UNITED AUTO GROUP INC - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended September 30, 2002

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from to

Commission file number 1-12297

United Auto Group, Inc.

(Exact name of registrant as specified in its charter)






Delaware		22-3086739
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)





2555 Telegraph Road Bloomfield Hills, Michigan (Address of principal executive offices)		48302-0954 (Zip Code)

Registrant’s telephone number, including area code

(248) 648-2500

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

As of November 12, 2002, there were 38,839,026 shares of voting common stock outstanding and 1,758,784 shares of non-voting common stock outstanding.

TABLE OF CONTENTS


CONSOLIDATED CONDENSED BALANCE SHEETS
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING BALANCE SHEETS
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
PART II
Item 1 -- Legal Proceedings
Item 6 -- Exhibits, Financial Statement Schedules and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
10-Q EXHIBIT INDEX
Purchase Agreement
Lease Agreement dated September 29, 2002
Lease Agreement September 11, 2002
Certification of CEO
Certification of CFO

TABLE OF CONTENTS


		Page





PART I
1.	Financial Statements and Supplementary Data (unaudited)




	Consolidated Condensed Balance Sheets as of September 30, 2002 and December 31, 2001		2




	Consolidated Condensed Statements of Income for the three and nine months ended September 30, 2002 and 2001		3




	Consolidated Condensed Statements of Cash Flow for the nine months ended September 30, 2002 and 2001		4




	Consolidated Condensed Statement of Stockholders’ Equity and Comprehensive Income for the three and nine months ended September 30, 2002		5




	Notes to Consolidated Condensed Financial Statements		6




2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18




PART II




1.	Legal Proceedings		31




6.	Exhibits, Financial Statement Schedules and Reports on Form 8-K		31




Signatures			32

UNITED AUTO GROUP, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS


		September 30,			December 31,
		2002			2001


		(In Thousands)
		(Unaudited)




ASSETS




Cash and cash equivalents		$	685		$	2,952




Accounts receivable, net			305,313			239,610




Inventories			885,805			611,889




Other current assets			33,821			16,081

	Total current assets		1,225,624			870,532




Property and equipment, net			274,259			181,290




Intangible assets, net			957,390			772,737




Assets of discontinued operations			34,193			66,624




Other assets			63,020			55,393

	Total Assets	$	2,554,486		$	1,946,576

LIABILITIES AND STOCKHOLDERS’ EQUITY




Liabilities




Floor plan notes payable		$	790,850		$	586,620




Accounts payable			138,540			73,781




Accrued expenses			161,701			83,949




Current portion of long-term debt			9,217			4,202

	Total current liabilities		1,100,308			748,552




Long-term debt			646,793			551,648




Other long-term liabilities			96,703			92,774




Liabilities of discontinued operations			21,281			37,919

	Total liabilities		1,865,085			1,430,893




Stockholders’ Equity




Series A Preferred Stock, $0.0001 par value; liquidation preference $10 per share; 10 shares authorized; none issued and outstanding at September 30, 2002; 9 issued and outstanding at December 31, 2001			—			—




Series B Preferred Stock, $0.0001 par value; liquidation preference $10 per share; 10 shares authorized; none issued and outstanding at September 30, 2002; 1 issued and outstanding at December 31, 2001			—			—




Common stock, $0.0001 par value, 80,000 shares authorized; 43,667 shares issued, including 4,830 treasury shares, at September 30, 2002; 23,540 shares issued, including 3,821 treasury shares, at December 31, 2001			4			2




Non-voting Common Stock, $0.0001 par value, 7,125 shares authorized; 1,759 issued and outstanding at September 30, 2002; none issued and outstanding at December 31, 2001			—			—




Class C Common Stock, $0.0001 par value, 20,000 shares authorized; none issued and outstanding at September 30, 2002 and December 31, 2001			—			—




Additional paid-in-capital			564,632			445,311




Retained earnings			133,142			78,750




Accumulated other comprehensive loss			(8,377	)		(8,380	)

	Total stockholders’ equity		689,401			515,683

	Total Liabilities and Stockholders’ Equity	$	2,554,486		$	1,946,576

See Notes to Consolidated Condensed Financial Statements

UNITED AUTO GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF INCOME



		Three Months Ended						Nine Months Ended
		September 30,						September 30,

		2002			2001			2002			2001


		(In Thousands, Except per Share Amounts)
		(Unaudited)




New vehicle sales		$	1,227,100		$	914,577		$	3,303,753		$	2,618,117




Used vehicle sales			411,161			272,765			1,106,603			807,329




Finance and insurance			49,920			38,306			133,283			106,705




Service and parts			207,586			152,247			565,221			435,614




Fleet sales			32,604			37,097			93,355			119,061




Wholesale vehicle sales			131,232			91,059			355,422			263,463

	Total revenues		2,059,603			1,506,051			5,557,637			4,350,289




Cost of sales			1,771,953			1,294,050			4,767,825			3,745,316

	Gross profit		287,650			212,001			789,812			604,973




Selling, general and administrative expenses			229,803			171,411			631,596			487,364

	Operating income		57,847			40,590			158,216			117,609




Floor plan interest expense			(9,082	)		(8,998	)		(26,023	)		(31,577	)




Other interest expense			(9,990	)		(7,992	)		(27,834	)		(27,217	)

	Income from continuing operations before minority interests and income taxes		38,775			23,600			104,359			58,815




Minority interests			(458	)		(66	)		(1,383	)		(364	)




Income taxes			(15,704	)		(10,266	)		(42,035	)		(25,583	)

	Income from continuing operations		22,613			13,268			60,941			32,868




Income (loss) from discontinued operations, net of tax			(624	)		220			648			595

	Net income		21,989			13,488			61,589			33,463




Preferred dividends			(92	)		(1,641	)		(6,293	)		(6,338	)

	Income available to common stockholders	$	21,897		$	11,847		$	55,296		$	27,125

Shares used in computing basic per share data			40,849			23,433			36,582			23,092

Shares used in computing diluted per share data			41,733			35,418			41,168			33,550

Basic income from continuing operations per common share		$	0.55		$	0.50		$	1.49		$	1.15

Basic net income per common share		$	0.54		$	0.51		$	1.51		$	1.17

Income from continuing operations per diluted common share		$	0.54		$	0.37		$	1.48		$	0.98

Net income per diluted common share		$	0.53		$	0.38		$	1.50		$	1.00

See Notes to Consolidated Condensed Financial Statements

UNITED AUTO GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW



			Nine Months Ended
			September 30,

			2002			2001


			(In Thousands)
			(Unaudited)




Operating activities:




Net income			$	61,589		$	33,463




Adjustments to reconcile net income to net cash provided by operating activities:




	Depreciation and amortization			15,761			24,246




	Minority interests			1,383			364
Changes in operating assets and liabilities




	Accounts receivable			(20,339	)		(25,274	)




	Inventories			(118,089	)		112,642




	Floor plan notes payable			79,178			(79,540	)




	Accounts payable and accrued expenses			52,066			3,224




	Other			(27,294	)		11,687

		Net cash provided by operating activities		44,255			80,812

Investing activities:




Purchase of equipment and improvements				(140,049	)		(65,939	)




Proceeds from sale-leaseback transactions				80,000			—




Dealership acquisitions, net				(191,631	)		(105,756	)

	Net cash used in investing activities			(251,680	)		(171,695	)

Financing activities:




Proceeds from borrowings of long-term debt				632,800			97,405




Payments of long-term debt and capital leases				(561,173	)		(23,426	)




Proceeds from issuance of common stock				135,318			14,835




Repurchase of common stock				(16,000	)		(2,402	)

	Net cash provided by financing activities			190,945			86,412

	Net cash distributed by discontinued operations			14,213			802

	Net decrease in cash and cash equivalents			(2,267	)		(3,669	)




Cash and cash equivalents, beginning of period				2,952			5,090

Cash and cash equivalents, end of period			$	685		$	1,421

See Notes to Consolidated Condensed Financial Statements

UNITED AUTO GROUP, INC.

CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME



	Class A					Class B
	Convertible					Convertible					Voting and Non-voting
	Preferred Stock					Preferred Stock					Common Stock
																Additional
	Issued					Issued					Issued					Paid-in			Retained
	Shares			Amount		Shares			Amount		Shares			Amount		Capital			Earnings


	(Dollars In Thousands)
	(Unaudited)




Balances, January 1, 2002		8,794			—		649			—		23,540,231		$	2	$	445,311		$	78,750




Issuance of common stock		(1,913	)		—		—			—		9,936,812			1		124,184			—




Exercise of options		—			—		—			—		167,778			—		2,627			—




Payment of preferred stock dividends		—			—		—			—		—			—		—			(2,719	)




Fair value of interest rate swap agreement		—			—		—			—		—			—		—			—




Foreign currency translation		—			—		—			—		—			—		—			—




Net income		—			—		—			—		—			—		—			15,711

Balances, March 31, 2002		6,881			—		649			—		33,644,821			3		572,122			91,742




Payment of in-kind preferred stock dividends		152			—		—			—		—			—		4,212			(4,212	)




Conversion of preferred stock to common stock		(7,033	)		—		—			—		7,036,371			1		(792	)		—




Exercise of options		—			—		—			—		270,963			—		5,068			—




Fair value of interest rate swap agreement		—			—		—			—		—			—		—			—




Foreign currency translation		—			—		—			—		—			—		—			—




Net income		—			—		—			—		—			—		—			23,889

Balances, June 30, 2002		—			—		649			—		40,952,155			4		580,610			111,419




Payment of in-kind preferred stock dividends		—			—		3			—		—			—		55			(55	)




Payment of preferred stock dividends		—			—		—			—		—			—		—			(211	)




Conversion of preferred stock to common stock		—			—		(652	)		—		652,452			—		(43	)		—




Exercise of options		—			—		—			—		1,000			—		10			—




Repurchase of common stock		—			—		—			—		(1,009,463	)		—		(16,000	)		—




Fair value of interest rate swap agreement		—			—		—			—		—			—		—			—




Foreign currency translation		—			—		—			—		—			—		—			—




Net income		—			—		—			—		—			—		—			21,989

Balances, September 30, 2002		—			—		—			—		40,596,144		$	4	$	564,632		$	133,142

[Additional columns below]

[Continued from above table, first column(s) repeated]

Accumulated

Other

Comprehensive Total Comprehensive

Income Stockholders’ Income

(Loss) Equity (Loss)

(Dollars In Thousands)

(Unaudited)

Balances, January 1, 2002
$ (8,380 ) $ 515,683 $ —

Issuance of common stock
— 124,185 —

Exercise of options
— 2,627 —

Payment of preferred stock dividends
— (2,719 ) —

Fair value of interest rate swap agreement
3,539 3,539 3,539

Foreign currency translation
162 162 162

Net income
— 15,711 15,711

Balances, March 31, 2002
(4,679 ) 659,188 19,412

Payment of in-kind preferred stock dividends
— — —

Conversion of preferred stock to common stock
— (791 ) —

Exercise of options
— 5,068 —

Fair value of interest rate swap agreement
(1,496 ) (1,496 ) (1,496 )

Foreign currency translation
246 246 246

Net income
— 23,889 23,889

Balances, June 30, 2002
(5,929 ) 686,104 42,051

Payment of in-kind preferred stock dividends
— — —

Payment of preferred stock dividends
— (211 ) —

Conversion of preferred stock to common stock
— (43 ) —

Exercise of options
— 10 —

Repurchase of common stock
— (16,000 ) —

Fair value of interest rate swap agreement
(4,135 ) (4,135 ) (4,135 )

Foreign currency translation
1,687 1,687 1,687

Net income
— 21,989 21,989

Balances, September 30, 2002
$ (8,377 ) $ 689,401 $ 61,592

See Notes to Consolidated Condensed Financial Statements

UNITED AUTO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In Thousands, Except Per Share Amounts)

(Unaudited)

1. Basis of Presentation

The information presented as of September 30, 2002 and 2001 and for the three and nine month periods then ended is unaudited, but includes all adjustments (consisting only of normal recurring accruals) which the management of United Auto Group, Inc. (the “Company”) believes to be necessary for the fair presentation of results for the periods presented. The results for the interim periods are not necessarily indicative of results to be expected for the year. These consolidated condensed financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2001, which were included as part of the Company’s Annual Report on Form 10-K. In order to maintain consistency and comparability of financial information between periods presented, certain reclassifications have been made to the Company’s prior year consolidated condensed financial statements to conform to the current year presentation.

