 --------- --------- --------- --------- --------- Net income $ 430 $ 1,290 $ 2,022 $ 325 $ 1,653 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
The accompanying notes are an integral part of the financial statements. F-58 SUN AUTOMOTIVE GROUP Combined Statements of Stockholders' Equity (Dollars in thousands)
-------------------------------------------- Common Stock Retained -------------------- Earnings Shares Amount (Deficit) Total --------- --------- ----------- --------- Balance, December 31, 1992 2,526 $ 3,148 $ (1,426) $ 1,722 Issuance of common stock 670 1,342 1,342 Dividends (2,010) (2,010) Net income 430 430 --------- --------- ----------- --------- Balance, December 31, 1993 3,196 4,490 (3,006) 1,484 Issuance of common stock 399 445 445 Dividends (1,520) (1,520) Net income 1,290 1,290 --------- --------- ----------- --------- Balance, December 31, 1994 3,595 4,935 (3,236) 1,699 Issuance of common stock 1,634 2,043 2,043 Dividends (3,185) (3,185) Net income 2,022 2,022 --------- --------- ----------- --------- Balance, December 31, 1995 5,229 6,978 (4,399) 2,579 Issuance of common stock (Unaudited) 201 201 Dividends (Unaudited) (1,467) (1,467) Net income (Unaudited) 1,653 1,653 --------- --------- ----------- --------- Balance, March 31, 1996 (Unaudited) 5,229 $ 7,179 $ (4,213) $ 2,966 --------- --------- ----------- --------- --------- --------- ----------- ---------
The accompanying notes are an integral part of the financial statements. F-59 SUN AUTOMOTIVE GROUP Combined Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 (Dollars in thousands)
----------------------------------------------------- (Unaudited) Three Months Years Ended Ended December 31, March 31, ------------------------------- -------------------- 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- Operating activities: Net income $ 430 $ 1,290 $ 2,022 $ 325 $ 1,653 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 462 545 726 136 189 Net gain on sale of assets (244) (287) Changes in operating assets and liabilities: Accounts receivable 156 (712) (1,402) (2,268) (1,253) Inventories 279 (250) (7,220) (1,808) 1,600 Notes receivable (855) 127 64 Prepaid and other assets 414 502 (479) (531) (74) Floor plan notes payable (789) 741 7,372 2,801 (935) Accounts payable and accrued liabilities 1,040 (176) 1,383 293 (268) --------- --------- --------- --------- --------- Net cash provided by operating activities 1,992 1,085 2,285 (988) 625 --------- --------- --------- --------- --------- Investing activities: Purchases of property and equipment (390) (846) (1,308) (194) (154) Proceeds from sale of assets 971 287 Acquisition of dealership (1,936) (1,936) --------- --------- --------- --------- --------- Net cash used in investing activities (390) (846) (2,273) (2,130) 133 --------- --------- --------- --------- --------- Financing activities: Cash overdraft, net (408) 374 (131) 740 831 Payment on debt (816) (553) (2,070) (128) (323) Proceeds from issuance of long-term debt 290 1,015 3,293 2,100 Dividends paid to shareholders (2,010) (1,520) (3,147) (625) (1,467) Proceeds from issuance of common stock 1,342 445 2,043 1,031 201 --------- --------- --------- --------- --------- Net cash provided by (used in) financing activities (1,602) (239) (12) 3,118 (758) --------- --------- --------- --------- --------- Net increase (decrease) in cash 0 0 0 0 0 Cash, beginning of year 0 0 0 --------- --------- --------- --------- --------- Cash, end of year $ 0 $ 0 $ 0 $ 0 $ 0 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
The accompanying notes are an integral part of the financial statements. F-60 SUN AUTOMOTIVE GROUP Statements of Cash Flows -- Supplemental Information (Dollars in thousands)
------------------------------- Years Ended December 31, ------------------------------- 1993 1994 1995 --------- --------- --------- Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 2,503 $ 2,042 $ 1,805 Property acquired under capital leases: Assets 87 Liabilities 87 Property acquired with debt: Assets 191 Liabilities 191
The accompanying notes are an integral part of the financial statements. F-61 SUN AUTOMOTIVE GROUP Notes To Combined Financial Statements (Dollars in thousands) 1. Organization: The Sun Automotive Group (the "Combined Group" or the "Company"), operating in the State of Arizona, is engaged in the sale of new and used vehicles, as well as finance, insurance and service contracts thereon. The Company operates dealerships which hold franchise agreements with a number of automotive manufacturers. In accordance with the individual franchise agreement, 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 operating results of the Company. 2. Summary of Significant Accounting Policies: The following is a summary of significant accounting policies followed in the preparation of the financial statements. COMBINATION POLICY - COMMON CONTROL The accompanying combined financial statements include the following automotive affiliated companies that are all under common control: Scottsdale Management Group, Ltd. SA Automotive, Ltd. (Scottsdale Acura) Scottsdale Jaguar, Ltd. (Scottsdale Jaguar) SL Automotive, Ltd. (Scottsdale Lexus) SPA Automotive, Ltd. (Land Rover Scottsdale) Sun BMW, Ltd. (Camelback BMW) LRP, Ltd. (Land Rover Phoenix) 6725 Dealership, Ltd. 6725 Agent Arizona Cars & Credit Arizona Cars & Credit provided used vehicles and financing in Scottsdale, Arizona. This affiliate was sold in July 1995, resulting in a $244 gain on the sale. All significant intercompany transactions and balances have been eliminated in the combination. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. INTERIM FINANCIAL STATEMENTS (UNAUDITED): The interim unaudited financial statements reflect adjustments, consisting only of normal recurring accruals, which are, in the opinion of the Company's management, necessary for a fair presentation of the financial position and results of operations for the periods presented. Operating results for any interim period are not necessarily indicative of the results for a full year. 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. The Company also reflects outstanding checks in excess of the ledger cash balance as a component of accounts payable. Such amounts as of December 31, 1994 and 1995 were $502 and $371, respectively. REVENUE RECOGNITION Revenue is recognized by the Company when vehicles and parts are delivered to consumers, or when service is performed. INVENTORIES Inventories are stated at the lower of cost or market. In 1993, cost was determined by using the specific identification method for vehicles and the first-in, first-out (FIFO) method for parts. The Company changed its method of inventory valuation to the last-in, first-out (LIFO) method for both vehicles and parts in 1994. Under the current F-62 SUN AUTOMOTIVE GROUP Notes To Combined Financial Statements (Continued) (Dollars in thousands) 2. Summary of Significant Accounting Policies: (Continued) economic environment of rising vehicle prices, the Company believes that the LIFO method will result in a better measurement of operating results. The effect of the change in 1994 was to decrease net income by approximately $489. The cumulative effect of the change has not been calculated nor have proforma results of prior periods been prepared as it would require assumptions that may furnish results different from what they would have been had the LIFO method actually been used in prior periods. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost and depreciated over their estimated useful lives, using the straight-line and accelerated methods. Useful lives for purposes of computing depreciation and amortization are: Buildings -- 31.5 years Leasehold improvements -- Economic life or life of the lease, whichever is shorter. Equipment, furniture and -- 5 to 7 years fixtures, and company vehicles
Expenditures for repairs and maintenance which increase the useful life or substantially increase serviceability of the asset are capitalized. All others are charged to expense as incurred. When equipment is sold or otherwise disposed, the cost and related accumulated depreciation are removed from their respective accounts and any resulting gain or loss is included in the statement of operations. INTANGIBLE ASSETS Intangible assets consist of excess of cost over net assets acquired which is being amortized on a straight-line basis over the estimated benefit period of 40 years. The Company periodically reviews these costs to assess recoverability. Losses in value, if any, are charged to operations in the period such losses are determined to be permanent. The Company's policy with respect to assessing whether there has been a permanent impairment in the value of excess of cost over net assets is to compare the carrying value of a business' excess of cost over net assets with the anticipated undiscounted future cash flows from operating activities of the business. Factors considered by the Company in performing this assessment include current operating income, trends and other economic factors. Accumulated amortization at December 31, 1994 and 1995 was $0 and $43, respectively. RESERVE FOR CHARGEBACK OF FINANCE AND INSURANCE INCOME Provisions for chargebacks of finance and insurance income resulting from customer prepayments and repossessions are recorded based on management's estimates and historical experience. LONG-LIVED ASSETS Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of" ("SFAS 121") requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset in question may not be recoverable. SFAS 121 was adopted 1996, and did not have an effect on the Group's results of operations, cash flows or financial position. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist of cash, accounts receivable, accounts payable, debt, and an interest rate swap agreement. The carrying amount of these financial instruments approximates fair value due either to length of maturity or existence of variable interest rates that approximate prevailing market rates. The fair value of the interest rate swap is the amount the Company would receive or pay to terminate the swap agreement. At F-63 SUN AUTOMOTIVE GROUP Notes To Combined Financial Statements (Continued) (Dollars in thousands) 2. Summary of Significant Accounting Policies: (Continued) December 31, 1994 and 1995, the Company would have been required to pay $39 and $149, respectively, to settle this agreement, representing an excess of carrying value over fair value, based on estimates received from financial institutions. INTEREST RATE SWAP AGREEMENT The Company entered into an interest rate swap agreement to exchange fixed and variable rate interest payment obligations without the exchange of the underlying principal amounts in order to manage interest rate exposures on its variable rate long-term mortgage obligations. The differential to be paid or received is accrued as interest rates change and is recognized as an adjustment to interest expense over the life of the agreement. The Company does not hold or issue interest rate swap agreements for trading purposes. CAPITAL STOCK Each affiliate of the Company is an individual entity that issues stock for that entity only and at different and unrelated prices. The Company as a single entity does not issue stock. For purposes of these financial statements, the capital stock activity of the individual affiliates have been summed to present combined totals. INCOME TAXES Scottsdale Management Group, Ltd. is a C Corporation under the provisions of the Internal Revenue Code and, accordingly, is subject to federal and state income taxes. The other affiliates of Sun Automotive Group have elected S Corporation status under the provisions of the Internal Revenue Code, except for 6725 Agent which is a general partnership. Accordingly, they are generally not subject to federal and state income taxes. For income tax reporting purposes, all profits and losses, and certain other items, pass through to the stockholders/partners of the other affiliates of Sun Automotive Group, who report these items on their individual income tax returns. Scottsdale Management Group Ltd. recognizes no profit or loss and as such a tax provision has not been made. 3. Concentration of Credit Risk: The Company's significant concentration of credit risk is with its cash. The Company maintains cash balances at a financial institution located in Arizona which are at times in excess of federally-insured levels. 4. Inventories: Inventories consist of the following:
--------------------------------- March 31, December 31, 1996 1994 1995 (Unaudited) --------- --------- ----------- New vehicles $ 8,314 $ 15,790 $ 14,077 Used vehicles 2,565 3,682 3,785 Parts, accessories and other 1,357 1,768 1,777 --------- --------- ----------- 12,236 21,240 19,639 Cumulative LIFO reserve 489 874 874 --------- --------- ----------- $ 11,747 $ 20,366 $ 18,765 --------- --------- ----------- --------- --------- -----------
If the FIFO method had been used instead of the LIFO methods, inventories would have been higher by $489 and $874 at December 31, 1994 and December 31, 1995, respectively. F-64 SUN AUTOMOTIVE GROUP Notes To Combined Financial Statements (Continued) (Dollars in thousands) 5. Property and Equipment: Property and equipment consists of the following as of:
-------------------- December 31, -------------------- 1994 1995 --------- --------- Land $ 3,473 $ 3,473 Buildings and leasehold improvements 6,528 6,556 Machinery and shop equipment 1,159 1,412 Furniture, fixtures, vehicles and other 2,694 3,912 --------- --------- Total 13,854 15,353 Less: Accumulated depreciation and amortization 3,525 3,995 --------- --------- Total property and equipment, net $ 10,329 $ 11,358 --------- --------- --------- ---------
The Company has entered into a lease of computer equipment. The lease meets the criteria of a capital lease and, accordingly, has been recorded as such. The lease is noncancelable and expires November 1997. As of December 31, 1994 and 1995, there are approximately $87 of assets under capital leases. 6. Acquisitions: On February 27, 1995, the Company acquired substantially all the assets of two dealer franchises for $1,936 in cash and $1,231 of notes payable. The acquisition was accounted for under the purchase method and the accompanying financial statements reflect the results of operations from the date of acquisition. The excess of purchase price over the underlying estimate fair value of assets acquired was $1,200. Included in other assets long-term and as part of the purchase, the Company entered into certain lease arrangements with the seller to lease certain land and buildings. As part of this lease, the Company made a $500 payment to the seller as an advance on rent; the balance of which is being amortized over the life of the lease. 7. Floor Plan Notes Payable: The amounts payable to financial institutions under trust receipt transactions are collateralized by liens on inventories of specific new and used vehicles. Floor plan notes payable are as follows:
-------------------- December 31, -------------------- 1994 1995 --------- --------- Bank of America, interest at variable reference rate as determined by Bank of America National Trust and Savings Association $ 7,852 $ 13,558 Jaguar Cars, Inc. and other, interest at prime minus 2%, increasing to prime plus 1% after 180 days 1,880 3,546 --------- --------- Total $ 9,732 $ 17,104 --------- --------- --------- ---------
The Bank of America note contains, among other provisions, requirements for maintaining certain working capital and other financial ratios and restrictions on incurring additional indebtedness. The prime rate at December 31, 1994 and 1995 was 8.5%. F-65 SUN AUTOMOTIVE GROUP Notes To Combined Financial Statements (Continued) (Dollars in thousands) 8. Long-Term Debt: Long-term debt consists of the following as of:
-------------------- December 31, -------------------- 1994 1995 --------- --------- Bank of America: Mortgage note payable, interest negotiated periodically based on the bank's First Rate, interest was 7.75% at December 31, 1994 and 1995, due in 2004, collateralized by land and buildings $ 8,783 $ 8,618 Bank of America: Notes payable, interest negotiated periodically based on the bank's First Rate, interest ranged from 7.75% to 8.5% at December 31, 1994 and 1995, maturing between March 1997 and December 2004, collateralized by all the Company's personal property including inventories, receivables, and furniture and fixtures 1,484 5,609 Camelback Automotive: Note payable, interest at 6%, due in three annual installments of $150, $150, and $200 plus interest in February 1996, 1997, and 1998, respectively, collateralized by all BMW personal property and inventory 500 H.M. Knappenberger Revocable Trusts: Notes payable, interest at prime, due 367 days from demand 2,028 ADP Credit Corporation: Capital lease obligation, terminated in September 1995 244 ADP Credit Corporation: Note payable, interest at 9.4%, due September 2000, collateralized by certain computer equipment 186 Toyota Motor Distributors: Capital lease obligation, monthly payments of $2 including interest at 7.5% through December 1997, collateralized by computer equipment 66 45 Various notes payable 36 10 --------- --------- 12,641 14,968 Less - current portion 647 1,260 --------- --------- $ 11,994 $ 13,708 --------- --------- --------- ---------
F-66 SUN AUTOMOTIVE GROUP Notes To Combined Financial Statements (Continued) (Dollars in thousands) 8. Long-Term Debt: (Continued) Principal maturities of long-term debt in each of the next five years are as follows:
--------- Period Ending December 31, Amount - -------------- --------- 1996 $ 1,260 1997 1,328 1998 1,308 1999 1,133 2000 6,584 Thereafter 3,355 --------- Total $ 14,968 --------- ---------
The terms of certain financing agreements contain, among other provisions, requirements for maintaining certain cash flows, current ratios and tangible net worth ratios and restrictions on incurring additional indebtedness. Interest expense for the years ending December 31, 1993, 1994 and 1995 was $762, $664, and $819, respectively. 9. Commitments: The Company is leasing land and buildings in Arizona under several noncancelable operating leases with terms expiring at various dates from December 15, 1998 through December 31, 2005. Annual payments range from $89 to $324. Certain leases provide for periodic increases in payments throughout the lease term in proportion to increases in the consumer price index and other factors. Certain leases also contain options to purchase the related property. Rental expense for the years ended December 31, 1993, 1994 and 1995 was $508, $668 and $1,183, respectively. Future minimum lease commitments are summarized as follows:
--------- Amount --------- 1996 $ 1,253 1997 1,248 1998 1,231 1999 1,127 2000 1,054 Thereafter 4,245 --------- Total $ 10,158 --------- ---------
10. Interest Rate Swap Agreement: At December 31, 1995, the Company had one outstanding interest rate swap agreement with Bank of America, under which the Company receives a variable rate based on three month LIBOR rates on a notional amount of $5,750 and pays a fixed rate of 7.45% as determined in three month intervals. The transaction effectively changes a portion of the Company's interest rate exposure from a variable rate to a fixed rate. The interest rate swap agreement expires at January 31, 1997. The Company is exposed to credit loss in the event of nonperformance by the other party to the interest rate swap agreements. However, the Company does not anticipate nonperformance by the counterparties. 11. Terminated Franchises: In the first quarter of 1993, the Company terminated two franchises. As a result of the termination, the Company recognized a charge to earnings from operations of $1,161 which represented the remainder of rental payments for which the Company was obligated under a non-cancelable lease obligation net of future sublet rental income. F-67 SUN AUTOMOTIVE GROUP Notes To Combined Financial Statements (Continued) (Dollars in thousands) 12. Defined Contribution Plan: The Company has a 401(k) and profit sharing plan (the "Plan") for all employees meeting certain service requirements. This Plan qualifies under Section 401(k) of the Internal Revenue Code. The Plan allows employees to contribute up to 20% of their annual compensation subject to Internal Revenue Code limitations. The Company may make matching contributions at its discretion. During the years ended December 31, 1993, 1994, and 1995, the Company contributed $30, $50 and $75 to the Plan, respectively. 13. Reclassification: Certain amounts in the 1993 and 1994 financial statements have been reclassified to conform with the presentation adopted in 1995. 14. Subsequent Event: In January 1996, the Company sold its Saab franchise and realized net profit of $287 as a result of the sale of the franchise. On June 6, 1996, the Company entered into an acquisition agreement and plan of merger with United Auto Group, Inc. F-68 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the various expenses in connection with the sale and distribution of the securities being registered which will be paid solely by the Company. All the amounts shown are estimates, except the Commission registration fee and the NASD filing fee: SEC Registration Fee.................................................... $ 59,483 NASD Fees............................................................... 17,750 NYSE Listing Fee........................................................ * Transfer Agent and Registrar Fees and Expenses.......................... * Printing and Engraving Expenses......................................... * Legal Fees and Expenses................................................. * Accounting Fees and Expenses............................................ * Blue Sky Fees and Expenses.............................................. * Miscellaneous Expenses.................................................. * --------- Total........................................................... $ * --------- ---------
