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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

For the fiscal year ended December 31, 2000

OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

For the transition period from            to            .

Commission file number 1-12297

UNITED AUTO GROUP, INC.

Delaware

13400 Outer Drive West,

22-3086739

48239

Registrant’s telephone number, including area code (313) 592-7311

Securities registered pursuant to Section 12(b) of the Act:

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    No

     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.  

     The aggregate market value of the voting common stock held by non-affiliates as of March 23, 2001 was $151,886,521.

     As of March 23, 2001, there were 23,317,192 shares of voting common stock outstanding.

     Portions of the registrant’s proxy statement to be filed in connection with the annual meeting of stockholders, presently scheduled to be held on May 16, 2001, are incorporated by reference in Part III of this Form 10-K.

TABLE OF CONTENTS

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PART I

ITEM 1.  BUSINESS

Overview

      United Auto Group, Inc. (“UAG” or the “Company”) is a leading operator of franchised automobile and light truck dealerships and related businesses. At the end of 2000, the Company operated franchises located in 17 states and Puerto Rico. In addition, the Company has an investment in three retail automotive dealerships in Brazil. As an integral part of its dealership operations, UAG also sells used vehicles. All of UAG’s franchised dealerships include integrated service and parts operations, which are an important source of recurring revenues. In addition, UAG dealerships market a complete line of aftermarket automotive products and services.

      UAG was incorporated in the State of Delaware in December 1990 and commenced dealership operations in October 1992. Unless the context otherwise requires, references herein to “Common Stock” are to the Company’s Voting Common Stock, par value $0.0001 per share.

      The Company was formed to capitalize on consolidation opportunities within the highly fragmented automotive retailing industry by acquiring, consolidating and operating large automobile retailers and related businesses. As capital requirements to operate dealerships continue to increase and many owners who were granted franchises in the 1950s and 1960s approach retirement age, many individual dealers are seeking exit opportunities. These conditions may present attractive acquisition opportunities for larger automobile retailers such as UAG.

      The following table sets forth information with respect to dealerships acquired by the Company during 2000:

      UAG purchases substantially all of its new car inventories directly from manufacturers. Each of the Company’s dealerships operates pursuant to a franchise agreement between the applicable manufacturer and the subsidiary of the Company that operates such dealership. In accordance with the individual franchise agreements, each dealership is subject to certain rights and restrictions typical of the industry. The ability of manufacturers to influence the operations of a dealership, or the loss of a franchise agreement, could have a negative impact on the Company’s operating results. Manufacturers allocate inventory based on the size and location of dealerships, but actual shipments result from negotiations with individual dealers. The Company

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Business Strategy

      UAG seeks to be a leader in the automotive retailing industry and to increase stockholder value through a business strategy that includes the following principal elements:

Acquire and Integrate Profitable Dealership Operations

      UAG seeks to selectively acquire dealerships with significant earnings growth potential. The Company principally targets dealerships or dealership groups with established records of profitability and with experienced management willing to remain in place. The Company focuses on opportunities in geographic markets with above-average projected population and job growth and attempts to create regional hubs of dealerships that will be able to share administrative and other functions to reduce costs.

      The Company’s acquisition program has been tailored to address dealers’ desire to retain a management role in their businesses while achieving personal liquidity. Owners and management teams of acquired dealerships typically continue as dealership managers. The Company believes it provides dealership managers additional management tools and that its economies of scale, marketing expertise and corporate resources act as catalysts for continual dealership growth. In addition, the dealer may retain an equity interest in the business through the ownership of capital stock and/or stock options of UAG.

Grow Higher-Margin Operating Businesses

      UAG is focused on increasing higher-margin businesses such as the retail sale of used vehicles, aftermarket products, service, parts and collision repair services.

      Used Vehicles. Used vehicle sales by franchised dealers, with average prices approximating 60% of new vehicle prices, typically generate higher gross margins as a percentage of sales value than new car sales because of limited comparability among them and the somewhat subjective nature of their valuation. Consumer acceptance of used vehicle purchasing has grown, due principally to (i) an increase in the availability of late-model, low-mileage used vehicles due in part to the large supply of vehicles coming off short-term leases, (ii) improvements in the quality of motor vehicles and (iii) increases in the prices of new vehicles.

      UAG believes that through its new vehicle franchises, it enjoys significant advantages in sourcing used vehicles over both independent and chain used-vehicle companies. Specifically, the Company has access to (i) a steady supply of used vehicles accepted as trade-ins for new vehicle purchases, (ii) off-lease vehicles that were originally leased through the new vehicle franchise and (iii) used vehicle auctions open only to new vehicle dealers. In addition, only new vehicle franchises are able to sell used vehicles certified by the manufacturer under programs through which the manufacturer supports specific high-quality used cars with extended warranties and attractive financing options.

      Aftermarket Products. Each sale of a new or used vehicle provides the opportunity for the Company to sell aftermarket products. Aftermarket products include finance, warranty, extended service and maintenance contracts, as well as accessories such as radios, cellular phones, alarms, custom wheels, paint sealants and fabric protectors. In addition, the Company receives fees for placing financing and lease contracts.

