UNITED AUTO GROUP INC - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-12297

UNITED AUTO GROUP, INC.

(Exact name of registrant as specified in its charter)


DELAWARE (State or other jurisdiction of incorporation or organization)		22-3086739 (I.R.S. Employer Identification No.)
13400 Outer Drive West, Detroit, Michigan (Address of principal executive offices)		48239 (Zip Code)

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

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 o

As of August 12, 2002, there were 39,846,042 shares of voting common stock outstanding and 1,758,565 shares of non-voting common stock outstanding.

TABLE OF CONTENTS


CONSOLIDATED CONDENSED BALANCE SHEETS
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING BALANCE SHEET
CONDENSED CONSOLIDATING BALANCE SHEET
CONDENSED CONSOLIDATING STATEMENT OF INCOME
CONDENSED CONSOLIDATING STATEMENT OF INCOME
CONDENSED CONSOLIDATING STATEMENT OF INCOME
CONDENSED CONSOLIDATING STATEMENT OF INCOME
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
PART II
Item 1 -- Legal Proceedings
Item 4 -- Submission of Matters to a Vote of Security Holders
Item 6 -- Exhibits, Financial Statement Schedules and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
4th Amendment to Amended/Restated Credit Agreement
Certification of Chief Executive Officer
Certification of Chief Financial Officer

TABLE OF CONTENTS


		Page

PART I
1. Financial Statements and Supplementary Data (unaudited)
	Consolidated Condensed Balance Sheets as of June 30, 2002 and December 31, 2001		1
	Consolidated Condensed Statements of Income for the three and six months ended June 30, 2002 and 2001		2
	Consolidated Condensed Statements of Cash Flow for the six months ended June 30, 2002 and 2001		3
	Consolidated Condensed Statement of Stockholders’ Equity and Comprehensive Income for the three and six months ended June 30, 2002		4
	Notes to Consolidated Condensed Financial Statements		5
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
PART II
1. Legal Proceedings			29
4. Submission of Matters to a Vote of Security Holders			29
6. Exhibits, Financial Statement Schedules and Reports on Form 8-K			29
Signatures			31

UNITED AUTO GROUP, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(In Thousands)


		June 30,			December 31,
		2002			2001

		(Unaudited)
ASSETS
Cash and cash equivalents		$	13,699		$	2,699
Accounts receivable, net			310,309			245,126
Inventories			890,378			629,858
Other current assets			31,280			16,134

	Total current assets		1,245,666			893,817
Property and equipment, net			262,791			184,144
Intangible assets, net			911,504			781,622
Net assets of discontinued operations			—			11,560
Other assets			56,942			55,452

	Total Assets	$	2,476,903		$	1,926,595

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Floor plan notes payable		$	817,145		$	602,184
Accounts payable			134,111			75,262
Accrued expenses			143,725			84,842
Current portion of long-term debt			12,204			4,202

	Total current liabilities		1,107,185			766,490
Long-term debt			586,170			551,648
Other long-term liabilities			97,444			92,774

	Total liabilities		1,790,799			1,410,912
Stockholders’ Equity
Series A Preferred Stock, $0.0001 par value; liquidation preference $10 per share; 10 shares authorized; none issued and outstanding at June 30, 2002; 9 issued and outstanding at December 31, 2001			—			—
Series B Preferred Stock, $0.0001 par value; liquidation preference $10 per share; 10 shares authorized; 1 issued and outstanding at June 30, 2002 and December 31, 2001			—			—
Common stock, $0.0001 par value, 80,000 shares authorized; 39,846 shares issued, including 3,821 treasury shares, at June 30, 2002; 23,540 shares issued, including 3,821 treasury shares, at December 31, 2001.			4			2
Non-voting Common Stock, $0.0001 par value, 7,125 shares authorized; 1,106 issued and outstanding at June 30, 2002; none issued and outstanding at December 31, 2001.			—			—
Class C Common Stock, $0.0001 par value, 20,000 shares authorized; none issued and outstanding at June 30, 2002 and December 31, 2001.			—			—
Additional paid-in-capital			580,610			445,311
Retained earnings			111,419			78,750
Accumulated other comprehensive loss			(5,929	)		(8,380	)

	Total stockholders’ equity		686,104			515,683

	Total Liabilities and Stockholders’ Equity	$	2,476,903		$	1,926,595

See Notes to Consolidated Condensed Financial Statements

UNITED AUTO GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(In Thousands, Except per Share Amounts)

(Unaudited)



		Three Months Ended						Six Months Ended
		June 30,						June 30,

		2002			2001			2002			2001

New vehicle sales		$	1,150,085		$	947,057		$	2,117,144		$	1,739,460
Used vehicle sales			403,868			290,970			713,042			553,564
Finance and insurance			46,574			37,834			85,358			70,411
Service and parts			199,306			153,439			366,218			291,350
Fleet sales			29,427			47,332			60,750			81,992
Wholesale vehicle sales			130,147			88,719			229,430			176,111

	Total revenues		1,959,407			1,565,351			3,571,942			2,912,888
Cost of sales			1,680,122			1,349,779			3,058,935			2,509,020

	Gross profit		279,285			215,572			513,007			403,868
Selling, general and administrative expenses			221,149			170,884			412,024			325,834

	Operating income		58,136			44,688			100,983			78,034
Floor plan interest expense			(8,919	)		(11,154	)		(17,404	)		(23,426	)
Other interest expense			(9,976	)		(9,570	)		(17,844	)		(19,225	)

	Income from continuing operations before minority interests and income taxes		39,241			23,964			65,735			35,383
Minority interests			(509	)		(284	)		(925	)		(298	)
Income taxes			(15,893	)		(10,425	)		(26,383	)		(15,390	)

	Income from continuing operations		22,839			13,255			38,427			19,695
Income from discontinued operations, net of tax			1,050			150			1,173			280

	Net income	$	23,889		$	13,405		$	39,600		$	19,975

Shares used in computing basic per share data			38,367			23,391			33,935			22,923

Shares used in computing diluted per share data			42,841			33,889			41,076			32,620

Income from continuing operations available to common stockholders		$	18,128		$	10,009		$	32,226		$	14,998

Net income available to common stockholders		$	19,178		$	10,159		$	33,399		$	15,278

Basic income from continuing operations per common share		$	0.47		$	0.43		$	0.95		$	0.65

Basic net income per common share		$	0.50		$	0.43		$	0.98		$	0.67

Income from continuing operations per diluted common share		$	0.53		$	0.39		$	0.94		$	0.60

Net income per diluted common share		$	0.56		$	0.40		$	0.96		$	0.61

See Notes to Consolidated Condensed Financial Statements

UNITED AUTO GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW

(In Thousands)

(Unaudited)



			Six Months Ended June 30,

			2002			2001

Operating activities:
Net income			$	39,600		$	19,975
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
	Depreciation and amortization			10,506			15,827
	Minority interests			925			298
Changes in operating assets and liabilities
	Accounts receivable			(2,986	)		(50,265	)
	Inventories			(92,385	)		35,769
	Floor plan notes payable			64,632			(40,156	)
	Accounts payable and accrued expenses			37,168			(18,020	)
	Other			369			7,967

		Net cash provided by (used in) operating activities		57,829			(28,605	)

Investing activities:
Purchase of equipment and improvements				(87,902	)		(40,101	)
Proceeds from sale-leaseback transactions				50,000			—
Dealership acquisitions, net				(152,136	)		(89,469	)

	Net cash used in investing activities			(190,038	)		(129,570	)

Financing activities:
Proceeds from borrowings of long-term debt				539,000			157,250
Payments of long-term debt and capital leases				(525,201	)		(18,641	)
Proceeds from issuance of common stock				131,083			14,681

	Net cash provided by financing activities			144,882			153,290

	Net cash distributed by (invested in) discontinued operations			(1,673	)		1,595

	Net increase (decrease) in cash and cash equivalents			11,000			(3,290	)
Cash and cash equivalents, beginning of period				2,699			4,846

Cash and cash equivalents, end of period			$	13,699		$	1,556

See Notes to Consolidated Condensed Financial Statements

UNITED AUTO GROUP, INC.

CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME

(Dollars In Thousands)

(Unaudited)



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

Balances, January 1, 2002		8,794					649				23,540,231	$	2	$	445,311		$	78,750
Issuance of common stock		(1,913	)		—		—		—		9,936,812		1		124,184			—
Exercise of options		—			—		—		—		167,778		—		2,627			—
Payment of preferred stock dividends		—			—		—		—		—		—		—			(2,719	)
Fair value of interest rate swap agreement		—			—		—		—		—		—		—			—
Foreign currency translation		—			—		—		—		—		—		—			—
Net income		—			—		—		—		—		—		—			15,711

Balances, March 31, 2002		6,881					649				33,644,821	$	3	$	572,122		$	91,742
Payment of preferred stock dividends		152			—		—		—		—		—		4,212			(4,212	)
Conversion of preferred stock to common stock		(7,033	)		—		—		—		7,036,371		1		(792	)		—
Exercise of options		—			—		—		—		270,963		—		5,068			—
Fair value of interest rate swap agreement		—			—		—		—		—		—		—			—
Foreign currency translation		—			—		—		—		—		—		—			—
Net income		—			—		—		—		—		—		—			23,889

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

[Additional columns below]

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

Accumulated

Other

Comprehensive Total

Income Stockholders’ Comprehensive

(Loss) Equity Income

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

Issuance of common stock
— 124,185 —

Exercise of options
— 2,627 —

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

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

Foreign currency translation
162 162 162

Net income
— 15,711 15,711

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

Payment of preferred stock dividends
— — —

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

Exercise of options
— 5,068 —

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

Foreign currency translation
246 246 246

Net income
— 23,889 23,889

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

See Notes to Consolidated Condensed Financial Statements

UNITED AUTO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In Thousands, Except Per Share Amounts)

(Unaudited)

1. Basis of Presentation

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

2. Inventories

Inventories consisted of the following:


		June 30,		December 31,
		2002		2001

New vehicles		$	664,666	$	481,394
Used vehicles			180,044		109,882
Parts, accessories and other			45,668		38,582

	Total inventories	$	890,378	$	629,858

3. Business Combinations

During 2001 and 2000, the Company completed a number of acquisitions. Each of these acquisitions has been accounted for using the purchase method of accounting. As a result, the Company’s financial statements include the results of operations of the acquired dealerships only from the date of acquisition.

During the six months ended June 30, 2002, the Company acquired 65 automobile dealership franchises. The aggregate consideration paid in connection with such acquisitions amounted to $151,340 in cash. The consolidated condensed balance sheets include preliminary allocations of the purchase price relating to these acquisitions, which are subject to final adjustment pending the final implementation by the Company of Statement of Financial Accounting Standards No. 142 Goodwill and Other Intangibles (“SFAS No. 142”). Such allocations resulted in recording approximately $128,279 of intangibles. Final purchase price allocations are expected to be completed in connection with the implementation of SFAS No. 142.

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



	Six Months Ended
	June 30,

	2002		2001

Revenues	$	3,775,100	$	3,558,745
Income from continuing operations		68,721		47,564
Net income		40,204		26,577
Net income per diluted common share		0.98		0.81

UNITED AUTO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In Thousands, Except Per Share Amounts)

(Unaudited)

4. Capital Stock

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

5. Discontinued Operations

During the second quarter of 2002, the Company sold two dealerships which qualify for treatment as discontinued operations in accordance with Statement of Financial Accounting Standards No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets. Combined financial information of the dealerships follows:



	Three Months Ended					Six Months Ended
	June 30,					June 30,

	2002			2001		2002			2001

Revenues	$	10,070		$	23,503	$	30,641		$	47,659
Pre-tax income		(345	)		263		(140	)		495
Gain on disposal		2,000			—		2,000			—


	December 31,
	2001

Inventories	$	11,542
Other assets		19,998
Floorplan notes payable		17,830
Other liabilities		2,150

6. Intangible Assets

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

UNITED AUTO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In Thousands, Except Per Share Amounts)

(Unaudited)

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



	Three Months Ended				Six Months Ended
	June 30,				June 30,

	2002		2001		2002		2001

Income from continuing operations	$	22,839	$	13,255	$	38,427	$	19,695

Net income	$	23,889	$	13,405	$	39,600	$	19,975

Goodwill amortization, net of tax	$	—	$	2,785	$	—	$	5,401

Pro forma income from continuing operations	$	22,839	$	16,040	$	38,427	$	25,096

Pro forma net income	$	23,889	$	16,190	$	39,600	$	25,376

Pro forma basic income from continuing operations per common share	$	0.44	$	0.55	$	0.83	$	0.89

Pro forma basic net income per common share	$	0.47	$	0.55	$	0.86	$	0.90

Pro forma income from continuing operations per diluted common share	$	0.53	$	0.47	$	0.94	$	0.77

Pro forma net income per diluted common share	$	0.56	$	0.48	$	0.96	$	0.78

7. Earnings Per Share

Income available to common shareholders used in the computation of basic earnings per share data is based on net income, adjusted to reflect accrued dividends relating to outstanding preferred stock. Basic earnings per share data is computed using the weighted average number of common shares outstanding. Diluted earnings per share data is based on the weighted average number of common shares outstanding, adjusted for the dilutive effect of stock options, preferred stock and warrants. For the three and six months ended June 30, 2001, 980 and 1,028 shares issuable upon the exercise of outstanding options were excluded from the calculation of diluted earnings per share because the effect of such securities was antidilutive. For the six months ended June 30, 2001, 5,000 shares issuable upon the exercise of warrants were excluded from the calculation of diluted earnings per share because the effect of such securities was antidilutive. A reconciliation of the number of shares used in the calculation of basic and dilutive earnings per share for the three and six month periods ended June 30, 2002 and 2001 follows:



	Three Months
	Ended				Six Months Ended
	June 30,				June 30,

	2002		2001		2002		2001

Weighted average number of common shares outstanding		38,367		23,391		33,935		22,923
Effect of stock options		1,352		688		1,322		418
Effect of preferred stock		3,122		9,345		5,389		9,279
Effect of warrants		—		465		430		—

Weighted average number of common share outstanding, including effect of dilutive securities		42,841		33,889		41,076		32,620

UNITED AUTO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In Thousands, Except Per Share Amounts)

(Unaudited)

8. Supplemental Cash Flow Information

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



	Six Months Ended
	June 30,

	2002		2001

Cash paid for interest	$	36,206	$	44,604
Cash paid for income taxes		7,403		6,493
Acquisition costs financed with assumed debt		22,448		—
Acquisition costs financed with seller financed notes		—		2,000

9. Sale-Leaseback Transactions

The Company finances a portion of its dealership expansion program through sale-leaseback transactions with Automotive Group Realty, LLC (“AGR”), a wholly-owned subsidiary of Penske Corporation. Sales of real property are valued at a price that was either independently confirmed by a third party appraiser, or for the price paid by the Company to an independent third party. Improvements are sold for the Company’s cost. All sale-leaseback transactions with AGR have been consummated at the Company’s net book value, and the resulting leases are being accounted for as operating leases. To date during 2002, the Company has entered into sale-leaseback transactions for $50,000 of properties and related improvements.