- ------------------------ * To be completed by amendment. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the DGCL empowers a Delaware corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation) by reason of the fact that such person is or was a director, officer, employee or agent of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise. A corporation may indemnify such person against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if he acted in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, has no reasonable cause to believe his conduct was unlawful. A corporation may, in advance of the final disposition of any civil, criminal, administrative or investigative action, suit or proceeding, pay the expenses (including attorneys' fees) incurred by any officer or director in defending such action, provided that the director or officer undertake to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation. A Delaware corporation may indemnify officers and directors in an action by or in the right of the corporation to procure a judgment in its favor under the same conditions, except that no indemnification is permitted without judicial approval if the officer or director is adjudged to be liable to the corporation. Where an officer or director is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him against the expenses (including attorneys' fees) which he actually or reasonably incurred in connection therewith. The indemnification provided is not deemed to be exclusive of any other rights to which an officer or director may be entitled under any corporation's bylaw, agreement, vote or otherwise. The Company has adopted provisions in its Certificate of Incorporation and Bylaws that provide that the Company shall indemnify its officers and directors to the maximum extent permitted under the Act. The Spielvogel Employment Agreement provides for indemnification of Mr. Spielvogel to the maximum extent legally permitted or authorized by the Company's Certificate of Incorporation or Bylaws or resolutions of the Board of Directors. The Stockholders Agreement provides that in the event that a II-1 director elected pursuant thereto is made or threatened to be made a party to any action, suit or proceeding with respect to which such director may be entitled to indemnification by the Company, such director will be entitled to be represented by counsel of his choice and the reasonable expenses of such representation will be reimbursed by the Company to the extent provided in or authorized by its Certificate of Incorporation or Bylaws. Certain directors are also entitled to indemnification from the organizations that employ them. In addition, the Underwriting Agreement filed as Exhibit 1.1 to the Registration Statement provides for indemnification of the Company, its officers and its directors by the Underwriters under certain circumstances. The Company has purchased insurance on behalf of its officers and directors for liabilities arising out of their capacities as such. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES In the three years preceding the filing of this Registration Statement, the Company has issued the following securities that were not registered under the Securities Act. In connection with the Equity Facility, the Company issued shares of its capital stock in multiple transactions between December 28, 1993 and July 10, 1996. Montgomery Securities acted as the placement agent for the Equity Facility and received fees in the amount of $1.4 million in connection therewith. In addition, on July 10, 1996, the Company issued additional shares of its capital stock to its existing stockholders on terms substantially similar to those of the Equity Facility. After giving effect to the Preferred Stock Conversion, the number of shares of Common Stock purchased and the aggregate offering price paid by each investor are set forth in the following table:
AGGREGATE SHARES OF OFFERING INVESTOR COMMON STOCK PRICE - ------------------------------------------------------------------------- -------------- ------------- Trace International Holdings, Inc........................................ 3,531,156 $ 28,436,560 Aeneas Venture Corporation............................................... 2,843,656 28,436,560 AIF II, L.P.............................................................. 1,843,656 18,436,560 Ezra P. Mager............................................................ 163,240 1,632,400 Jeremy Grantham.......................................................... 104,474 1,044,740 Jules Kroll.............................................................. 104,474 1,044,740 Andrea Farace............................................................ 52,237 522,370 Natio Vie Developpment................................................... 52,237 522,370 Assu Venture............................................................. 36,566 365,660 Natio Fonds Venture 2.................................................... 36,566 365,660 Carl Spielvogel.......................................................... 26,118 261,180 Jerome Markowitz......................................................... 5,572 55,720 Philip Halperin.......................................................... 5,572 55,720 Derek Lemke-von Ammon.................................................... 2,786 27,860 Frank Dunlevy............................................................ 2,786 27,860
Pursuant to the Securities Purchase Agreements, the Company issued its Senior Notes and Warrants in multiple transactions between September 22, 1995 and July 11, 1996. J.P. Morgan Securities Inc. acted as the placement agent for sales to non-affiliated investors and received fees in the amount of $0.9 million in connection therewith. In addition, on July 10, 1996, the Company issued Additional Warrants to such investors. The amount of securities purchased and the aggregate offering price paid by each investor are set forth in the following table:
SHARES OF COMMON STOCK AGGREGATE PRINCIPAL AMOUNT SUBJECT TO OFFERING INVESTOR OF SENIOR NOTES WARRANTS PRICE - -------------------------------------------------- ---------------- ------------------ ------------- J.P. Morgan Capital Corporation (and its affiliates)...................................... $ 20,000,000 634,198 $ 20,535,164 The Equitable Life Assurance Society of the United States............................. 15,000,000 475,648 15,401,368
II-2 On April 3, 1996, the Company granted Carl Spielvogel an option to purchase up to 400,000 shares of Common Stock at an exercise price of $10.00 per share. The stock option vests in four equal installments beginning on the first anniversary of October 18, 1994, the date of Mr. Spielvogel's employment with the Company. Under the Stock Option Plan, adopted April 23, 1996, the Company granted options to purchase 473,000 shares of Common Stock at an exercise price of $10.00 per share to employees of the Company and its affiliates. Such options vest in five equal installments on each of the first five anniversaries of the later of December 29, 1993 and the optionee's date of employment. See "Management -- Stock Option Plan." The grants of options under the Stock Option Plan were effected in reliance on Rule 701 promulgated under the Securities Act for offers and sales pursuant to certain compensatory benefit plans. On July 31, 1996, the Company issued 10,000 shares of Class A Preferred Stock to Richard Sinkfield for an aggregate offering price of $100,000. In addition to any exemptions specified above, each of the foregoing offerings was effected in reliance on Section 4(2) of the Securities Act as a transaction not involving any public offering. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits
NO. DESCRIPTION - ----------- ----------------------------------------------------------------------------------------------------- *1.1 Form of Underwriting Agreement *3.1 Form of Restated Certificate of Incorporation *3.2 Form of Restated By-Laws *4.1 Specimen Common Stock certificate *5.1 Opinion of Willkie Farr & Gallagher *10.1.1.1 Registration Rights Agreement, dated as of October 15, 1993, among the Company and the investors listed in Exhibit A thereto. *10.1.1.2 Amendment to Registration Rights Agreement, dated as of July 10, 1996, among the Company and the investors listed in Exhibit A thereto. *10.1.2 Waiver, Consent and Modification Agreement, dated as of September 22, 1995, among the Company and its stockholders. *10.1.3 Letter Agreement, dated September 22, 1996, between the Company and J.P. Morgan Capital Corporation. *10.1.4 Form of Warrant. *10.1.5 Form of Additional Warrant. *10.1.6 Employment Agreement, dated as of June 21, 1996, between the Company and Carl Spielvogel. *10.1.7 Severance Agreement, dated April 5, 1996, among the Company, Trace and Ezra P. Mager. *10.1.8 Stock Option Plan of the Company. *10.2.1.1 Honda Automobile Dealer Sales and Service Agreement, dated October 5, 1995, between American Honda Motor Co. Inc. and Danbury Auto Partnership (standard provisions are in Exhibit 10.2.1.2 hereto). *10.2.1.2 American Honda Motor Co. Standard Provisions. *10.2.2.1 Lexus Dealer Agreement, dated March 15, 1994, between Lexus, a division of Toyota Motor Sales, U.S.A., Inc. and Somerset Motors Partnership (standard provisions are in Exhibit 10.2.2.2 hereto). *10.2.2.2 Lexus Dealer Agreement Standard Provisions. *10.2.3.1 Saturn Distribution Corporation Dealer Agreement, dated October 1, 1992, between Saturn Distribution Corporation and Danbury-Mt. Kisco Saturn Partnership. *10.2.4.1 BMW of North America, Inc. Dealer Agreement, dated January 1, 1994, between BMW of North America, Inc. and DiFeo BMW Partnership (standard provisions are in Exhibit 10.2.4.2 hereto). *10.2.4.2 BMW of North America, Inc. Dealer Standard Provisions Applicable to Dealer Agreement. *10.2.5.1 Term Dealer Sales and Service Agreement, dated December 23, 1992, between American Suzuki Motor Corporation and Fair Hyundai Partnership.
II-3
NO. DESCRIPTION - ----------- ----------------------------------------------------------------------------------------------------- *10.2.6.1 Toyota Dealer Agreement, dated May 5, 1995, between Toyota Motor Distributors, Inc. and Hudson Motors Partnership (standard provisions are in Exhibit 10.2.6.2 hereto). *10.2.6.2 Toyota Dealer Agreement Standard Provisions. *10.2.7.1 Oldsmobile Division Dealer Sales and Service Agreement, dated October 2, 1992, between General Motors Corporation, Oldsmobile Division and J & F Oldsmobile-Isuzu Partnership (standard provision are in Exhibit 10.2.7.2 hereto). *10.2.7.2 General Motors Dealer Sales and Service Agreement Standard Provisions. *10.2.8.1 Chevrolet-Geo Dealer Sales and Service Agreement, dated November 1, 1995, between General Motors Corporation, Chevrolet Motor Division and Fair Chevrolet-Geo Partnership (substantially similar to Exhibit 10.2.7.1). *10.2.9.1 Nissan Dealer Term Sales and Service Agreement, between the Nissan Division of Nissan Motor Corporation in U.S.A. and DiFeo Nissan Partnership. *10.2.10.1 Chrysler Corporation Jeep Sales and Service Agreement, dated October 8, 1992, between DiFeo Jeep-Eagle Partnership and Chrysler Corporation (standard provisions are in Exhibit 10.2.10.2). *10.2.10.2 Chrysler Corporation Sales and Service Agreement Additional Terms and Provisions. *10.2.11 Chrysler Corporation Eagle Sales and Service Agreement, dated October 8, 1992, between DiFeo Jeep-Eagle Partnership and Chrysler Corporation (substantially similar to Exhibit 10.2.10.1). *10.2.12 Chrysler Corporation Chrysler Sales and Service Agreement, dated August 16, 1995, between DiFeo Chrysler Plymouth Jeep Eagle Partnership and Chrysler Corporation (substantially similar to Exhibit 10.2.10.1). *10.2.13 Chrysler Corporation Plymouth Sales and Service Agreement, dated November 13, 1992, between DiFeo Chrysler Plymouth Jeep Eagle Partnership and Chrysler Corporation (substantially similar to Exhibit 10.2.10.1). *10.2.14 Toyota Dealer Agreement, dated May 5, 1995, between Toyota Motor Distributors, Inc. and County Auto Group Partnership (substantially similar to Exhibit 10.2.6.1). *10.2.15.1 Hyundai Motor America Dealer Sales and Service Agreement, dated October 12, 1992, as amended November 22, 1993, October 12, 1995, and March 14, 1996, between Hyundai Motor America and Fair Hyundai Partnership (standard provisions are in Exhibit 10.2.15.2 hereto). *10.2.15.2 Hyundai Motor America Dealer Sales and Service Agreement Standard Provisions. *10.2.16 Hyundai Motor America Dealer Sales and Service Agreement, dated November 22, 1993, as amended April 1, 1994, and November 3, 1995, between Hyundai Motor America and DiFeo Hyundai Partnership (substantially similar to Exhibit 10.2.15.1). *10.2.17.1 Mitsubishi Motor Sales of America, Inc. Interim Sales and Service Agreement, dated August 29, 1994, between Mitsubishi Motor Sales of America, Inc. and Rockland Motors Partnership (standard provisions are in Exhibit 10.2.17.2 hereto). *10.2.17.2 Mitsubishi Motor Sales of America, Inc. Dealer Sales and Service Agreement Standard Provisions. *10.2.18 Toyota Dealer Agreement, dated August 23, 1995, between Toyota Motor Distributors, Inc. and OCT Partnership (substantially similar to Exhibit 10.2.6.1). *10.2.19 Mitsubishi Motor Sales of America, Inc. Sales and Service Agreement, dated June 30, 1994, between Mitsubishi Motor Sales of America, Inc. and OCM Partnership (substantially similar to Exhibit 10.2.17.1). *10.2.20 Chrysler Corporation Dodge Sales and Service Agreement, dated June 18, 1993, between Fair Chrysler Plymouth Partnership and Chrysler Corporation (substantially similar to Exhibit 10.2.10.1). *10.2.21 Chevrolet-Geo Dealer Sales and Service Agreement, dated November 1, 1995 between General Motors Corporation, Chevrolet Motor Division and DiFeo Chevrolet-Geo Partnership (substantially similar to Exhibit 10.2.7.1). *10.2.22 Employment Agreement, dated July 1, 1996, between James D. Evans and Danbury-Mt. Kisco Saturn Partnership. *10.3.1 Receivables Purchase Agreement, dated as of June 28, 1995, between Atlantic Auto Funding Corporation and Atlantic Auto Finance Corporation.
II-4
NO. DESCRIPTION - ----------- ----------------------------------------------------------------------------------------------------- *10.3.2 Loan and Security Agreement, dated as of June 28, 1995, among Atlantic Auto Funding Corporation, Atlantic Auto Finance Corporation and Citibank, N.A. *10.3.3 Support Agreement of the Company, dated as of June 28, 1995, in favor of Atlantic Auto Funding Corporation. *10.3.4 Purchase Agreement, dated as of June 14, 1996, between Atlantic Auto Finance Corporation and Atlantic Auto Second Funding Corporation. *10.3.5 Transfer and Administration Agreement, dated as of June 14, 1996, among Atlantic Auto Second Funding Corporation, Atlantic Auto Finance Corporation and Morgan Guaranty Trust Company of New York. *10.3.6 Support Agreement of the Company, dated as of June 14, 1996, in favor of Atlantic Auto Second Funding Corporation. *10.3.7 Pooling and Servicing Agreement relating to Atlantic Auto Grantor Trust 1996-A, dated as of June 20, 1996, among Atlantic Auto Third Funding Corporation, Atlantic Auto Finance Corporation and The Chase Manhattan Bank. *10.3.8 Insurance and Indemnity Agreement, dated as of June 20, 1996, among Financial Security Assurance Inc., Atlantic Auto Third Funding Corporation and Atlantic Auto Finance Corporation. *10.3.9 Master Spread Account Agreement, dated as of June 20, 1996, among Atlantic Auto Third Funding Corporation, Financial Security Assurance Inc. and The Chase Manhattan Bank. *10.4.1 Amended and Restated Stock Purchase Agreement, dated as of July 1, 1995, among the Company, Landers Auto Sales, Inc., Steve Landers, John Landers and Bob Landers. *10.4.2 Promissory Note of the Company, dated August 1, 1995, for the benefit of Steve Landers and John Landers. *10.4.3 Promissory Note of the Company, dated August 1, 1995, in favor of Steve Landers and John Landers. *10.4.4 Guarantee of the Company, dated as of August 1, 1995, in favor of Steve Landers and John Landers. *10.4.5 Employment Agreement, dated as of August 1, 1995, between Landers Auto Sales, Inc. and Steve Landers. *10.4.6 Lease, dated as of August 1, 1995, among Steve Landers, John Landers, Bob Landers and Landers Auto Sales, Inc., regarding Jeep-Eagle premises. *10.4.7 Lease, dated as of August 1, 1995, among Steve Landers, John Landers, Bob Landers and Landers Auto Sales, Inc., regarding Oldsmobile-GMC premises. *10.4.8 Shareholders' Agreement, dated as of August 1, 1995, among the Company, United Landers, Inc., Landers Auto Sales, Inc., Steve Landers and John Landers. *10.4.9 Registration Rights Agreement, dated as of August 1, 1995, among the Company and the parties listed on Schedule I thereto. *10.4.10 Chrysler Corporation Eagle Sales and Service Agreement, dated August 16, 1995, between United Landers Auto Sales, Inc. and Chrysler Corporation (substantially similar to Exhibit 10.2.10.1). *10.4.11 Chrysler Corporation Jeep Sales and Service Agreement, dated August 16, 1995, between United Landers Auto Sales, Inc. and Chrysler Corporation (substantially similar to Exhibit 10.2.10.1). *10.4.12 Chrysler Corporation Dodge Sales and Service Agreement, dated August 16, 1995, between United Landers Auto Sales, Inc. and Chrysler Corporation (substantially similar to Exhibit 10.2.10.1). *10.4.13 Chrysler Corporation Plymouth Sales and Service Agreement, dated August 16, 1995, between United Landers Auto Sales, Inc. and Chrysler Corporation (substantially similar to Exhibit 10.2.10.1). *10.4.14 Chrysler Corporation Chrysler Sales and Service Agreement, dated August 16, 1995, between United Landers Auto Sales, Inc. and Chrysler Corporation (substantially similar to Exhibit 10.2.10.1). *10.4.15 Oldsmobile Division Dealer Sales and Service Agreement, dated November 1, 1995, between General Motors Corporation, Oldsmobile Division and United Landers Auto Sales, Inc. (substantially similar to Exhibit 10.2.7.1).
II-5
NO. DESCRIPTION - ----------- ----------------------------------------------------------------------------------------------------- *10.4.16 GMC Truck Division Dealer Sales and Service Agreement, dated November 1, 1995, between General Motors Corporation, GMC Truck Division and United Landers Auto Sales, Inc. (substantially similar to Exhibit 10.2.7.1). *10.4.17 Chrysler Corporation Dodge Sales and Service Agreement, dated June 18, 1993, between United Landers Auto Sales, Inc. and Chrysler Corporation (substantially similar to Exhibit 10.2.10.1). *10.4.18 Security Agreement and Master Credit Agreement, dated October 25, 1993, between Landers Oldsmobile-GMC Inc. and Chrysler Credit Corporation. *10.4.19 Fixed Rate Commercial Revolving or Draw Note of Landers Oldsmobile-GMC Inc., dated December 5, 1994, in favor of The Benton State Bank. *10.5.1 Stock Purchase Agreement, dated as of November 17, 1995, among the Company, UAG Atlanta, Inc., Atlanta Toyota, Inc. and Carl H. Westcott. *10.5.2 Promissory Note of UAG Atlanta, Inc., dated January 16, 1996, in favor of Carl H. Westcott. *10.5.3 Guarantee of the Company, dated as of January 16, 1996, in favor of Carl Westcott. *10.5.4 Promissory Note of Atlanta Toyota, Inc., dated January 16, 1996, in favor of First Extended Service Corporation. *10.5.5 Guarantee of the Company, dated as of January 16, 1996, in favor of Carl Westcott. *10.5.6 Lease Agreement, dated as of January 3, 1996, between Carl Westcott and Atlanta Toyota, Inc. *10.5.7 Lease Guarantee of the Company, dated as of January 16, 1996, in favor of Carl Westcott. *10.5.8 Toyota Dealer Agreement, dated January 16, 1996, between Southeast Toyota Motor Distributors, Inc. and Atlanta Toyota, Inc (substantially similar to Exhibit 10.2.6.1). *10.5.9 Wholesale Floor Plan Security Agreement, dated May 24, 1996, between World Omni Financial Corp. and Atlanta Toyota, Inc. *10.5.10 Demand Promissory Note of Atlanta Toyota, Inc., in favor of World Omni Financial Corp. *10.5.11 Shareholders' Agreement, dated as of July 31, 1996, among the Company, UAG Atlanta, Inc., Atlanta Toyota and John Smith. *10.5.12 Employment Agreement, among the Company, UAG Atlanta, Inc. and John Smith. *10.6.1 Stock Purchase Agreement, dated as of March 1, 1996, among the Company, UAG Atlanta II, Inc., Steve Rayman Nissan, Inc., Steven L. Rayman and Richard W. Keffer, Jr. *10.6.2 Employment Agreement, dated as of May 1, 1996, among the Company, UAG Atlanta II, Inc., Steve Rayman Nissan, Inc. and Bruce G. Dunker. *10.6.3 Lease Agreement, dated as of May 1, 1996, among Steven L. Rayman, Richard W. Keffer, Jr. and Steve Rayman Nissan, Inc. *10.6.4 Nissan Dealer Term Sales and Service Agreement, between the Nissan Division of Nissan Motor Corporation in U.S.A. and United Nissan, Inc. *10.6.5 Lease Agreement, dated May 1, 1996, among Steven L. Rayman, Richard W. Keffer, Jr. and Steve Rayman Nissan, Inc. *10.6.6 Wholesale Floor Plan Security Agreement, dated April 29, 1996, between World Omni Financial Corp. and United Nissan, Inc. *10.7.1 Stock Purchase Agreement, dated as of June 7, 1996, among the Company, UAG Atlanta III, Inc., Hickman Nissan, Inc., Lynda Jane Hickman and Lynda Jane Hickman as Executrix under the will of James Franklin Hickman, Jr., deceased. *10.7.1 Nissan Dealer Term Sales and Service Agreement, between the Nissan Division of Nissan Motor Corporation in U.S.A. and Peachtree Nissan, Inc. (substantially similar to Exhibit 10.6.4). *10.7.2 Automotive Wholesale Financing and Security Agreement, dated July 12, 1996, between Nissan Motor Acceptance Corporation and Peachtree Nissan, Inc. *10.8.1 Stock Purchase Agreement, dated as of June 6, 1996, among the Company, UAG West, Inc., Scottsdale Jaguar, LTD., SA Automotive, LTD., SL Automotive, LTD., SPA Automotive, LTD., LRP, LTD., Sun BMW, LTD., Scottsdale Management Group, LTD., 6725 Dealership, LTD., Steven Knappenberger Revocable Trust Dated April 15, 1983, as amended, Brochick 6725 Trust dated December 29, 1992, Beskind 6725 Trust dated December 29, 1992, Steven Knappenberger, Jay P. Beskind December 29, 1992, Knappenberger 6725 Trust dated and George W. Brochick.
II-6
NO. DESCRIPTION - ----------- ----------------------------------------------------------------------------------------------------- *10.8.2 Purchase and Sale Agreement, 6950 E. McDowell Road, dated June 6, 1996, among Steven Knappenberger, as Trustee of the Steven Knappenberger Revocable Trust II, Bruce Knappenberger, as Trustee of the Bruce Knappenberger Trust and UAG West, Inc. *10.8.3 Form of Employment Agreement between the Company, UAG West, Inc. and Steven Knappenberger. *10.8.4 Form of Broker's Agreement between UAG West, Inc. and KBB, Inc. *21.1 List of subsidiaries of the Company. 23.1.1 Consent of Coopers & Lybrand L.L.P. 23.1.2 Consent of Coopers & Lybrand L.L.P. 23.1.3 Consent of Coopers & Lybrand L.L.P. 23.1.4 Consent of Coopers & Lybrand L.L.P. 23.1.5 Consent of Faucett Taylor & Associates, P.C. 23.1.6 Consent of Coopers & Lybrand L.L.P. *23.2 Consent of Willkie Farr & Gallagher (included in Exhibit 5.1). 24.1 Powers of Attorney (included in the signature pages of this registration statement). 27.1 Financial Data Schedules.
- ------------------------ *To be filed by amendment. (b) Financial Statement Schedule Schedule II--Valuation and Qualifying Accounts ITEM 17. UNDERTAKINGS (1) The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreements certificates for the Common Stock in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (2) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to its Bylaws, the Underwriting Agreements or otherwise, the Registrant has been advised that, in the opinion of the Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (3) The Registrant hereby undertakes that: (a)For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of the Registration Statement as of the time it was declared effective. (b)For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-7 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in New York, New York on August 2, 1996. UNITED AUTO GROUP, INC. By: /s/ CARL SPIELVOGEL ----------------------------------- Carl Spielvogel CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints each of Carl Spielvogel and Philip N. Smith, Jr., as his true and lawful attorneys-in-fact and agents for the undersigned, with full power of substitution, for and in the name, place and stead of the undersigned to sign and file with the Securities and Exchange Commission under the Securities Act of 1933, as amended, (i) any and all pre-effective and post-effective amendments to this registration statement, (ii) any registration statement relating to this offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, (iii) any exhibits to any such registration statement or pre-effective or post-effective amendments, (iv) any and all applications and other documents in connection with any such registration statement or pre-effective or post-effective amendments, and generally to do all things and perform any and all acts and things whatsoever requisite and necessary or desirable to enable United Auto Group, Inc. to comply with the provisions of the Securities Act of 1933, as amended, and all requirements of the Securities and Exchange Commission. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------------------ ------------------------------------------------- ------------------ /s/ CARL SPIELVOGEL --------------------------------- Chairman of the Board and Chief Executive Officer August 2, 1996 Carl Spielvogel /s/ ARTHUR J. RAWL Executive Vice President and Chief Financial --------------------------------- Officer (Principal Accounting Officer and August 2, 1996 Arthur J. Rawl Principal Financial Officer) /s/ MARSHALL S. COGAN --------------------------------- Director August 2, 1996 Marshall S. Cogan /s/ MICHAEL R. EISENSON --------------------------------- Director August 2, 1996 Michael R. Eisenson
II-8
SIGNATURE TITLE DATE - ------------------------------------------ ------------------------------------------------- ------------------ /s/ JOHN J. HANNAN --------------------------------- Director August 2, 1996 John J. Hannan /s/ JULES KROLL --------------------------------- Director August 2, 1996 Jules Kroll /s/ ROBERT H. NELSON --------------------------------- Director August 2, 1996 Robert H. Nelson /s/ JOHN M. SALLAY --------------------------------- Director August 2, 1996 John M. Sallay /s/ RICHARD SINKFIELD --------------------------------- Director August 2, 1996 Richard Sinkfield
II-9 Report of Independent Accountants on Financial Statement Schedule In connection with our audits of the consolidated financial statements of United Auto Group, Inc. and Subsidiaries as of December 31, 1995 and 1994, and for each of the three years in the period ended December 31, 1995, which financial statements are included in this Registration Statement, we have also audited the financial statement schedule listed in Item 16 herein. In our opinion, the financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. /s/ Coopers & Lybrand L.L.P. Coopers & Lybrand L.L.P. Princeton, New Jersey June 17, 1996 S-1 SCHEDULE II UNITED AUTO GROUP, INC. Valuation and Qualifying Accounts For the years ended December 31, 1995, 1994 and 1993
------------------------------------------------------------------------- Additions ---------------------------------- Balance Charged to Balance beginning costs and Charged to end of of period expenses other accounts Deductions period ----------- ----------------- --------------- ----------- ----------- 1995 - -------------------------------------------- Allowance for uncollectibles................ $ 678 $ 500 $ (678) $ 500 Allowance for finance income chargebacks.... 2,123 3,634 (3,451) 2,306 1994 - -------------------------------------------- Allowance for uncollectibles................ 393 285 678 Allowance for finance income chargebacks.... 2,564 1,176 (1,617) 2,123 1993 - -------------------------------------------- Allowance for uncollectibles................ 0 393 393 Allowance for finance income chargebacks.... 0 3,136 (572) 2,564
S-2 EXHIBIT INDEX
No. Description - ----------- ------------------------------------------------------------------------------------------- *1.1 Form of Underwriting Agreement *3.1 Form of Restated Certificate of Incorporation *3.2 Form of Restated By-Laws *4.1 Specimen Common Stock certificate *5.1 Opinion of Willkie Farr & Gallagher *10.1.1.1 Registration Rights Agreement, dated as of October 15, 1993, among the Company and the investors listed in Exhibit A thereto. *10.1.1.2 Amendment to Registration Rights Agreement, dated as of July 10, 1996, among the Company and the investors listed in Exhibit A thereto. *10.1.2 Waiver, Consent and Modification Agreement, dated as of September 22, 1995, among the Company and its stockholders. *10.1.3 Letter Agreement, dated September 22, 1996, between the Company and J.P. Morgan Capital Corporation. *10.1.4 Form of Warrant. *10.1.5 Form of Additional Warrant. *10.1.6 Employment Agreement, dated as of June 21, 1996, between the Company and Carl Spielvogel. *10.1.7 Severance Agreement, dated April 5, 1996, among the Company, Trace and Ezra P. Mager. *10.1.8 Stock Option Plan of the Company. *10.2.1.1 Honda Automobile Dealer Sales and Service Agreement, dated October 5, 1995, between American Honda Motor Co. Inc. and Danbury Auto Partnership (standard provisions are in Exhibit 10.2.1.2 hereto). *10.2.1.2 American Honda Motor Co. Standard Provisions. *10.2.2.1 Lexus Dealer Agreement, dated March 15, 1994, between Lexus, a division of Toyota Motor Sales, U.S.A., Inc. and Somerset Motors Partnership (standard provisions are in Exhibit 10.2.2.2 hereto). *10.2.2.2 Lexus Dealer Agreement Standard Provisions. *10.2.3.1 Saturn Distribution Corporation Dealer Agreement, dated October 1, 1992, between Saturn Distribution Corporation and Danbury-Mt. Kisco Saturn Partnership. *10.2.4.1 BMW of North America, Inc. Dealer Agreement, dated January 1, 1994, between BMW of North America, Inc. and DiFeo BMW Partnership (standard provisions are in Exhibit 10.2.4.2 hereto). *10.2.4.2 BMW of North America, Inc. Dealer Standard Provisions Applicable to Dealer Agreement. *10.2.5.1 Term Dealer Sales and Service Agreement, dated December 23, 1992, between American Suzuki Motor Corporation and Fair Hyundai Partnership. *10.2.6.1 Toyota Dealer Agreement, dated May 5, 1995, between Toyota Motor Distributors, Inc. and Hudson Motors Partnership (standard provisions are in Exhibit 10.2.6.2 hereto). *10.2.6.2 Toyota Dealer Agreement Standard Provisions. *10.2.7.1 Oldsmobile Division Dealer Sales and Service Agreement, dated October 2, 1992, between General Motors Corporation, Oldsmobile Division and J & F Oldsmobile-Isuzu Partnership (standard provision are in Exhibit 10.2.7.2 hereto). *10.2.7.2 General Motors Dealer Sales and Service Agreement Standard Provisions. *10.2.8.1 Chevrolet-Geo Dealer Sales and Service Agreement, dated November 1, 1995, between General Motors Corporation, Chevrolet Motor Division and Fair Chevrolet-Geo Partnership (substantially similar to Exhibit 10.2.7.1). *10.2.9.1 Nissan Dealer Term Sales and Service Agreement, between the Nissan Division of Nissan Motor Corporation in U.S.A. and DiFeo Nissan Partnership. *10.2.10.1 Chrysler Corporation Jeep Sales and Service Agreement, dated October 8, 1992, between DiFeo Jeep-Eagle Partnership and Chrysler Corporation (standard provisions are in Exhibit 10.2.10.2). *10.2.10.2 Chrysler Corporation Sales and Service Agreement Additional Terms and Provisions. *10.2.11 Chrysler Corporation Eagle Sales and Service Agreement, dated October 8, 1992, between DiFeo Jeep-Eagle Partnership and Chrysler Corporation (substantially similar to Exhibit 10.2.10.1). *10.2.12 Chrysler Corporation Chrysler Sales and Service Agreement, dated August 16, 1995, between DiFeo Chrysler Plymouth Jeep Eagle Partnership and Chrysler Corporation (substantially similar to Exhibit 10.2.10.1). *10.2.13 Chrysler Corporation Plymouth Sales and Service Agreement, dated November 13, 1992, between DiFeo Chrysler Plymouth Jeep Eagle Partnership and Chrysler Corporation (substantially similar to Exhibit 10.2.10.1).