      Service and Parts. Each of UAG’s new vehicle dealerships offers a fully integrated service and parts department. The service and parts business provides an important recurring revenue stream to the Company’s dealerships, which may help to mitigate the effects of downturns in the automobile sales cycle. Unlike independent service shops or used car dealerships with service operations, UAG is qualified to perform work covered by manufacturer warranties. Since warranty service work is paid for by the manufacturer, consumers are motivated to service their vehicles at a dealership for the warranty period. In recent years, manufacturers have generally lengthened standard warranty coverage on new cars and introduced warranty coverage on used

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Collision repair centers

      The Company currently owns 21 collision repair centers, each of which is operated as an integral part of a new vehicle franchise. In light of the recurring stream of referral work from the Company’s new vehicle franchises and the higher margins associated with repair center revenues, the Company has embarked on an effort to increase such revenues. As such, the Company is currently exploring the possibility of constructing several new regional repair centers to act as central collision repair centers in geographic hubs. If constructed, the Company believes that these centers may increase the recurring stream of non-vehicle sales, which may help to mitigate the effects on the Company of downturns in the automobile sales cycles.

Implement “Best Practices‘

      The Company’s senior executives and dealership managers meet periodically to review the operating performance of individual dealerships, as well as to examine important industry trends and, where appropriate, recommend specific operating improvements. This facilitates implementation of successful strategies throughout the organization so that each dealership can benefit from the successes of the others, as well as from the knowledge and experience of UAG’s senior management. Dealership management also attends various industry sponsored leadership and management seminars and receives continuing education in products, marketing strategies and management information systems. The Company shares training techniques across its dealership base and has made increasing revenues from the sale of used cars, aftermarket products, service, parts and collision repair centers a Company-wide focus.

Emphasize Customer Service

      Central to UAG’s overall philosophy is customer-oriented service designed to meet the needs of an increasingly sophisticated and demanding automotive consumer through “one-stop” shopping convenience, competitive pricing and a sales staff that is knowledgeable about product offerings and responsive to a customer’s particular needs. The Company’s goal is to establish lasting relationships with its customers, which enhance its reputation in the community and create the opportunity for significant repeat and referral business.

      The quality of customer service provided by dealerships’ sales and service departments is measured by customer satisfaction index (“CSI”) scores, which are derived from data accumulated by manufacturers through individual customer surveys. UAG relies on this data to track the performance of dealership operations and uses it as a factor in determining the compensation of general managers and sales and service personnel in its dealerships. The Company’s most recent CSI scores indicate that a majority of its dealerships’ CSI scores were at or above the average CSI scores for the applicable regions.

Competition

Automobile Dealerships

      The automotive retailing industry is extremely competitive. In large metropolitan areas, consumers have a number of choices in deciding where to purchase a new or used vehicle and where to have such a vehicle serviced.

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      For new vehicle sales, the Company competes with other franchised dealers in each of its marketing areas. The Company does not have any cost advantage in purchasing new vehicles from the manufacturer, and typically relies on advertising and merchandising, sales expertise, service reputation and location of its dealerships to sell new vehicles. In recent years, automobile dealers have also faced increased competition in the sale of new vehicles from independent leasing companies 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 franchised dealers. In addition, the Company may face competition in the future from partnerships between manufacturers and dealers.

      For used vehicle sales, the Company competes with other franchised dealers, independent used vehicle dealers, automobile rental agencies, private parties and used vehicle “superstores” for supply and resale of used vehicles.

      The Company believes that the principal competitive factors in vehicle sales are the marketing campaigns conducted by manufacturers, the ability of dealerships to offer a wide selection of the most popular vehicles, the location of dealerships and the quality of customer service. Other competitive factors include customer preference for particular brands of automobiles, pricing (including manufacturer rebates and other special offers) and warranties. The Company believes that its dealerships are competitive in all of these areas.

      The Company competes against other franchised dealers to perform warranty repairs and against other automobile dealers, franchised and unfranchised service center chains, and independent garages for non-warranty repair and routine maintenance business. The Company competes with other automobile dealers, service stores and auto parts retailers in its parts operations. The Company believes that the principal competitive factors in parts and service sales are price, the use of factory-approved replacement parts, the familiarity with a manufacturer’s brands and models and the quality of customer service. A number of regional or national chains offer selected parts and services at prices that may be lower than the Company’s prices.

Employees and Labor Relations

      As of December 31, 2000, UAG employed approximately 7,500 people, approximately 275 of whom are covered by collective bargaining agreements with labor unions. Relations with employees are considered by the Company to be satisfactory. The Company’s policy is to motivate its key managers through, among other things, variable compensation programs tied principally to dealership profitability and grants of stock options.

Environmental Matters

      As with automobile dealerships generally, and service, parts and body shop operations in particular, the Company’s business involves the use, handling and contracting for recycling or disposal of hazardous or toxic substances or wastes, including environmentally sensitive materials such as motor oil, waste motor oil and filters, transmission fluid, antifreeze, refrigerant, waste paint and lacquer thinner, batteries, solvents, lubricants, degreasing agents, gasoline and diesel fuels. The Company’s business also involves the past and current operation and/or removal of aboveground and underground storage tanks containing such substances or wastes. Accordingly, the Company is subject to regulation by federal, state and local authorities that establish health and environmental quality standards and impose penalties for violations of those standards. The Company is also subject to laws, ordinances and regulations governing remediation of contamination at facilities it operates or to which it sends hazardous or toxic substances or wastes for treatment, recycling or disposal.

      The Company believes that it does not have any material environmental liabilities and that compliance with environmental laws, ordinances and regulations will not, individually or in the aggregate, have a material adverse effect on the Company’s results of operations or financial condition. However, soil and groundwater contamination has been known to exist at certain properties leased by the Company. Furthermore, environmental laws and regulations are complex and subject to frequent change. There can be no assurance that compliance with amended, new or more stringent laws or regulations, stricter interpretations of existing laws or the future discovery of environmental conditions will not require additional expenditures by the Company, or that such expenditures would not be material.

