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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

Commission file number 1-12297

United Auto Group, Inc.

Registrant’s telephone number, including area code:

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

      Indicate by check mark whether the registrant is an accelerated filer (as defined Rule 12b-2 of the Exchange Act)     Yes þ          No o

      As of May 12, 2003, there were 40,611,310 shares of voting common stock outstanding.

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UNITED AUTO GROUP, INC.

See Notes to Consolidated Condensed Financial Statements

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UNITED AUTO GROUP, INC.

See Notes to Consolidated Condensed Financial Statements

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UNITED AUTO GROUP, INC.

See Notes to Consolidated Condensed Financial Statements

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UNITED AUTO GROUP, INC.

See Notes to Consolidated Condensed Financial Statements

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UNITED AUTO GROUP, INC.

1.     Interim Financial Statements

      The information presented as of March 31, 2003 and 2002 and for the three month periods then ended is unaudited, but includes all adjustments (consisting only of normal and recurring adjustments) which the management of United Auto Group, Inc. (the “Company”) believes to be necessary for the fair presentation of results for the periods presented. The results for the interim periods are not necessarily indicative of results to be expected for the year. These consolidated condensed financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2002, 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.

      During 2002, the Company sold certain dealerships which qualified for treatment as discontinued operations in accordance with Statement of Financial Accounting Standard No. 144 “Accounting for the Impairment of Disposal of Long-Lived Assets”. Consequently, such dealerships have been reported as discontinued operations. Combined financial information of these dealerships is as follows:

      In March 2003, the Financial Accounting Standards Board’s (“FASB”) Emerging Issues Task Force (“EITF”) finalized Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Cash Consideration Received from a Vendor” (“EITF 02-16”). EITF 02-16 addresses the accounting treatment for vendor allowances and provides that cash consideration received from a vendor should be presumed to be a reduction of the prices of the vendors’ product and should therefore be shown as a reduction in the purchase price of the merchandise. To the extent that the cash consideration represents a reimbursement of a specific, incremental and identifiable cost, then those vendor allowances should be used to offset such costs. Historically, the company recorded non-refundable floor plan credits and certain other non-refundable credits when received. As a result of the EITF, these credits are now presumed to be reductions in the cost of purchased inventory and are deferred until the related vehicle is sold. In accordance with EITF 02-16, the Company recorded a cumulative effect of accounting change as of January 1, 2003, the date of adoption, that decreased net income for 2002 by $3.1 million, net of tax, or $0.07 per diluted share.

      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. The adoption of SFAS No. 146 did not have a material impact on the Company’s results of operations, financial position or cash flows.

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      Financial Accounting Standards Board (“FASB”) Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”) was issued in November 2002. FIN 45 requires the recognition of a liability for certain guarantee obligations issued or modified after December 31, 2002. FIN 45 also clarifies disclosure requirements to be made by a guarantor for certain guarantees. The adoption of FIN 45 did not have a material impact on the Company’s results of operations, financial position or cash flows.

      FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of APB No. 50” (“FIN 46”) was issued in January 2003. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The Company does not currently participate in any variable interest entities.

      The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual result could differ from those estimates. The accounts requiring the use of significant estimates include accounts receivable, inventories, income taxes, intangible assets and certain reserves.

      Intangible assets in the consolidated condensed balance sheets include goodwill and franchise value. Goodwill represents the excess of cost over the fair value of tangible and identified intangible assets acquired arising in connection with purchase business combinations. Franchise value represents the estimated value of franchises acquired in business combinations. Goodwill and franchise value are deemed to have indefinite lives and are not amortized, but are subject to, at a minimum, an annual impairment test. If the carrying value of goodwill, franchise value or other intangible assets exceeds its fair market value, an impairment loss would be recorded. The Company uses a discounted cash flow model to determine the fair market value of the Company’s reporting units.

      Following is a summary of the changes in the carrying amount of goodwill and franchise value:

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2.     Inventories

      Inventories consisted of the following:

3.     Business Combinations

      During the three months ended March 31, 2002, the Company acquired 62 automobile dealership franchises. The aggregate consideration paid in connection with such acquisitions amounted to $144,832 in cash. The Company’s financial statements include the results of operations of the acquired dealerships only from the date of acquisition.

      The following unaudited consolidated pro forma results of operations of the Company for the three month period ended March 31, 2002 give effect to acquisitions consummated subsequent to January 1, 2002 as if they had occurred on January 1, 2002.

4.     Stock-Based Compensation

      Full-time employees of the Company and its subsidiaries and affiliates are eligible to receive stock options pursuant to the terms of the Company’s Stock Option Plan. Options granted under the Stock Option Plan have a ten year life and typically vest on a pro-rata basis over three or five years. The aggregate number of shares of Common Stock for which stock options may be granted under the Stock Option Plan is 3,001,000. As of March 31, 2003, 150,000 shares of Common Stock were available for the grant of options under the Stock Option Plan.

