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UNITED STATES SECURITIES AND EXCHANGE COMMISSION  Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003 or 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 333-87452-112 UAG MENTOR ACQUISITION, LLC  Delaware
    
    38-355-3602(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 2555 Telegraph Road
    
    48302-0954Bloomfield Hills, Michigan(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code (248) 648-2500    Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None.    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 [x] No [   ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b of the Act). Yes [   ] No [x] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x] The aggregate market value of the common stock held by non-affiliates as of
June 30, 2003 was $0.0. The registrant meets the conditions set forth in General Instructions (I) (1)
(a) and (b) of Form 10-K (as modified by grants of no action relief) and is
therefore filing this form with the reduced disclosure format specified
therein.




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TABLE OF CONTENTS Items
    
    
    
    PagePART I1.
    
    Business
    
    
    12.
    
    Properties
    
    
    43.
    
    Legal Proceedings
    
    
    44.
    
    Submission of Matters to a Vote of Security-Holders
    
    
    4PART II5.
    
    Market for
Registrants Common Equity and Related Stockholder Matters
    
    
    46.
    
    Selected Consolidated Financial Data
    
    
    47.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    47A.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    118.
    
    Financial Statements and Supplementary Data
    
    
    119.
    
    Changes in and
Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    119A.
    
    Disclosure Controls and ProceduresPART III10.
    
    Directors and Executive Officers of the Registrant
    
    
    1111.
    
    Executive Compensation
    
    
    1112.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    1113.
    
    Certain Relationships and Related Transactions
    
    
    1114.
    
    Principal Accountant Fees and Services
    
    
    11PART IV15.
    
    Exhibits, Financial Statement Schedules and Reports on Form 8-K
    
    
    13Certification Pursuant to Section 302Certification Pursuant to Section 302Certification Pursuant to Section 906






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PART I 
 Item 1. Business Overview UAG Mentor Acquisition, LLC (Honda of Mentor or the Company), is
engaged in the sale of new and used motor vehicles and related products and
services, including vehicle service and parts, third-party finance and
insurance products and other aftermarket products. The Company operates a
dealership under a franchise agreement with the Honda Automobile Division of
American Honda Motor Co., Inc. (Honda). In accordance with the franchise
agreement, the dealership is subject to certain rights and restrictions typical
of the industry. The ability of the manufacturer to influence the operations of
the dealership, or the loss of its franchise agreement, could have a negative
impact on the Companys operating results. Honda of Mentor, a Delaware limited liability company, is a majority-owned
subsidiary of United Auto Group, Inc. (UAG). The remaining 30% interest in
the Company is held by YAG Mentor Investors, LLC (YAG). UAG is the second largest automotive retailer in the United States as
measured by total revenues. As of March 1, 2004, UAG owned and operated 137
franchises in the United States and 83 franchises internationally, primarily in
the United Kingdom. UAG offers a full range of vehicle brands, with the
majority of its revenues in 2003 generated from the combined sale of foreign
brands and luxury brands such as Honda, Toyota, BMW, Lexus, Mercedes, Audi and
Porsche. For a complete discussion of UAG, see its 2003 annual report on Form
10-K and its other reports filed with the Securities and Exchange Commission,
which reports are available through its website UnitedAuto.com. Dealership Operations New Vehicle Sales.Our customers may finance their purchases of new
vehicles through both traditional purchase transactions as well as through
leasing companies providing consumer automobile leasing. Lease transactions are
typically short-term leases, providing us a market of low mileage, late model
vehicles still covered by manufacturers warranty for our used vehicle sales
business. Short-term leases also give us the opportunity to obtain repeat
business from customers on a more regular basis than purchase transactions. Used Vehicle Sales.We generally acquire used vehicles from auctions open
only to authorized new vehicle dealers, public auctions, trade-ins in
connection with new purchases and lease expirations or terminations. We clean,
repair and recondition, as necessary, generally at our own service facilities,
all used vehicles we acquire for resale. To improve customer confidence in our
used vehicle inventory, we participate in any available manufacturer
certification processes for used vehicles. If certification is obtained, the
used vehicle owner is typically provided the benefits and warranties similar to
those offered to new vehicle owners by the applicable manufacturer. In
addition, we offer for sale third-party extended service contracts on all of
our used vehicles. Finance and Insurance Sales and Other Aftermarket Products.We are capable
of arranging third-party financing for our customers vehicle purchases,
selling vehicle extended care service contracts and arranging insurance in
connection with vehicle financing. We provide financing and insurance services
to our customers through third parties, including manufacturers captive
finance companies. We also offer for sale other aftermarket products, such as
cellular phones, alarms and fabric protectors. Service and Parts Sales. We generate service and parts sales primarily for
the vehicle models sold at our dealership. We perform both warranty and
non-warranty work. As part of our agreements with our manufacturers, we obtain
all equipment required by the manufacturer and needed to service and maintain
each make of vehicle sold at any particular dealership. Marketing We believe that our marketing programs have contributed to our sales
growth. We utilize many different media for our marketing activities, including
newspapers, magazines, television, radio and the Internet. In addition,
automobile manufacturers supplement our local and regional advertising efforts
by producing large advertising campaigns to support their brands, promote
attractive financing packages and draw traffic to local area dealerships. 1