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ITEM 2.  PROPERTIES

      The Company seeks to structure its operations so as to minimize the ownership of real property. As a result, the Company leases or subleases substantially all of its facilities, including dealerships and office space used for corporate activities. As of December 31, 2000, the Company has leases at the majority of its dealerships, which can include facilities for (i) new and used vehicle sales, (ii) vehicle service operations, (iii) retail and wholesale parts operations, (iv) body shop operations, (v) storage and (vi) general office use. Such leases are generally for a period of between five and twenty years and typically include renewal options for an additional five to ten years in favor of the Company. In addition, the Company leases office space in Detroit, MI and Secaucus, NJ for the Company’s administrative headquarters and other corporate related activities.

ITEM 3.  LEGAL PROCEEDINGS

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

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS

	a)	A Special Meeting of Stockholders (the “Meeting”) was held on December 13, 2000.
	b)	Proxies for the Meeting were solicited pursuant to regulation 14A under the Securities Exchange Act of 1934, as amended.
	c)	The following matter was voted upon at the Meeting:

	1.  Approval of an amendment to the Company’s Third Restated Certificate of Incorporation increasing the authorized shares of Common Stock from 40,000,000 to 80,000,000. The results of the vote follow:

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PART II

      The Company’s Common Stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “UAG.” As of March 16, 2001, there were 106 holders of record of the Common Stock.

      The following table sets forth the high and low sales prices as reported on the NYSE during each fiscal quarter during 2000 and 1999.

      The Company has never declared or paid dividends on its Common Stock. The Company intends to retain future earnings, if any, to finance the development and expansion of its business and, therefore, does not anticipate paying any cash dividends on its Common Stock in the foreseeable future. The decision whether to pay dividends will be made by the Board of Directors of the Company in light of conditions then existing, including the Company’s results of operations, financial condition and cash requirements, business conditions and other factors.

      The indentures governing the Company’s 11% Senior Subordinated Notes due 2007 (the “Notes”) limit the Company’s ability to pay dividends based on a formula, which takes into account, among other things, the Company’s consolidated net income.

      The Company is a holding company whose assets consist primarily of the indirect ownership of the capital stock of its operating subsidiaries. Consequently, the Company’s ability to pay dividends is dependent upon the earnings of its subsidiaries and their ability to distribute earnings and other advances and payments to the Company.

      Pursuant to the automobile franchise agreements to which the Company’s dealerships are subject, all dealerships are required to maintain a certain minimum working capital, and some dealerships are also required to maintain a certain minimum net worth. These requirements may restrict the ability of the Company’s operating subsidiaries to make dividend payments, which in turn may restrict the Company’s ability to make dividend payments.

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

      The following table sets forth selected historical consolidated financial and other data of the Company as of and for the five years in the period ended December 31, 2000. Such financial information has been derived from the Company’s consolidated financial statements. During the five year period, the Company made a number of acquisitions, each of which has been accounted for using the purchase method of accounting. Accordingly, the Company’s financial statements include the results of operations of the acquired dealerships from the date of acquisition. As a result, the Company’s period to period results of operations vary depending on the dates of such acquisitions. The selected consolidated financial data should be read in conjunction with the Company’s consolidated financial statements and related footnotes included elsewhere herein.

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SELECTED CONSOLIDATED FINANCIAL DATA(1)(2)

General

      As an integral part of its dealership operations, the Company retails new and used automobiles and light trucks, operates service and parts departments, operates collision repair centers and sells various aftermarket products, including finance, warranty, extended service and insurance contracts.

      New vehicle revenues include sales to retail and fleet 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, other dealers and wholesalers. Finance and insurance revenues are generated from sales of accessories, finance contracts, warranty policies, extended service contracts and credit insurance policies, as well as fees for placing finance and lease contracts. Service,

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      The Company’s 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. Other interest expense consists of interest charges on all of the Company’s interest-bearing debt, other than interest relating to floor plan inventory financing.

      Also, the Company made a number of dealership acquisitions in 2000, 1999 and 1998. Each of these acquisitions has been accounted for using the purchase method of accounting and as a result, the Company’s financial statements include the results of operations of the acquired dealerships from the date of acquisition.

Results of Operations

Year Ended December 31, 2000 Compared to Year Ended December 31, 1999

      Revenues. Retail revenues, which exclude revenues relating to fleet and wholesale transactions, increased by $855.7 million, or 23.9%, from $3.6 billion to $4.4 billion. The overall increase in revenues is due primarily to: (i) a $196.1 million, or 6.2%, increase in retail revenues at dealerships owned prior to January 1, 1999 and (ii) dealership acquisitions made subsequent to January 1, 1999; partially offset by a decrease in revenues resulting from the divestiture of certain dealerships. The overall increase in retail revenues at dealerships owned prior to January 1, 1999 reflects 6.3%, 5.1%, 7.3% and 7.9% increases in new retail vehicle, used retail vehicle, finance and insurance and service and parts revenues, respectively. Revenues of $446.2 million from fleet and wholesale transactions were consistent with the prior year.