10. Senior Subordinated Notes

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

11. Condensed Consolidating Financial Information

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

UNITED AUTO GROUP, INC.

CONDENSED CONSOLIDATING BALANCE SHEET



		June 30, 2002

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


		(In thousands)
Cash and cash equivalents		$	13,699	$	—		$	—	$	(5,420	)	$	—		$	19,119
Accounts receivable, net			310,309		—			—		234,208			8,033			68,068
Inventories			890,378		—			—		691,011			18,241			181,126
Other current assets			31,280		—			2,959		16,295			446			11,580

	Total current assets		1,245,666		—			2,959		936,094			26,720			279,893
Property and equipment, net			262,791					3,429		188,410			3,656			67,296
Intangible assets, net			911,504		—			—		707,450			63,030			141,024
Net assets of discontinued operations			—		—			—		—			—			—
Other assets			56,942		(508,491	)		535,839		20,007			2			9,585

	Total assets	$	2,476,903	$	(508,491	)	$	542,227	$	1,851,961		$	93,408		$	497,798

Floorplan notes payable		$	817,145	$	—		$	—	$	637,810		$	15,898		$	163,437
Accounts payable			134,111					3,009		63,867			2,368			64,867
Accrued expenses			143,725		—			816		95,747			3,239			43,923
Current portion of long-term debt			12,204					—		3,414			—			8,790

	Total current liabilities		1,107,185		—			3,825		800,838			21,505			281,017
Long-term debt			586,170		—			—		347,635			71,391			167,144
Other long-term liabilities			97,444		—			—		90,305			5,637			1,502

	Total liabilities		1,790,799		—			3,825		1,238,778			98,533			449,663

	Total stockholders’ equity		686,104		(508,491	)		538,402		613,183			(5,125	)		48,135

	Total liabilities and stockholders’ equity	$	2,476,903	$	(508,491	)	$	542,227	$	1,851,961		$	93,408		$	497,798

UNITED AUTO GROUP, INC.

CONDENSED CONSOLIDATING BALANCE SHEET



		December 31, 2001

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


		(In thousands)
Cash and cash equivalents		$	2,699	$	—		$	416	$	593	$	—		$	1,690
Accounts receivable, net			245,126		—			—		217,074		10,626			17,426
Inventories			629,858		—			—		586,258		20,336			23,264
Other current assets			16,134		—			4,015		10,994		347			778

	Total current assets		893,817		—			4,431		814,919		31,309			43,158
Property and equipment, net			184,144					1,493		171,052		753			10,846
Intangible assets, net			781,622		—			—		702,649		63,030			15,943
Net assets of discontinued operations			11,560		—			—		6,498		—			5,062
Other assets			55,452		(358,634	)		376,999		25,839		868			10,380

	Total assets	$	1,926,595	$	(358,634	)	$	382,923	$	1,720,957	$	95,960		$	85,389

Floorplan notes payable		$	602,184	$	—		$	—	$	552,272	$	19,022		$	30,890
Accounts payable			75,262					1,972		65,727		3,293			4,270
Accrued expenses			84,842		—			3,337		70,662		6,412			4,431
Current portion of long-term debt			4,202					—		4,202		—			—

	Total current liabilities		766,490		—			5,309		692,863		28,727			39,591
Long-term debt			551,648		—			—		446,266		71,318			34,064
Other long-term liabilities			92,774		—			—		91,279		1,095			400

	Total liabilities		1,410,912		—			5,309		1,230,408		101,140			74,055

	Total stockholders’ equity		515,683		(358,634	)		377,614		490,549		(5,180	)		11,334

	Total liabilities and stockholders’ equity	$	1,926,595	$	(358,634	)	$	382,923	$	1,720,957	$	95,960		$	85,389

UNITED AUTO GROUP, INC.

CONDENSED CONSOLIDATING STATEMENT OF INCOME



	Three Months Ended June 30, 2002

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


	(In thousands)
Total Revenues	$	1,959,407		$	—	$	—		$	1,502,008		$	54,242		$	403,157
Cost of Sales		1,680,122			—		—			1,284,573			46,534			349,015

Gross Profit		279,285			—		—			217,435			7,708			54,142
Selling, general, and administrative expenses		221,149			—		1,770			169,681			5,472			44,226

Operating income		58,136			—		(1,770	)		47,754			2,236			9,916
Floor plan interest expense		(8,919	)		—		—			(7,297	)		(127	)		(1,495	)
Other interest expense		(9,976	)		—		—			(6,648	)		(763	)		(2,565	)
Equity in earnings of subsidiaries		—			—		—			—			—			—

Income (loss) from continuing operations before minority interests and income taxes		39,241			—		(1,770	)		33,809			1,346			5,856
Minority interests		(509	)		—		—			(262	)		(211	)		(36	)
Income taxes		(15,893	)		—		717			(13,693	)		(545	)		(2,372	)

Income (loss) from continuing operations		22,839			—		(1,053	)		19,854			590			3,448
Discontinued operations, net of taxes		1,050			—		—			795			—			255

Net income (loss)	$	23,889		$		$	(1,053	)	$	20,649		$	590		$	3,703

UNITED AUTO GROUP, INC.

CONDENSED CONSOLIDATING STATEMENT OF INCOME



	Three Months Ended June 30, 2001

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


	(In thousands)
Total Revenues	$	1,565,351		$	—	$	—		$	1,414,543		$	58,526		$	92,282
Cost of Sales		1,349,779			—		—			1,217,131			50,113			82,535

Gross Profit		215,572			—		—			197,412			8,413			9,747
Selling, general, and administrative expenses		170,884			—		1,640			154,022			6,125			9,097

Operating income		44,688			—		(1,640	)		43,390			2,288			650
Floor plan interest expense		(11,154	)		—		—			(10,470	)		(216	)		(468	)
Other interest expense		(9,570	)		—		—			(8,327	)		(780	)		(463	)
Equity in earnings of subsidiaries		—			—		—			—			—			—

Income (loss) from continuing operations before minority interests and income taxes		23,964			—		(1,640	)		24,593			1,292			(281	)
Minority interests		(284	)		—		—			(215	)		—			(69	)
Income taxes		(10,425	)		—		713			(10,698	)		(562	)		122

Income (loss) from continuing operations		13,255			—		(927	)		13,680			730			(228	)
Discontinued operations, net of taxes		150			—		—			118			32			—

Net income (loss)	$	13,405		$		$	(927	)	$	13,798		$	762		$	(228	)

UNITED AUTO GROUP, INC.