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Agreements with Vehicle Manufacturers We operate under a franchise agreement with Honda. This agreement contains
provisions and standards governing almost every aspect of the operations of the
dealership, including ownership, management, personnel, training, maintenance
of minimum working capital and net worth, maintenance of minimum lines of
credit, advertising and marketing, facilities, signs, products and services,
acquisitions of other dealerships (including restrictions on how many
dealerships can be acquired or operated in any given market), inventory,
warranties offered to customers, maintenance of minimum amounts of insurance,
achievement of minimum customer service standards, information systems and
monthly financial reporting. Typically, the owner of a dealership may not be
changed without the manufacturers consent. In exchange for complying with these provisions and standards, we are
granted the non-exclusive right to sell the manufacturers brand of vehicles
and related parts and services at our dealership. The agreements also grant us
a non-exclusive license to use the manufacturers trademarks, service marks and
designs in connection with our sales and service of its brand at our
dealerships. Our Franchise agreement expires October 9, 2009 and is expected to
be renewed in the normal course of business. The agreement also permits the
manufacturer to terminate or not renew the agreement for a variety of causes,
including failure to adequately operate the dealership, insolvency or
bankruptcy, impairment of the dealers reputation or financial standing,
changing the dealerships ownership or location without consent, sales of the
dealerships assets without consent, failure to maintain adequate working
capital or floor plan financing, changes in the dealerships financial or other
condition, failure to submit information to the manufacturer on a timely basis,
pledging the dealerships stock, failure to have any permit or license
necessary to operate the dealership, and material breaches of other provisions
of the agreement, subject to applicable state franchise laws that limit a
manufacturers right to terminate a franchise. Our agreement with the manufacturer gives the manufacturer the right,
under some circumstances (including upon a merger, sale, or change of control
of the Company, or in some cases a material change in our business or capital
structure), to acquire the dealership from us, at fair market value. In
general, our agreement with the manufacturer limits our ability to sell
significant percentages of our voting stock or significant percentages of the
assets relating to our franchise to any other person or entity (other than for
passive investment) or another manufacturer, engage in other extraordinary
corporate transactions (such as a merger, reorganization or sale of a material
amount of assets) or change of control of our board of directors. In addition,
the manufacturer has a right of first refusal if we propose to sell our
franchise to a third party. The agreement prohibits us from pledging our
capital stock to lenders. Competition For new vehicle sales, we compete primarily with other franchised dealers
in our marketing area. We do not have any cost advantage in purchasing new
vehicles from the manufacturer, and typically we rely on advertising and
merchandising, sales expertise, service reputation and location of our
dealership to sell new vehicles. Our market includes a number of
well-capitalized competitors that have extensive automobile dealership
managerial experience and strong retail locations and facilities. We compete
with dealers that sell the same brands of new vehicles that we sell and with
dealers that sell other brands of new vehicles that we do not represent. Our
new vehicle dealership competitors have franchise agreements with the various
vehicle manufacturers and, as such, generally have access to new vehicles on
the same terms as us. In recent years, automotive dealers have also faced
increased competition in the sale of new vehicles from independent leasing
companies and on-line purchasing services and warehouse clubs. Due to lower
overhead and sales costs, these companies may be capable of operating on
smaller gross margins and offering lower sales prices than us. For used vehicle sales, we compete with other franchised dealers,
independent used vehicle dealers, automobile rental agencies, private parties
and used vehicle superstores for supply and resale of used vehicles. We believe that the principal competitive factors in vehicle sales are the
marketing campaigns conducted by manufacturers, the ability of dealerships to
offer a wide selection of the most popular vehicles, the location of
dealerships and the quality of customer service. Other competitive factors
include customer preference for particular brands of automobiles, pricing
(including manufacturer rebates and other special offers) and warranties. We
believe that our dealership is competitive in all of these areas. We compete with other franchised dealers to perform warranty repairs and
with other automotive dealers, franchised service center chains and independent
garages for non-warranty repair and routine maintenance business. We compete
with other automotive dealers, service stores and auto parts retailers in our
parts operations. We believe that the principal competitive factors in parts
and service sales are price, the use of factory-approved replacement parts, the
familiarity with a manufacturers brands and models and the quality of customer
service. A number of regional or national chains offer selected parts and
services at prices that may be lower than our prices. 2




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We believe that a growing number of consumers are utilizing the Internet,
to differing degrees, in connection with the purchase of vehicles. Accordingly,
we may face increased pressures from on-line automotive websites, including
those developed by automobile manufacturers, is well as by other dealership
groups. Consumers use the Internet to compare prices for vehicles and related
services, which may cause reduced margins for new vehicles, used vehicles and
related services. Employees and Labor Relations As of December 31, 2003, we employed approximately 76 people, none of whom
are covered by collective bargaining agreements with labor unions. We consider
our relations with our employees to be satisfactory. Our policy is to motivate
our key managers through, among other things, variable compensation programs
tied principally to dealership profitability and equity incentive grants of
UAG. Due to our reliance on vehicle manufacturers, we may be adversely affected
by labor strikes or work stoppages at the manufacturers facilities. Environmental Matters We are subject to a wide range of foreign, federal, state and local
environmental laws and regulations, including those governing discharges into
the air and water, the operation and removal of aboveground and underground
storage tanks, the use, handling, storage and disposal of hazardous substances
and other materials and the investigation and remediation of contamination. As
with automotive dealerships generally, and service, parts and body shop
operations in particular, our business involves the generation, use, handling
and contracting for recycling or disposal of hazardous or toxic substances or
wastes, including environmentally sensitive materials such as motor oil, waste
motor oil and filters, transmission fluid, antifreeze, refrigerant, waste paint
and lacquer thinner, batteries, solvents, lubricants, degreasing agents,
gasoline and diesel fuels. Similar to many of our competitors, we have incurred
and will continue to incur, capital and operating expenditures and other costs
in complying with such laws and regulations. Our operations involving the management of hazardous and other
environmentally sensitive materials are subject to requirements of the federal
Resource Conservation and Recovery Act, or RCRA, and comparable state statutes.
Our business also involves the operation of storage tanks containing such
materials. Storage tanks are subject to periodic testing, containment,
upgrading and removal under RCRA and comparable state statutes. Furthermore,
investigation or remediation may be necessary in the event of leaks or other
discharges from current or former underground or aboveground storage tanks. In
addition, water quality protection programs under the federal Water Pollution
Control Act (commonly known as the Clean Water Act), the Safe Drinking Water
Act and comparable state and local programs govern certain discharges from some
of our operations. Similarly, certain air emissions from our operations, such
as auto body painting, may be subject to the federal Clean Air Act and related
state and local laws. Various health and safety standards promulgated by the
Occupational Safety and Health Administration of the United States Department
of Labor and related state agencies also apply to our operations. We may also have liability in connection with materials that were sent to
third-party recycling, treatment, and/or disposal facilities under the
Comprehensive Environmental Response, Compensation and Liability Act, and
comparable state statutes. These statutes impose liability for investigation
and remediation of contamination without regard to fault or the legality of the
conduct which contributed to the contamination. Responsible parties under these
statutes may include the owner or operator of the site where the contamination
occurred and companies that disposed or arranged for the disposal of the
hazardous substances released at these sites. We believe that we do not have any material environmental liabilities and
that compliance with environmental laws and regulations will not, individually
or in the aggregate, have a material adverse effect on our results of
operations, financial condition or cash flows. However, environmental laws and
regulations are complex and subject to change. Compliance with current,
amended, new or more stringent laws or regulations, stricter interpretations of
existing laws or the future discovery of environmental conditions could require
additional expenditures by us, and such expenditures could be material. Insurance Due to the nature of the automotive retail industry and the large
inventory maintained by dealerships, automotive retail dealerships generally
require significant levels of insurance covering a broad variety of risks. The
business is subject to substantial risk of property loss due to the significant
concentration of property values at dealership locations. Other potential
liabilities arising out of our operations involve claims of employees,
customers or third parties for personal injury or property damage and potential
fines and penalties in connection with alleged violations of regulatory
requirements. Accordingly, we participate in UAG liability and property insurance
programs subject to specified deductibles and loss retentions. We also
participate in UAG umbrella liability insurance programs to provide insurance
in excess of our primary insurance policies. The level of risk we retain may
change in the future as insurance market conditions or other factors affecting 3