      Retail sales of new vehicles, which exclude fleet sale transactions, increased by $593.0 million, or 26.4%, from $2.2 billion to $2.8 billion. The increase is due primarily to: (i) a $125.0 million, or 6.3%, increase at dealerships owned prior to January 1, 1999 and (ii) acquisitions made subsequent to January 1, 1999; partially offset by a decrease resulting from the divestiture of certain dealerships. The increase at dealerships owned prior to January 1, 1999 is due primarily to a 4.0% increase in new retail unit sales and an increase in comparative average selling prices per vehicle. Aggregate retail unit sales of new vehicles increased by 20.8%, due principally to: (i) the net increase at dealerships owned prior to January 1, 1999 and (ii) acquisitions made subsequent to January 1, 1999; partially offset by the decrease due to divested dealerships. The Company retailed 112,676 new vehicles (65.9% of total retail vehicle sales) during the year ended December 31, 2000, compared with 93,259 new vehicles (64.2% of total retail vehicle sales) during the year ended December 31, 1999. Fleet sales decreased $39.5 million, or 23.2%, versus the comparable prior year period due primarily to a 31.9% decrease in fleet unit sales.

      Retail sales of used vehicles, which exclude wholesale transactions, increased by $142.3 million, or 18.5%, from $769.6 million to $912.0 million. The increase is due primarily to: (i) a $35.2 million, or 5.1%, increase at dealerships owned prior to January 1, 1999 and (ii) acquisitions made subsequent to January 1, 1999; partially offset by a decrease resulting from the divestiture of certain dealerships. The increase at dealerships owned prior to January 1, 1999 is due primarily to a 1.5% increase in used retail unit sales and an increase in comparative average selling prices per vehicle. Aggregate retail unit sales of used vehicles increased by 12.0%, due principally to: (i) the net increase at dealerships owned prior to January 1, 1999 and (ii) acquisitions made subsequent to January 1, 1999; partially offset by the decrease due to divested dealerships. The Company retailed 58,252 used vehicles (34.1% of total retail vehicle sales) during the year ended December 31, 2000 compared with 52,027 used vehicles (35.8% of total retail vehicle sales) during the year ended December 31, 1999. Wholesale revenues increased $45.2 million, or 16.7%, versus the comparable prior year period. The increase in wholesale revenues is due primarily to: acquisitions made subsequent to January 1, 1999, offset in part by (i) a $8.2 million, or 3.5%, decrease at dealerships owned prior to January 1, 1999 and (ii) a decrease resulting from the divestiture of certain dealerships.

      Finance and insurance revenues increased by $27.4 million, or 16.5%, from $165.8 million to $193.1 million. The increase is due primarily to: (i) a $8.8 million, or 7.3%, increase at dealerships owned prior to

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      Service and parts revenues increased by $93.0 million, or 23.3%, from $398.8 million to $491.8 million. The increase is due primarily to: (i) a $27.1 million, or 7.9%, increase at dealerships owned prior to January 1, 1999 and (ii) acquisitions made subsequent to January 1, 1999; partially offset by a decrease resulting from the divestiture of certain dealerships.

      Gross Profit. Retail gross profit, which excludes gross profit on fleet and wholesale transactions, increased $125.9 million, or 22.9%, from $549.6 million to $675.5 million. The increase in gross profit is due to: (i) a $30.6 million, or 6.5%, increase in retail gross profit at stores owned prior to January 1, 1999 and (ii) acquisitions made subsequent to January 1, 1999; partially offset by a decrease resulting from the divestiture of certain dealerships. Gross profit as a percentage of revenues on retail transactions decreased from 15.3% to 15.2%. Gross profit as a percentage of revenues for new vehicle retail, used vehicle retail, finance and insurance and service and parts revenues was 8.8%, 10.7%, 58.7%, and 43.8%, respectively, compared with 8.6%, 11.1%, 58.8% and 43.4% in comparable prior year period. The decrease in gross profit as a percentage of revenues on retail transactions is primarily attributable to: (i) an increase in the relative proportion of lower margin new vehicle sales revenues to total retail revenues during 2000 and (ii) decreases in gross profit margins on used retail vehicle revenues; partially offset by increases in gross profit margins on new retail vehicle and service and parts revenues and an increase in service and parts revenues as a percentage of total revenues. Aggregate gross profit on fleet and wholesale transactions increased by $2.6 million to $2.4 million.

      Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $94.6 million, or 21.2%, from $445.1 million to $539.7 million. Such expenses as a percentage of revenue were 11.1%, which is consistent with the prior year, and decreased as a percentage of gross profit from 81.0% to 79.6%. The aggregate increase in selling, general and administrative expenses is due principally to: (i) a $26.6 million, or 7.3%, increase at stores owned prior to January 1, 1999 and (ii) acquisitions made subsequent to January 1, 1999; partially offset by a decrease resulting from the divestiture of certain dealerships. The increase in selling, general and administrative expense at stores owned prior to January 1, 1999 is due in large part to increased selling expenses, including increased variable compensation, as a result of the 6.5% increase in retail gross profit over the prior year.

      Floor Plan Interest Expense. Floor plan interest expense increased by $15.7 million, or 54.8%, from $28.7 million to $44.4 million. The increase in floor plan interest expense is due to: (i) a $6.0 million, or 24.3%, increase at stores owned prior to January 1, 1999 and (ii) acquisitions made subsequent to January 1, 1999, offset in part by decreases relating to (i) the effect of the Company’s interest rate swaps hedging floorplan interest rates and (ii) the divestiture of certain dealerships. The increase at stores owned prior to January 1, 1999 is due to an increase in inventory levels compared to 1999 and an increase in the Company’s weighted average borrowing rate during 2000.

      Other Interest Expense. Other interest expense increased by $3.4 million, or 11.7%, from $29.3 million to $32.8 million. The increase is due primarily to increased acquisition related indebtedness, offset in part by (i) the effect of refinancing the Notes and certain other indebtedness with lower interest borrowings under the Company’s Credit Agreement, dated as of August 3, 1999, as amended and restated (the “Credit Agreement”) and (ii) the paydown of indebtedness with proceeds from equity offerings during 1999.