      Pursuant to Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, the Company accounts for stock-based employee compensation arrangements using the intrinsic value method. Accordingly, no compensation expense has been recorded in the Consolidated Financial Statements with respect to option grants. The Company has adopted the disclosure only provisions of Financial Accounting Standards Board Statement No. 123, “Accounting for Stock Based Compensation”, as amended by Financial Accounting Standards Board Statement No. 148, “Accounting for Stock Based Compensation — Transition and Disclosure, an Amendment of FASB Statement No. 123”.

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      Had the Company elected to recognize compensation expense for stock-based compensation using the fair value method, net income, basic net income per common share and net income per diluted common share would have been as follows (unaudited):

      The weighted average fair value of the Company’s stock options was calculated using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2002: no dividend yield; expected volatility of 60.8%; risk-free interest rate of 4% and expected lives of five years. There were no option grants in the first quarter of 2003. The weighted average fair value of options granted during the period ended March 31, 2002 was $11.67.

      The Company has proposed that stockholders approve the United Auto Group, Inc. 2002 Equity Compensation Plan (the “Plan”) at its annual meeting of stockholders in May 2003. The Plan would include 2,100,000 shares available for future issuance of awards including; stock options, stock appreciation rights, restricted stock and restricted stock units, performance shares and other awards to key employees, outside directors, consultants and advisors of the Company.

5.     Earnings Per Share

      Basic earnings per common share is computed using the weighted average number of common shares outstanding. Diluted earnings per common share is based on the weighted average number of common shares outstanding, adjusted for the dilutive effect of stock options, preferred stock, warrants and stock price guarantees. For the three months ended March 31, 2003 and 2002, 969,087 and 150,000 shares issuable upon the exercise of outstanding options were excluded from the calculation of diluted earnings per common share

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because the effect of such securities was antidilutive. A reconciliation of the number of shares used in the calculation of basic and diluted earnings per common share is as follows:

6.     Supplemental Cash Flow Information

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

7.     Long Term Debt

      Long-term debt consisted of the following:

      Undrawn, available capacity under the Company’s credit facilities amounted to approximately $344,000 as of March 31, 2003.

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      The Company is party to a credit agreement with DaimlerChrysler Services North America LLC and Toyota Motor Credit Corporation, dated as of August 3, 1999, as amended and restated (the “U.S. Credit Agreement”), which provides for up to $700,000 in revolving loans to be used for acquisitions, working capital, the repurchase of common stock and general corporate purposes, as well as a $50,000 standby letter of credit facility. Revolving loans mature on August 3, 2005. Loans under the U.S. Credit Agreement bear interest between U.S. LIBOR plus 2.00% and U.S. LIBOR plus 3.00%. The U.S. Credit Agreement is fully and unconditionally guaranteed on a joint and several basis by the Company’s domestic automotive dealership subsidiaries and contains a number of significant covenants that, among other things, restrict the ability of the Company to dispose of assets, incur additional indebtedness, repay other indebtedness, create liens on assets, make investments or acquisitions and engage in mergers or consolidations. We are also required to maintain specified ratios and tests as defined in the U.S. Credit Agreement. The U.S. Credit Agreement also contains typical events of default including change of control and non-payment of obligations. Availability under the revolving portion of the U.S. Credit Agreement is subject to a collateral-based borrowing limitation, which is determined based on certain of our allowable tangible assets (which does not include foreign assets). Substantially all of the Company’s domestic assets are subject to security interests granted to lenders under the U.S. Credit Agreement. Our U.S. Credit Agreement, the subordinated notes discussed below and borrowings under floor plan financing arrangements have cross-default provisions that trigger a default in the event of an uncured default under other material indebtedness. As of March 31, 2003 and December 31, 2002, outstanding letters of credit under the U.S. Credit Agreement amounted to $42,500. As of March 31, 2003 the Company was in compliance with all financial covenants under the U.S. Credit Agreement.