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the economics of our insurance purchasing change. Although we have, subject to
limitations and exclusions, substantial insurance, we may be exposed to
uninsured or underinsured losses that could have a material adverse effect on
UAG programs results of operations, financial condition or cash flows. 
 Item 2. Properties We seek to structure our operations so as to minimize the ownership of
real property. As a result, we lease our facilities. The leases cover
facilities for new and used vehicle sales facilities, vehicle service
operations, storage, and general office use. These leases are for periods of
ten years, and are structured to include renewal options for an additional ten
years in our favor. 
 Item 3. Legal Proceedings From time to time, we are involved in litigation relating to claims
arising out of our operations in the normal course of business. As of December
31, 2003, we are not a party to any legal proceedings that, individually or in
the aggregate, are reasonably expected to have a material adverse effect on our
results of operations, financial condition or cash flows. 
 Item 4. Submission of Matters to a Vote of Security-Holders Omitted pursuant to General Instruction I to Form 10-K (the
Instruction). 
 PART II 
 Item 5. Market for Registrants Common Equity and Related Stockholder Matters UAG Mentor Acquisition, LLCs equity securities are not publicly traded.
The Company files reports under the Securities and Exchange Act of 1934, as
amended, because of its status as a non-wholly owned subsidiary guarantor of
UAGs $300.0 million Senior Subordinated Notes due 2012. The Company periodically makes pro rata distributions to its owners in
accordance with the Operating Agreement. The Companys ability to make such
distributions is dependent upon the earnings of our dealership operations and
their ability to distribute earnings and other advances and payments. Also,
pursuant to the franchise agreement to which our dealership is subject, we are
required to maintain a certain amount of working capital, which could limit our
ability to make distributions. Any future determination to make distributions
will be at the discretion of our board of directors and will be dependent upon
our financial condition, results of operations, capital requirements and other
factors the board of directors deems relevant. 
 Item 6. Selected Consolidated Financial Data Omitted pursuant to the Instruction. 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results
of Operations General As an integral part of our dealership operations, we retail new and used
automobiles and light trucks, operate service and parts departments and sell
various third-party 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 third-party
extended service contracts, other third-party 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
and the sale of replacement parts. 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, 4




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allowing us to adjust them over time to reflect economic trends. Floor plan interest expense relates to indebtedness incurred in connection
with the acquisition of new and used vehicle inventories. Other interest
expense represents interest on debt due to UAG. 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 making estimates and
employing judgment. Such judgments influence the reported amounts of the
assets, liabilities, revenues and expenses in the Companys financial
statements. Management, on an ongoing basis, reviews these estimates and
assumptions. Managements determination that modifications in assumptions and
estimates are appropriate may result in a material change in our future results
of operations or financial position as reported in the financial statements. Following is a summary of the accounting policies applied in the
preparation of our financial statements that management believes are most
dependent upon the use of estimates and assumptions. Revenue Recognition Vehicle, Parts and Service Sales We record revenue when vehicles are delivered and title has passed to the
customer, when vehicle service or repair work is performed and when parts are
delivered. Sales promotions that we offer to customers are accounted for as a
reduction to the sales price at the time of sale. Incentives, rebates and
holdbacks offered by manufacturers directly to us are recognized at the time of
sale if they are vehicle specific, or as earned in accordance with the
manufacturer program rules. Finance and Insurance Sales We arrange financing for customers through various financial institutions
and receive a commission from the lender equal to the difference between the
interest rates charged to customers and the interest rates set by the financing
institution. We also receive commissions from the sale of various third-party
insurance products to customers, including credit, life, and health insurance
policies and extended service contracts. These commissions are recorded as
revenue at the time the customer enters into the contract. We are not the
obligor under any of these contracts. In the case of finance contracts, a
customer may prepay or fail to pay their contract, thereby terminating the
contract. Customers may also terminate extended service contracts, which are
fully paid at purchase, and become eligible for refunds of unused premiums. In
these circumstances, a portion of the commissions we receive may be charged
back to us based on the relevant terms of the contracts. The revenue we record
relating to commissions is net of an estimate of the ultimate amount of
chargebacks we will be required to pay. Such estimate of chargeback exposure is
based on our historical chargeback experience arising from similar contracts,
including the impact of refinance and default rates on retail finance contracts
and cancellation rates on extended service contracts and other insurance
products. Goodwill Goodwill represents the excess of cost over the fair value of tangible and
identified intangible assets acquired in connection with business combinations.
Goodwill impairment is assessed annually or when events or circumstances
indicate that impairment may have occured. If our carrying amount is determined
to exceed its fair value, an impairment loss is recognized. New Accounting Pronouncements Statement of Financial Accounting Standards (SFAS) No. 149, Amendment
of SFAS No. 133 on Derivative Instruments and Hedging Activities was issued in
April 2003. SFAS No. 149 clarifies the circumstances under which a contract
with an initial net investment meets the characteristics of a derivative and
clarifies when a derivative contains a financing component that warrants
special reporting in the statement of cash flows. SFAS No. 149 amends certain
other existing pronouncements. SFAS No. 149 is generally effective for
contracts entered into or modified after June 30, 2003 and should be applied
prospectively. We do not expect SFAS No. 149 to have a material impact on our
consolidated financial position, result of operations or cash flows. SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity, was issued in May 2003. SFAS
No. 150 is effective for financial instruments entered into or modified after
May 31, 2003. This statement establishes standards for an issuers
classification and measurement of certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a freestanding financial instrument that is within its scope as a
liability (or an asset in some circumstances). Pursuant to the operating
agreement between UAG and the minority member, UAG is required to repurchase
YAGs interest in Honda of Mentor in July 2008, the payment is expected to be
approximately $2.7 million. 5




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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. In December 2003, the FASB
issued FIN No. 46 (Revised) (FIN 46-R) to address certain FIN 46
implementation issues. FIN 46-R also deferred the effective date of FIN 46 for
entities not considered special-purpose entities to the first reporting period
that ends after March 15, 2004. We do not expect FIN 46 to have a material
impact on our consolidated financial position, result of operations or cash
flows. Results of Operations Year Ended December 31, 2003 Compared to Year Ended December 31, 2002 Revenues Total revenues decreased $0.2 million, or 0.4%, from $53.2 million to
$53.0 million. New vehicle retail revenues decreased $0.9 million, or 2.3%, from $39.9
million to $39.0 million. The decrease in new vehicle retail revenues was due
primarily to, a 5.1% decrease in unit sales versus the prior year offset
somewhat by a $600 increase in the average selling price per new unit retailed. Used vehicle retail revenues increased $0.4 million, or 6.7%, from $6.4
million to $6.8 million. The increase in used vehicle retail revenues was due
primarily to a 12.6% increase in unit sales versus the prior year, offset
somewhat by a $600 decrease in the average selling price per used unit
retailed. Wholesale revenue decreased $0.2 million, or 7.9%, from $2.4
million to $2.2 million. Finance & Insurance Revenues Finance and insurance revenues increased $0.1 million, or 12.5%, from $0.9
million to $1.0 million. This increase was due principally to increased finance
and insurance product sales penetration.. Service & Parts Revenues Service and parts revenues increased $0.4 million, or 10.3%, from $3.7
million to $4.1 million. The increase is due primarily to increased utilization
of our facilities. Gross Profit Gross profit decreased $0.3 million, or 5.0%, from $6.9 million to $6.6
million. The decrease in gross profit is due primarily to a decrease in new
vehicle gross profit per unit retailed, offset somewhat by an increase in used
vehicle gross profit per unit retailed, increased finance and insurance
revenues and service and parts revenues. Gross profit as a percentage of
revenues decreased from 13.0% to 12.4%. The decrease in gross profit as a
percentage of revenues is due primarily to a decrease in new vehicle gross
margin per unit retailed, offset somewhat by increased used vehicle gross
margin per unit retailed, increased penetration of higher margin finance and
insurance product sales and increased higher-margin service and parts revenues
as a percentage of total revenues. Selling, General and Administrative Expenses Selling, general and administrative expenses increased $0.3 million, or
5.3%, from $5.3 million to $5.6 million. Such expenses increased as a
percentage of total revenue from 9.9% to 10.5%, and increased as a percentage
of gross profit from 76.3% to 84.6%. The aggregate increase in selling,
general and administrative expenses is due principally to increased
depreciation as a result of the renovation of our sales and service facilities
and increased personnel related costs. 6