CONDENSED CONSOLIDATING STATEMENT OF INCOME



	Six Months Ended June 30, 2002

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


	(In thousands)
Total Revenues	$	3,571,942		$	—	$	—		$	2,881,609		$	104,938		$	585,395
Cost of Sales		3,058,935			—		—			2,462,467			89,583			506,885

Gross Profit		513,007			—		—			419,142			15,355			78,510
Selling, general, and administrative expenses		412,024			—		3,489			335,000			10,894			62,641

Operating income		100,983			—		(3,489	)		84,142			4,461			15,869
Floor plan interest expense		(17,404	)		—		—			(15,134	)		(253	)		(2,017	)
Other interest expense		(17,844	)		—		—			(11,172	)		(1,488	)		(5,184	)
Equity in earnings of subsidiaries		—			—		—			—			—			—

Income (loss) from continuing operations before minority interests and income taxes		65,735			—		(3,489	)		57,836			2,720			8,668
Minority interests		(925	)		—		—			(262	)		(421	)		(242	)
Income taxes		(26,383	)		—		1,430			(23,729	)		(545	)		(3,539	)

Income (loss) from continuing operations		38,427			—		(2,059	)		33,845			1,754			4,887
Discontinued operations, net of taxes		1,173			—		—			834			—			339

Net income (loss)	$	39,600		$		$	(2,059	)	$	34,679		$	1,754		$	5,226

UNITED AUTO GROUP, INC.

CONDENSED CONSOLIDATING STATEMENT OF INCOME



	Six Months Ended June 30, 2001

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


	(In thousands)
Total Revenues	$	2,912,888		$	—	$	—		$	2,664,624		$	76,808		$	171,456
Cost of Sales		2,509,020			—		—			2,292,007			65,587			151,426

Gross Profit		403,868			—		—			372,617			11,221			20,030
Selling, general, and administrative expenses		325,834			—		3,280			295,828			8,174			18,552

Operating income		78,034			—		(3,280	)		76,789			3,047			1,478
Floor plan interest expense		(23,426	)		—		—			(22,040	)		(295	)		(1,091	)
Other interest expense		(19,225	)		—		—			(17,188	)		(1,107	)		(930	)
Equity in earnings of subsidiaries		—			—		—			—			—			—

Income (loss) from continuing operations before minority interests and income taxes		35,383			—		(3,280	)		37,561			1,645			(543	)
Minority interests		(298	)		—		—			(215	)		—			(83	)
Income taxes		(15,390	)		—		1,393			(16,265	)		(754	)		236

Income (loss) from continuing operations		19,695			—		(1,887	)		21,081			891			(390	)
Discontinued operations, net of taxes		280			—		—			187			93			—

Net income (loss)	$	19,975		$	—	$	(1,887	)	$	21,268		$	984		$	(390	)

UNITED AUTO GROUP, INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS



		Six Months Ended June 30, 2002

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


		(In thousands)
Net cash provided by operating activities		$	57,829		$	—	$	1,931		$	23,886		$	4,588		$	27,424

Investing Activities:
Purchase of equipment and improvements			(87,902	)		—		(2,347	)		(73,194	)		(2,964	)		(9,397	)
Proceeds from sale-leaseback transactions			50,000			—		—			50,000			—			—
Dealership acquisitions, net of cash acquired			(152,136	)		—		—			(152,136	)		—			—

	Net cash used in investing activities		(190,038	)		—		(2,347	)		(175,330	)		(2,964	)		(9,397	)

Financing Activities:
Proceeds from borrowings of long-term debt			539,000			—		—			539,000			—			—
Payments of long-term debt and capital leases			(525,201	)		—		—			(525,201	)		—			—
Proceeds from issuance of common stock			131,083			—		—			131,083			—			—
Distributions to (from) Parent			—			—		—			2,822			(1,624	)		(1,198	)

	Net cash provided by (used in) financing activities		144,882			—		—			147,704			(1,624	)		(1,198	)

	Net cash distributed by (invested in) discontinued operations		(1,673	)		—		—			(2,273	)		—			600

	Net increase (decrease) in cash and cash equivalents		11,000			—		(416	)		(6,013	)		—			17,429
Cash and cash equivalents, beginning of period			2,699			—		416			593			—			1,690

Cash and cash equivalents, end of period		$	13,699		$	—	$	—		$	(5,420	)	$	—		$	19,119

UNITED AUTO GROUP, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS



		Six Months Ended June 30, 2001

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


		(In thousands)
Net cash provided by (used in) operating activities		$	(28,605	)	$	—	$	2,537		$	(27,884	)	$	(4,728	)	$	1,470

Investing Activities:
Purchase of equipment and Improvements			(40,101	)		—		(2,019	)		(33,155	)		1,631			(6,558	)
Dealership acquisitions, net of cash acquired			(89,469	)		—		—			(90,200	)		731			—

	Net cash provided by (used in) investing activities		(129,570	)		—		(2,019	)		(123,355	)		2,362			(6,558	)

Financing Activities:
Proceeds from borrowings of long-term debt			157,250			—		—			157,250			—			—
Payments of long-term debt and capital leases			(18,641	)		—		—			(32,993	)		3,906			10,446
Proceeds from issuance of common stock			14,681			—		—			14,681			—			—
Distributions to (from) Parent			—			—		—			2,891			(1,331	)		(1,560	)

	Net cash provided by financing activities		153,290			—		—			141,829			2,575			8,886

	Net cash distributed by discontinued operations		1,595			—		—			1,465			—			130

	Net increase (decrease) in cash and cash equivalents		(3,290	)		—		518			(7,945	)		209			3,928
Cash and cash equivalents, beginning of period			4,846			—		124			4,722			—			—

Cash and cash equivalents, end of period		$	1,556		$	—	$	642		$	(3,223	)	$	209		$	3,928

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

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

General

We are the second largest publicly-held automotive retailer in the United States as measured by total revenues. As of June 30, 2002, we owned and operated 125 franchises in the United States and 68 franchises internationally, primarily in the United Kingdom. As an integral part of our dealership operations, we retail new and used automobiles and light trucks, operate service and parts departments, operate collision repair centers and sell various aftermarket products, including finance, warranty, extended service and other insurance contracts.

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

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

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

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

We have made a number of dealership acquisitions in each year since 1999. Each of these acquisitions has been accounted for using the purchase method of accounting. As a result, our financial statements include the results of operations of the acquired dealerships from the date of acquisition.

Critical Accounting Policies

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

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

Finance and Insurance Revenue Recognition

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

Results of Operations

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

Revenues. Retail revenues, which exclude revenues relating to fleet and wholesale transactions, increased by $370.5 million, or 25.9%, from $1.4 billion to $1.8 billion. The overall increase in retail revenues is due primarily to (1) a $34.7 million, or 2.5%, increase in retail revenues at dealerships owned prior to April 1, 2001, and (2) dealership acquisitions made subsequent to April 1, 2001, 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 April 1, 2001 reflects 3.5%, 5.8% and 5.8% increases in new retail vehicle, finance and insurance and service and parts revenues, respectively, offset in part by a 2.6% decrease in used retail vehicle revenues. Revenues of $159.6 million from fleet and wholesale transactions represent a 17.3% increase versus the prior year. The increase in fleet and wholesale revenues is due to acquisitions subsequent to April 1, 2001, offset by a $14.0 million, or 10.6%, decrease at stores owned prior to April 1, 2001.