      Income Taxes. Income taxes increased by $5.1 million from $21.4 million to $26.6 million. The increase is due to an increase in pre-tax income compared with 1999, offset in part by a decrease in the Company’s annual effective income tax rate. The decrease in the comparative effective rate is due primarily to a decrease in the Company’s effective state tax rate resulting from certain tax planning initiatives and a change in the geographic mix of the Company’s earnings.

      Extraordinary Item. The $4.0 million extraordinary item in 2000 represents a loss resulting from the redemption premium paid for the Notes and the write-off of unamortized deferred financing costs relating to the Notes. The $0.7 million extraordinary item in 1999 represents the after tax gain arising from the

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Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

      Revenues. Revenues increased by $679.4 million, or 20.3%, from $3.3 billion to $4.0 billion. The overall increase in revenues is due primarily to (i) an aggregate 12.9% increase in retail revenues at dealerships owned prior to January 1, 1998 and (ii) dealership acquisitions made subsequent to January 1, 1998, partially offset by a decrease in revenues resulting from the divestiture of certain dealerships. The overall increase in retail revenues at dealerships owned prior to January 1, 1998 reflects 13.2%, 11.7%, 25.0% and 9.6% increases in new retail vehicle sales, used retail vehicle sales, finance and insurance and service and parts revenues, respectively.

      Sales of new vehicles increased by $459.0 million, or 23.4%, from $2.0 billion to $2.4 billion. The increase is due primarily to (i) the net increase at dealerships owned prior to January 1, 1998 and (ii) acquisitions made subsequent to January 1, 1998, offset by a decrease resulting from the divestiture of certain dealerships. The increase at dealerships owned prior to January 1, 1998 is due primarily to an 11.0% increase in retail unit sales and an increase in the comparative average selling price per vehicle. Aggregate retail unit sales of new vehicles increased by 20.5%, due principally to the net increase at dealerships owned prior to January 1, 1998 and acquisitions, offset by the decrease due to divested dealerships. The Company retailed 93,259 new vehicles (64.2% of total vehicle sales) during the year ended December 31, 1999, compared with 77,403 new vehicles (62.4% of total vehicle sales) during the year ended December 31, 1998.

      Sales of used vehicles increased by $117.2 million, or 12.7%, from $922.8 million to $1.0 billion. The increase is due primarily to (i) the net increase at dealerships owned prior to January 1, 1998 and (ii) acquisitions made subsequent to January 1, 1998, offset by a decrease resulting from the divestiture of certain dealerships. The increase at dealerships owned prior to January 1, 1998 is due primarily to a 6.0% increase in retail unit sales and an increase in the comparative average selling price per vehicle. Aggregate retail unit sales of used vehicles increased by 11.3%, due principally to the net increase at dealerships owned prior to January 1, 1998 and acquisitions, offset by the decrease due to divested dealerships. The Company retailed 52,027 used vehicles (35.8% of total vehicle sales) during the year ended December 31, 1999, compared with 46,724 used vehicles (37.6% of total vehicle sales) during the year ended December 31, 1998.

      Finance and insurance revenues increased by $38.3 million, or 30.1%, from $127.4 million to $165.8 million. The increase is due primarily to (i) the net increase at dealerships owned prior to January 1, 1998, (ii) a 27.4% increase in revenues at UAC and (iii) acquisitions made subsequent to January 1, 1998, offset by a decrease resulting from the divestiture of certain dealerships.

      Service and parts revenues increased by $64.8 million, or 19.4%, from $334.1 million to $398.8 million. The increase is due primarily to (i) the net increase at dealerships owned prior to January 1, 1998 and (ii) acquisitions made subsequent to January 1, 1998, offset by a decrease resulting from the divestiture of certain dealerships.

      Gross Profit. Gross profit increased by $93.8 million, or 20.6%, from $455.6 million to $549.4 million. The increase in gross profit is due to (i) an aggregate 11.1% increase in retail gross profit at stores owned prior to January 1, 1998 and (ii) acquisitions made subsequent to January 1, 1998, offset by a decrease resulting from the divestiture of certain dealerships. Gross profit as a percentage of revenues increased from 13.6% to 13.7%. The increase in gross profit as a percentage of revenues is primarily attributable to (i) an increase in higher margin finance and insurance and service and parts revenues as a percentage of total revenues during 1999, (ii) the impact of a $12.6 million charge to gross profit in 1998 and (iii) improved gross profit margins on service and parts revenues, partially offset by (i) a decrease in gross profit margins on new and used retail vehicle sales revenues and (ii) a decrease in gross profit margins on finance and insurance revenues.

      Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $70.1 million, or 18.7%, from $375.0 million to $445.1 million. Such expenses as a percentage of revenue decreased from 11.2% to 11.1%, and such expenses as a percentage of gross profit decreased from 82.3% to 81.0%. The aggregate increase in selling, general and administrative expense is due principally to (i) a 12.9%

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      Floor Plan Interest Expense. Floor plan interest expense of $28.7 million was consistent with the prior year. Factors influencing floor plan interest expense include higher average outstanding borrowings during 1999, offset by lower borrowing rates.

      Other Interest Expense. Other interest expense decreased by $2.1 million, from $31.5 million to $29.3 million. The decrease is due primarily to the paydown of indebtedness with proceeds from equity offerings and the effect of refinancing a portion of the Notes with lower interest borrowings under the Credit Agreement, offset in part by an increase in the Company’s average borrowing rate during 1999.