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Interest Expense Floor plan interest expense was consistent with the prior year. Other
interest expense increased $0.4 million, or 192.7%, from $0.2 million to $0.6
million. The increase is due primarily to interest expense recorded during 2003
in connection with UAGs obligation to repurchase YAGs interest in Honda of
Mentor in July 2008. Year Ended December 31, 2002 Compared to Year Ended December 31, 2001 Revenues Total revenues increased $1.6 million, or 3.2%, from $51.6 million to
$53.2 million. New vehicle retail revenues increased $0.9 million, or 2.2%, from $39.0
million to $39.9 million. The increase in new vehicle retail revenues was due
primarily to a $500 increase in the average selling price per new unit
retailed. Used vehicle retail revenues increased $1.2 million, or 22.1%, from $5.2
million to $6.4 million. The increase in used vehicle retail revenues was due
primarily to a 23.3% increase in unit sales versus the prior year. Wholesale
revenue decreased $0.9 million, or 26.2%, from $3.2 million to $2.4 million. Finance & Insurance Revenues Finance and insurance revenues increased $0.3 million, or 37.0% from $0.6
million to $0.9 million. This increase was due principally to the increase in
used retail vehicle volume and increased finance and insurance product sales
penetration. Service & Parts Revenues Service and parts revenues increased $0.3 million, or 7.3%, from $3.4
million to $3.7 million. The increase is due primarily to increased utilization
of our facilities. Gross Profit Gross profit increased $1.0 million, or 17.6%, from $5.9 million to $6.9
million. The increase in gross profit is due to (1) the increase in used unit
sales, (2) the increase in finance and insurance revenues and (3) the increase
in service and parts revenues. Gross profit as a percentage of revenues
increased from 11.4% to 13.0%. The increase in gross profit as a percentage of
revenues is due primarily to an increase in the gross margin per unit on new
vehicles sales and an increase in wholesale gross margin per unit. Selling, General and Administrative Expenses Selling, general and administrative expenses increased $0.5 million, or
10.6%, from $4.8 million to $5.3 million. Such expenses increased as a
percentage of total revenue from 9.2% to 9.9%, and decreased as a percentage of
gross profit from 81.2% to 76.3%. The aggregate increase in selling, general
and administrative expenses is due principally to increased variable expenses
as a result of the increased retail gross profit. 7




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Interest Expense Floor plan interest expense decreased $0.1 million, or 43.1%, from $0.2
million to $0.1 million. The decrease is due primarily to a decrease in our
weighted average interest rate during 2002. Other interest expense was
consistent with the prior year. Liquidity and Capital Resources Our cash requirements are primarily for working capital, the improvement
and expansion of existing facilities and the construction of new facilities.
Historically, these cash requirements have been met through the issuance of
debt instruments, including floor plan notes payable, borrowings from UAG and
cash flow from operations. UAG has agreed to support any required capital needs
of the Company in the event cash flow from operations is not sufficient to fund
working capital requirements and the Company is not able to raise capital
through the issuance of additional debt at commercially reasonable rates. We finance the majority of our new and a portion of our used vehicle
inventory under revolving floor plan financing agreements with DaimlerChrysler
Services North America LLC. 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 our assets.
Interest rates on the floor plan arrangements are variable and increase or
decrease based on movements in LIBOR. Outstanding borrowings under floor plan
arrangements amounted to $5.9 million as of December 31, 2003. UAG is party to a $700.0 million credit agreement which is fully and
unconditionally guaranteed on a joint and several basis by the majority of its
domestic automotive dealership subsidiaries, including the Company. Loans under
such agreement bear interest between U.S. LIBOR plus 2.00% and U.S. LIBOR plus
3.00%. Substantially all of our assets not pledged as security under our floor
plan agreements and our member interests are subject to security interests
granted to lenders under UAGs credit agreement. UAG has issued $300.0 million aggregate principal amount of 9.625% Senior
Subordinated Notes due 2012 (the Notes). The Notes are unsecured senior
subordinated notes and rank behind all of UAGs existing and future senior
debt, including debt under UAGs credit agreements and floor plan indebtedness.
The Notes are fully and unconditionally guaranteed on a joint and several basis
by the majority of UAGs domestic automotive dealership subsidiaries, including
the Company. During 2003, net cash provided by operations amounted to $1.6 million. Net
cash used in investing activities during 2003 totaled $1.5 million, which
relates to capital expenditures incurred in connection with renovating our
sales and service facilities. Net cash used in financing activities during 2003
totaled $.07 million, consisting solely of distributions to members. The
Companys Secretary and Treasurer owns approximately 1.5% of the membership
interests of the Company through an ownership interest in YAG and received
approximately seven thousand dollars in distributions in 2003. We believe that our cash flow provided by operating activities and our
existing capital resources, including the liquidity provided by our floor plan
financing arrangements and the support indicated by UAG, will be sufficient to
fund our current operations and commitments for the next twelve months. To the
extent we pursue acquisitions or initiate incremental facility construction or
renovation projects, we may need to raise additional capital. There is no
assurance that we would be able to access capital or increase our borrowing
capabilities on terms acceptable to us, if at all. 8




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Contractual Payment Obligations The table below sets forth our best estimates as to the amounts and timing of future payments for our most significant contractual obligations as of December 31,
2003. The information in the table reflects future unconditional payments and is based upon, among other things, the terms of any relevant agreements. Future events
could cause actual payments to differ significantly from these amounts. See - Forward-Looking Statements. Payments due in(in millions)
    
    Total
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    ThereafterFloorplan Notes Payable (A)
    
    $
    5.9
    
    
    $
    5.9
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Long-Term Debt (B)
    
    
    3.8
    
    
    
    
    
    
    
    3.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating Lease Commitments
    
    
    2.8
    
    
    
    0.4
    
    
    
    0.4
    
    
    
    0.4
    
    
    
    0.4
    
    
    
    0.4
    
    
    
    0.8Repurchase Obligation
    
    
    2.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.7
    
    
    
    $
    15.2
    
    
    $
    6.3
    
    
    $
    4.2
    
    
    $
    0.4
    
    
    $
    0.4
    
    
    $
    3.1
    
    
    $
    0.8
  (B) Due to UAG We expect that the amounts above will be funded through cash provided by
operations. In the case of balloon payments at the end of the term of our debt
to UAG; UAG expects to be able to refinance such instruments as they expire in
the normal course of business. Commitment and Contingencies From time to time, we are involved in litigation relating to claims
arising out of operations in the normal course of business. As of December 31,
2003, we are not a party to any legal proceedings that, individually or in the
aggregate, are reasonably expected to have a material adverse effect on our
results of operations, financial condition or cash flows. 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. 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 service and parts
business at our dealership experiences relatively modest seasonal fluctuations. Effects of Inflation We believe that the relatively moderate rates of inflation over the last
few years have not had a significant impact on revenues or profitability. We do
not expect inflation to have any near-term material effects on the sale of our
products and services. However, there can be no assurance that there will be no
such effect in the future. We finance substantially all of our inventory through various revolving
floor plan arrangements with interest rates that vary based on 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. 9