No. Description - ----------- ------------------------------------------------------------------------------------------- *10.2.14 Toyota Dealer Agreement, dated May 5, 1995, between Toyota Motor Distributors, Inc. and County Auto Group Partnership (substantially similar to Exhibit 10.2.6.1). *10.2.15.1 Hyundai Motor America Dealer Sales and Service Agreement, dated October 12, 1992, as amended November 22, 1993, October 12, 1995, and March 14, 1996, between Hyundai Motor America and Fair Hyundai Partnership (standard provisions are in Exhibit 10.2.15.2 hereto). *10.2.15.2 Hyundai Motor America Dealer Sales and Service Agreement Standard Provisions. *10.2.16 Hyundai Motor America Dealer Sales and Service Agreement, dated November 22, 1993, as amended April 1, 1994, and November 3, 1995, between Hyundai Motor America and DiFeo Hyundai Partnership (substantially similar to Exhibit 10.2.15.1). *10.2.17.1 Mitsubishi Motor Sales of America, Inc. Interim Sales and Service Agreement, dated August 29, 1994, between Mitsubishi Motor Sales of America, Inc. and Rockland Motors Partnership (standard provisions are in Exhibit 10.2.17.2 hereto). *10.2.17.2 Mitsubishi Motor Sales of America, Inc. Dealer Sales and Service Agreement Standard Provisions. *10.2.18 Toyota Dealer Agreement, dated August 23, 1995, between Toyota Motor Distributors, Inc. and OCT Partnership (substantially similar to Exhibit 10.2.6.1). *10.2.19 Mitsubishi Motor Sales of America, Inc. Sales and Service Agreement, dated June 30, 1994, between Mitsubishi Motor Sales of America, Inc. and OCM Partnership (substantially similar to Exhibit 10.2.17.1). *10.2.20 Chrysler Corporation Dodge Sales and Service Agreement, dated June 18, 1993, between Fair Chrysler Plymouth Partnership and Chrysler Corporation (substantially similar to Exhibit 10.2.10.1). *10.2.21 Chevrolet-Geo Dealer Sales and Service Agreement, dated November 1, 1995 between General Motors Corporation, Chevrolet Motor Division and DiFeo Chevrolet-Geo Partnership (substantially similar to Exhibit 10.2.7.1). *10.2.22 Employment Agreement, dated July 1, 1996, between James D. Evans and Danbury-Mt. Kisco Saturn Partnership. *10.3.1 Receivables Purchase Agreement, dated as of June 28, 1995, between Atlantic Auto Funding Corporation and Atlantic Auto Finance Corporation. *10.3.2 Loan and Security Agreement, dated as of June 28, 1995, among Atlantic Auto Funding Corporation, Atlantic Auto Finance Corporation and Citibank, N.A. *10.3.3 Support Agreement of the Company, dated as of June 28, 1995, in favor of Atlantic Auto Funding Corporation. *10.3.4 Purchase Agreement, dated as of June 14, 1996, between Atlantic Auto Finance Corporation and Atlantic Auto Second Funding Corporation. *10.3.5 Transfer and Administration Agreement, dated as of June 14, 1996, among Atlantic Auto Second Funding Corporation, Atlantic Auto Finance Corporation and Morgan Guaranty Trust Company of New York. *10.3.6 Support Agreement of the Company, dated as of June 14, 1996, in favor of Atlantic Auto Second Funding Corporation. *10.3.7 Pooling and Servicing Agreement relating to Atlantic Auto Grantor Trust 1996-A, dated as of June 20, 1996, among Atlantic Auto Third Funding Corporation, Atlantic Auto Finance Corporation and The Chase Manhattan Bank. *10.3.8 Insurance and Indemnity Agreement, dated as of June 20, 1996, among Financial Security Assurance Inc., Atlantic Auto Third Funding Corporation and Atlantic Auto Finance Corporation. *10.3.9 Master Spread Account Agreement, dated as of June 20, 1996, among Atlantic Auto Third Funding Corporation, Financial Security Assurance Inc. and The Chase Manhattan Bank. *10.4.1 Amended and Restated Stock Purchase Agreement, dated as of July 1, 1995, among the Company, Landers Auto Sales, Inc., Steve Landers, John Landers and Bob Landers. *10.4.2 Promissory Note of the Company, dated August 1, 1995, for the benefit of Steve Landers and John Landers. *10.4.3 Promissory Note of the Company, dated August 1, 1995, in favor of Steve Landers and John Landers. *10.4.4 Guarantee of the Company, dated as of August 1, 1995, in favor of Steve Landers and John Landers. *10.4.5 Employment Agreement, dated as of August 1, 1995, between Landers Auto Sales, Inc. and Steve Landers. *10.4.6 Lease, dated as of August 1, 1995, among Steve Landers, John Landers, Bob Landers and Landers Auto Sales, Inc., regarding Jeep-Eagle premises.
No. Description - ----------- ------------------------------------------------------------------------------------------- *10.4.7 Lease, dated as of August 1, 1995, among Steve Landers, John Landers, Bob Landers and Landers Auto Sales, Inc., regarding Oldsmobile-GMC premises. *10.4.8 Shareholders' Agreement, dated as of August 1, 1995, among the Company, United Landers, Inc., Landers Auto Sales, Inc., Steve Landers and John Landers. *10.4.9 Registration Rights Agreement, dated as of August 1, 1995, among the Company and the parties listed on Schedule I thereto. *10.4.10 Chrysler Corporation Eagle Sales and Service Agreement, dated August 16, 1995, between United Landers Auto Sales, Inc. and Chrysler Corporation (substantially similar to Exhibit 10.2.10.1). *10.4.11 Chrysler Corporation Jeep Sales and Service Agreement, dated August 16, 1995, between United Landers Auto Sales, Inc. and Chrysler Corporation (substantially similar to Exhibit 10.2.10.1). *10.4.12 Chrysler Corporation Dodge Sales and Service Agreement, dated August 16, 1995, between United Landers Auto Sales, Inc. and Chrysler Corporation (substantially similar to Exhibit 10.2.10.1). *10.4.13 Chrysler Corporation Plymouth Sales and Service Agreement, dated August 16, 1995, between United Landers Auto Sales, Inc. and Chrysler Corporation (substantially similar to Exhibit 10.2.10.1). *10.4.14 Chrysler Corporation Chrysler Sales and Service Agreement, dated August 16, 1995, between United Landers Auto Sales, Inc. and Chrysler Corporation (substantially similar to Exhibit 10.2.10.1). *10.4.15 Oldsmobile Division Dealer Sales and Service Agreement, dated November 1, 1995, between General Motors Corporation, Oldsmobile Division and United Landers Auto Sales, Inc. (substantially similar to Exhibit 10.2.7.1). *10.4.16 GMC Truck Division Dealer Sales and Service Agreement, dated November 1, 1995, between General Motors Corporation, GMC Truck Division and United Landers Auto Sales, Inc. (substantially similar to Exhibit 10.2.7.1). *10.4.17 Chrysler Corporation Dodge Sales and Service Agreement, dated June 18, 1993, between United Landers Auto Sales, Inc. and Chrysler Corporation (substantially similar to Exhibit 10.2.10.1). *10.4.18 Security Agreement and Master Credit Agreement, dated October 25, 1993, between Landers Oldsmobile-GMC Inc. and Chrysler Credit Corporation. *10.4.19 Fixed Rate Commercial Revolving or Draw Note of Landers Oldsmobile-GMC Inc., dated December 5, 1994, in favor of The Benton State Bank. *10.5.1 Stock Purchase Agreement, dated as of November 17, 1995, among the Company, UAG Atlanta, Inc., Atlanta Toyota, Inc. and Carl H. Westcott. *10.5.2 Promissory Note of UAG Atlanta, Inc., dated January 16, 1996, in favor of Carl H. Westcott. *10.5.3 Guarantee of the Company, dated as of January 16, 1996, in favor of Carl Westcott. *10.5.4 Promissory Note of Atlanta Toyota, Inc., dated January 16, 1996, in favor of First Extended Service Corporation. *10.5.5 Guarantee of the Company, dated as of January 16, 1996, in favor of Carl Westcott. *10.5.6 Lease Agreement, dated as of January 3, 1996, between Carl Westcott and Atlanta Toyota, Inc. *10.5.7 Lease Guarantee of the Company, dated as of January 16, 1996, in favor of Carl Westcott. *10.5.8 Toyota Dealer Agreement, dated January 16, 1996, between Southeast Toyota Motor Distributors, Inc. and Atlanta Toyota, Inc (substantially similar to Exhibit 10.2.6.1). *10.5.9 Wholesale Floor Plan Security Agreement, dated May 24, 1996, between World Omni Financial Corp. and Atlanta Toyota, Inc. *10.5.10 Demand Promissory Note of Atlanta Toyota, Inc., in favor of World Omni Financial Corp. *10.5.11 Shareholders' Agreement, dated as of July 31, 1996, among the Company, UAG Atlanta, Inc., Atlanta Toyota and John Smith. *10.5.12 Employment Agreement, among the Company, UAG Atlanta, Inc. and John Smith. *10.6.1 Stock Purchase Agreement, dated as of March 1, 1996, among the Company, UAG Atlanta II, Inc., Steve Rayman Nissan, Inc., Steven L. Rayman and Richard W. Keffer, Jr. *10.6.2 Employment Agreement, dated as of May 1, 1996, among the Company, UAG Atlanta II, Inc., Steve Rayman Nissan, Inc. and Bruce G. Dunker. *10.6.3 Lease Agreement, dated as of May 1, 1996, among Steven L. Rayman, Richard W. Keffer, Jr. and Steve Rayman Nissan, Inc. *10.6.4 Nissan Dealer Term Sales and Service Agreement, between the Nissan Division of Nissan Motor Corporation in U.S.A. and United Nissan, Inc. *10.6.5 Lease Agreement, dated May 1, 1996, among Steven L. Rayman, Richard W. Keffer, Jr. and Steve Rayman Nissan, Inc.