      Other Income (Expense), Net. Other income (expense), net decreased by $2.2 million, or 46.4%, from $4.8 million to $2.6 million. Other income relates to management agreements entered into by the Company with certain dealerships where the acquisition of such dealerships by the Company waited final manufacturer approval. Pursuant to the agreements, the Company managed all aspects of such dealership’s operations. The decrease in other income (expense), net is due primarily to the completion of the acquisition in 1999 of certain of the dealerships being operated pursuant to management agreements.

      Income Tax Provision. The 1999 income tax provision increased by $9.9 million from $11.6 million to $21.4 million. The increase is due to an increase in pre-tax income in 1999 compared with 1998, partially offset by a decrease in the Company’s annual effective income tax rate. The decrease in the Company’s annual effective income tax rate is due primarily to a decrease in the Company’s effective state tax rate.

      Extraordinary Item. The $0.7 million extraordinary item in 1999 represents a net after tax gain on the retirement of $49.0 million of Notes, offset in part by a net after tax loss resulting from the write-off of the unamortized deferred financing costs related to the Company’s previous credit facility. The $1.2 million extraordinary item in 1998 represents the net after tax loss resulting from the write-off of unamortized deferred financing costs relating to a previous credit facility.

Liquidity and Capital Resources

Cash and Liquidity Requirements

      The cash requirements of the Company are primarily for the acquisition of new dealerships, working capital and the improvement of existing facilities. Historically, these cash requirements have been met through issuances of equity and debt instruments and cash flow from operations. At December 31, 2000, the Company had working capital of $93.1 million.

      In December 2000, the Company issued 2,139,535 shares of Common Stock to Penske Corporation for $10.75 per share. Aggregate proceeds, amounting to $23.0 million, were used to reduce debt. In February 2001, the Company issued 1,302,326 shares of Common Stock to Mitsui & Co., Ltd. and Mitsui & Co. (U.S.A.), Inc. (together with Mitsui & Co., Ltd. “Mitsui”) for $10.75 per share. Aggregate proceeds, amounting to $14.0 million, were used to reduce borrowings under the Credit Agreement.

      In 1999, the Company announced that its Board of Directors authorized the repurchase of up to 10% of the Company’s outstanding stock. Pursuant to such authorization, the Company repurchased 2,990,856 shares through open market purchases and negotiated transactions at an aggregate cost of $27.2 million.

      The Company finances the majority of its new and a portion of its used vehicle inventory under revolving floor plan financing arrangements with various lenders. 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. The floor plan agreements grant a security interest in the financed vehicles, as well as the related sales proceeds, and require repayment after a vehicle’s sale. Interest rates on the floor plan arrangements are

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      The Credit Agreement provides for up to $520.0 million in revolving loans to be used for acquisitions, working capital, the repurchase of common stock and general corporate purposes. In addition, the Credit Agreement provides for up to $186.0 million to be used to repurchase Notes. Loans under the Credit Agreement bear interest at either LIBOR plus 2.00% or LIBOR plus 2.25%, other than borrowings to repurchase Notes which bear interest at LIBOR plus 3.00%. The Credit Agreement is fully and unconditionally guaranteed on a joint and several basis by the Company’s auto 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. In addition, the Company is required to comply with specified ratios and tests, including debt to equity, debt service coverage and minimum working capital covenants. The Credit Agreement also contains typical events of default including change of control, material adverse change and non-payment of obligations. Substantially all of the Company’s assets not subject to security interests granted to floor plan lending sources are subject to security interests granted to lenders under the Credit Agreement. As of December 31, 2000, the Company’s outstanding borrowings under the Credit Agreement amounted to $390.6 million, $186.0 million of which was incurred in connection with the repurchase of Notes.

      The indentures governing the Notes require the Company to comply with specified debt service coverage ratio levels in order to incur incremental indebtedness. Such indentures also limit the Company’s ability to pay dividends based on a formula which takes into account, among other things, the Company’s consolidated net income, and contain other covenants which restrict the Company’s ability to purchase capital stock, incur liens, sell assets and enter into other transactions. The Notes are fully and unconditionally guaranteed on a joint and several basis by the Company’s auto dealership subsidiaries.

      The indentures governing the Notes also contain a provision which requires the Company to offer to purchase all of the then outstanding Notes at a purchase price in cash equal to 101% of their principal amount in the event of a change in control. A change in control is deemed to have occurred if a purchaser, as defined, beneficially obtains 40% of the voting power, as defined, of the voting stock of the Company. During 2000, the Company repurchased approximately three million shares of Common Stock through open market purchases, negotiated transactions, or other means based upon market conditions. Such repurchase increased the beneficial ownership interest of Penske Capital Partners and certain affiliated entities above 40%. As a result, the Company made an offer to purchase the outstanding Notes at a change of control redemption price of 101% of face value. In May 2000, the Company completed the tender for the then outstanding Notes, pursuant to which it repurchased $147.4 million face value of Notes. As of December 31, 2000, $3.6 million of Notes remain outstanding.