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##### Table of Contents



Forward Looking Statements This annual report on Form 10-K 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 respond to economic cycles;
    
    trends in the automotive retail industry and in the general economy;
    
    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 our 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 brand we sell, adverse conditions affecting Honda may negatively
impact our revenues and profitability;
    
    we may not be able to satisfy our capital requirements for our dealership renovation projects or financing the purchase of
our inventory;
    
    our failure to meet Hondas consumer satisfaction requirements may adversely affect our ability to acquire new
dealerships, our ability to obtain incentive payments from Honda and our profitability;
    
    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 growth 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 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 dealership is subject to substantial regulation which may adversely affect our profitability;
    
    if state dealer laws in the United States are repealed or weakened, our dealership may be more susceptible
to termination, non-renewal or renegotiation of its franchise agreement;
    
    our automotive dealership is subject to foreign, federal, state and local environmental regulations that
may result in claims and liabilities;
    
    our operations may be affected by severe weather or other periodic business interruptions;
    
    the substantial indebtedness of UAG may limit our ability to obtain financing for capital expenditures and;
    
    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. 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. 10




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##### Table of Contents



Item 7A. Quantitative and Qualitative Disclosures about Market Risk Interest Rates.We are exposed to market risk from changes in the interest
rates on our floor plan financing arrangement and our debt to UAG. Outstanding
balances under floor plan financing arrangements bear interest at a variable
rate based on a margin over LIBOR. Based on the average aggregate outstanding
amounts under floor plan financing arrangements during the year ended December
31, 2003, a 100 basis point change in interest rates would result in an
approximate $0.1 million change to our annual floor plan interest expense.
Based on the amount outstanding as of December 31, 2003 a 100 basis point
change in the interest rate on the debt to UAG would result in an approximate
$0.04 million change to our annual interest expense. In common with other automotive retailers, we purchase our new vehicle and
parts inventories from a foreign manufacturer. Although we purchase our
inventories in U.S. Dollars, 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 8. Financial Statements and Supplementary Data See the financial statements listed in the accompanying Index to Financial
Statements for the information required by this item. 
 Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure None. 
 Item 9A. Disclosure Controls and Procedures We maintain disclosure controls and procedures designed to ensure that
both non-financial and financial information required to be disclosed in our
periodic reports is recorded, processed, summarized and reported in a timely
fashion. Based on the fourth quarter evaluation, the principal executive
officer and principal financial officer concluded that our disclosure controls
and procedures are effective. In addition, we maintain internal controls
designed to provide the Company with the information it requires for accounting
and financial reporting purposes. There were no changes in our internal
controls over financial reporting that occurred during our fourth quarter of
2003 that materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting. 
 PART III 
 Item 10. Directors and Executive Officers of the Registrant Omitted pursuant to the Instruction. 
 Item 11. Executive Compensation Omitted pursuant to the Instruction. 
 Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters Omitted pursuant to the Instruction. 
 Item 13. Certain Relationships and Related Transactions Omitted pursuant to the Instruction. 
 Item 14. Principal Accountant Fees and Services Deloitte & Touche LLP will audit our financial statements for 2004 and
perform other services. We paid Deloitte & Touche the following fees for the
enumerated services in 2003, all of which services were approved by the audit
committee of UAG (the Audit Committee). 11




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##### Table of Contents



Audit Fees.The aggregate fees for professional services rendered by
Deloitte & Touche in connection with their audit of our financial statements,
reviews of the condensed financial statements included in our quarterly reports
on Form 10-Q and other services normally provided in connection with statutory
or regulatory engagements for 2003 and 2002, were approximately $35,000 in each
year. There were no audit-related, tax or other fees for services rendered by
Deloitte & Touche during 2003 and 2002. The Audit Committee has considered the nature of the above-listed services
provided by Deloitte & Touche LLP and determined that they are compatible with
their provision of independent audit services. The Audit Committee has
discussed these services with Deloitte & Touche and management to determine
that they are permitted under the Code of Professional Conduct of the American
Institute of Certified Public Accountants and the auditor independence
requirements of the Securities and Exchange Commission. Pre-approval Policy.The Audit Committee has adopted a policy requiring
pre-approval of audit and non-audit services provided by the independent
auditors. The primary purpose of this policy is to ensure the engagement of
public accountants to only provide audit and non-audit services that are
compatible with maintaining independence. The Audit Committee is required to
pre-approve all services performed for us by our independent auditors and the
related fees for such services. The Audit Committee must also approve fees
incurred for pre-approved services that are in excess of the approved amount
prior to payment, except as provided below. The Companys independent auditors
are prohibited from performing any service prohibited by applicable law. Pre-approval of audit and non-audit services may be given at any time up
to a year before commencement of the specified service. Engagement of the
independent auditors and their fees for the annual audit must be approved by
the entire Audit Committee. The Chairman of the Audit Committee may
independently approve services if the estimated fee for the service is less
than 10% of the total estimated audit fee, or if the excess fees for
pre-approved services are less than 20% of the approved fees for that service;
provided, however, that no such pre-approval may be granted with respect to any
service prohibited by applicable law or that otherwise appears reasonably
likely to compromise the independent auditors independence. Any pre-approval
granted pursuant to this delegation of authority will be reviewed with the
Audit Committee at its next regularly scheduled meeting. Non-audit services
for which the estimated fee is greater than 10% of the audit fee must be
approved by the entire Committee before commencement of the service. 12




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PART IV 
 Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Financial Statements The financial statements listed in the accompanying Index to Financial
Statements are filed as part of this Annual Report on Form 10-K. (b) Reports on Form 8-K  None. (c) Exhibits 3.1
    
    Certificate of Formation dated August 22, 2000 (incorporated by
reference to the quarterly report on Form 10-Q for the quarter ended
September 30, 2003).3.2
    
    Operating agreement dated July 1, 2003 between United Auto Group, Inc.
and YAG Mentor Investors, LLC (incorporated by reference to the
quarterly report on Form 10-Q for the quarter ended September 30,
2003).10.1
    
    Form of Honda Automobile Dealer Agreement with Honda Automobile
Division, American Honda Motor Co., Inc., including Standard
Provisions (incorporated by reference to the quarterly report on Form
10-Q for the quarter ended September 30, 2003).10.2
    
    Indenture dated as of March 18, 2002 between United Auto Group, Inc.,
the guarantors named therein and Bank One Trust Company, N.A., as
Trustee (incorporated by reference to the quarterly report on Form
10-Q for the quarter ended September 30, 2003).10.3
    
    Form of 9 5/8% Senior Subordinated Note Due 2012 of United Auto Group,
Inc. (including form of Guarantee of UAG Mentor Acquisition, LLC)
(incorporated by reference to the quarterly report on Form 10-Q for
the quarter ended September 30, 2003).31.1
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 (d) Schedules  None. 13




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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, in New York, New
York on March 30, 2004. UAG MENTOR ACQUISITION, LLCBy:       /s/ROGER S. PENSKE, JR.Chairman of the Board
 Signature
    
    Title
    
    Date/s/ ROGER S. PENSKE, JR.
    
    Chairman of the Board and Director
    
    March 30, 2004(Principal Executive Officer)Roger S. Penske, Jr./s/ THOMAS E. SCHMITT
    
    Secretary and Treasurer
    
    March 30, 2004(Principal Accounting Officer)Thomas E. Schmitt/s/ JAMES R. DAVIDSON
    
    Director
    
    March 30, 2004James R. Davidson/s/ ROBERT H. KURNICK, JR.
    
    Director
    
    March 30, 2004Robert H. Kurnick, Jr.Director
    
    March 30, 2004Alan V. Young
 14




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INDEX TO FINANCIAL STATEMENTS UAG MENTOR ACQUISITION, LLC
As of December 31, 2003 and 2002 and for the years ended
December 31, 2003, 2002 and 2001 Independent Auditors Report
    
    
    16Balance Sheets
    
    
    17Statements of Income
    
    
    18Statement of Members Capital
    
    
    19Statements of Cash Flows
    
    
    20Notes to Financial Statements
    
    
    21
 15




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INDEPENDENT AUDITORS REPORT To the Members
UAG Mentor Acquisition, LLC We have audited the accompanying balance sheets of UAG Mentor Acquisition,
LLC, Inc. (the Company), as of December 31, 2003 and 2002 and the related
statements of operations, members capital and cash flows for each of the three
years in the period ended December 31, 2003. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company at December 31,
2003 and 2002, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2003 in conformity with
accounting principles generally accepted in the United States of America. As discussed in Note 1 to the financial statements, the Company changed
its method of accounting for cash consideration received from a vendor in 2003
to conform to Emerging Issues Task Force Issue No. 02-16 and for goodwill and
other intangible assets in 2002 to conform to Statement of Financial Accounting
Standards No. 142. /s/ Deloitte & Touche LLP New York, New York
March 29, 2004 16




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UAG MENTOR ACQUISITION, LLC 
 BALANCE SHEETS
(In thousands) December 31,
    
    December 31,2003
    
    2002ASSETSCash and cash equivalents
    
    $
    85
    
    
    $
    Accounts receivable, net
    
    
    1,538
    
    
    
    2,291Inventories
    
    
    6,320
    
    
    
    4,038Other current assets
    
    
    3
    
    
    
    Total current assets
    
    
    7,946
    
    
    
    6329Property and equipment, net
    
    
    1,926
    
    
    
    590Goodwill
    
    
    3,722
    
    
    
    3,722Total Assets
    
    $
    13,594
    
    
    $
    10,641LIABILITIES AND MEMBERS CAPITALFloor plan notes payable
    
    $
    5,926
    
    
    $
    3,160Accounts payable
    
    
    211
    
    
    
    394Accrued expenses
    
    
    520
    
    
    
    788Total current liabilities
    
    
    6,657
    
    
    
    4,342Long-term debt
    
    
    3,842
    
    
    
    3,842Other long-term liabilities
    
    
    2,570
    
    
    
    331Total Liabilities
    
    
    13,069
    
    
    
    8,515Commitments and contingentliabilitiesMembers Capital
    
    
    525
    
    
    
    2,126Total Liabilities and
Members Capital
    
    $
    13,594
    
    
    $
    10,641
 See Notes to Financial Statements. 17




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UAG MENTOR ACQUISITION, LLC 
 STATEMENTS OF INCOME
(In thousands) Year Ended
    
    Year Ended
    
    Year EndedDecember 31,
    
    December 31,
    
    December 31,2003
    
    2002
    
    2001New vehicle sales
    
    $
    38,956
    
    
    $
    39,874
    
    
    $
    39,013Used vehicle sales
    
    
    6,795
    
    
    
    6,371
    
    
    
    5,219Finance and insurance
    
    
    981
    
    
    
    872
    
    
    
    637Service and parts
    
    
    4,063
    
    
    
    3,685
    
    
    
    3,435Wholesale vehicle sales
    
    
    2,208
    
    
    
    2,398
    
    
    
    3,249Total revenues
    
    
    53,003
    
    
    
    53,200
    
    
    
    51,553Cost of sales
    
    
    46,441
    
    
    
    46,293
    
    
    
    45,681Gross profit
    
    
    6,562
    
    
    
    6,907
    
    
    
    5,872Selling, general and
administrative expenses
    
    
    5,552
    
    
    
    5,273
    
    
    
    4,767Operating income
    
    
    1,010
    
    
    
    1,634
    
    
    
    1,105Floor plan interest expense
    
    
    (131
    )
    
    
    (99
    )
    
    
    (174
    )Other interest expense
    
    
    (563
    )
    
    
    (192
    )
    
    
    (192
    )Income before cumulative
effect of accounting change
    
    
    316
    
    
    
    1,343
    
    
    
    739Cumulative effect of
accounting change
    
    
    (44
    )
    
    
    
    
    
    
    Net income
    
    $
    272
    
    
    $
    1,343
    
    
    $
    739
 See Notes to Financial Statements. 18




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##### Table of Contents



UAG MENTOR ACQUISITION, LLC 
 STATEMENT OF MEMBERS CAPITAL
(In thousands, except share data) Members'CapitalBalance, December 31, 2000
    
    
    1,870Distributions
    
    
    (752
    )Net income
    
    
    739Balance, December 31, 2001
    
    
    1,857Distributions
    
    
    (1,074
    )Net income
    
    
    1,343Balance, December 31, 2002
    
    
    2,126Repurchase commitment
    
    
    (1,808
    )Distributions
    
    
    (65
    )Net income
    
    
    272Balance, December 31, 2003
    
    $
    525
 See Notes to Financial
Statements. 19




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UAG MENTOR ACQUISITION, LLC 
 STATEMENTS OF CASH FLOWS
(In thousands) Year Ended
    
    Year Ended
    
    Year EndedDecember 31,
    
    December 31,
    
    December 31,2003
    
    2002
    
    2001Operating Activities:Net income
    
    $
    272
    
    
    $
    1,343
    
    
    $
    739Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    155
    
    
    
    81
    
    
    
    152Changes in operating assets and liabilities:Accounts receivable
    
    
    753
    
    
    
    (880
    )
    
    
    31Inventories
    
    
    (2,282
    )
    
    
    (243
    )
    
    
    341Floor plan notes payable
    
    
    2,766
    
    
    
    577
    
    
    
    (866
    )Accounts payable and accrued expenses
    
    
    (451
    )
    
    
    442
    
    
    
    541Other
    
    
    428
    
    
    
    92
    
    
    
    73Net cash provided by operating activities
    
    
    1,641
    
    
    
    1,412
    
    
    
    1,011Investing Activities:Purchase of equipment and improvements
    
    
    (1,491
    )
    
    
    (338
    )
    
    
    (266
    )Financing Activities:Distributions
    
    
    (65
    )
    
    
    (1,074
    )
    
    
    (752
    )Net change in cash and cash equivalents
    
    
    85
    
    
    
    
    
    
    
    (7
    )Cash and cash equivalents, beginning of period
    
    
    
    
    
    
    
    
    
    
    7Cash and cash equivalents, end of period
    
    $
    85
    
    
    $
    
    
    
    $
    
 See Notes to Financial
Statements. 20




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UAG MENTOR ACQUISITION, LLC 
 NOTES TO FINANCIAL STATEMENTS
(Dollars in Thousands)  1.
    
    Organization and Summary of Significant Accounting Policies UAG Mentor Acquisition, LLC (Honda of Mentor or the Company), is
engaged in the sale of new and used motor vehicles and related products and
services, including vehicle service and parts, third-party finance and
insurance products and other aftermarket products. The Company operates a
dealership under a franchise agreement with the Honda Automobile Division of
American Honda Motor Co., Inc. (Honda). In accordance with the franchise
agreement, the dealership is subject to certain rights and restrictions typical
of the industry. The ability of the manufacturer to influence the operations of
the dealership, or the loss of its franchise agreement, could have a negative
impact on the Companys operating results. Honda of Mentor, a Delaware limited liability company, is a majority-owned
subsidiary of United Auto Group, Inc. (UAG). The remaining 30% interest in
the Company is held by YAG Mentor Investors, LLC (YAG). The Company is
operated pursuant to an operating agreement between UAG and YAG. Basis of Presentation The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates. The accounts requiring the use of significant estimates
include accounts receivable, inventories, intangible assets and certain
reserves. Certain prior year amounts have been reclassified to conform to the
current year presentation. Accounting Change In March 2003, the Financial Accounting Standards Boards Emerging Issues
Task Force finalized Issue No. 02-16, Accounting by a Customer (Including a
Reseller) for Cash Consideration Received from a Vendor (EITF 02-16), which
addresses the accounting treatment for vendor allowances. EITF 02-16 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 such allowances should be used to offset such costs.
Historically, the Company recorded non-refundable floor plan credits and
certain other non-refundable credits when received. As a result of EITF 02-16,
these credits are now presumed to be reductions in the cost of purchased
inventory and are deferred until the related vehicle is sold. In accordance
with EITF 02-16, the Company recorded a cumulative effect of accounting change
as of January 1, 2003 (the date of adoption) that decreased net income by $.04
million. Cash and Cash Equivalents Cash and cash equivalents include all highly-liquid investments that have
an original maturity of three months or less at the date of purchase. Fair Value of Financial Instruments Financial instruments consist of cash and cash equivalents, accounts
receivable, accounts payable and debt, including floor plan notes payable. The
carrying amount of all significant financial instruments approximates fair
value due either to length of maturity or the existence of variable interest
rates that approximate prevailing market rates. Contracts in Transit Contracts in transit represent customer finance contracts evidencing loan
agreements or lease agreements between the Company, as creditor, and the
customer, as borrower, to acquire or lease a vehicle whereby a third-party
finance source has given the Company initial, non-binding approval to assume
the Companys position as creditor. Funding and final approval from the 21




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finance source is provided upon the finance sources review of the loan or
lease agreement and related documentation executed by the customer at the
dealership. These finance contracts are typically funded within ten days of the
initial approval of the finance transaction by the third-party finance source.
The finance source is not contractually obligated to make the loan or lease to
the customer until it gives its final approval and funds the transaction. Until
such final approval is given, the contracts in transit represent amounts due
from the customer to the Company. Contracts in transit, included in accounts
receivable, net in the Companys balance sheets, amounted to $1,087 and $1,486
as of December 31, 2003 and 2002, respectively. Inventory Valuation Inventories are stated at the lower of cost or market. Cost for new and
used vehicle inventories is determined using the specific identification
method. Cost for parts, accessories and other inventories is based on factory
list prices. Property and Equipment Property and equipment are recorded at cost and depreciated over estimated
useful lives, primarily using the straight-line method. Useful lives for
purposes of computing depreciation for assets, other than equipment under
capital lease and leasehold improvements, are between 5 and 10 years. Leasehold
improvements and equipment under capital lease are depreciated over the shorter
of the term of the lease or the estimated useful life of the asset. Expenditures relating to recurring repair and maintenance are expensed as
incurred. Expenditures that increase the useful life or substantially increase
the serviceability of an existing asset are capitalized. When equipment is sold
or otherwise disposed of, the cost and related accumulated depreciation are
removed from the accounts, and any resulting gain or loss is reflected in
income. Income Taxes Honda of Mentor is not an income tax paying entity. Income taxes are the
responsibility of Honda of Mentors members. Goodwill Goodwill represents the excess of cost over the fair value of tangible and
identified intangible assets acquired in connection with business combinations.
Goodwill impairment is assessed annually or when events or circumstances
indicate that impairment may have occurred. If the carrying amount is
determined to exceed its fair value, an impairment loss is recognized. Prior
to January 1, 2002, goodwill was amortized on a straight line basis over
periods not exceeding 40 years. Amortization expense for 2001 was $96. Impairment of Long-Lived Assets The carrying value of long-lived assets is reviewed if the facts and
circumstances, such as significant declines in revenues, earnings or cash flows
or material adverse changes in the business climate, indicate that they may be
impaired. The Company performs its review by comparing the carrying amounts of
long-lived assets to the estimated undiscounted cash flows relating to such
assets. If any impairment in the value of the long-lived assets is indicated,
the carrying value of the long-lived assets is adjusted to reflect such
impairment based on the fair value of the impaired assets or an estimate of
fair value based on discounted cash flows. Revenue Recognition Vehicle, Parts and Service Sales The Company records revenue when vehicles are delivered and title has
passed to the customer, when vehicle service or repair work is performed and
when parts are delivered. Sales promotions that are offered to customers are
accounted for as a reduction to the sales price at the time of sale.
Incentives, rebates and holdbacks offered by manufacturers directly to the
Company are recognized at the time of sale if they are vehicle specific, or as
earned in accordance with the manufacturer program rules. Finance and Insurance Sales 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 and the interest rates set by
the financing institution. The Company also receives commissions from the sale
of various third-party insurance products to customers, including credit, life,
and health insurance policies and extended service contracts. These commissions
are recorded as revenue at the time the customer enters into the contract. 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 their contract, thereby
terminating the contract. Customers may also terminate extended service
contracts, which are fully paid at purchase, and become eligible for refunds of
unused premiums. In these circumstances, a 22




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portion of the commissions the Company receives may be charged back based on
the relevant terms of the contracts. The revenue the Company records relating
to commissions is net of an estimate of the ultimate amount of chargebacks the
Company will be required to pay. Such estimate of chargeback experience 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 service contracts and other insurance
products. Defined Contribution Plan UAG sponsors a defined contribution plan covering a significant majority
of the Companys employees. Company contributions to the plan are based on the
level of compensation and contribution by plan participants. The Company
incurred expense of $24, $19, and $5 relating to such plan during the years
ended December 31, 2003, 2002 and 2001, respectively. Advertising Advertising costs are expensed as incurred or when such advertising takes
place. The Company incurred advertising costs of $835, $811 and $577 during
the years ended December 31, 2003, 2002, and 2001, respectively. New Accounting Pronouncements Statement of Financial Accounting Standards (SFAS) No. 149, Amendment
of SFAS No. 133 on Derivative Instruments and Hedging Activities, was issued
in April 2003. SFAS No. 149 clarifies the circumstances under which a contract
with an initial net investment meets the characteristics of a derivative and
clarifies when a derivative contains a financing component that warrants
special reporting in the statement of cash flows. SFAS No. 149 amends certain
other existing pronouncements. SFAS No. 149 is generally effective for
contracts entered into or modified after June 30, 2003, and should be applied
prospectively. The Company does not expect SFAS No. 149 to have a material
impact on its consolidated financial position, result of operations or cash
flows. SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity, was issued in May 2003. SFAS
No. 150 is effective for financial instruments entered into or modified after
May 31, 2003. This statement establishes standards for an issuers
classification and measurement of certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a freestanding financial instrument that is within its scope as a
liability (or an asset in some circumstances). Pursuant to the operating
agreement between UAG and the minority member, UAG is required to repurchase
YAGs interest in Honda of Mentor in July 2008, the payment is expected to be
approximately $2.7 million.  The present value of such
commitment is included in other long-term liabilities in the
accompanying balance sheet. 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. In December 2003, the FASB
issued FIN No. 46 (Revised) (FIN 46-R) to address certain FIN 46
implementation issues. FIN 46-R also deferred the effective date of FIN 46 for
entities not considered special-purpose entities to the first reporting period
that ends after March 15, 2004. The Company does not expect FIN 46 to have a
material impact on its consolidated financial position, result of operations or
cash flows. 23




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2. Inventories Inventories consisted of the following: December 31,2003
    
    2002New vehicles
    
    $
    5,309
    
    
    $
    3,236Used vehicles
    
    
    801
    
    
    
    571Parts, accessories and other
    
    
    210
    
    
    
    231Total inventories
    
    $
    6,320
    
    
    $
    4,038
 3. Property and Equipment Property and equipment consisted of the following: December 31,2003
    
    2002Leasehold improvements
    
    $
    1,637
    
    
    $
    399Furniture, fixtures and equipment
    
    
    553
    
    
    
    321Total
    
    
    2,190
    
    
    
    720Less: Accumulated depreciation and amortization
    
    
    264
    
    
    
    130Property and equipment, net
    
    $
    1,926
    
    
    $
    590
 Depreciation and amortization expense for the years ended December 31,
2003, 2002 and 2001 was $155, $81, and $56, respectively. 4. Floor Plan Notes Payable The Company currently finances the majority of its new and a portion of
its used vehicle inventory under revolving floor plan financing arrangements
with DaimlerChrysler Services North America LLC. Such floor plan financing
agreements are guaranteed by UAG. Prior to the Acquisition, the Company
financed the majority of its new and a portion of its used vehicle inventory
under revolving floor plan financing agreements with a bank. Under the terms of
its current floor plan financing agreements, the Company makes monthly interest
payments on the amount financed, but is not required to make loan principal
repayments prior to the sale of new and used vehicles. Outstanding borrowings
under floor plan financing arrangements as of December 31, 2003 and 2002 were
$5,926 and $3,160, respectively. The floor plan agreements grant a security
interest in substantially all of the assets of the Companys dealerships, and
require repayment after a vehicles sale. Interest rates on the floor plan
agreements are variable and increase or decrease based on movements in LIBOR. 5. Operating Lease Obligations The Company leases its dealership facilities under non-cancelable
operating lease agreements with expiration dates through 2010. Minimum future
rental payments required under non-cancelable operating leases in effect as of
December 31, 2003 are as follows: 2004
    
    $
    4162005
    
    
    4162006
    
    
    4162007
    
    
    4162008
    
    
    4162009 and thereafter
    
    
    763$
    2,843
 Rent expense was $416 for each of the years ended December 31, 2003, 2002,
and 2001. 6. Long-Term Debt Long-term debt represents the debt incurred by UAG in connection with its
acquisition of the Company. The interest expense included in these financial
statements reflects UAGs weighted average interest rate of 3.23% and 3.79% on
this indebtedness during 2003 and 2002, respectively. UAG borrowed these funds
under a credit agreement with DaimlerChrysler 24




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Services North America LLC and Toyota Motor Credit Corporation that provides
UAG with revolving loans to be used for acquisitions, working capital, the
repurchase of common stock and general corporate purposes. UAGs credit
agreement is fully and unconditionally guaranteed on a joint and several basis
by the majority of its domestic automotive dealership subsidiaries, including
the Company. Substantially all of the Companys assets not pledged as security
under the floor plan arrangements and the Companys member interests are
subject to security interests granted to lenders under UAGs credit agreement. UAG has issued $300,000 aggregate principal amount of 9.625% Senior
Subordinated Notes due 2012 (the Notes). The Notes are unsecured senior
subordinated notes and rank behind all of UAGs existing and future senior
debt, including debt under UAGs credit agreements and floor plan indebtedness.
The Notes are fully and unconditionally guaranteed on a joint and several basis
by the majority of UAGs domestic automotive dealership subsidiaries, including
the Company. 7. Related Party Transactions From time to time, the Company pays and/or receives fees from UAG and its
affiliates for services rendered in the normal course of business. These
transactions reflect the providers cost or an amount mutually agreed upon by
both parties. It is the Companys belief that the payments relating to these
transactions are on terms at least as favorable as those which could be
obtained from an unrelated third party. In addition, management fees of $90,
$90 and $54 were charged to the Company by UAG or its affiliates for the years
ended December 31, 2003, 2002 and 2001, respectively. The Companys Secretary and Treasurer owns approximately 1.5% of the
membership interests of the Company through an ownership interest in YAG and
received approximately $7 in distributions in 2003. 8. Commitments and Contingencies From time to time, the Company is involved in litigation relating to
claims arising out of operations in the normal course of business. As of
December 31, 2003, the Company is not a party to any legal proceedings that,
individually or in the aggregate, are reasonably expected to have a material
adverse effect on its results of operations, financial condition or cash flows. 25




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EXHIBIT INDEX ExhibitNo.
    
    Description3.1
    
    Certificate of Formation dated August 22, 2000 (incorporated by
reference to the quarterly report on Form 10-Q for the quarter ended
September 30, 2003).3.2
    
    Operating agreement dated July 1, 2003 between United Auto Group, Inc.
and YAG Mentor Investors, LLC (incorporated by reference to the
quarterly report on Form 10-Q for the quarter ended September 30,
2003).10.1
    
    Form of Honda Automobile Dealer Agreement with Honda Automobile
Division, American Honda Motor Co., Inc., including Standard
Provisions (incorporated by reference to the quarterly report on Form
10-Q for the quarter ended September 30, 2003).10.2
    
    Indenture dated as of March 18, 2002 between United Auto Group, Inc.,
the guarantors named therein and Bank One Trust Company, N.A., as
Trustee (incorporated by reference to the quarterly report on Form
10-Q for the quarter ended September 30, 2003).10.3
    
    Form of 9 5/8% Senior Subordinated Note Due 2012 of United Auto Group,
Inc. (including form of Guarantee of UAG Mentor Acquisition, LLC)
(incorporated by reference to the quarterly report on Form 10-Q for
the quarter ended September 30, 2003).31.1
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002