Retail sales of new vehicles increased by $203.0 million, or 21.5%, from $947.1 million to $1.2 billion. The increase is due primarily to (1) a $31.5 million, or 3.5%, increase at dealerships owned prior to April 1, 2001 and (2) acquisitions made subsequent to April 1, 2001. The increase at dealerships owned prior to April 1, 2001, is due primarily to a 1.6% increase in new retail unit sales, which increased revenue by $14.9 million, and a 1.8% increase in comparative average selling prices per vehicle, which increased revenue by $16.6 million. The Company believes that this increase is due in part to its favorable brand mix, which includes a higher concentration of foreign nameplates, which have been steadily increasing market share in the United States. Approximately 69% of the increase in new retail unit sales at dealerships owned prior to April 1, 2001 results from sales of these foreign nameplates. Aggregate retail unit sales of new vehicles increased by 16.4%, due principally to: (1) the net increase at dealerships owned prior to April 1, 2001 and (2) acquisitions made subsequent to April 1, 2001. We retailed 41,657 new vehicles (67.0% of total retail vehicle sales) during the three months ended June 30, 2002, compared with 35,795 new vehicles (67.0% of total retail vehicle sales) during the three months ended June 30, 2001.

Retail sales of used vehicles increased by $112.9 million, or 38.8%, from $291.0 million to $403.9 million. The increase is due primarily to acquisitions made subsequent to April 1, 2001, partially offset by a $7.2 million, or 2.6%, decrease at dealerships owned prior to April 1, 2001. The decrease at dealerships owned prior to April 1, 2001 is due primarily to a 3.8% decrease in used retail unit sales which decreased revenue by $10.5 million, offset by a 1.2% increase in comparative average selling prices per vehicle which increased revenue by $3.3 million. Aggregate retail unit sales of used vehicles increased by 16.8%, due principally to acquisitions made subsequent to April 1, 2001, partially offset by the net decrease at dealerships owned prior to April 1, 2001. We retailed 20,561 used vehicles (33.0% of total retail vehicle sales) during the three months

ended June 30, 2002, compared with 17,610 used vehicles (33.0% of total retail vehicle sales) during the three months ended June 30, 2001.

Finance and insurance revenues increased by $8.7 million, or 23.1%, from $37.8 million to $46.6 million. The increase is due primarily to: (1) a $1.9 million, or 5.8%, increase at dealerships owned prior to April 1, 2001 and (2) acquisitions made subsequent to April 1, 2001. The increase at dealerships owned prior to April 1, 2001 is primarily due to a revenue increase of $39 per retail vehicle sold, which increased revenue by $2.0 million.

Service and parts revenues increased by $45.9 million, or 29.9%, from $153.4 million to $199.3 million. The increase is due primarily to (1) an $8.5 million, or 5.8%, increase at dealerships owned prior to April 1, 2001 and (2) acquisitions made subsequent to April 1, 2001. The Company believes that its service and parts business is being positively impacted by the complexity of today’s vehicles, manufacturers’ warranty programs for both new and certified used vehicles and increases in retail unit sales at our dealerships.

Fleet revenues decreased $17.9 million, or 37.8%, versus the comparable prior year period. The decrease in fleet revenues is due primarily to a $19.2 million, or 41.9%, decrease in fleet sales revenues at dealerships owned prior to April 1, 2001, partially offset by an increase due to acquisitions made subsequent to April 1, 2001.

Wholesale revenues increased $41.4 million, or 46.7%, versus the comparable prior year period. The increase in wholesale revenues is due primarily to (1) a $5.2 million, or 6.0%, increase at dealerships owned prior to April 1, 2001 and (2) acquisitions made subsequent to April 1, 2001.

Gross Profit. Retail gross profit, which excludes gross profit on fleet and wholesale transactions, increased $64.6 million, or 30.1%, from $215.0 million to $279.6 million. The increase in gross profit is due to: (1) a $10.5 million, or 5.1%, increase in retail gross profit at stores owned prior to April 1, 2001 and (2) acquisitions made subsequent to April 1, 2001. Gross profit as a percentage of revenues on retail transactions increased from 15.0% to 15.5%. Gross profit as a percentage of revenues for new vehicle retail, used vehicle retail, finance and insurance and service and parts revenues was 8.6%, 10.0%, 100.0%, and 47.2%, respectively, compared with 8.2%, 10.5%, 100.0% and 44.7% in the comparable prior year period. The increase in gross profit as a percentage of revenues on retail transactions is primarily attributable to (1) increased gross profit margins on service and parts revenues, (2) an increase in the relative proportion of used vehicle retail sales to total vehicle sales and (3) an increase in the percentage of higher margin service and parts revenues to total retail revenues. Aggregate gross profit on fleet and wholesale transactions decreased by $0.9 million to a loss of $0.3 million.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $50.3 million, or 29.4%, from $170.9 million to $221.1 million. Such expenses increased as a percentage of total revenue from 10.9% to 11.3%, and decreased as a percentage of gross profit from 79.3% to 79.2%. The aggregate increase in selling, general and administrative expenses is due principally to: (1) a $13.4 million, or 8.7%, increase at dealerships owned prior to April 1, 2001, and (2) acquisitions made subsequent to April 1, 2001, partially offset by a $4.9 million decrease in goodwill amortization due to the adoption of SFAS No. 142. The increase in selling, general and administrative expenses at stores owned prior to April 1, 2001 is due in large part to increased selling expenses, including increases in variable compensation as a result of the 5.1% increase in retail gross profit over the prior year, depreciation, healthcare costs, and other insurance costs versus the prior year.

Floor Plan Interest Expense. Floor plan interest expense decreased by $2.2 million, or 20.0%, from $11.2 million to $8.9 million. The decrease in floor plan interest expense is due to a $4.7 million, or 49.9%, decrease at stores owned prior to April 1, 2001, partially offset by acquisitions made subsequent to April 1, 2001. The decrease at stores owned prior to April 1, 2001 is due primarily to a decrease in inventory at those dealerships, coupled with a decrease in our weighted average borrowing rate on floor plan indebtedness during 2002.

Other Interest Expense. Other interest expense increased by $0.4 million, or 4.2%, from $9.6 million to $10.0 million. The increase is due primarily to increased acquisition related indebtedness, offset in part by

(1) a decrease in our weighted average borrowing rate during 2002 and (2) the pay-down of indebtedness with proceeds from equity offerings subsequent to December 31, 2001.

Income Taxes. Income taxes increased by $5.5 million from $10.4 million to $15.9 million. The increase is due to an increase in pre-tax income compared with 2001, partially offset by a decrease in our estimated effective annual tax rate.

Discontinued Operations. Income from discontinued operations, consisting of the results of two dealerships sold during the second quarter of 2002, increased by $0.9 million from $0.2 million to $1.1 million. The current year results include an after-tax gain on disposal of $1.2 million.

Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001

Revenues. Retail revenues, which exclude revenues relating to fleet and wholesale transactions, increased by $627.0 million, or 23.6%, from $2.7 billion to $3.3 billion. The overall increase in retail revenues is due primarily to: (1) a $110.1 million, or 4.5%, increase in retail revenues at dealerships owned prior to January 1, 2001, and (2) dealership acquisitions made subsequent to January 1, 2001. The overall increase in retail revenues at dealerships owned prior to January 1, 2001 reflects 5.6%, 9.7% and 6.5% increases in new retail vehicle, finance and insurance and service and parts revenues, respectively, offset in part by a 0.6% decrease in used retail vehicle revenues. Revenues of $290.2 million from fleet and wholesale transactions represent a 12.4% increase versus the prior year. The increase in fleet and wholesale revenues is due to acquisitions subsequent to January 1, 2001, offset by an $18.9 million, or 8.1%, decrease at stores owned prior to January 1, 2001.

Retail sales of new vehicles increased by $377.7 million, or 21.7%, from $1.7 billion to $2.1 billion. The increase is due primarily to: (1) a $90.1 million, or 5.6%, increase at dealerships owned prior to January 1, 2001 and (2) acquisitions made subsequent to January 1, 2001. The increase at dealerships owned prior to January 1, 2001, is due primarily to a 3.3% increase in new retail unit sales, which increased revenue by $53.5 million, and a 2.2% increase in comparative average selling prices per vehicle, which increased revenue by $36.6 million. The Company believes that this increase is due in part to its favorable brand mix, which includes a higher concentration of foreign nameplates, which have been steadily increasing market share in the United States. Approximately 85% of the increase in new retail unit sales at dealerships owned prior to January 1, 2001 results from sales of these foreign nameplates. Aggregate retail unit sales of new vehicles increased by 16.7%, due principally to: (1) the net increase at dealerships owned prior to January 1, 2001 and (2) acquisitions made subsequent to January 1, 2001. We retailed 77,197 new vehicles (66.7% of total retail vehicle sales) during the six months ended June 30, 2002, compared with 66,168 new vehicles (66.2% of total retail vehicle sales) during the six months ended June 30, 2001.

Retail sales of used vehicles increased by $159.5 million, or 28.8%, from $553.6 million to $713.0 million. The increase is due primarily to acquisitions made subsequent to January 1, 2001, partially offset by a $3.2 million, or 0.6%, decrease at dealerships owned prior to January 1, 2001. The decrease at dealerships owned prior to January 1, 2001, is due primarily to a 1.0% decrease in used retail unit sales, which decreased revenue by $5.0 million, offset by a 0.4% increase in comparative average selling prices per vehicle, which increased revenue by $1.8 million. Aggregate retail unit sales of used vehicles increased by 13.9%, due principally to acquisitions made subsequent to January 1, 2001, partially offset by the net decrease at dealerships owned prior to January 1, 2001. We retailed 38,517 used vehicles (33.3% of total retail vehicle sales) during the six months ended June 30, 2002, compared with 33,811 used vehicles (33.8% of total retail vehicle sales) during the six months ended June 30, 2001.

Finance and insurance revenues increased by $14.9 million, or 21.2%, from $70.4 million to $85.4 million. The increase is due primarily to: (1) a $5.7 million, or 9.7%, increase at dealerships owned prior to January 1, 2001 and (2) acquisitions made subsequent to January 1, 2001. The increase at dealerships owned prior to January 1, 2001 is primarily due to a revenue increase of $49 per retail vehicle sold, which increased revenue by $4.6 million, and a 1.9% increase in retail vehicles sold, which increased revenue by $1.1 million.

Service and parts revenues increased by $74.9 million, or 25.7%, from $291.4 million to $366.2 million. The increase is due primarily to: (1) a $17.5 million, or 6.5%, increase at dealerships owned prior to January 1, 2001 and (2) acquisitions made subsequent to January 1, 2001. The Company believes that its service and parts business is being positively impacted by the complexity of today’s vehicles, manufacturers’ warranty programs for both new and certified used vehicles and increases in retail unit sales at our dealerships.

Fleet revenues decreased $21.2 million, or 25.9%, versus the comparable prior year period. The decrease in fleet revenues is due primarily to a $23.0 million, or 31.2%, decrease in fleet sales revenues at dealerships owned prior to January 1, 2001, partially offset by an increase due to acquisitions made subsequent to January 1, 2001.

Wholesale revenues increased $53.3 million, or 30.3%, versus the comparable prior year period. The increase in wholesale revenues is due primarily to: (1) a $4.1 million, or 2.6%, increase at dealerships owned prior to January 1, 2001 and (2) acquisitions made subsequent to January 1, 2001.

Gross Profit. Retail gross profit, which excludes gross profit on fleet and wholesale transactions, increased $109.5 million, or 27.2%, from $403.2 million to $512.7 million. The increase in gross profit is due to (1) a $27.0 million, or 7.4%, increase in retail gross profit at stores owned prior to January 1, 2001 and (2) acquisitions made subsequent to January 1, 2001. Gross profit as a percentage of revenues on retail transactions increased from 15.2% to 15.6%. Gross profit as a percentage of revenues for new vehicle retail, used vehicle retail, finance and insurance and service and parts revenues was 8.6%, 10.5%, 100.0%, and 46.6%, respectively, compared with 8.3%, 10.5%, 100.0% and 44.7% in the comparable prior year period. The increase in gross profit as a percentage of revenues on retail transactions is primarily attributable to (1) increased gross profit margins on service and parts revenues, (2) an increase in the relative proportion of used vehicle retail sales to total vehicle sales, (3) an increase in the percentage of higher margin service and parts revenues to total retail revenues and (4) an increase in gross profit margins on new retail vehicle revenues. Aggregate gross profit on fleet and wholesale transactions decreased by $0.4 million to $0.3 million.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $86.2 million, or 26.5%, from $325.8 million to $412.0 million. Such expenses increased as a percentage of total revenue from 11.2% to 11.5%, and decreased as a percentage of gross profit from 80.7% to 80.3%. The aggregate increase in selling, general and administrative expenses is due principally to: (1) a $29.0 million, or 10.3%, increase at dealerships owned prior to January 1, 2001 and (2) acquisitions made subsequent to January 1, 2001, partially offset by a $9.6 million decrease in goodwill amortization due to the adoption of SFAS No. 142. The increase in selling, general and administrative expenses at stores owned prior to January 1, 2001 is due in large part to increased selling expenses, including increases in variable compensation as a result of the 7.4% increase in retail gross profit over the prior year, depreciation, healthcare costs, and other insurance costs versus the prior year.

Floor Plan Interest Expense. Floor plan interest expense decreased by $6.0 million, or 25.7%, from $23.4 million to $17.4 million. The decrease in floor plan interest expense is due to an $11.2 million, or 56.9%, decrease at stores owned prior to January 1, 2001, partially offset by acquisitions made subsequent to January 1, 2001. The decrease at stores owned prior to January 1, 2001 is due primarily to a decrease in inventory at those dealerships, coupled with a decrease in our weighted average borrowing rate on floor plan indebtedness during 2002.

Other Interest Expense. Other interest expense decreased by $1.4 million, or 7.2%, from $19.2 million to $17.8 million. The decrease is due primarily to (1) a decrease in our weighted average borrowing rate during 2002 and (2) the pay-down of indebtedness with proceeds from equity offerings subsequent to December 31, 2001, offset in part by increased acquisition related indebtedness.

Discontinued Operations. Income from discontinued operations, consisting of the results of two dealerships sold during the second quarter of 2002, increased by $0.9 million from $0.3 million to $1.2 million. The current year results include an after-tax gain on disposal of $1.2 million.

Liquidity and Capital Resources

Our cash requirements are primarily for working capital, the acquisition of new dealerships, the improvement and expansion of existing facilities and the construction of new facilities. Historically, these cash requirements have been met through borrowings under our credit agreement, the issuance of debt securities, including floor plan notes payable, sale-leaseback transactions, the issuance of equity securities and cash flow from operations. As of June 30, 2002, we had working capital of $138.5 million.

We finance the majority of our new and a portion of our used vehicle inventory under revolving floor plan financing arrangements into which our subsidiaries have entered with various lenders. We make monthly interest payments on the amount financed, but are generally not required to make loan principal repayments prior to the sale of the new and used vehicles we have financed. The floor plan agreements grant a security interest in substantially all of the assets of our automotive dealership subsidiaries. Interest rates on the floor plan arrangements are variable and increase or decrease based on movements in the prime rate or LIBOR. As of June 30, 2002, our outstanding borrowings under floor plan arrangements amounted to $817.1 million.