      On April 12, 1999, the Company and International Motor Cars Group I, L.L.C. and International Motor Cars Group II, L.L.C. (“IMCG II”), Delaware limited liability companies controlled by Penske Capital Partners, L.L.C. (together, the “Purchaser”), entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) pursuant to which the Purchaser agreed to purchase (i) an aggregate of 7,903.124 shares of the Company’s Series A Convertible Preferred Stock, par value $0.0001 per share (the “Series A Preferred Stock”), (ii) an aggregate of 396.876 shares of the Company’s Series B Convertible Preferred Stock, par value $0.0001 per share (the “Series B Preferred Stock”), and (iii) warrants (the “Warrants”) to purchase (a) 3,898,665 shares of Common Stock and (b) 1,101,335 shares of the Company’s non-voting Common Stock, par value $0.0001 per share (the “Non-Voting Common Stock”) for $83.0 million. The shares of Series A Preferred Stock and Series B Preferred Stock entitle the Purchaser to dividends at a rate of 6.5% per year, payable in kind for the first two years, except that IMCG II’s dividends will be paid in shares of Series B Preferred Stock. After two years, all such dividends are payable in cash. The Series A Preferred Stock is convertible into an aggregate of 7,903,124 shares of Common Stock and the Series B Preferred Stock is convertible into an aggregate of 396,876 shares of Non-Voting Common Stock. The Warrants are exercisable at a price of $12.50 per share for the thirty months following the date of issuance, and $15.50 per share thereafter until May 2, 2004. Pursuant to the anti-dilution provisions of the Warrants and as a result of

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      During 2000, cash flow from operations amounted to $46.6 million. Net cash used in investing activities during the year ended December 31, 2000 totaled $234.5 million, relating to dealership acquisitions and capital expenditures. Net cash provided by financing activities during the year ended December 31, 2000 totaled $170.3 million, relating to net borrowings of $179.6 million for acquisitions and $16.9 million relating to the issuance of Common Stock, offset in part by $26.2 million used to repurchase Common Stock. In addition, the Company has received distributions amounting to $5.3 million from United Auto Finance, Inc.

      As of December 31, 2000, the Company had approximately $7.4 million of cash available to fund operations and future acquisitions. In addition, $200.4 million is available for borrowing under the Credit Agreement as of March 23, 2001. The Company is a holding company whose assets consist primarily of the indirect ownership of the capital stock of its operating subsidiaries. Consequently, the Company’s ability to pay dividends is dependent upon the earnings of its subsidiaries and their ability to distribute earnings and other advances and payments by such subsidiaries to the Company.

      The Company’s principal source of growth has come from acquisitions of automobile dealerships. The Company believes that its existing capital resources will be sufficient to fund its current operations and commitments. To the extent the Company pursues additional significant acquisitions, it may need to raise additional capital either through the public or private issuance of equity or debt securities or through additional bank borrowings. A public equity offering would require the prior approval of certain automobile manufacturers.

New Accounting Pronouncements

      Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted (“SFAS No. 133”), is effective for all fiscal years beginning after June 15, 2000. SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. Under SFAS 133, all derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. SFAS 133 defines requirements for designation and documentation of hedging relationships, as well as ongoing effectiveness assessments, which must be met in order to qualify for hedge accounting. For a derivative that does not qualify as a hedge, changes in fair value would be recorded in earnings immediately. If the derivative is designated in a fair-value hedge, the changes in the fair value of the derivative and the hedged item are recorded in earnings. If the derivative is designated in a cash-flow hedge, effective changes in the fair value of the derivative are recorded in other comprehensive income and recorded in the income statement when the hedged item affects earnings. Changes in the fair value of the derivative attributable to hedge ineffectiveness are recorded in earnings immediately. The Company adopted SFAS 133 on January 1, 2001 and recorded $10.2 million as a cumulative transition adjustment (reducing other comprehensive income) relating to an interest rate swap (cash flow hedge) the Company entered into prior to the adoption of SFAS 133. Pursuant to SFAS 133, the cumulative transition adjustment will be amortized and reflected as additional floorplan interest expense over the remaining life of the interest rate swap.

Cyclicality

      Unit sales of motor vehicles, particularly new vehicles, historically have been cyclical, fluctuating with general economic cycles. During economic downturns, the automotive retailing industry tends to experience similar periods of decline and recession as the general economy. The Company believes that the industry is

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Seasonality

      The Company’s combined business is modestly seasonal overall. The greatest seasonalities exist with the dealerships in the northeast United States, for which the second and third quarters are the strongest with respect to vehicle related sales. The service and parts business at all dealerships experiences relatively modest seasonal fluctuations.

Effects of Inflation

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

      The Company finances substantially all of its inventory through various revolving floor plan arrangements with interest rates that vary based on the prime rate or LIBOR. Such rates have historically increased during periods of increasing inflation. The Company does not believe that it would be placed at a competitive disadvantage should interest rates increase due to increased inflation since most other automobile dealers have similar floating rate borrowing arrangements.

Forward Looking Statements

      Certain portions of this Annual Report contain “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. All statements, other than statements of historical facts, included in this Annual Report or incorporated herein by reference regarding the Company’s financial position and business strategy may constitute forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Company’s expectations, some of which are described in greater detail elsewhere in this Annual Report, include the following: (i) the Company is subject to the influence of various manufacturers whose franchises it holds; (ii) the Company is leveraged and subject to restrictions imposed by the terms of its indebtedness; (iii) the Company’s growth depends in large part on the Company’s ability to manage expansion, control costs in its operations and consummate and consolidate dealership acquisitions; (iv) many of the Company’s franchise agreements impose restrictions on the transferability of the Company’s Common Stock; (v) the Company will require substantial additional capital to acquire automobile dealerships and purchase inventory; (vi) unit sales of motor vehicles historically have been cyclical; (vii) the automotive retailing industry is highly competitive; (viii) the automotive retailing industry is a mature industry; (ix) the Company’s success depends to a significant extent on key members of its management; and (x) the Company’s business is seasonal. In light of the foregoing, readers of this Annual Report are cautioned not to place undue reliance on the forward-looking statements contained herein. Additional information concerning these factors, or other factors which could cause the actual results to differ materially, is set forth elsewhere in this Annual Report and is contained from time to time in the Company’s other filings with the Securities Exchange Commission.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      Foreign Currency Exchange Rates. Substantially all of the Company’s business is conducted in the United States where its revenues and expenses are transacted in U.S. dollars. As a result, the majority of the Company’s results of operations are not subject to foreign exchange rate fluctuations. The Company does not hedge against foreign exchange rate fluctuations due to the limited financial exposure it faces with respect to such risk. In common with other automobile retailers, the Company purchases certain of its new car inventories from foreign manufacturers. The Company’s business in this regard is subject to certain risks,