2. Inventories

Inventories consisted of the following:


		September 30,		December 31,
		2002		2001

New vehicles		$	663,951	$	469,108




Used vehicles			174,672		105,389




Parts, accessories and other			47,182		37,392

	Total inventories	$	885,805	$	611,889

3. Business Combinations

During 2002 and 2001, the Company completed a number of acquisitions. Each of these acquisitions has been accounted for using the purchase method of accounting. As a result, the Company’s financial statements include the results of operations of the acquired dealerships only from the date of acquisition.

During the nine months ended September 30, 2002, the Company acquired 69 automobile dealership franchises. The aggregate consideration paid in connection with such acquisitions amounted to $182,030 in cash. The consolidated condensed balance sheets include preliminary allocations of the purchase price relating to these acquisitions, which are subject to final adjustment pending the final implementation by the Company of Statement of Financial Accounting Standards No. 142 Goodwill and Other Intangibles (“SFAS No. 142”). Such allocations resulted in recording approximately $183,930 of intangibles.

The following unaudited consolidated pro forma results of operations of the Company for the nine month periods ended September 30, 2002 and 2001 give effect to acquisitions consummated subsequent to January 1, 2001 as if they had occurred on January 1, 2001.



	Nine Months Ended
	September 30,

	2002		2001

Revenues	$	5,841,045	$	5,419,978




Income from continuing operations		63,841		44,773




Net income		64,489		45,368




Net income per diluted common share		1.57		1.35

UNITED AUTO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

4. Capital Stock

In February 2002, affiliates of Penske Corporation exercised warrants to acquire voting and non-voting common stock of the Company. The warrants were issued in connection with such affiliates’ investment in the Company in 1999. As a result, the Company issued 3,916 shares of voting common stock and 1,106 shares of non-voting common stock in exchange for $62,520. In March 2002, the Company completed the sale of 3,000 shares of voting common stock to the public in an underwritten registered offering at $22.00 per share. Net proceeds of the two equity transactions totaled approximately $123,393, which was used to repay indebtedness under the Company’s credit agreement.

In September 2002, the Company repurchased 1,009 shares of common stock from Combined Specialty Insurance Company, a wholly owned subsidiary of Aon Corporation, for $15.85 per share with funds obtained from borrowings under the Company’s credit agreement.

5. Discontinued Operations

During 2002, the Company has sold or has entered into definitive agreements to sell five dealerships which qualify for treatment as discontinued operations in accordance with Statement of Financial Accounting Standards No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets. Combined financial information of the dealerships follows:



	Three Months Ended					Nine Months Ended
	September 30,					September 30,

	2002			2001		2002			2001

Revenues	$	32,657		$	61,671	$	137,207		$	177,834




Pre-tax income (loss)		(1,885	)		390		(1,874	)		1,054




Gain on disposal		499			—		1,689			—


	September 30,		December 31,
	2002		2001

Inventories	$	21,555	$	29,577




Other assets		12,638		37,047




Floorplan notes payable		19,563		33,394




Other liabilities		1,718		4,525

6. Intangible Assets

Effective January 1, 2002, the Company adopted SFAS No. 142. As a result, the Company no longer amortizes goodwill. The Company completed the intangible impairment assessment required by SFAS No. 142 and determined that no adjustment to the carrying value of goodwill is required. The following

UNITED AUTO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

income statement information is presented as if the Company stopped amortizing goodwill as of January 1, 2001:



	Three Months Ended				Nine Months Ended
	September 30,				September 30,

	2002		2001		2002		2001

Income from continuing operations	$	22,613	$	13,268	$	60,941	$	32,868

Net income	$	21,989	$	13,488	$	61,589	$	33,463

Goodwill amortization, net of taxes	$	—	$	2,850	$	—	$	8,252

Pro forma income from continuing operations	$	22,613	$	16,118	$	60,941	$	41,120

Pro forma net income	$	21,989	$	16,338	$	61,589	$	41,715

Preferred dividends	$	92	$	1,641	$	6,293	$	6,338

Pro forma income available to common stockholders	$	21,897	$	14,697	$	55,296	$	35,377

Pro forma basic income from continuing operations per common share	$	0.55	$	0.62	$	1.49	$	1.51

Pro forma basic net income per common share	$	0.54	$	0.63	$	1.51	$	1.53

Pro forma income from continuing operations per diluted common share	$	0.54	$	0.46	$	1.48	$	1.23

Pro forma net income per diluted common share	$	0.53	$	0.46	$	1.50	$	1.24

7. Earnings Per Share

Income available to common shareholders used in the computation of basic earnings per share data is based on net income, adjusted to reflect accrued dividends relating to outstanding preferred stock. Basic earnings per share data is computed using the weighted average number of common shares outstanding. Diluted earnings per share data is based on the weighted average number of common shares outstanding, adjusted for the dilutive effect of stock options, preferred stock and warrants. For the three and nine months ended September 30, 2002, 884 and 82 shares issuable upon the exercise of outstanding options were excluded from the calculation of diluted earnings per share because the effect of such securities was antidilutive. For the three and nine months ended September 30, 2001, 218 and 978 shares issuable upon the exercise of outstanding options were excluded from the calculation of diluted earnings per share because the effect of such securities was antidilutive. A reconciliation of the number of shares used in the calculation of basic and dilutive earnings per share for the three and nine month periods ended September 30, 2002 and 2001 follows:



	Three Months Ended				Nine Months Ended
	September 30,				September 30,

	2002		2001		2002		2001

Weighted average number of common shares outstanding		40,849		23,433		36,582		23,092




Effect of stock options		643		1,049		1,077		681




Effect of preferred stock		241		9,418		3,224		9,308




Effect of warrants		—		1,518		285		469

Weighted average number of common shares outstanding, including effect of dilutive securities		41,733		35,418		41,168		33,550

UNITED AUTO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

8. Supplemental Cash Flow Information

The following table presents certain supplementary information to the consolidated condensed statements of cash flows:



	Nine Months Ended
	September 30,

	2002		2001

Cash paid for interest	$	62,942	$	52,696




Cash paid for income taxes		12,358		7,277




Acquisition costs financed with assumed debt		22,448		—




Acquisition costs financed with seller financed notes		—		2,550

9. Sale-Leaseback Transactions

The Company finances a portion of its dealership expansion program through sale-leaseback transactions with Automotive Group Realty, LLC (“AGR”), a wholly-owned subsidiary of Penske Corporation. Sales of real property are valued at a price that was either independently confirmed by a third party appraiser, or for the price paid by the Company to an independent third party. Improvements are sold for the Company’s cost. All sale-leaseback transactions with AGR have been consummated at the Company’s net book value, and the resulting leases are being accounted for as operating leases. To date during 2002, the Company has entered into sale-leaseback transactions for $80,000 of properties and related improvements.

10. Senior Subordinated Notes

In March 2002, the Company completed the sale of $300,000 aggregate principal amount of 9.625% Senior Subordinated Notes due 2012. The sale of the notes was exempt from registration pursuant to Rule 144A and Regulation S under the Securities Act, as amended. The notes are unsecured senior subordinated notes and rank behind all existing and future senior debt, including debt under our credit agreement. The notes are guaranteed by substantially all of our domestic subsidiaries on a senior subordinated basis. We can redeem all or some of the notes at our option beginning in 2007 at specified redemption prices. In addition, until 2005 we are allowed to redeem up to 35% of the notes with the net cash proceeds from specified public equity offerings. Upon a change of control each holder of notes will be able to require us to repurchase all or some of the notes at a redemption price of 101% of the principal amount of the notes. The notes also contain customary negative covenants and events of default. Net proceeds from the offering amounted to approximately $292,200, which was used to repay indebtedness under the Company’s credit agreement.

11. Condensed Consolidating Financial Information

The following tables include condensed consolidating financial information as of September 30, 2002 and December 31, 2001 and for the three and nine month periods ended September 30, 2002 and 2001 for United Auto Group, Inc. (as the issuer), wholly-owned subsidiary guarantors, non-wholly owned guarantors, and non-guarantor subsidiaries (primarily representing foreign entities). The condensed consolidating financial information includes certain allocations of balance sheet, income statement and cash flow items, which are not necessarily indicative of the financial position, results of operations and cash flows of these entities on a stand-alone basis.

UNITED AUTO GROUP, INC.

CONDENSED CONSOLIDATING BALANCE SHEETS



		September 30, 2002

											Non-Wholly
							United				Owned			Non-
		Total					Auto		Guarantor		Guarantor			Guarantor
		Company		Eliminations			Group, Inc.		Subsidiaries		Subsidiaries			Subsidiaries


		(In thousands)




Cash and cash equivalents		$	685	$	(2,711	)	$	—	$	—	$	—		$	3,396




Accounts receivable, net			305,313		—			—		226,212		7,828			71,273




Inventories			885,805		—			—		655,506		17,908			212,391




Other current assets			33,821		—			2,748		16,061		407			14,605

	Total current assets		1,225,624		(2,711	)		2,748		897,779		26,143			301,665




Property and equipment, net			274,259		—			4,159		199,004		5,735			65,361




Intangible assets, net			957,390		—			—		726,131		63,030			168,229




Assets of discontinued operations			34,193		—			—		34,193		—			—




Other assets			63,020		(561,112	)		596,292		19,401		2			8,437

	Total assets	$	2,554,486	$	(563,823	)	$	603,199	$	1,876,508	$	94,910		$	543,692





Floorplan notes payable		$	790,850	$	—		$	—	$	588,705	$	15,804		$	186,341




Accounts payable			138,540		(2,711	)		4,469		67,865		2,517			66,400




Accrued expenses			161,701		—			2,324		101,930		2,509			54,938




Current portion of long-term debt			9,217		—			—		3,078		—			6,139

	Total current liabilities		1,100,308		(2,711	)		6,793		761,578		20,830			313,818




Long-term debt			646,793		—			—		380,865		71,391			194,537




Other long-term liabilities			96,703		—			—		89,678		6,431			594




Liabilities of discontinued operations			21,281		—			—		21,281		—			—

	Total liabilities		1,865,085		(2,711	)		6,793		1,253,402		98,652			508,949




	Total stockholders’ equity		689,401		(561,112	)		596,406		623,106		(3,742	)		34,743

	Total liabilities and stockholders’ equity	$	2,554,486	$	(563,823	)	$	603,199	$	1,876,508	$	94,910		$	543,692

UNITED AUTO GROUP, INC.

CONDENSED CONSOLIDATING BALANCE SHEETS — (Continued)



		December 31, 2001

											Non-Wholly
							United				Owned			Non-
		Total					Auto		Guarantor		Guarantor			Guarantor
		Company		Eliminations			Group, Inc.		Subsidiaries		Subsidiaries			Subsidiaries


		(In thousands)




Cash and cash equivalents		$	2,952	$	—		$	417	$	2,535	$	—		$	—




Accounts receivable, net			239,610		—			—		211,558		10,626			17,426




Inventories			611,889		—			—		568,289		20,336			23,264




Other current assets			16,081		—			4,014		10,942		347			778

	Total current assets		870,532		—			4,431		793,324		31,309			41,468




Property and equipment, net			181,290					1,493		168,198		753			10,846




Intangible assets, net			772,737		—			—		692,451		63,030			17,256




Assets of discontinued operations			66,624		—			—		43,336		—			23,288




Other assets			55,393		(358,634	)		376,999		25,780		868			10,380

	Total assets	$	1,946,576	$	(358,634	)	$	382,923	$	1,723,089	$	95,960		$	103,238





Floorplan notes payable		$	586,620	$	—		$	—	$	536,708	$	19,022		$	30,890




Accounts payable			73,781					1,972		66,046		3,293			2,470




Accrued expenses			83,949		—			3,337		69,812		6,412			4,388




Current portion of long-term debt			4,202		—			—		4,202		—			—

	Total current liabilities		748,552		—			5,309		676,768		28,727			37,748




Long-term debt			551,648		—			—		446,266		71,318			34,064




Other long-term liabilities			92,774		—			—		91,279		1,095			400




Liabilities of discontinued operations			37,919		—			—		22,227		—			15,692

	Total liabilities		1,430,893		—			5,309		1,236,540		101,140			87,904




	Total stockholders’ equity		515,683		(358,634	)		377,614		486,549		(5,180	)		15,334

	Total liabilities and stockholders’ equity	$	1,946,576	$	(358,634	)	$	382,923	$	1,723,089	$	95,960		$	103,238

UNITED AUTO GROUP, INC.

CONDENSED CONSOLIDATING STATEMENTS OF INCOME



	Three Months Ended September 30, 2002

													Non-Wholly
													Owned			Non-
	Total						United Auto			Guarantor			Guarantor			Guarantor
	Company			Eliminations			Group, Inc.			Subsidiaries			Subsidiaries			Subsidiaries


	(In thousands)




Total Revenues	$	2,059,603					$	—		$	1,583,096		$	49,230		$	427,277




Cost of Sales		1,771,953			—			—			1,360,909			42,161			368,883

Gross Profit		287,650			—			—			222,187			7,069			58,394




Selling, general, and administrative expenses		229,803			—			1,816			176,381			5,337			46,269

Operating income		57,847			—			(1,816	)		45,806			1,732			12,125




Floor plan interest expense		(9,082	)		—			—			(7,123	)		(107	)		(1,852	)




Other interest expense		(9,990	)		—			—			(7,312	)		(763	)		(1,915	)




Equity in earnings of subsidiaries		—			(48,477	)		48,477			—			—			—

Income (loss) from continuing operations before minority interests and income taxes		38,775			(48,477	)		46,661			31,371			862			8,358




Minority interests		(458	)		—			—			(249	)		(163	)		(46	)




Income taxes		(15,704	)		19,633			(18,898	)		(12,705	)		(349	)		(3,385	)

Income (loss) from continuing operations		22,613			(28,844	)		27,763			18,417			350			4,927




Discontinued operations, net of taxes		(624	)		—			—			(624	)		—			—

Net income (loss)		21,989			(28,844	)		27,763			17,793			350			4,927




Preferred dividends		(92	)		—			(92	)		—			—			—

Income available to common stockholders	$	21,897		$	(28,844	)	$	27,671		$	17,793		$	350		$	4,927

UNITED AUTO GROUP, INC.

CONDENSED CONSOLIDATING STATEMENTS OF INCOME — (Continued)



	Three Months Ended September 30, 2001

													Non-Wholly
													Owned			Non-
	Total						United Auto			Guarantor			Guarantor			Guarantor
	Company			Eliminations			Group, Inc.			Subsidiaries			Subsidiaries			Subsidiaries


	(In thousands)




Total Revenues	$	1,506,051					$	—		$	1,380,001		$	54,235		$	71,815




Cost of Sales		1,294,050			—			—			1,184,311			46,225			63,514

Gross Profit		212,001			—			—			195,690			8,010			8,301




Selling, general, and administrative expenses		171,411			—			1,640			155,865			5,876			8,030

Operating income		40,590			—			(1,640	)		39,825			2,134			271




Floor plan interest expense		(8,998	)		—			—			(8,409	)		(166	)		(423	)




Other interest expense		(7,992	)		—			—			(6,747	)		(782	)		(463	)




Equity in earnings of subsidiaries		—			(22,206	)		22,206			—			—			—

Income (loss) from continuing operations before minority interests and income taxes		23,600			(22,206	)		20,566			24,669			1,186			(615	)




Minority interests		(66	)		—			—			10			—			(76	)




Income taxes		(10,266	)		9,660			(8,946	)		(10,731	)		(516	)		267

Income (loss) from continuing operations		13,268			(12,546	)		11,620			13,948			670			(424	)




Discontinued operations, net of taxes		220			—			—			95			—			125

Net income (loss)		13,488			(12,546	)		11,620			14,043			670			(299	)




Preferred dividends		(1,641	)		—			(1,641	)		—			—			—

Income available to common stockholders	$	11,847		$	(12,546	)	$	9,979		$	14,043		$	670		$	(299	)

UNITED AUTO GROUP, INC.

CONDENSED CONSOLIDATING STATEMENTS OF INCOME



	Nine Months Ended September 30, 2002

													Non-Wholly
													Owned			Non-
	Total						United Auto			Guarantor			Guarantor			Guarantor
	Company			Eliminations			Group, Inc.			Subsidiaries			Subsidiaries			Subsidiaries


	(In thousands)




Total Revenues	$	5,557,637					$	—		$	4,390,797		$	154,168		$	1,012,672




Cost of Sales		4,767,825			—			—			3,760,313			131,744			875,768

Gross Profit		789,812			—			—			630,484			22,424			136,904




Selling, general, and administrative expenses		631,596			—			5,305			501,150			16,231			108,910

Operating income		158,216			—			(5,305	)		129,334			6,193			27,994




Floor plan interest expense		(26,023	)		—			—			(21,794	)		(360	)		(3,869	)




Other interest expense		(27,834	)		—			—			(18,484	)		(2,251	)		(7,099	)




Equity in earnings of subsidiaries		—			(138,952	)		138,952			—			—			—

Income (loss) from continuing operations before minority interests and income taxes		104,359			(138,952	)		133,647			89,056			3,582			17,026




Minority interests		(1,383	)		—			—			(677	)		(583	)		(123	)




Income taxes		(42,035	)		55,903			(53,770	)		(35,859	)		(1,438	)		(6,871	)

Income (loss) from continuing operations		60,941			(83,049	)		79,877			52,520			1,561			10,032




Discontinued operations, net of taxes		648			—			—			309			—			339

Net income (loss)		61,589			(83,049	)		79,877			52,829			1,561			10,371




Preferred dividends		(6,293	)		—			(6,293	)		—			—			—

Income available to common stockholders	$	55,296		$	(83,049	)	$	73,584		$	52,829		$	1,561		$	10,371

UNITED AUTO GROUP, INC.

CONDENSED CONSOLIDATING STATEMENTS OF INCOME — (Continued)



	Nine Months Ended September 30, 2001

													Non-Wholly
													Owned			Non-
	Total						United Auto			Guarantor			Guarantor			Guarantor
	Company			Eliminations			Group, Inc.			Subsidiaries			Subsidiaries			Subsidiaries


	(In thousands)




Total Revenues	$	4,350,289					$	—		$	3,998,988		$	131,043		$	220,258




Cost of Sales		3,745,316			—			—			3,441,317			111,812			192,187

Gross Profit		604,973			—			—			557,671			19,231			28,071




Selling, general, and administrative expenses		487,364			—			4,920			445,017			14,050			23,377

Operating income		117,609			—			(4,920	)		112,654			5,181			4,694




Floor plan interest expense		(31,577	)		—			—			(29,862	)		(461	)		(1,254	)




Other interest expense		(27,217	)		—			—			(23,954	)		(1,889	)		(1,374	)




Equity in earnings of subsidiaries		—			(105,217	)		105,217			—			—			—

Income (loss) from continuing operations before minority interests and income taxes		58,815			(105,217	)		100,297			58,838			2,831			2,066




Minority interests		(364	)		—			—			(205	)		—			(159	)




Income taxes		(25,583	)		45,770			(43,628	)		(25,595	)		(1,231	)		(899	)

Income (loss) from continuing operations		32,868			(59,447	)		56,669			33,038			1,600			1,008




Discontinued operations, net of taxes		595			—			—			349						246

Net income (loss)		33,463			(59,447	)		56,669			33,387			1,600			1,254




Preferred dividends		(6,338	)		—			(6,338	)		—			—			—

Income available to common stockholders	$	27,125		$	(59,447	)	$	50,331		$	33,387		$	1,600		$	1,254

UNITED AUTO GROUP, INC.

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS



		Nine Months Ended September 30, 2002

														Non-Wholly
														Owned
		Total						United Auto			Guarantor			Guarantor			Non-Guarantor
		Company			Eliminations			Group, Inc.			Subsidiaries			Subsidiaries			Subsidiaries


		(In thousands)




Net cash provided by operating activities		$	44,255		$	(2,711	)	$	2,872		$	8,674		$	7,159		$	28,261

Investing Activities:




Purchase of equipment and improvements			(140,049	)		—			(3,289	)		(108,995	)		(5,091	)		(22,674	)




Proceeds from sale-leaseback transactions			80,000			—			—			80,000			—			—




Dealership acquisitions, net of cash acquired			(191,631	)		—			—			(191,631	)		—			—

	Net cash used in investing activities		(251,680	)		—			(3,289	)		(220,626	)		(5,091	)		(22,674	)

Financing Activities:




Proceeds from borrowings of long-term debt			632,800			—			—			632,800			—			—




Payments of long-term debt and capital leases			(561,173	)		—			—			(561,365	)		—			192




Proceeds from issuance of common stock			135,318			—			—			135,318			—			—




Repurchase of common stock			(16,000	)		—			(16,000	)		—			—			—




Distributions to (from) Parent			—			—			16,000			(2,928	)		(2,068	)		(11,004	)

	Net cash provided by (used in) financing activities		190,945			—			—			203,825			(2,068	)		(10,812	)

	Net cash distributed by discontinued operations		14,213			—			—			5,592			—			8,621

	Net increase (decrease) in cash and cash equivalents		(2,267	)		(2,711	)		(417	)		(2,535	)		—			3,396




Cash and cash equivalents, beginning of period			2,952			—			417			2,535			—			—

Cash and cash equivalents, end of period		$	685		$	(2,711	)	$	—		$	—		$	—		$	3,396

UNITED AUTO GROUP, INC.

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS — (Continued)



		Nine Months Ended September 30, 2001

														Non-Wholly
														Owned
		Total						United Auto			Guarantor			Guarantor			Non-Guarantor
		Company			Eliminations			Group, Inc.			Subsidiaries			Subsidiaries			Subsidiaries


		(In thousands)




Net cash provided by (used in) operating activities		$	80,812		$	(4,627	)	$	3,634		$	94,092		$	(1,342	)	$	(10,945	)

Investing Activities:




Purchase of equipment and improvements			(65,939	)		—			(2,042	)		(59,869	)		1,581			(5,609	)




Dealership acquisitions, net of cash acquired			(105,756	)		—			—			(106,487	)		731			—

	Net cash provided by (used in) investing activities		(171,695	)		—			(2,042	)		(166,356	)		2,312			(5,609	)

Financing Activities:




Proceeds from borrowings of long-term debt			97,405			—			—			97,405			—			—




Payments of long-term debt and capital leases			(23,426	)		—			—			(27,332	)		3,906			—




Proceeds from issuance of common stock			14,835			—			—			14,835			—			—




Repurchase of common stock			(2,402	)		—			(2,402	)		—			—			—




Distributions to (from) Parent			—			—			2,402			(16,800	)		(4,304	)		18,702

	Net cash provided by financing activities		86,412			—			—			68,108			(398	)		18,702

	Net cash distributed by (used in) discontinued operations		802			—			—			(809	)		—			1,611

	Net increase (decrease) in cash and cash equivalents		(3,669	)		(4,627	)		1,592			(4,965	)		572			3,759




Cash and cash equivalents, beginning of period			5,090			—			125			4,965			—			—

Cash and cash equivalents, end of period		$	1,421		$	(4,627	)	$	1,717		$	—		$	572		$	3,759

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors.

General

We are the second largest publicly-held automotive retailer in the United States as measured by total revenues. As of September 30, 2002, we owned and operated 126 franchises in the United States and 71 franchises internationally, primarily in the United Kingdom. As an integral part of our dealership operations, we retail new and used automobiles and light trucks, operate service and parts departments, operate collision repair centers and sell various aftermarket products, including finance, warranty, extended service and other insurance contracts.

New vehicle revenues include sales to retail customers and to leasing companies providing consumer automobile leasing. Used vehicle revenues include amounts received for used vehicles sold to retail customers, leasing companies providing consumer leasing and other dealers. We generate finance and insurance revenues from sales of warranty policies, extended service contracts, other insurance policies, and accessories, as well as from fees for placing finance and lease contracts. Service and parts revenues include fees paid for repair and maintenance service, the sale of replacement parts and body shop repairs.

Our gross profit tends to vary with the mix of revenues we derive from the sale of new vehicles, used vehicles, finance and insurance products, and service and parts services. Our gross profit generally varies across product lines, with new vehicle sales usually resulting in lower gross profit margins and our other products resulting in higher gross profit margins. Factors such as seasonality, weather, cyclicality and manufacturers’ advertising and incentives may impact the mix of our revenues, and therefore influence our gross profit margin.

Our selling expenses consist of advertising and compensation for sales department personnel, including commissions and related bonuses. General and administrative expenses include compensation for administration, finance, legal and general management personnel, depreciation, amortization, rent, insurance, utilities and other outside services. A significant portion of our selling expenses are variable, and a significant portion of our general and administrative expenses are subject to our control, allowing us to adjust them over time to reflect economic trends.

Floor plan interest expense relates to floor plan financing. Other interest expense consists of interest charges on all of our interest-bearing debt, other than interest relating to floor plan financing.

We have made a number of dealership acquisitions in 2002 and 2001. Each of these acquisitions has been accounted for using the purchase method of accounting. As a result, our financial statements include the results of operations of the acquired dealerships from the date of acquisition.

Critical Accounting Policies

The preparation of financial statements in accordance with accounting standards generally accepted in the United States of America requires the application of accounting policies that often involve a significant amount of judgment. Such judgments influence the reported amounts of the assets, liabilities, revenues and expenses in the Company’s consolidated financial statements. Management, on an ongoing basis, reviews estimates and assumptions. If management determines, as a result of its consideration of facts and circumstances, that modifications in assumptions and estimates are appropriate, results of operations and financial position as reported in the consolidated financial statements may change significantly.

Following is a summary of the accounting policies applied in the preparation of our consolidated financial statements that management believes are most dependent upon the use of estimates and assumptions.

Finance and Insurance Revenue Recognition

The Company arranges financing for customers through various financial institutions and receives a commission from the lender equal to the difference between the interest rates charged to customers over the predetermined interest rates set by the financing institution. The Company also receives commissions from the sale of various insurance products to customers, including credit, life, and health insurance policies and extended service contracts. The Company receives fee income from the placement of these contracts at the time the customer enters into the contract. The Company is not the obligor under any of these contracts. In the case of finance contracts, a customer may prepay, or fail to pay, thereby terminating the contract. Customers may also terminate extended warranty contracts with the underlying warranty provider, which are fully paid at purchase, and become eligible for refunds of unused premiums. If the customer terminates a retail finance contract or cancels an extended warranty or other insurance product prior to scheduled maturity, a portion of these fees may be charged back to us based on the relevant terms of the contracts. The revenue we record relating to these fees is net of an estimate of the ultimate amount of chargebacks we will be required to pay. Such estimate of ultimate chargeback exposure is based on our historical chargeback expense arising from similar contracts, including the impact of refinance and default rates on retail finance contracts and cancellation rates on extended warranty contracts and other insurance products.

Results of Operations

Three Months Ended September 30, 2002 Compared to Three Months Ended September 30, 2001

Revenues. Retail revenues, which exclude revenues relating to fleet and wholesale transactions, increased by $517.9 million, or 37.5%, from $1.4 billion to $1.9 billion. The overall increase in retail revenues is due primarily to (1) a $100.2 million, or 7.4%, increase in retail revenues at dealerships owned prior to July 1, 2001, and (2) a $435.0 million increase at dealerships acquired subsequent to July 1, 2001. The overall increase in retail revenues at dealerships owned prior to July 1, 2001 reflects 9.2%, 1.9%, 10.3% and 6.3% increases in new retail vehicle, used retail vehicle, finance and insurance and service and parts revenues, respectively. Revenues of $163.8 million from fleet and wholesale transactions represent a 27.8% increase versus the prior year. The increase in fleet and wholesale revenues is due to $41.7 million from acquisitions subsequent to July 1, 2001, offset by a $4.5 million, or 3.6%, decrease at stores owned prior to July 1, 2001.

Retail sales of new vehicles increased by $312.5 million, or 34.2%, from $914.6 million to $1.2 billion. The increase is due primarily to (1) an $82.4 million, or 9.2%, increase at dealerships owned prior to July 1, 2001 and (2) a $241.5 million increase at dealerships acquired subsequent to July 1, 2001. The increase at dealerships owned prior to July 1, 2001, is due primarily to a 6.2% increase in new retail unit sales, which increased revenue by $57.3 million, and a 2.8% increase in comparative average selling prices per vehicle, which increased revenue by $25.1 million. The Company believes that this increase is due in part to its favorable brand mix, which includes a higher concentration of foreign nameplates which have been steadily increasing market share in the US, coupled with aggressive incentive programs being offered by domestic nameplate manufacturers. Approximately 78% of the increase in new retail unit sales at dealerships owned prior to July 1, 2001 results from sales of these foreign nameplates. Aggregate retail unit sales of new vehicles increased by 25.7%, due principally to: (1) the net increase at dealerships owned prior to July 1, 2001 and (2) a 7,388 increase in new vehicle retail unit sales at dealerships acquired subsequent to July 1, 2001. We retailed 44,432 new vehicles (68.1% of total retail vehicle sales) during the three months ended September 30, 2002, compared with 35,351 new vehicles (67.8% of total retail vehicle sales) during the three months ended September 30, 2001.

Retail sales of used vehicles increased by $138.4 million, or 50.7%, from $272.8 million to $411.2 million. The increase is due primarily to (1) a $5.0 million, or 1.9%, increase at dealerships owned prior to July 1, 2001 and (2) a $138.5 million increase at dealerships acquired subsequent to July 1, 2001. The increase at dealerships owned prior to July 1, 2001 is due primarily to a 0.3% increase in used retail unit sales which increased revenue by $0.8 million, and a 1.6% increase in comparative average selling prices per vehicle which increased revenue by $4.2 million. The Company believes the relative affordability of new vehicles resulting from manufacturer incentive programs has negatively impacted used vehicles sales growth during the three

months ended September 30, 2002. Aggregate retail unit sales of used vehicles increased by 23.8%, due principally to: (1) the net increase at dealerships owned prior to July 1, 2001 and (2) a 4,274 increase in used vehicle retail unit sales at dealerships acquired subsequent to July 1, 2001. We retailed 20,792 used vehicles (31.9% of total retail vehicle sales) during the three months ended September 30, 2002, compared with 16,792 used vehicles (32.2% of total retail vehicle sales) during the three months ended September 30, 2001.

Finance and insurance revenues increased by $11.6 million, or 30.3%, from $38.3 million to $49.9 million. The increase is due primarily to: (1) a $3.5 million, or 10.3%, increase at dealerships owned prior to July 1, 2001 and (2) a $7.3 million increase at dealerships acquired subsequent to July 1, 2001. The increase at dealerships owned prior to July 1, 2001 is primarily due to a revenue increase of $38 per retail vehicle sold, which increased revenue by $1.9 million, and a 4.3% increase in retail vehicles sold, which increased revenue by $1.6 million.

Service and parts revenues increased by $55.3 million, or 36.3%, from $152.2 million to $207.6 million. The increase is due primarily to (1) an $9.4 million, or 6.3%, increase at dealerships owned prior to July 1, 2001 and (2) a $47.8 million increase at dealerships acquired subsequent to July 1, 2001. The Company believes that its service and parts business is being positively impacted by the complexity of today’s vehicles, manufacturers’ warranty programs for both new and certified used vehicles, increases in retail unit sales at our dealerships and capacity increases in our service and parts operations resulting from capital construction projects.

Fleet revenues decreased $4.5 million, or 12.1%, versus the comparable prior year period. The decrease in fleet revenues is due primarily to a $6.3 million, or 17.0%, decrease in fleet sales revenues at dealerships owned prior to July 1, 2001, partially offset by a $1.8 million increase at stores acquired subsequent to July 1, 2001. The Company has elected to de-emphasize the low margin fleet business and expects fleet sales volumes to remain lower in the future.

Wholesale revenues increased $40.2 million, or 44.1%, versus the comparable prior year period. The increase in wholesale revenues is due primarily to (1) a $1.8 million, or 2.0%, increase at dealerships owned prior to July 1, 2001 and (2) a $39.9 million increase at dealerships acquired subsequent to July 1, 2001. The Company believes the increase at dealerships owned prior to July 1, 2001 is due in part to the relative strength of the new car market, resulting in an increase in the number of cars taken in on trade, versus the relative weakness of the used car market.

Gross Profit. Retail gross profit, which excludes gross profit on fleet and wholesale transactions, increased $76.5 million, or 36.0%, from $212.4 million to $288.9 million. The increase in gross profit is due to: (1) a $12.4 million, or 6.1%, increase in retail gross profit at stores owned prior to July 1, 2001 and (2) a $65.4 million increase at dealerships acquired subsequent to July 1, 2001. Retail gross profit as a percentage of revenues from retail transactions decreased from 15.4% to 15.2%. Gross profit as a percentage of revenues for new vehicle retail, used vehicle retail, finance and insurance and service and parts revenues was 8.2%, 9.7%, 100.0%, and 47.3%, respectively, compared with 8.4%, 10.7%, 100.0% and 44.8% in the comparable prior year period. The decrease in retail gross profit as a percentage of revenues from retail transactions is primarily attributable to (1) decreased margins on the sale of used vehicle, which relate primarily to the lower margins realized on used vehicle sales in the UK, (2) decreased margins on the sale of new vehicles, which are due primarily to margin compression in the US, offset in part by higher margins realized on new vehicle sales in the UK, and (3) a decrease in the percentage of higher margin finance and insurance revenues to total retail revenues, offset in part by (1) increased gross profit margins on service and parts revenues, which result from the realization of higher margins in the US and UK, and (2) an increase in the relative proportion of used vehicle retail sales to total vehicle sales. Aggregate gross profit on fleet and wholesale transactions decreased by $0.9 million to a loss of $1.2 million.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $58.4 million, or 34.1%, from $171.4 million to $229.8 million. Such expenses decreased as a percentage of total revenue from 11.4% to 11.2%, and decreased as a percentage of gross profit from 80.8% to 79.9%. The aggregate increase in selling, general and administrative expenses is due principally to: (1) a $16.1 million, or 10.3%, increase at dealerships owned prior to July 1, 2001, and (2) a $51.2 million increase at dealerships

acquired subsequent to July 1, 2001, partially offset by a $5.0 million decrease in goodwill amortization due to the adoption of SFAS No. 142. The increase in selling, general and administrative expenses at stores owned prior to July 1, 2001 is due in large part to increased selling expenses, including increases in variable compensation as a result of the 6.1% increase in retail gross profit over the prior year, depreciation, healthcare costs, and other insurance costs versus the prior year.

Floor Plan Interest Expense. Floor plan interest expense increased by $0.1 million, or 0.9%, from $9.0 million to $9.1 million. The increase in floor plan interest expense is due to a $1.7 million, or 19.0%, decrease at stores owned prior to July 1, 2001, partially offset by a $1.9 million increase at dealerships acquired subsequent to July 1, 2001. The decrease at stores owned prior to July 1, 2001 is due primarily to a decrease in inventory at those dealerships, coupled with a decrease in our weighted average borrowing rate on floor plan indebtedness during 2002.

Other Interest Expense. Other interest expense increased by $2.0 million, or 25.0%, from $8.0 million to $10.0 million. The increase is due primarily to increased acquisition related indebtedness, including approximately $140.0 million borrowed in connection with the acquisition of the Sytner Group plc in March 2002, offset in part by (1) a decrease in our weighted average borrowing rate during 2002 and (2) the pay-down of indebtedness with proceeds from equity offerings subsequent to December 31, 2001.

Income Taxes. Income taxes increased by $5.4 million from $10.3 million to $15.7 million. The increase is due to an increase in pre-tax income compared with 2001, partially offset by a decrease in our estimated effective annual tax rate.

Discontinued Operations. Income (loss) from discontinued operations, consisting of the results of operations which have been or will be divested or closed, decreased by $0.8 million from $0.2 million to a loss of $0.6 million. The current year results include an after-tax gain on disposal of $0.5 million.


	*Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30, 2001*

Revenues. Retail revenues, which exclude revenues relating to fleet and wholesale transactions, increased by $1.1 billion, or 28.8%, from $4.0 billion to $5.1 billion. The overall increase in retail revenues is due primarily to: (1) a $200.0 million, or 5.6%, increase in retail revenues at dealerships owned prior to January 1, 2001, and (2) a $1.0 billion increase at dealerships acquired subsequent to January 1, 2001. The overall increase in retail revenues at dealerships owned prior to January 1, 2001 reflects 7.0%, 9.9% and 6.2% increases in new retail vehicle, finance and insurance and service and parts revenues, respectively. Revenues of $448.8 million from fleet and wholesale transactions represent a 17.3% increase versus the prior year. The increase in fleet and wholesale revenues is due to $97.1 million from acquisitions subsequent to January 1, 2001, offset by a $23.2 million, or 6.7%, decrease at stores owned prior to January 1, 2001.

Retail sales of new vehicles increased by $685.6 million, or 26.2%, from $2.6 billion to $3.3 billion. The increase is due primarily to: (1) a $166. million, or 7.0%, increase at dealerships owned prior to January 1, 2001 and (2) a $561.2 million increase at dealerships acquired subsequent to January 1, 2001. The increase at dealerships owned prior to January 1, 2001, is due primarily to a 4.4% increase in new retail unit sales, which increased revenue by $106.9 million, and a 2.5% increase in comparative average selling prices per vehicle, which increased revenue by $59.1 million. The Company believes that this increase is due in part to its favorable brand mix, which includes a higher concentration of foreign nameplates which have been steadily increasing market share in the US, coupled with aggressive incentive programs being offered by domestic nameplate manufacturers. Approximately 89% of the increase in new retail unit sales at dealerships owned prior to January 1, 2001 results from sales of these foreign nameplates. Aggregate retail unit sales of new vehicles increased by 19.9%, due principally to: (1) the net increase at dealerships owned prior to January 1, 2001 and (2) a 17,617 increase in new vehicle retail unit sales at dealerships acquired subsequent to January 1, 2001. We retailed 119,662 new vehicles (67.4% of total retail vehicle sales) during the nine months ended September 30, 2002, compared with 100,016 new vehicles (67.0% of total retail vehicle sales) during the nine months ended September 30, 2001.

Retail sales of used vehicles increased by $299.3 million, or 37.1%, from $807.3 million to $1.1 billion. The increase is due primarily to a $323.9 million increase at dealerships acquired subsequent to January 1, 2001. Retail sales of used vehicles at dealerships owned prior to January 1, 2001 were consistent with the prior year. The Company believes the relative affordability of new vehicles resulting from manufacturer incentive programs has negatively impacted used vehicles sales growth during the nine months ended September 30, 2002. Aggregate retail unit sales of used vehicles increased by 17.9%, due principally to a 10,738 increase in used vehicle retail unit sales at dealerships acquired subsequent to January 1, 2001. We retailed 58,092 used vehicles (32.6% of total retail vehicle sales) during the nine months ended September 30, 2002, compared with 49,278 used vehicles (33.0% of total retail vehicle sales) during the nine months ended September 30, 2001.

Finance and insurance revenues increased by $26.6 million, or 24.9%, from $106.7 million to $133.3 million. The increase is due primarily to: (1) an $8.8 million, or 9.9%, increase at dealerships owned prior to January 1, 2001 and (2) a $16.5 million increase at dealerships acquired subsequent to January 1, 2001. The increase at dealerships owned prior to January 1, 2001 is primarily due to a revenue increase of $46 per retail vehicle sold, which increased revenue by $6.2 million, and a 2.7% increase in retail vehicles sold, which increased revenue by $2.6 million.

Service and parts revenues increased by $129.6 million, or 29.8%, from $435.6 million to $565.2 million. The increase is due primarily to: (1) a $24.8 million, or 6.2%, increase at dealerships owned prior to January 1, 2001 and (2) a $111.5 million increase at dealerships acquired subsequent to January 1, 2001. The Company believes that its service and parts business is being positively impacted by the complexity of today’s vehicles, manufacturers’ warranty programs for both new and certified used vehicles, increases in retail unit sales at our dealerships and capacity increases in our service and parts operations resulting from capital construction projects.

Fleet revenues decreased $25.7 million, or 21.6%, versus the comparable prior year period. The decrease in fleet revenues is due primarily to a $28.8 million, or 26.8%, decrease in fleet sales revenues at dealerships owned prior to January 1, 2001, partially offset by a $4.0 million increase at stores acquired subsequent to January 1, 2001. The Company has elected to de-emphasize the low margin fleet business and expects fleet sales volumes to remain lower in the future.

Wholesale revenues increased $92.0 million, or 34.9%, versus the comparable prior year period. The increase in wholesale revenues is due primarily to: (1) a $5.6 million, or 2.4%, increase at dealerships owned prior to January 1, 2001 and (2) a $93.2 million increase at dealerships acquired subsequent to January 1, 2001. The Company believes the increase at dealerships owned prior to July 1, 2001 is due in part to the relative strength of the new car market, resulting in an increase in the number of cars taken in on trade, versus the relative weakness of the used car market.

Gross Profit. Retail gross profit, which excludes gross profit on fleet and wholesale transactions, increased $185.9 million, or 30.7%, from $604.7 million to $790.6 million. The increase in gross profit is due to: (1) a $38.4 million, or 7.1%, increase in retail gross profit at stores owned prior to January 1, 2001 and (2) a $154.3 million increase at dealerships acquired subsequent to January 1, 2001. Retail gross profit as a percentage of revenues from retail transactions increased from 15.2% to 15.5%. Gross profit as a percentage of revenues for new vehicle retail, used vehicle retail, finance and insurance and service and parts revenues was 8.5%, 10.2%, 100.0%, and 46.9%, respectively, compared with 8.3%, 10.6%, 100.0% and 44.7% in the comparable prior year period. The increase in retail gross profit as a percentage of revenues from retail transactions is primarily attributable to (1) increased gross profit margins on service and parts revenues, which result from the realization of higher margins in the US and UK, (2) an increase in the relative proportion of service and parts sales to total retail sales, (3) an increase in the relative proportion of used vehicle retail sales to total vehicle sales and (4) an increase in margins on the sale of new vehicles, which is due primarily to higher margins realized on new vehicle sales in the UK, offset in part by decreased margins on the sale of used vehicles, which relate primarily to the lower margins realized on used vehicle sales in the UK, offset in part by higher margins on used vehicle sales in the US. Aggregate gross profit on fleet and wholesale transactions decreased by $1.1 million to a loss of $0.8 million.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $144.2 million, or 29.6%, from $487.4 million to $631.6 million. Such expenses increased as a percentage of total revenue from 11.2% to 11.4%, and decreased as a percentage of gross profit from 80.6% to 80.0%. The aggregate increase in selling, general and administrative expenses is due principally to: (1) a $43.5 million, or 10.5%, increase at dealerships owned prior to January 1, 2001 and (2) a $122.4 million increase at dealerships acquired subsequent to January 1, 2001, partially offset by a $14.6 million decrease in goodwill amortization due to the adoption of SFAS No. 142. The increase in selling, general and administrative expenses at stores owned prior to January 1, 2001 is due in large part to increased selling expenses, including increases in variable compensation as a result of the 7.1% increase in retail gross profit over the prior year, depreciation, healthcare costs, and other insurance costs versus the prior year.

Floor Plan Interest Expense. Floor plan interest expense decreased by $5.6 million, or 17.6%, from $31.6 million to $26.0 million. The decrease in floor plan interest expense is due to an $8.2 million, or 28.1%, decrease at stores owned prior to January 1, 2001, partially offset by a $3.5 million increase at dealerships acquired subsequent to January 1, 2001. The decrease at stores owned prior to January 1, 2001 is due primarily to a decrease in inventory at those dealerships, coupled with a decrease in our weighted average borrowing rate on floor plan indebtedness during 2002.

Other Interest Expense. Other interest expense increased by $0.6 million, or 2.3%, from $27.2 million to $27.8 million. The increase is due primarily to increased acquisition related indebtedness, including approximately $140.0 million borrowed in connection with the acquisition of the Sytner Group plc in March 2002, offset in part by (1) a decrease in our weighted average borrowing rate during 2002 and (2) the pay-down of indebtedness with proceeds from equity offerings subsequent to December 31, 2001.

Discontinued Operations. Income (loss) from discontinued operations, consisting of the results of operations which have been or will be divested or closed, increased by $0.1 million from $0.6 million to $0.7 million. The current year results include an after-tax gain on disposal of $1.7 million.

Liquidity and Capital Resources

Our cash requirements are primarily for working capital, the acquisition of new dealerships, the improvement and expansion of existing facilities and the construction of new facilities. Historically, these cash requirements have been met through borrowings under our credit agreement, the issuance of debt securities, including floor plan notes payable, sale-leaseback transactions, the issuance of equity securities and cash flow from operations. As of September 30, 2002, we had working capital of $125.3 million.

We finance the majority of our new and a portion of our used vehicle inventory under revolving floor plan financing arrangements into which our subsidiaries have entered with various lenders. We make monthly interest payments on the amount financed, but are generally not required to make loan principal repayments prior to the sale of the new and used vehicles we have financed. The floor plan agreements grant a security interest in substantially all of the assets of our automotive dealership subsidiaries. Interest rates on the floor plan arrangements are variable and increase or decrease based on movements in the prime rate or LIBOR. As of September 30, 2002, our outstanding borrowings under floor plan arrangements amounted to $790.9 million.

Our credit agreement with DaimlerChrysler Services North America LLC and Toyota Motor Credit Corporation provides for revolving loans to be used for acquisitions, working capital, the repurchase of common stock and general corporate purposes. Our borrowing capacity under the revolving portion of the credit agreement is $700.0 million and, in addition, we have use of a standby letter of credit facility in the amount of $50.0 million. Our credit agreement also provided for a term loan of $161.0 million, all of which was used during 1999 and 2000 to repurchase our 11.0% senior subordinated notes. Loans under the credit agreement bear interest between LIBOR plus 2.00% and LIBOR plus 3.00%. The credit agreement is fully and unconditionally guaranteed on a joint and several basis by our domestic automotive dealership subsidiaries (and will be guaranteed by domestic automotive dealership subsidiaries acquired or established by us in the future) and contains a number of significant covenants that, among other things, restrict our ability to dispose of assets, incur additional indebtedness, repay other indebtedness, create liens on assets, make investments or acquisitions and engage in mergers or consolidations. Under the terms of our credit agreement, we are required

to comply with minimum manufacturer working capital standards at each of our dealerships. We are also required to maintain a total debt (including floor plan borrowings) to stockholders’ equity ratio of less than 2.75:1, a non floor plan debt to stockholders’ equity ratio of less than 1.30:1, a senior debt (non floor plan debt less subordinated debt) to EBITDA ratio of less than 3.75:1. EBITDA is based upon the preceding twelve months and, as defined, is pro forma to include twelve months EBITDA for acquired entities. Our credit agreement also contains typical events of default including change of control and non-payment of obligations. Substantially all of our assets are subject to security interests granted to lenders under the credit agreement. The availability under the revolving portion of the credit agreement is subject to a collateral-based borrowing limitation, which is determined based on certain of our allowable tangible assets (which does not include foreign assets). Revolving loans mature on August 3, 2005. As of September 30, 2002, our outstanding borrowings under the credit agreement amounted to $327.8 million. As of November 12, 2002, our outstanding borrowings under the credit agreement amounted to $336.8 million.

During 2000, we entered into a swap agreement of five years duration pursuant to which a notional $200.0 million of our floating rate debt was exchanged for fixed rate debt for five years. The fixed rate interest paid by us is based on LIBOR and amounted to approximately 7.1%. In October 2002, we extended the term of this swap to January 2008. In connection with the extension of the term of the swap, the fixed rate interest rate to be paid by us was reduced to 5.86%.

In March 2002, we issued $300.0 million of 9.625% senior subordinated notes due 2012 pursuant to Rule 144A and Regulation S under the Securities Act, as amended. Proceeds from the offering of $292.2 million were used to repay borrowings under the Company’s credit agreement. The notes are unsecured senior subordinated notes and rank behind all of our existing and future senior debt, including debt under our credit agreement. The notes are guaranteed by substantially all of our domestic subsidiaries on a senior subordinated basis. We can redeem all or some of the notes at our option beginning in 2007 at specified redemption prices. In addition, until 2005 we are allowed to redeem up to 35% of the notes with the net cash proceeds from specified public equity offerings. Upon a change of control each holder of notes will be able to require us to repurchase all or some of the notes at a redemption price of 101% of the principal amount of the notes. The notes also contain customary negative covenants and events of default. We are obligated to use our best efforts to complete a registered exchange offer for the notes or to register resales of the notes under the Securities Act, but we cannot assure that such a registration will be completed or that any trading market will develop after completion of such a registration.

In March 2002, we completed an offering of 6,000,000 shares of our common stock for $22.00 per share pursuant to an underwritten registered offering, of which 3,000,000 shares were sold by the Company and 3,000,000 were sold by selling stockholders. Proceeds to the Company from the offering of $61.5 million were used to repay borrowings under the Company’s credit agreement.

On April 12, 1999, we entered into a securities purchase agreement with International Motor Cars Group I, L.L.C. and International Motor Cars Group II, L.L.C., Delaware limited liability companies controlled by Penske Capital Partners, L.L.C. (together, the “PCP Entities”), pursuant to which the PCP Entities agreed to purchase (1) an aggregate of 7,903.124 shares of our Series A convertible preferred stock, par value $0.0001 per share, (2) an aggregate of 396.876 shares of our Series B convertible preferred stock, par value $0.0001 per share, and (3) warrants to purchase (a) 3,898,665 shares of common stock and (b) 1,101,335 shares of our non-voting common stock, par value $0.0001 per share, for $83.0 million. The shares of Series A preferred stock and Series B preferred stock entitled the PCP Entities to dividends at a rate of 6.5% per year. The dividends were payable in kind for the first two years after issuance, after which they were payable in cash. The Series A preferred stock was converted into 7,033,031 shares of our voting common stock in May 2002. The Series B preferred stock was converted into 652,452 shares of our non-voting common stock in August 2002.

The warrants, as originally issued to the PCP Entities, were exercisable at a price of $12.50 per share until February 3, 2002, and $15.50 per share thereafter until May 2, 2004. Pursuant to the anti-dilution provisions of the warrants and as a result of the sale of equity to Mitsui & Co. in 2001, (a) the number of warrants to purchase common stock was increased from 3,898,665 shares to 3,915,580 shares, (b) the number of warrants

to purchase non-voting common stock was increased from 1,101,335 shares to 1,106,113 shares, and (c) the warrant exercise price was lowered from $12.50 to $12.45. On February 1, 2002, the PCP Entities exercised the warrants in full and paid us the full exercise price of $62.5 million. The proceeds of the warrant exercise were used to repay borrowings under the Company’s credit agreement.

In September 2001, we announced that our board of directors authorized the repurchase of up to three million shares of our outstanding common stock. Pursuant to that authorization, we repurchased 1,009,463 shares in a negotiated transaction at an aggregate cost of $16.0 million during 2002. As of November 12, 2002, we have repurchased 1,396,555 shares under the program announced in September 2001. The share repurchase program remains open and the Company continually evaluates market conditions and internal financing considerations when contemplating purchasing shares.

In March 2002, we acquired Sytner Group plc, a publicly traded automotive retailer operating in excess of 60 franchises in the United Kingdom, pursuant to an all cash tender offer for approximately £95.3 million in cash. In addition, we assumed approximately £15.8 million of Sytner’s debt. As an alternative to receiving all or any part of the £95.3 million of the cash consideration receivable under the offer, Sytner shareholders could elect to receive £1 of loan notes in lieu of every £1 of consideration otherwise receivable under the offer. A total of £26.4 million of such loan notes were issued pursuant to this election. The loan notes bear interest at approximately 3.9% and mature in July 2003. The funds to be used to repay these notes are being held in escrow by the Royal Bank of Scotland for the benefit of the noteholders.

During 2002, net cash provided by operations amounted to $44.3 million. Net cash used in investing activities during 2002 totaled $251.7 million, including $140.0 million related to capital expenditures and $191.6 million for acquisitions (which includes approximately $140.0 million relating to the acquisition of Sytner), offset by $80.0 million in proceeds from sale-leaseback transactions. Net cash provided by financing activities during 2002 totaled $190.9 million, relating to: (1) borrowings of $332.8 million for capital expenditures and acquisitions, (2) borrowings of $300.0 million in connection with the issuance of the senior subordinated notes due 2012 and (3) $135.3 million relating to the issuance of voting common stock, offset by (1) $561.2 million used to repay borrowings under the Company’s credit agreement and (2) $16.0 million to repurchase common stock.

We have a number of capital projects planned or underway relating to the expansion and renovation of our retail automotive operations. Gross cash expenditures during 2002 relating to such projects are estimated to aggregate to $150.0 million, a substantial portion of which has already been spent. Historically, we have financed such capital expenditures with borrowings under our credit agreement and cash flow from operations. In the past, we have also entered into sale-leaseback transactions with Automotive Group Realty, LLC (“AGR”), a wholly owned subsidiary of Penske Corporation. We sold certain properties to AGR in 2002 for consideration of $80.0 million and made lease payments to AGR totaling $8.9 million during the nine months ended September 30, 2002, which payments relate to the properties we lease from AGR. We believe we will continue to finance certain capital expenditures in this fashion during 2002. As a result, we anticipate that the net cash we will fund for capital expenditures will amount to approximately $70.0 million. Funding for such capital expenditures is expected to come from cash flow from operations, supplemented by borrowings under our credit agreement.

The Company agreed to make a contingent payment in cash to the extent the 841,476 shares of common stock issued in connection with an acquisition completed in October 2000 are sold subsequent to the fifth anniversary of the transaction and have a market value at the time of sale of less than $12.00 per share. The Company will be forever released from this guarantee in the event the average daily closing price of the Company’s common stock for any 90 day period subsequent to the fifth anniversary of the transaction exceeds $12.00 per share. The Company has further granted the seller a put option pursuant to which the Company may be required to repurchase no more than 108,333 shares for $12.00 per share in cash on each of the first five anniversary dates of the transaction. As of September 30, 2002, the maximum of future cumulative cash payments the Company may be required to make in connection with the put option amounted to $5.2 million. As of November 12, 2002, such maximum cash payments amounted to $3.9 million. To date, no payments have been made by the Company relating to the put option.

In connection with an acquisition of dealerships in October 1997, we agreed that if the acquired companies achieved aggregate specified base earnings levels in any of the five years beginning with the year ending December 31, 1999, we would pay to the sellers for each year in which the acquired companies exceeded base earnings an amount equal to $0.7 million plus defined percentages of the amounts earned in excess of such base earnings for any such year. The total amount of payments to be made pursuant to this agreement is limited to $7.0 million. To date we have paid $2.0 million relating to this agreement. The amount of additional payments, if any, will be determined based upon the financial performance of the acquired business in 2002 and 2003. We also have obligations with respect to past transactions totaling $32.7 million over the next four years.

As of September 30, 2002, we had approximately $0.7 million of cash available to fund operations and future acquisitions. In addition, $355.7 million was available for borrowing under our credit agreement as of November 12, 2002, which availability is subject to a maximum actual borrowing limit of $329.6 million due to the credit agreement’s borrowing base collateral limitation (in general, the borrowing base equals certain of our allowable tangible assets plus $300.0 million). Borrowings used to finance the cost of acquisitions and capital construction projects will typically increase tangible assets, allowing the Company to access borrowing capacity which is currently not available due to the base collateral limitation.

We are a holding company whose assets consist primarily of the direct or indirect ownership of the capital stock of our operating subsidiaries. Consequently, our ability to pay dividends is dependent upon the earnings of our subsidiaries and their ability to distribute earnings and other advances and payments to us. The minimum working capital requirement under our franchise agreements could in some cases restrict the ability of our subsidiaries to make distributions, although to date we have not faced any such restrictions.

Our principal source of growth has come from acquisitions of automotive dealerships. We believe that our existing capital resources, including the liquidity provided by our credit agreement and floor plan financing, will be sufficient to fund our current operations and commitments for the next twelve months. To the extent we pursue additional significant acquisitions, we may need to raise additional capital either through the public or private issuance of equity or debt securities or through additional bank borrowings. We may not have sufficient availability under our credit agreement to finance significant additional acquisitions. In certain circumstances, a public equity offering could require the prior approval of several automobile manufacturers. There is no assurance that we would be able to access the capital markets or increase our borrowing capabilities on terms acceptable to us, if at all.

Joint Ventures

From time to time we enter into joint venture arrangements in the ordinary course of business, pursuant to which we acquire dealerships together with a minority investor.

In January 1998, we entered into a joint venture agreement with a third party to manage and acquire dealerships in Illinois, Ohio, North Carolina and South Carolina. With respect to any joint venture established pursuant to this agreement, we are required to buy out the other party at the end of the five-year period following the date of the acquisition. Pursuant to this arrangement, in 1998 we entered into a joint venture with respect to the Citrus Chrysler dealership. We are required to buy out our partner in this dealership in May 2003. We expect this payment to be approximately $3.0 million.

In November 1999 we formed a joint venture to own and operate certain dealerships in Brazil. Our joint venture partners in Brazil are Roger S. Penske, Jr. and Andre Ribeiro Holdings, Ltda. We contributed approximately $3.6 million for a 90.6% interest in United Auto do Brasil, Ltda. and Mr. Penske, Jr. and Mr. Ribeiro each contributed approximately $0.2 million for a 4.7% interest.

In October 2000, we purchased the operating assets of certain dealerships in Fairfield, Connecticut for approximately $26.8 million. We are contractually committed to sell 20% of this venture to Lucio A. Noto and other investors upon receipt of approval for the transfer of ownership by the manufacturers represented at the Fairfield location and the completion of other conditions. Upon completion of these conditions, the closing will occur as of March 1, 2001. The selling price is approximately $5.4 million, representing 20% of the

consideration we paid inclusive of assets acquired. Mr. Noto will pay for this interest with $1.2 million at closing, with the remaining $4.2 million to be paid in quarterly payments over twenty years. The payments will be offset from permitted periodic cash distributions to Mr. Noto by the venture, which are expected to fully fund the investors installment payments.

In December 2000 we formed a joint venture with Roger S. Penske, Jr. to own and operate certain Mercedes-Benz, Audi and Porsche dealerships. We contributed $65.1 million for a 90% interest in HBL, LLC and Mr. Penske, Jr. contributed $7.2 million for the remaining 10% interest.

In July 2001 we invested in the Tulsa Auto Collection, a group of dealerships in Tulsa, Oklahoma. The Tulsa Auto Collection consists of seven dealerships representing the Ford, Lincoln-Mercury, Jaguar and Mazda brands. In addition, through the Tulsa Auto Collection, we operate two automotive care service centers and two used vehicle facilities in the Tulsa market.

Cyclicality

Unit sales of motor vehicles, particularly new vehicles, historically have been cyclical, fluctuating with general economic cycles. During economic downturns, the automotive retailing industry tends to experience similar periods of decline and recession as the general economy. We believe that the industry is influenced by general economic conditions and particularly by consumer confidence, the level of personal discretionary spending, fuel prices, interest rates and credit availability.

Seasonality

Our business is modestly seasonal overall. Our operations generally experience higher volumes of vehicle sales in the second and third quarters of each year due in part to consumer buying trends and the introduction of new vehicle models. Also, demand for cars and light trucks is generally lower during the winter months than in other seasons, particularly in regions of the United States where dealerships may be subject to harsh winters. Accordingly, we expect our revenues and profitability to be generally lower in our first and fourth quarters as compared to our second and third quarters. The greatest seasonalities exist with the dealerships we operate in the northeastern and upper mid-western United States, for which the second and third quarters are the strongest with respect to vehicle-related sales. The service and parts business at all dealerships experiences relatively modest seasonal fluctuations.

New Accounting Pronouncements

Statement of Financial Accounting Standards No. 146 Accounting for Costs Associated with Exit or Disposal Activities (“SFAS No. 146”) was issued in June 2002 and is effective for exit or disposal activities initiated after December 31, 2002. SFAS No. 146 addresses the timing of the recognition of exit costs associated with restructuring activities. Under the new standard, certain exit costs will be recognized over the period in which the restructuring activities occur, rather than at the point in time the Company commits to the restructuring plan. SFAS No. 146 is not expected to have a material impact on the Company’s results of operations.

Effects of Inflation

We believe that the relatively moderate rates of inflation over the last few years have not had a significant impact on revenues or profitability. We do not expect inflation to have any near-term material effects on the sale of our products and services. However, there can be no assurance that there will be no such effect in the future.

We finance substantially all of our inventory through various revolving floor plan arrangements with interest rates that vary based on the prime rate or LIBOR. Such rates have historically increased during periods of increasing inflation. We do not believe that we would be placed at a competitive disadvantage should interest rates increase due to increased inflation since most other automotive dealerships have similar floating rate borrowing arrangements.

Forward Looking Statements

This Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements generally can be identified by the use of terms such as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “intend,” “plan,” “estimate,” “predict,” “potential,” “forecast,” “continue” or variations of such terms, or the use of these terms in the negative. Forward-looking statements include statements regarding our current plans, forecasts, estimates, beliefs or expectations, including, without limitation, statements with respect to:

• our future financial performance;

• future acquisitions;

• future capital expenditures;

• our ability to obtain cost savings and synergies;

• our ability to respond to economic cycles;

• trends in the automotive retail industry and in the general economy;

• trends in the European automotive market;

• our plans and expectations with respect to Sytner;

• our ability to access the remaining availability under our credit agreement;

• our liquidity;

• trends affecting our future financial condition or results of operations; and

• our business strategy.

Forward-looking statements involve known and unknown risks and uncertainties and are not assurances of future performance. Actual results may differ materially from anticipated results due to a variety of factors, including the factors identified in the reports and our other periodic filings with the SEC. Important factors that could cause actual results to differ materially from our expectations include the following:

• automobile manufacturers exercise significant control over our operations and we depend on them in order to operate our business;

• because we depend on the success and popularity of the brands we sell, adverse conditions affecting one or more automobile manufacturers may negatively impact our revenues and profitability;

• if we are unable to complete additional acquisitions and successfully integrate acquisitions, we will be unable to achieve desired results from our acquisition strategy;

• we may not be able to satisfy our capital requirements for making acquisitions and financing the purchase of our inventory;

• our failure to meet a manufacturer’s consumer satisfaction requirements may adversely affect our ability to acquire new dealerships, our ability to obtain incentive payments from manufacturers and our profitability;

• automobile manufacturers impose limits on our ability to issue additional equity and on the ownership of our common stock by third parties, which may hamper our ability to meet our financing needs;

• our business and the automotive retail industry in general are susceptible to adverse economic conditions, including changes in consumer confidence, fuel prices and credit availability;

• substantial competition in automotive sales and services may adversely affect our profitability;

• automotive retailing is a mature industry with limited potential in new vehicle sales;

• if we lose key personnel or are unable to attract additional qualified personnel, our business could be adversely affected;

• our quarterly operating results may fluctuate due to seasonality in the automotive retail business and other factors;

• our business may be adversely affected by import product restrictions and foreign trade risks that may impair our ability to sell foreign vehicles profitably;

• our automobile dealerships are subject to substantial regulation which may adversely affect our profitability;

• if state dealer laws in the United States are repealed or weakened, our automotive dealerships will be more susceptible to termination, non-renewal or renegotiation of their franchise agreements;

• our automotive dealerships are subject to foreign, federal, state and local environmental regulations that may result in claims and liabilities;

• our principal stockholders have substantial influence over us and may make decisions with which stockholders may disagree;

• some of our directors and officers may have conflicts of interest with respect to certain related party transactions and other business interests;

• our substantial amount of indebtedness may limit our ability to obtain financing for acquisitions and will require that a significant portion of our cash flow be used for debt service;

• due to the nature of the automotive retailing business, we may be involved in legal proceedings that could have a material adverse effect on our business;

• changes in the European Commission’s regulations regarding automobile manufacturers may have an adverse effect on Sytner;

• the Sytner acquisition exposes us to the risks involved in international operations;

• the price of our common stock is subject to substantial fluctuation, which may be unrelated to our performance;

• shares eligible for future sale may cause the market price of our common stock to drop significantly, even if our business is doing well; and

• we are a holding company and as a result rely on the receipt of payments from our subsidiaries in order to meet our cash needs and service our indebtedness.

We urge you to carefully consider these risk factors in evaluating all forward-looking statements regarding our business. Readers of this report are cautioned not to place undue reliance on the forward-looking statements contained in this report. All forward-looking statements attributable to us are qualified in their entirety by this cautionary statement. Except to the extent required by the federal securities laws and Securities and Exchange Commission rules and regulations, we have no intention or obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rates. We are exposed to market risk from changes in the interest rates on a significant portion of our outstanding indebtedness. Outstanding balances under our credit agreements bear interest at a variable rate based on a margin over LIBOR, as defined. Based on the amount outstanding as of September 30, 2002, a 100 basis point change in interest rates would result in an approximate $3.6 million change to our annual interest expense. Similarly, amounts outstanding under floor plan financing arrangements bear interest at a variable rate based on a margin over defined LIBOR or Prime rates. Based on an average of the aggregate amounts outstanding under our floor plan financing arrangements, a 100 basis point change in interest rates would result in an approximate $5.9 million change to our annual floor plan interest expense.

The Company continually evaluates its exposure to interest rate fluctuations and follows established policies and procedures to implement strategies designed to manage the amount of variable rate indebtedness outstanding at any point in time in an effort to reduce the effect of interest rate fluctuations on the Company’s earnings and cash flows. The Company is currently party to a swap agreement pursuant to which a notional $200.0 million of our floating rate debt was exchanged for fixed rate debt through January 2008. The fixed rate interest paid by us is based on LIBOR and amounts to approximately 5.86%.