Our credit agreement with DaimlerChrysler Services North America LLC and Toyota Motor Credit Corporation provides for revolving loans to be used for acquisitions, working capital, the repurchase of common stock and general corporate purposes. Our borrowing capacity under the revolving portion of the credit agreement is $700.0 million and, in addition, we have use of a standby letter of credit facility in the amount of $50.0 million. Our credit agreement also provided for a term loan of $161.0 million, all of which was used during 1999 and 2000 to repurchase our 11.0% senior subordinated notes. Loans under the credit agreement bear interest between LIBOR plus 2.00% and LIBOR plus 3.00%. The credit agreement is fully and unconditionally guaranteed on a joint and several basis by our domestic automotive dealership subsidiaries (and will be guaranteed by domestic automotive dealership subsidiaries acquired or established by us in the future) and contains a number of significant covenants that, among other things, restrict our ability to dispose of assets, incur additional indebtedness, repay other indebtedness, create liens on assets, make investments or acquisitions and engage in mergers or consolidations. Under the terms of our credit agreement, we are required to comply with minimum manufacturer working capital standards at each of our dealerships. We are also required to maintain a total debt (including floor plan borrowings) to stockholders’ equity ratio of less than 2.75:1, a non floor plan debt to stockholders’ equity ratio of less than 1.30:1, a senior debt (non floor plan debt less subordinated debt) to EBITDA ratio of less than 3.75:1. EBITDA is based upon the preceding twelve months and, as defined, is pro forma to include twelve months EBITDA for acquired entities. Our credit agreement also contains typical events of default including change of control and non-payment of obligations. Substantially all of our assets are subject to security interests granted to lenders under the credit agreement. The availability under the revolving portion of the credit agreement is subject to a collateral-based borrowing limitation, which is determined based on certain of our allowable tangible assets (which does not include foreign assets). Revolving loans mature on August 3, 2005. As of June 30, 2002, our outstanding borrowings under the credit agreement amounted to $263.5 million. As of August 12, 2002, our outstanding borrowings under the credit agreement amounted to $322.8 million.

In October 2001, we entered into swap agreements of approximately four years duration pursuant to which a notional $400.0 million of our floating rate debt was exchanged for fixed rate debt. The fixed rate interest to be paid by us is based on LIBOR and amounts to approximately 4.23%. During 2000, we entered into a swap agreement of five years duration pursuant to which a notional $200.0 million of our floating rate debt was exchanged for fixed rate debt for five years. The fixed rate interest to be paid by us is based on LIBOR and amounts to approximately 7.1%. In order to rebalance the ratio of our fixed to floating rate indebtedness after the equity and debt financings in March 2002 discussed below, we terminated the $400.0 million swap agreements originally entered into in October 2001.

In 1997, we issued $200.0 million of 11.0% senior subordinated notes due 2007. In 1999, we redeemed $49.0 million of the notes. In 2000 we completed a tender offer in which we repurchased $147.3 million of the notes at a redemption price of 101% of the principal amount of the subordinated notes. The indentures governing the subordinated notes require us to comply with specified debt service coverage ratio levels in order to incur incremental indebtedness. Such indentures also limit our ability to pay dividends based on a formula

that takes into account, among other things, our consolidated net income, and contain other covenants which restrict our ability to purchase capital stock, incur liens, sell assets and enter into other transactions. The subordinated notes are fully and unconditionally guaranteed on a joint and several basis by certain of our domestic automotive dealership subsidiaries. The $3.7 million of these notes outstanding as of June 30, 2002 was redeemed in July 2002.

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

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

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

The warrants, as originally issued to the PCP Entities, were exercisable at a price of $12.50 per share until February 3, 2002, and $15.50 per share thereafter until May 2, 2004. Pursuant to the anti-dilution provisions of the warrants and as a result of the sale of equity to Mitsui & Co. in 2001, (a) the number of warrants to purchase common stock was increased from 3,898,665 shares to 3,915,580 shares, (b) the number of warrants to purchase non-voting common stock was increased from 1,101,335 shares to 1,106,113 shares, and (c) the warrant exercise price was lowered from $12.50 to $12.45. On February 1, 2002, the PCP Entities exercised the warrants in full and paid us the full exercise price of $62.5 million. The proceeds of the warrant exercise were used to repay borrowings under the Company’s credit agreement.

In September 2001, we announced that our board of directors authorized the repurchase of up to three million shares of our outstanding common stock. Pursuant to that authorization, we repurchased 387,092 shares through open market purchases and negotiated transactions at an aggregate cost of $5.8 million during 2001. The share repurchase program remains open and the Company continually evaluates market conditions and internal financing considerations when contemplating purchasing shares. The Company has not repurchased any shares in 2002.

In March 2002, we acquired Sytner Group plc, a publicly traded automotive retailer operating in excess of 60 franchises in the United Kingdom, pursuant to an all cash tender offer for approximately £95.3 million in

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

During 2002, net cash provided by operations amounted to $57.8 million. Net cash used in investing activities during 2002 totaled $190.0 million, including $87.9 million related to capital expenditures and $152.1 million for acquisitions (which includes approximately $140.0 million relating to the acquisition of Sytner), offset by $50.0 million in proceeds from sale-leaseback transactions. Net cash provided by financing activities during 2002 totaled $144.9 million, relating to: (1) borrowings of $239.0 million for capital expenditures and acquisitions, (2) borrowings of $300.0 million in connection with the issuance of the senior subordinated notes due 2012 and (3) $131.1 million relating to the issuance of voting common stock, offset by $525.2 million used to repay borrowings under the Company’s credit agreement.

We have a number of capital projects planned or underway relating to the expansion and renovation of our retail automotive operations. Gross cash expenditures during 2002 relating to such projects are estimated to aggregate to $130.0 million, a portion of which has already been spent. Historically, we have financed such capital expenditures with borrowings under our credit agreement and cash flow from operations. In the past, we have also entered into sale-leaseback transactions with Automotive Group Realty, LLC (“AGR”), a wholly owned subsidiary of Penske Corporation. We sold certain properties to AGR in 2002 for consideration of $50.0 million and made lease payments to AGR totaling $4.1 million during the six months ended June 30, 2002, which payments relate to properties we lease from AGR. We believe we will continue to finance certain capital expenditures in this fashion during 2002. As a result, we anticipate that the net cash we will fund for capital expenditures will amount to approximately $70.0 million. Funding for such capital expenditures is expected to come from cash flow from operations, supplemented by borrowings under our credit agreement.

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

In connection with an acquisition of dealerships in October 1997, we agreed that if the acquired companies achieved aggregate specified base earnings levels in any of the five years beginning with the year ending December 31, 1999, we would pay to the sellers for each year in which the acquired companies exceeded base earnings an amount equal to $0.7 million plus defined percentages of the amounts earned in excess of such base earnings for any such year. The total amount of payments to be made pursuant to this agreement is limited to $7.0 million. To date we have paid $2.0 million relating to this agreement. The amount of additional payments, if any, will be determined based upon the financial performance of the acquired business in 2002 and 2003. We also have obligations with respect to past transactions totaling $24.5 million over the next four years.

As of June 30, 2002, we had approximately $13.7 million of cash available to fund operations and future acquisitions. In addition, $369.7 million was available for borrowing under our credit agreement as of August 12, 2002, which availability is subject to a maximum actual borrowing limit of $328.9 million due to the credit agreement’s borrowing base collateral limitation (in general, the borrowing base equals certain of our allowable tangible assets plus $300.0 million). Borrowings used to finance the cost of acquisitions and capital construction projects will typically increase tangible assets, allowing the Company to access borrowing capacity which is currently not available due to the base collateral limitation.

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

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

Joint Ventures

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

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

In November 1999 we formed a joint venture to own and operate certain dealerships in Brazil. Our joint venture partners in Brazil are Roger S. Penske, Jr. and Andre Ribeiro Holdings, Ltda. We contributed approximately $3.6 million for a 90.6% interest in United Auto do Brasil, Ltda. and Mr. Penske, Jr. and Mr. Ribeiro each contributed approximately $0.4 million for a 4.7% interest.

In October 2000, we purchased the operating assets of certain dealerships in Fairfield, Connecticut for approximately $26.8 million. We are contractually committed to sell 20% of this venture to Lucio A. Noto and other investors upon receipt of approval for the transfer of ownership by the manufacturers represented at the Fairfield location. The selling price is approximately $5.4 million, representing 20% of the consideration we paid inclusive of assets acquired. Mr. Noto will pay for this interest with $1.2 million at closing, with the remaining $4.2 million to be paid in quarterly payments over twenty years. The payments will be offset from permitted periodic cash distributions to Mr. Noto by the venture, which are expected to fully fund the investors installment payments. The sale of the minority interest to Mr. Noto is subject to approval by the manufacturers.

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

In July 2001 we invested in the Tulsa Auto Collection, a group of dealerships in Tulsa, Oklahoma. The Tulsa Auto Collection consists of seven dealerships representing the Ford, Lincoln-Mercury, Jaguar and Mazda brands. In addition, through the Tulsa Auto Collection, we operate two automotive care service centers and two used vehicle facilities in the Tulsa market. According to the terms of our joint venture arrangement, we have the option to buy out our partner over a period of time.

Cyclicality

Unit sales of motor vehicles, particularly new vehicles, historically have been cyclical, fluctuating with general economic cycles. During economic downturns, the automotive retailing industry tends to experience

similar periods of decline and recession as the general economy. We believe that the industry is influenced by general economic conditions and particularly by consumer confidence, the level of personal discretionary spending, fuel prices, interest rates and credit availability.

Seasonality

Our business is modestly seasonal overall. Our operations generally experience higher volumes of vehicle sales in the second and third quarters of each year due in part to consumer buying trends and the introduction of new vehicle models. Also, demand for cars and light trucks is generally lower during the winter months than in other seasons, particularly in regions of the United States where dealerships may be subject to harsh winters. Accordingly, we expect our revenues and profitability to be generally lower in our first and fourth quarters as compared to our second and third quarters. The greatest seasonalities exist with the dealerships 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.

New Accounting Pronouncements

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

Effects of Inflation

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

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

Forward Looking Statements

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

• our future financial performance;

• future acquisitions;

• future capital expenditures;

• our ability to obtain cost savings and synergies;

• our ability to respond to economic cycles;

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

• trends in the European automotive market;

• our plans and expectations with respect to Sytner;

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

• our liquidity;

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

• our business strategy.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

PART II

Item 1 — Legal Proceedings

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

Item 4 — Submission of Matters to a Vote of Security Holders

(a) The Company’s Annual Meeting of Stockholders (the “Annual Meeting”) was held on May 21, 2002.

(b) Proxies for the Annual Meeting were solicited pursuant to regulation 14A under the Securities Exchange Act of 1934, as amended. There were no solicitations in opposition to management’s nominees listed in the proxy statement. Each of the six nominees listed in the proxy statement were elected.

1. The election of six directors. The results of the vote follow:


Nominee	Class		For		Withheld

James A. Hislop		Class III		35,159,538		148,248
Lucio A. Noto		Class III		35,181,138		126,648
Roger S. Penske		Class III		34,678,809		628,977
Richard J. Peters		Class III		35,159,538		148,248
H. Brian Thompson		Class II		35,181,088		126,698
Laurence Vaughan		Class II		34,848,538		459,248

2. Ratification of Deloitte & Touche LLP as the Company’s independent auditors for the year ending December 31, 2002. The results of the vote follow:


For		Against		Abstain

	35,093,951		211,647		2,188

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

(a) Exhibits


10.1.19.1		Fourth Amendment to the Amended and Restated Credit Agreement dated July 19, 2002, among United Auto Group, Inc., various financial institutions and DaimlerChrysler Services North America LLC, as agent for the lenders.
99.1		Certification of CEO
99.2		Certification of CFO

(b) Reports on Form 8-K.

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

1. April 18, 2002, reporting under Items 7 and 9 (announcement of the scheduled earnings release and related conference call covering the Company’s earnings for the three months ended March 31, 2002).

2. May 1, 2002, reporting under Items 7 and 9 (announcement of the Company’s earnings for the three months ended March 31, 2002).

3. May 9, 2002, reporting under Items 5 and 7 (filing of the Company’s audited financial statements as of and for the three years ended December 31, 2001 and related Management’s Discussion and Analysis of Financial Condition and Results of Operations).

4. May 9, 2002, reporting under Items 7 and 9 (announcement of the Company’s Annual Meeting on May 21, 2002).

5. May 10, 2002, reporting under Item 5 (filing of the Company’s audited financial statements as of and for the three years ended December 31, 2001 and related Management’s Discussion and Analysis of Financial Condition and Results of Operations).

SIGNATURES

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

UNITED AUTO GROUP, INC.

By: /s/ ROGER S. PENSKE

Roger S. Penske

Chairman and

Chief Executive Officer

Date: August 14, 2002

By: /s/ JAMES R. DAVIDSON

James R. Davidson

Executive Vice President — Finance

(Chief Accounting Officer)

Date: August 14, 2002

EXHIBIT INDEX


Exhibit Number		Description

	10.1.19.1	Fourth Amendment to the Amended and Restated Credit Agreement dated July 19, 2002, among United Auto Group, Inc., various financial institutions and DaimlerChrysler Services North America LLC, as agent for the lenders.
	99.1	Certification of CEO
	99.2	Certification of CFO

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

Balances, January 1, 2002	$	(8,380	)	$	515,683		$	—
Issuance of common stock		—			124,185			—
Exercise of options		—			2,627			—
Payment of preferred stock dividends		—			(2,719	)		—
Fair value of interest rate swap agreement		3,539			3,539			3,539
Foreign currency translation		162			162			162
Net income		—			15,711			15,711

Balances, March 31, 2002	$	(4,679	)	$	659,188		$	19,412
Payment of preferred stock dividends		—			—			—
Conversion of preferred stock to common stock		—			(791	)		—
Exercise of options		—			5,068			—
Fair value of interest rate swap agreement		(1,496	)		(1,496	)		(1,496	)
Foreign currency translation		246			246			246
Net income		—			23,889			23,889

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


	•	our future financial performance;

	•	future acquisitions;

	•	future capital expenditures;

	•	our ability to obtain cost savings and synergies;

	•	our ability to respond to economic cycles;


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

	•	trends in the European automotive market;

	•	our plans and expectations with respect to Sytner;

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

	•	our liquidity;

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

	•	our business strategy.


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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



	James R. Davidson
	Executive Vice President — Finance
	(Chief Accounting Officer)