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      Interest Rates. The Company is exposed to market risk from changes in the interest rates on a significant portion of its outstanding indebtedness. Outstanding balances under the Credit Agreement bear interest at a variable rate based on a margin over LIBOR. Based on the amount outstanding as of March 23, 2001, a 100 basis point change in interest rates would result in an approximate $5.1 million change to the Company’s annual interest expense. Similarly, amounts outstanding under floor plan financing arrangements bear interest at a variable rate based on a margin over LIBOR or Prime. Based on the average aggregate outstanding amounts under floor plan financing arrangements during the year ended December 31, 2000, a 100 basis point change in interest rates would result in an approximate $5.5 million change to the Company’s annual floor plan interest expense. During 2000, the Company entered into swap agreements pursuant to which a notional $200.0 million of the Company’s floating rate debt has been exchanged for fixed rate debt for a period of five years. The fixed rate interest to be paid by the Company is based on LIBOR, as adjusted, and amounts to approximately 7.1%. For fixed rate debt including the Notes, certain seller financed promissory notes and obligations under certain capital leases, interest rate changes effect the fair market value of such debt, but do not impact the Company’s earnings or cash flows.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      See the consolidated financial statements listed in the accompanying Index to Consolidated Financial Statements for the information required by this item.

      On May 19, 1999, the Company dismissed PricewaterhouseCoopers LLP, which served as the Company’s independent public accountants since 1992. The reports issued by PricewaterhouseCoopers LLP on the financial statements of the Company for prior fiscal years did not contain an adverse opinion nor a disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles. Based on the recommendation of the Audit Committee, the Company’s Board of Directors approved the decision to change independent public accountants. In connection with its audits for prior fiscal years and through May 19, 1999, there were no disagreements with PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of PricewaterhouseCoopers LLP, would have caused PricewaterhouseCoopers LLP to make reference thereto in their report on the financial statements for such years or such interim periods.

      The Company engaged Deloitte & Touche LLP as its new independent public accountants as of May 19, 1999. The Company’s Board of Directors approved this on May 19, 1999. During prior fiscal years preceding their appointment and through May 19, 1999, the Company did not consult with Deloitte & Touche LLP regarding either:

      (i)  the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company’s financial statements; or

      (ii) any matter that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to this Item) or a reportable event (as described in Item 304(a)(1)(v) of Regulation S-K and related instructions to this Item).

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PART III

      The information required by Items 10 through 13 is included in the Company’s definitive proxy statement under the captions “Compensation of Directors,” “Election of Directors,” “Executive Officers,” “Executive Compensation,” “Security Ownership of Certain Beneficial Owners and Management,” “Related Party Transactions,” and “Section 16(a) Beneficial Ownership Reporting Compliance”. Such information is incorporated herein by reference, pursuant to General Instruction G(3).

      The following is a list of the executive officers and directors of the Company, including their principal occupation:

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PART IV

      (a)  Financial Statements

	The consolidated financial statements listed in the accompanying Index to Consolidated Financial Statements are filed as part of this Annual Report on Form 10-K.

      (b)  Reports on Form 8-K.

	The Company filed the following Current Reports on Form 8-K during the three month period ended December 31, 2000:

	1.	October 19, 2000, reporting under Items 7 and 9 (announcement of the Company’s earnings for the three and nine month periods ended September 30, 2000).
	2.	November 2, 2000, reporting under Items 7 and 9 (announcing the acquisition of the Audi, Volkswagen, Mercedes-Benz and Porsche dealerships formerly owned by Continental Motors, Inc. in Fairfield, Connecticut).

      (c)  Exhibits

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(d)	Schedules — No Financial Statement Schedules are required to be filed as part of this Annual Report on Form 10-K.

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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 28, 2001.

	UNITED AUTO GROUP, INC.

	By:	/s/ ROGER S. PENSKE

	Roger S. Penske
	Chairman of the Board and
	Chief Executive Officer

      Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on its behalf by the registrant and in the capacities and on the dates indicated:

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of United Auto Group, Inc.

      We have audited the accompanying consolidated balance sheets of United Auto Group, Inc. (the “Company”) and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2000. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audit.

      We conducted our audits 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 audits provide a reasonable basis for our opinion.

      In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America.

/s/ DELOITTE & TOUCHE

New York, New York

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REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders of United Auto Group, Inc.:

      In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the consolidated results of United Auto Group, Inc.’s (the “Company”) operations and cash flows for the year ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.

/s/ PRICEWATERHOUSECOOPERS LLP

Princeton, New Jersey

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UNITED AUTO GROUP, INC.

CONSOLIDATED BALANCE SHEETS

See Notes to Consolidated Financial Statements.

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UNITED AUTO GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

See Notes to Consolidated Financial Statements

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UNITED AUTO GROUP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY