Penske Automotive (PAG) 10-Q 2004 Q2 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from           to

Commission file number 1-12297

United Auto Group, Inc.

(Exact name of registrant as specified in its charter)

Delaware	22-3086739
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
2555 Telegraph Road, Bloomfield Hills, Michigan (Address of principal executive offices)	48302-0954 (Zip Code)

Registrant’s telephone number, including area code:

(248) 648-2500

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

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

     As of August 2, 2004, there were 46,261,792 shares of voting common stock outstanding.

TABLE OF CONTENTS

		Page
PART I
1.	Financial Statements and Supplementary Data
	Consolidated Condensed Balance Sheets (unaudited) as of June 30, 2004 and December 31, 2003		2
	Consolidated Condensed Statements of Income (unaudited) for the three and six months ended June 30, 2004 and 2003		3
	Consolidated Condensed Statements of Cash Flows (unaudited) for the six months ended June 30, 2004 and 2003		4
	Consolidated Condensed Statement of Stockholders’ Equity and Comprehensive Income (unaudited) for the six months ended June 30, 2004		5
	Notes to Consolidated Condensed Financial Statements (unaudited)		6
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
3.	Quantitative & Qualitative Disclosures about Market Risk		40
4.	Disclosure Controls and Procedures		40
PART II
1.	Legal Proceedings		40
2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities		41
4.	Submission of Matters to a Vote of Security Holders		41
6.	Exhibits, Financial Statement Schedules and Reports on Form 8-K		42
	Financial Statements of HBL, LLC, UAG Connecticut I, LLC and UAG Mentor Acquisition, LLC		43
	Signatures		63
Certificate of Amendment of Restated Certificate of Incorporation
Third Restated Certificate of Incorporation
Certificate of Amendment of Bylaws
Bylaws
Supplemental Agreement
Supplemental Agreement
Section 302 Certification
Section 302 Certification
Section 906 Certification

1

UNITED AUTO GROUP, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

			June 30,			December 31,
			2004			2003
			(Unaudited)
			(In thousands, except per
			share amounts)
ASSETS
Cash and cash equivalents			$	19,797		$	13,439
Accounts receivable, net				345,301			342,446
Inventories				1,263,132			1,166,756
Other current assets				52,213			43,090
	Total current assets			1,680,443			1,565,731
Property and equipment, net				430,312			368,504
Goodwill				998,177			991,314
Franchise value				94,312			93,720
Other assets				86,020			89,968
Assets of discontinued operations				—			27,944
	Total Assets		$	3,289,264		$	3,137,181
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Floor plan notes payable			$	1,186,086		$	1,122,065
Accounts payable				190,372			162,404
Accrued expenses				196,016			184,694
Current portion of long-term debt				981			8,574
	Total current liabilities			1,573,455			1,477,737
Long-term debt				544,350			643,145
Other long-term liabilities				165,973			168,111
Liabilities of discontinued operations				—			19,776
	Total Liabilities			2,283,778			2,308,769
Commitments and Contingent Liabilities
Stockholders’ Equity
Preferred stock, $0.0001 par value; 100 shares authorized; none issued and outstanding at June 30, 2004 and December 31, 2003				—			—
Common stock, $0.0001 par value, 80,000 shares authorized; 51,060 shares issued, including 4,845 treasury shares, at June 30, 2004; 46,552 shares issued, including 4,830 treasury shares at December 31, 2003				5			4
Non-voting common stock, $0.0001 par value, 7,125 shares authorized; none issued and outstanding at June 30, 2004 and December 31, 2003				—			—
Class C common stock, $0.0001 par value, 20,000 shares authorized; none issued and outstanding at June 30, 2004 and December 31, 2003				—			—
Additional paid-in-capital				709,377			582,104
Retained earnings				257,078			212,605
Unearned compensation				(1,781	)		(2,616	)
Accumulated other comprehensive income				40,807			36,315
	Total Stockholders’ Equity			1,005,486			828,412
		Total Liabilities and Stockholders’ Equity	$	3,289,264		$	3,137,181

See Notes to Consolidated Condensed Financial Statements

2

UNITED AUTO GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2004			2003			2004			2003
		(Unaudited)
		(In thousands, except per share amounts)
New vehicle sales		$	1,400,597		$	1,280,752		$	2,716,967		$	2,357,317
Used vehicle sales			531,789			473,993			1,056,742			898,546
Finance and insurance			53,322			52,670			106,365			99,228
Service and parts			263,524			224,130			523,007			430,458
Fleet sales			34,382			36,527			66,905			62,421
Wholesale vehicle sales			175,013			123,666			344,953			238,751
	Total revenues		2,458,627			2,191,738			4,814,939			4,086,721
Cost of sales			2,106,050			1,879,141			4,118,114			3,498,736
	Gross profit		352,577			312,597			696,825			587,985
Selling, general and administrative expenses			274,922			242,630			551,837			463,262
Depreciation and amortization			9,109			7,538			17,923			14,538
	Operating income		68,546			62,429			127,065			110,185
Floor plan interest expense			(11,182	)		(11,412	)		(24,505	)		(20,148	)
Other interest expense			(10,052	)		(10,810	)		(20,817	)		(21,092	)
Other income			6,611			—			6,611			—
	Income from continuing operations before minority interests, income taxes and cumulative effect of accounting change		53,923			40,207			88,354			68,945
Minority interests			(518	)		(658	)		(828	)		(1,051	)
Income taxes			(20,923	)		(15,883	)		(34,281	)		(27,236	)
	Income from continuing operations before cumulative effect of accounting change		32,482			23,666			53,245			40,658
Income (loss) from discontinued operations, net of tax			521			198			(38	)		(3	)
	Income before cumulative effect of accounting change		33,003			23,864			53,207			40,655
Cumulative effect of accounting change, net of tax			—			—			—			(3,058	)
	Net income	$	33,003		$	23,864		$	53,207		$	37,597
Basic earnings per common share:
	Continuing operations	$	0.71		$	0.58		$	1.22		$	1.00
	Discontinued operations		0.01			0.01			—			—
	Cumulative effect of accounting change		—			—			—			(0.08	)
	Net income	$	0.72		$	0.59		$	1.21		$	0.93
	Shares		45,897			40,705			43,816			40,643
Diluted earnings per common share:
	Continuing operations	$	0.70		$	0.57		$	1.20		$	0.99
	Discontinued operations		0.01			0.01			—			—
	Cumulative effect of accounting change		—			—			—			(0.07	)
	Net income	$	0.71		$	0.58		$	1.19		$	0.92
	Shares		46,565			41,176			44,548			40,994

See Notes to Consolidated Condensed Financial Statements

3

UNITED AUTO GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

		Six Months Ended
		June 30,
		2004			2003
		(Unaudited)
		(In thousands)
Operating activities:
Net income		$	53,207		$	37,597
Adjustments to reconcile net income to net cash from operating activities:
	Depreciation and amortization		17,923			14,538
	Amortization of unearned compensation		766			217
	Gain on sale of investment		(6,611	)		—
	Cumulative effect of accounting change		—			3,058
	Minority interests and other		(328	)		1,501
	Changes in operating assets and liabilities:
	Accounts receivable		(2,255	)		(44,343	)
	Inventories		(90,997	)		(111,287	)
	Floor plan notes payable		58,770			109,992
	Accounts payable and accrued expenses		43,541			54,515
	Other		(12,708	)		7,880
Net cash from operating activities			61,308			73,668
Investing activities:
Purchase of equipment and improvements			(90,963	)		(83,858	)
Proceeds from sale-leaseback transactions			13,374			—
Dealership acquisitions, net			(3,715	)		(72,825	)
Proceeds from sale of investment			7,703			—
Net cash from investing activities			(73,601	)		(156,683	)
Financing activities:
Net borrowings (repayments) of long-term debt			(107,052	)		78,796
Proceeds from issuance of common stock			127,343			1,264
Dividends			(8,734	)		—
Net cash from financing activities			11,557			80,060
Net cash from discontinued operations			7,094			14,935
Net increase in cash and cash equivalents			6,358			11,980
Cash and cash equivalents, beginning of period			13,439			9,844
Cash and cash equivalents, end of period		$	19,797		$	21,824
Supplemental disclosures of cash flow information:
Cash paid for:
	Interest	$	45,805		$	42,263
	Income taxes		5,136			4,853

See Notes to Consolidated Condensed Financial Statements

4

UNITED AUTO GROUP, INC.

CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME

	Common Stock												Accumulated
					Additional								Other			Total
	Issued				Paid-in		Retained			Unearned			Comprehensive			Stockholders’			Comprehensive
	Shares		Amount		Capital		Earnings			Compensation			Income			Equity			Income
	(Unaudited)
	(Dollars in thousands)
Balances, January 1, 2004		41,722,168	$	4	$	582,104	$	212,605		$	(2,616	)	$	36,315		$	828,412		$	—
Sale of common stock		4,050,000		1		119,434		—			—			—			119,435			—
Stock compensation		442,829		—		7,839		—			835						8,674			—
Unrealized appreciation of investment, net of tax		—		—		—		—			—			(1,866	)		(1,866	)		(1,866	)
Fair value of interest rate swap agreement, net of tax		—		—		—		—			—			3,088			3,088			3,088
Foreign currency translation				—		—		—			—			3,270			3,270			3,270
Dividends								(8,734	)								(8,734	)
Net income		—		—		—		53,207			—			—			53,207			53,207
Balances, June 30, 2004		46,214,997	$	5	$	709,377	$	257,078		$	(1,781	)	$	40,807		$	1,005,486		$	57,699

See Notes to Consolidated Condensed Financial Statements

5

UNITED AUTO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(In Thousands, Except Per Share Amounts)

1. Interim Financial Statements

Basis of Presentation

     The information presented as of June 30, 2004 and December 31, 2003 and for the three and six month periods ended June 30, 2004 and 2003 is unaudited, but includes all adjustments (consisting only of normal and recurring adjustments) which the management of United Auto Group, Inc. (the “Company”) believes to be necessary for the fair presentation of results for the periods presented. The results for the interim periods are not necessarily indicative of results to be expected for the year. These consolidated condensed financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2003, 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.

Discontinued Operations

     The Company periodically enters into transactions to sell or otherwise dispose of non-core or unprofitable dealerships. Such transactions typically result in treating such dealerships as discontinued operations. Combined financial information of the dealerships accounted for as discontinued operations follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2004			2003			2004			2003
Revenues	$	3,017		$	83,106		$	24,422		$	164,934
Pre-tax loss		(954	)		(725	)		(3,065	)		(1,059	)
Pre-tax gain on disposal		1,806			1,052			3,003			1,052

		December 31,
		2003
Inventories		$	17,112
Other assets			10,832
	Total assets	$	27,944
Floor plan notes payable		$	16,411
Other liabilities			3,365
	Total liabilities	$	19,776

Accounting Change

     In March 2003, the Financial Accounting Standards Board’s (“FASB”) Emerging Issues Task Force (“EITF”) finalized Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Cash Consideration Received from a Vendor” (“EITF 02-16”). EITF 02-16 addresses the accounting treatment for vendor allowances and provides that cash consideration received from a vendor should be presumed to be a reduction of the price of the vendors’ product and should therefore be shown as a reduction in the purchase price of the merchandise. To the extent that the cash consideration represents a reimbursement of a specific incremental and identifiable cost, then those vendor allowances should be used to offset such costs. Historically, the company recorded non-refundable floor plan credits and certain other non-refundable credits when received. As a result of EITF 02-16, these credits are now presumed to be reductions in the cost of

6

UNITED AUTO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

purchased inventory and are deferred until the related vehicle is sold. In accordance with EITF 02-16, the Company recorded a cumulative effect of accounting change as of January 1, 2003, the date of adoption, that decreased net income for the six months ended June 30, 2003 by $3.1 million, net of tax, or $0.07 per diluted share.

Estimates

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

Intangible Assets

     The Company’s principal intangible assets relate to its franchise agreements with vehicle manufacturers, which represent the estimated value of franchises acquired in business combinations consummated subsequent to July 1, 2001, and goodwill, which represents the excess of cost over the fair value of tangible and identified intangible assets acquired in connection with business combinations.

     Following is a summary of the changes in the carrying amount of goodwill and franchise value for the six months ended June 30, 2004:

			Franchise
	Goodwill		Value
Balance — January 1, 2004	$	991,314	$	93,720
Additions during period		4,092		—
Foreign currency translation		2,771		592
Balance — June 30, 2004	$	998,177	$	94,312

Stock-Based Compensation

     Key employees, outside directors, consultants and advisors of the Company are eligible to receive stock based compensation pursuant to the terms of the Company’s 2002 Equity Compensation Plan (the “Plan”). The Plan originally allowed for the issuance of 2,100 shares for stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares and other awards. As of June 30, 2004, 1,786 shares of common stock were available for grant under the Plan. In addition, 144 shares of common stock were available for the grant of equity compensation pursuant to a prior plan.

     Pursuant to Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” the Company accounts for option grants using the intrinsic value method. Accordingly, no compensation expense has been recorded in the consolidated condensed financial statements with respect to option grants. The Company has adopted the disclosure only provisions of SFAS 123, “Accounting for Stock Based Compensation,” as amended by SFAS 148, “Accounting for Stock Based Compensation — Transition and Disclosure, an Amendment of FASB Statement No. 123.” Had the Company elected to recognize

7

UNITED AUTO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

compensation expense for option grants using the fair value method, pro forma net income, basic earnings per common share and diluted earnings per common share would have been as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2004		2003		2004		2003
Net income(1)	$	33,003	$	23,864	$	53,207	$	37,597
Fair value method compensation expense attributable to stock-based compensation, net of tax		293		409		634		789
Pro forma net income	$	32,710	$	23,455	$	52,573	$	36,808
Basic earnings per common share	$	0.72	$	0.59	$	1.21	$	0.93
Pro forma basic earnings per common share	$	0.71	$	0.58	$	1.20	$	0.91
Diluted earnings per common share	$	0.71	$	0.58	$	1.19	$	0.92
Pro forma diluted earnings per common share	$	0.70	$	0.57	$	1.18	$	0.90

(1)  Includes approximately $216, $468, $131 and $131 of compensation expense, net of tax, related to restricted stock grants, for the three and six month periods ended June 30, 2004 and 2003, respectively.

     During the six months ended June 30, 2003, the Company granted options to acquire 8 shares of common stock. The weighted average fair value of the option grants of $6.33 was calculated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: no dividend yield; expected volatility of 61%; risk free interest rate of 4% and expected lives of five years. No options were granted during the six months ended June 30, 2004.

2. Inventories

     Inventories consisted of the following:

		June 30,		December 31,
		2004		2003
New vehicles		$	966,168	$	896,398
Used vehicles			242,486		217,381
Parts, accessories and other			54,478		52,977
	Total inventories	$	1,263,132	$	1,166,756

3. Floor Plan Notes Payable

     The Company finances the majority of its new and a portion of its used vehicle inventory under revolving floor plan financing arrangements with various lenders. In the U.S., the Company typically makes monthly interest payments on the amount financed, but is not required to make loan principal repayments prior to the sale of new and used vehicles. In the U.K., principal balances outstanding for 90 days must be repaid whether the vehicle has been sold or not. The floor plan agreements grant a security interest in substantially all of the assets of the Company’s dealership subsidiaries. Interest rates on the floor plan agreements are variable and increase or decrease based on movements in prime or LIBOR borrowing rates.

8

UNITED AUTO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

4. Business Combinations

     During the three and six month periods ended June 30, 2004 and 2003, 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 from the date of acquisition.

     During the six months ended June 30, 2004, the Company acquired three automobile dealership franchises. The aggregate consideration paid in connection with such acquisitions amounted to approximately $2,308 in cash. The consolidated balance sheets include preliminary allocations of the purchase price relating to such acquisitions, resulting in the recognition of approximately $1,941 of goodwill and franchise value. During the six months ended June 30, 2003, the Company acquired ten automobile dealership franchises. The aggregate consideration paid in connection with such acquisitions amounted to approximately $68,500 in cash. The consolidated condensed balance sheets include allocations of the purchase price relating to such acquisitions, resulting in the recognition of approximately $57,114 of goodwill and franchise value.