Interest rate fluctuations effect the fair market value of our fixed rate debt, including the senior subordinated notes, certain seller financed promissory notes and obligations under certain capital leases, but do not impact our earnings or cash flows.

Foreign Currency Exchange Rates. The Company currently has operations in the United Kingdom, Germany, Mexico and Brazil. In each of these markets, the local currency is the functional currency. Due to the Company’s intent to remain permanently invested in these foreign markets, we do not hedge against foreign currency fluctuations. Other than the United Kingdom, the Company’s foreign operations are not significant. In the event we enter into transactions that expose the Company to foreign exchange fluctuations, or change our intent with respect to the investment in any of our international operations, the Company would expect to implement strategies designed to manage those risks in an effort to reduce the effect of foreign currency fluctuations on the Company’s earnings and cash flows.

In common with other automotive retailers, we purchase certain of our new vehicle and parts inventories from foreign manufacturers. Although we purchase all of our inventories in the local functional currency, our business is subject to certain risks, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions and foreign exchange rate volatility which may influence such manufacturers’ ability to provide their products at competitive prices in the local jurisdictions. Our future results could be materially and adversely impacted by changes in these or other factors.

Item 4. Controls and Procedures

a) As of a date within 90 days prior to the filing of this report (the “Evaluation Date”), the Chief Executive Officer (the “CEO”) and the Chief Financial Officer (the “CFO”), with the participation of other members of the Company’s management, performed an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based upon this evaluation, the CEO and the CFO have concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective to ensure that material information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is made known to the CEO and CFO within the time periods specified in the Securities and Exchange Commission rules and forms.

b) There were no significant changes in the registrant’s internal controls or other factors that could significantly affect these controls subsequent to the Evaluation Date.

PART II

Item 1 — Legal Proceedings

The Company and its subsidiaries are involved in litigation that has arisen in the ordinary course of business. None of these matters, either individually or in the aggregate, are expected to have a material adverse effect on the Company’s results of operations or financial condition.

Item 6 — Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a) Exhibits


10.34		Purchase Agreement by and among United Auto Group, Inc. and Combined Specialty Insurance Company dated as of August 14, 2002.
10.35		Lease Agreement between Automotive Group Realty, LLC and UAG Realty, LLC, dated September 29, 2002.
10.36		Lease Agreement between Car Chauncey, LLC and UAG Realty, LLC, dated as of September 11, 2002.
99.1		Certification of CEO
99.2		Certification of CFO

(b) Reports on Form 8-K.

The Company filed the following Current Reports on Form 8-K and amendments to Form 8-K during the quarter ended September 30, 2002:

      1. July 22, 2002, reporting under Items 7 and 9 (announcement of the acquisition of a BMW franchise in Austin, Texas).

      2. July 30, 2002, reporting under Items 7 and 9 (announcement of the Company’s earnings for the three months ended June 30, 2002).

      3. August 7, 2002, reporting under Items 5 and 7 (filing of the Company’s audited financial statements as of and for the three years ended December 31, 2001 and related Management’s Discussion and Analysis of Financial Condition and Results of Operations).

      4. August 15, 2002, reporting under Items 7 and 9 (announcement of the repurchase of approximately 1.0 million shares of the Company’s voting common stock for $15.85 per share from Combined Specialty Insurance Company (“Aon”) under a previously announced share repurchase program).

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

UNITED AUTO GROUP, INC.

By: /s/ JAMES R. DAVIDSON

James R. Davidson

Chief Financial Officer

Principal Financial and Accounting Officer

Date: November 12, 2002

UNITED AUTO GROUP, INC.

CERTIFICATIONS PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

Certification

I, Roger S. Penske, certify that:

1. I have reviewed this quarterly report on form 10-Q of United Auto Group, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements and other financial information included in this quarterly report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act rules 13a-14 and 15d-14) for the registrant and we have:

a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b. evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation date”); and

c. presented in this quarterly report our conclusions about the effectives of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

/s/ ROGER S. PENSKE

Roger S. Penske

Title: Chief Executive Officer

Date: November 12, 2002

UNITED AUTO GROUP, INC.

CERTIFICATIONS PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

Certification

I, James R. Davidson, certify that:

7. I have reviewed this quarterly report on form 10-Q of United Auto Group, Inc.;

8. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

9. Based on my knowledge, the financial statements and other financial information included in this quarterly report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

10. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act rules 13a-14 and 15d-14) for the registrant and we have:

a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b. evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation date”);and

c. presented in this quarterly report our conclusions about the effectives of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

11. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

12. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

/s/ JAMES R. DAVIDSON

James R. Davidson

Title: Chief Financial Officer

Date: November 12, 2002

10-Q EXHIBIT INDEX


Exhibit No.		Description

	10.34	Purchase Agreement by and among United Auto Group, Inc. and Combined Specialty Insurance Company dated as of August 14, 2002.
	10.35	Lease Agreement between Automotive Group Realty, LLC and UAG Realty, LLC, dated September 29, 2002.
	10.36	Lease Agreement between Car Chauncey, LLC and UAG Realty, LLC, dated as of September 11, 2002.
	99.1	Certification of CEO
	99.2	Certification of CFO

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents


	Accumulated
	Other
	Comprehensive			Total			Comprehensive
	Income			Stockholders’			Income
	(Loss)			Equity			(Loss)


	(Dollars In Thousands)
	(Unaudited)




Balances, January 1, 2002	$	(8,380	)	$	515,683		$	—




Issuance of common stock		—			124,185			—




Exercise of options		—			2,627			—




Payment of preferred stock dividends		—			(2,719	)		—




Fair value of interest rate swap agreement		3,539			3,539			3,539




Foreign currency translation		162			162			162




Net income		—			15,711			15,711

Balances, March 31, 2002		(4,679	)		659,188			19,412




Payment of in-kind preferred stock dividends		—			—			—




Conversion of preferred stock to common stock		—			(791	)		—




Exercise of options		—			5,068			—




Fair value of interest rate swap agreement		(1,496	)		(1,496	)		(1,496	)




Foreign currency translation		246			246			246




Net income		—			23,889			23,889

Balances, June 30, 2002		(5,929	)		686,104			42,051




Payment of in-kind preferred stock dividends		—			—			—




Payment of preferred stock dividends		—			(211	)		—




Conversion of preferred stock to common stock		—			(43	)		—




Exercise of options		—			10			—




Repurchase of common stock		—			(16,000	)		—




Fair value of interest rate swap agreement		(4,135	)		(4,135	)		(4,135	)




Foreign currency translation		1,687			1,687			1,687




Net income		—			21,989			21,989

Balances, September 30, 2002	$	(8,377	)	$	689,401		$	61,592


	•	our future financial performance;

	•	future acquisitions;

	•	future capital expenditures;

	•	our ability to obtain cost savings and synergies;

	•	our ability to respond to economic cycles;

	•	trends in the automotive retail industry and in the general economy;

	•	trends in the European automotive market;

	•	our plans and expectations with respect to Sytner;

	•	our ability to access the remaining availability under our credit agreement;

	•	our liquidity;

	•	trends affecting our future financial condition or results of operations; and

	•	our business strategy.


	•	automobile manufacturers exercise significant control over our operations and we depend on them in order to operate our business;

	•	because we depend on the success and popularity of the brands we sell, adverse conditions affecting one or more automobile manufacturers may negatively impact our revenues and profitability;

	•	if we are unable to complete additional acquisitions and successfully integrate acquisitions, we will be unable to achieve desired results from our acquisition strategy;

	•	we may not be able to satisfy our capital requirements for making acquisitions and financing the purchase of our inventory;

	•	our failure to meet a manufacturer’s consumer satisfaction requirements may adversely affect our ability to acquire new dealerships, our ability to obtain incentive payments from manufacturers and our profitability;

	•	automobile manufacturers impose limits on our ability to issue additional equity and on the ownership of our common stock by third parties, which may hamper our ability to meet our financing needs;

	•	our business and the automotive retail industry in general are susceptible to adverse economic conditions, including changes in consumer confidence, fuel prices and credit availability;

	•	substantial competition in automotive sales and services may adversely affect our profitability;

	•	automotive retailing is a mature industry with limited potential in new vehicle sales;


	•	if we lose key personnel or are unable to attract additional qualified personnel, our business could be adversely affected;

	•	our quarterly operating results may fluctuate due to seasonality in the automotive retail business and other factors;

	•	our business may be adversely affected by import product restrictions and foreign trade risks that may impair our ability to sell foreign vehicles profitably;

	•	our automobile dealerships are subject to substantial regulation which may adversely affect our profitability;

	•	if state dealer laws in the United States are repealed or weakened, our automotive dealerships will be more susceptible to termination, non-renewal or renegotiation of their franchise agreements;

	•	our automotive dealerships are subject to foreign, federal, state and local environmental regulations that may result in claims and liabilities;

	•	our principal stockholders have substantial influence over us and may make decisions with which stockholders may disagree;

	•	some of our directors and officers may have conflicts of interest with respect to certain related party transactions and other business interests;

	•	our substantial amount of indebtedness may limit our ability to obtain financing for acquisitions and will require that a significant portion of our cash flow be used for debt service;

	•	due to the nature of the automotive retailing business, we may be involved in legal proceedings that could have a material adverse effect on our business;

	•	changes in the European Commission’s regulations regarding automobile manufacturers may have an adverse effect on Sytner;

	•	the Sytner acquisition exposes us to the risks involved in international operations;

	•	the price of our common stock is subject to substantial fluctuation, which may be unrelated to our performance;

	•	shares eligible for future sale may cause the market price of our common stock to drop significantly, even if our business is doing well; and

	•	we are a holding company and as a result rely on the receipt of payments from our subsidiaries in order to meet our cash needs and service our indebtedness.


	1. July 22, 2002, reporting under Items 7 and 9 (announcement of the acquisition of a BMW franchise in Austin, Texas).

	2. July 30, 2002, reporting under Items 7 and 9 (announcement of the Company’s earnings for the three months ended June 30, 2002).

	3. August 7, 2002, reporting under Items 5 and 7 (filing of the Company’s audited financial statements as of and for the three years ended December 31, 2001 and related Management’s Discussion and Analysis of Financial Condition and Results of Operations).

	4. August 15, 2002, reporting under Items 7 and 9 (announcement of the repurchase of approximately 1.0 million shares of the Company’s voting common stock for $15.85 per share from Combined Specialty Insurance Company (“Aon”) under a previously announced share repurchase program).



	James R. Davidson
	Chief Financial Officer
	Principal Financial and Accounting Officer


	1.	I have reviewed this quarterly report on form 10-Q of United Auto Group, Inc.;

	2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

	3.	Based on my knowledge, the financial statements and other financial information included in this quarterly report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

	4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act rules 13a-14 and 15d-14) for the registrant and we have:


	a.	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b.	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation date”); and

	c.	presented in this quarterly report our conclusions about the effectives of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;


	a.	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b.	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and


	/s/ ROGER S. PENSKE

	Roger S. Penske
	Title: Chief Executive Officer


	/s/ JAMES R. DAVIDSON

	James R. Davidson
	Title: Chief Financial Officer