      On February 28, 2003, the Company entered into a new credit facility with the Royal Bank of Scotland (the “U.K. Credit Facility”), which provides for up to £45,000 in revolving loans to be used for acquisitions, working capital, and general corporate purposes and a seasonally adjusted overdraft line of credit up to a maximum of £10,000. Loans under the U.K. Credit Facility bear interest between U.K. LIBOR plus 0.85% and U.K. LIBOR plus 1.25%. The Company’s borrowing capacity under the U.K. Credit Facility will be reduced by £2,000 every six months, with the first reduction occurring on January 1, 2004. The remaining £35,000 of revolving loans mature on January 31, 2006. The U.K. Credit Facility is fully and unconditionally guaranteed on a joint and several basis by the Company’s automotive dealership subsidiaries in the U.K. (the “U.K. Subsidiaries”), and contains a number of significant covenants that, among other things, restrict the ability of the U.K. Subsidiaries to pay dividends, dispose of assets, incur additional indebtedness, repay other indebtedness, create liens on assets, make investments or acquisitions and engage in mergers or consolidations. In addition, the U.K. Subsidiaries are required to comply with specified ratios and tests, as defined in the U.K. Credit Facility. The U.K. Credit Facility also contains typical events of default, including change of control and non-payment of obligations. Substantially all of the U.K. Subsidiaries’ assets are subject to security interests granted to lenders under the U.K. Credit Facility and the U.K. Credit Facility has cross-default provisions that trigger a default in the event of an uncured default under other material indebtedness of the U.K. Subsidiaries. As of March 31, 2003, outstanding borrowings under the U.K. Credit Facility amounted to approximately £23,800. As of March 31, 2003, the Company was in compliance with all financial covenants under the U.K. Credit Facility.

      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 of 1933, as amended. Net proceeds from the offering were approximately $291,900, and were used to repay indebtedness outstanding under the U.S. Credit

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Agreement. In February 2003, the Company exchanged the notes in a registered offering for $300,000 of new notes (the “Notes”) with identical terms. The Notes are unsecured senior subordinated notes and rank behind all existing and future senior debt, including debt under our credit agreements and floor plan indebtedness. The Notes are guaranteed by substantially all of our domestic subsidiaries on a senior subordinated basis. We can redeem all or some of the Notes at our option beginning in 2007 at specified redemption prices. In addition, until 2005 we are allowed to redeem up to 35% of the Notes with the net cash proceeds from specified public equity offerings. Upon a change of control, each holder of Notes will be able to require us to repurchase all or some of the Notes at a redemption price of 101% of the principal amount of the Notes. The Notes also contain customary negative covenants and events of default.

8.     Interest Rate Swaps

      During January 2000, the Company entered into a swap agreement of five years duration pursuant to which a notional $200,000 of our floating rate debt was exchanged for fixed rate debt. The fixed rate interest to be paid by us was based on U.S. LIBOR and amounted to 7.15%. In October 2002, the terms of this swap were amended pursuant to which the interest rate to be paid by the Company was reduced to 5.86% and the term of the agreement was extended for an additional three years. During March 2003, the Company entered into a swap agreement of five years duration pursuant to which a notional $350,000 of floating rate debt was exchanged for fixed rate debt. The fixed rate interest to be paid by the Company of 3.15% is based on U.S. LIBOR. These swaps have been designated as cash flow hedges of future interest payments of the Company’s LIBOR based floor plan borrowings.

9.     Subsequent Events

      In April 2003, the Company acquired nine automobile dealership franchises. The aggregate consideration paid in connection with such acquisitions amounted to approximately $62.7 million in cash.

      In April 2003, an entity controlled by one of our directors, Lucio A. Noto (the “Investor”), paid approximately $1.8 million (including approximately $800,000 credited from prior earnings retroactive to March 1, 2001) for a 6.5% interest in one of the Company’s subsidiaries, UAG Connecticut I, LLC, which entitles the Investor to 20% of the operating profits of UAG Connecticut I. In addition, the Investor has an option to purchase up to a 20% interest in UAG Connecticut I for specified amounts. The Investor has also guaranteed 20% of UAG Connecticut I’s lease obligation to Automotive Group Realty, LLC (“AGR”), our landlord of the facility at which the dealership operates and a wholly owned subsidiary of Penske Corporation. In exchange for that guarantee, the Investor will be entitled to 20% of any appreciation of the property, which appreciation would otherwise accrue to AGR at the time of sale, and the Investor is responsible to AGR for any corresponding depreciation of the property at the time of sale, which obligation shall be secured solely by the Investor’s ownership interest in UAG Connecticut I, LLC.

      In April 2003, we formed a joint venture to own and operate three BMW dealerships in and around Munich, Germany. Our joint venture partner in Germany is Mr. Peter Reisacher. We contributed approximately $5.0 million for a 50% interest and Mr. Reisacher contributed approximately $5.0 million for a 50% interest in the joint venture.

10.     Condensed Consolidating Financial Information

      The following tables include condensed consolidating financial information as of March 31, 2003 and December 31, 2002 and for the three month periods ended March 31, 2003 and 2002 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.

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UNITED AUTO GROUP, INC.

CONDENSED CONSOLIDATING BALANCE SHEET

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UNITED AUTO GROUP, INC.