No. Description - ----------- ------------------------------------------------------------------------------------------- *10.6.6 Wholesale Floor Plan Security Agreement, dated April 29, 1996, between World Omni Financial Corp. and United Nissan, Inc. *10.7.1 Stock Purchase Agreement, dated as of June 7, 1996, among the Company, UAG Atlanta III, Inc., Hickman Nissan, Inc., Lynda Jane Hickman and Lynda Jane Hickman as Executrix under the will of James Franklin Hickman, Jr., deceased. *10.7.1 Nissan Dealer Term Sales and Service Agreement, between the Nissan Division of Nissan Motor Corporation in U.S.A. and Peachtree Nissan, Inc. (substantially similar to Exhibit 10.6.4). *10.7.2 Automotive Wholesale Financing and Security Agreement, dated July 12, 1996, between Nissan Motor Acceptance Corporation and Peachtree Nissan, Inc. *10.8.1 Stock Purchase Agreement, dated as of June 6, 1996, among the Company, UAG West, Inc., Scottsdale Jaguar, LTD., SA Automotive, LTD., SL Automotive, LTD., SPA Automotive, LTD., LRP, LTD., Sun BMW, LTD., Scottsdale Management Group, LTD., 6725 Dealership, LTD., Steven Knappenberger Revocable Trust Dated April 15, 1983, as amended, Brochick 6725 Trust dated December 29, 1992, Beskind 6725 Trust dated December 29, 1992, Steven Knappenberger, Jay P. Beskind December 29, 1992, Knappenberger 6725 Trust dated and George W. Brochick. *10.8.2 Purchase and Sale Agreement, 6950 E. McDowell Road, dated June 6, 1996, among Steven Knappenberger, as Trustee of the Steven Knappenberger Revocable Trust II, Bruce Knappenberger, as Trustee of the Bruce Knappenberger Trust and UAG West, Inc. *10.8.3 Form of Employment Agreement between the Company, UAG West, Inc. and Steven Knappenberger. *10.8.4 Form of Broker's Agreement between UAG West, Inc. and KBB, Inc. *21.1 List of subsidiaries of the Company. 23.1.1 Consent of Coopers & Lybrand L.L.P. 23.1.2 Consent of Coopers & Lybrand L.L.P. 23.1.3 Consent of Coopers & Lybrand L.L.P. 23.1.4 Consent of Coopers & Lybrand L.L.P. 23.1.5 Consent of Faucett Taylor & Associates, P.C. 23.1.6 Consent of Coopers & Lybrand L.L.P. *23.2 Consent of Willkie Farr & Gallagher (included in Exhibit 5.1). 24.1 Powers of Attorney (included in the signature pages of this registration statement). 27.1 Financial Data Schedules.
- ------------------------ *To be filed by amendment. EX-23.1-1 2 EXHIBIT 23.1.1 Exhibit 23.1.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this Registration Statement on Form S-1 of our report dated June 17, 1996, on our audits of the financial statements and financial statement schedule of United Auto Group, Inc. and Subsidiaries. We also consent to the reference to our firm under the captions "Experts" and Selected Consolidated Financial Data. /s/ Coopers & Lybrand L.L.P. Coopers & Lybrand L.L.P. Princeton, New Jersey July 31, 1996 EX-23.1-2 3 EXHIBIT 23.1.2 Exhibit 23.1.2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this Registration Statement on Form S-1 of our report dated May 31, 1996, on our audits of the financial statements of Landers Auto Sales, Inc. We also consent to the reference to our firm under the caption "Experts". /s/ Coopers & Lybrand L.L.P. Coopers & Lybrand L.L.P. Princeton, New Jersey July 31, 1996 EX-23.1-3 4 EXHIBIT 23.1.3 Exhibit 23.1.3 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this Registration Statement on Form S-1 of our report dated June 30, 1996, on our audits of the financial statements of Atlanta Toyota, Inc. We also consent to the reference to our firm under the caption "Experts". /s/ Coopers & Lybrand L.L.P. Coopers & Lybrand L.L.P. Princeton, New Jersey July 31, 1996 EX-23.1-4 5 EXHIBIT 23.1.4 Exhibit 23.1.4 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this Registration Statement on Form S-1 of our report dated June 14, 1996, on our audits of the financial statements of Steve Rayman Nissan, Inc. We also consent to the reference to our firm under the caption "Experts". /s/ Coopers & Lybrand L.L.P. Coopers & Lybrand L.L.P. Princeton, New Jersey July 31, 1996 EX-23.1-5 6 EXHIBIT 23.1.5 EXHIBIT 23.1.5 To the Board of Directors and Stockholders of United Auto Group, Inc. New York, New York We consent to the use in this Registration Statement relating to shares of Common Stock of United Auto Group, Inc. on Form S-1 of our report on the financial statements of Hickman Nissan, Inc. dated April 3, 1996, appearing in the Prospectus, which is a part of this Registration Statement, and to the references to us under the heading "Experts" in such Prospectus. /s/ FAUCETT, TAYLOR & ASSOCIATES, P.C. Faucett, Taylor & Associates, P.C. Atlanta, Georgia July 31, 1996 EX-23.1-6 7 EXHIBIT 23.1.6 Exhibit 23.1.6 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this Registration Statement on Form S-1 of our report dated June 12, 1996, on our audits of the financial statements of Sun Automotive Group. We also consent to the reference to our firm under the caption "Experts". /s/ Coopers & Lybrand L.L.P. Coopers & Lybrand L.L.P. Princeton, New Jersey July 31, 1996 EX-27.1 8 EXHIBIT 27.1
5 1,000 YEAR 3-MOS DEC-31-1995 DEC-31-1996 JAN-01-1995 JAN-01-1996 DEC-31-1995 MAR-31-1996 4,697 4,914 0 0 27,349 38,662 0 0 101,556 120,438 141,649 172,292 15,924 18,100 3,778 4,190 236,027 277,752 139,447 169,364 24,073 29,722 0 0 1 1 1 1 49,238 55,956 236,027 277,752 805,621 261,719 806,151 262,131 720,344 232,502 812,668 260,710 0 0 0 0 1,621 1,000 (5,921) 1,207 (2,089) 536 0 0 0 0 0 0 0 0 (3,466) 171 (.67) .03 0 0
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