     The following unaudited consolidated pro forma results of operations of the Company for the three and six month periods ended June 30, 2004 and 2003 give effect to acquisitions and dispositions consummated during 2004 and 2003 as if they had occurred on January 1, 2003.

	Three Months Ended June 30,				Six Months Ended June 30,
	2004		2003		2004		2003
Revenues	$	2,461,127	$	2,176,336	$	4,819,939	$	4,184,189
Income from continuing operations		32,401		24,389		53,082		41,566
Net income		32,955		24,301		53,107		38,146
Net income per diluted common share	$	0.71	$	0.59	$	1.19	$	0.93

5. Capital Transaction

     On March 26, 2004, the Company sold an aggregate of 4,050 shares of common stock to Mitsui & Co., Ltd. and Mitsui & Co. (U.S.A.), Inc. for $119,435, or $29.49 per share. The proceeds of the sale were used for general corporate purposes which included reducing outstanding indebtedness under the Company’s credit agreements.

6. Earnings Per Share

     Basic earnings per common share is computed using the weighted average number of common shares outstanding. Diluted earnings per common share is computed using the weighted average number of common shares outstanding, adjusted for the dilutive effect of stock options, restricted stock and a stock price guarantee in connection with an acquisition consummated in 2000. For the three and six month periods ended June 30, 2003, 505 and 853 shares, respectively, issuable upon the exercise of outstanding options were excluded from the calculation of diluted earnings per common share because the effect of such securities was antidilutive. A

9

UNITED AUTO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

reconciliation of the number of shares used in the calculation of basic and diluted earnings per common share follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2004		2003		2004		2003
Weighted average number of common shares outstanding		45,897		40,705		43,816		40,643
Effect of stock options		458		471		495		351
Effect of restricted stock		210		—		237		—
Weighted average number of common shares outstanding, including effect of dilutive securities		46,565		41,176		44,548		40,994

7. Long Term Debt

     Long-term debt consisted of the following:

		June 30,		December 31,
		2004		2003
U.S. Credit Agreement — Revolving Loans, weighted average interest — 3.11% and 3.23% at June 30, 2004 and December 31, 2003, respectively		$	200,000	$	312,000
U.K. Credit Agreement — Revolving Loans, weighted average interest — 4.99% and 4.75% at June 30, 2004 and December 31, 2003, respectively			41,071		35,203
9.625% Senior Subordinated Notes due 2012			300,000		300,000
Other			4,260		4,516
	Total long-term debt		545,331		651,719
	Less: Current portion		981		8,574
	Net long-term debt	$	544,350	$	643,145

U.S. Credit Agreement

     The Company is party to a credit agreement with DaimlerChrysler Services North America LLC and Toyota Motor Credit Corporation, dated December 22, 2000, as amended (the “U.S. Credit Agreement”), which provides for up to $700,000 in revolving loans to be used for acquisitions, working capital, letters of credit, the repurchase of common stock and general corporate purposes. The Company is also party to an additional $50,000 standby letter of credit agreement provided by DaimlerChrysler Services North America LLC (the “Additional Facility”). Revolving loans mature on August 3, 2005. Loans under the U.S. Credit Agreement bear interest between LIBOR plus 2.00% and LIBOR plus 3.00%. The U.S. Credit Agreement is fully and unconditionally guaranteed on a joint and several basis by the Company’s domestic automotive dealership subsidiaries and contains a number of significant covenants that, among other things, restrict the Company’s 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. The Company is also required to comply with specified ratios and tests defined in the U.S. Credit Agreement. The U.S. Credit Agreement also contains typical events of default, including change of control and non-payment of obligations. Availability under the revolving portion of the U.S. Credit Agreement is subject to a collateral-based borrowing limitation, which is determined based on allowable domestic tangible assets. Substantially all of the Company’s domestic assets not pledged as security under floor plan arrangements in the U.S. are subject to

10

UNITED AUTO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

security interests granted to lenders under the U.S. Credit Agreement. The U.S. Credit Agreement, the subordinated notes discussed below and borrowings under floor plan financing arrangements have cross-default provisions that trigger a default in the event of an uncured default under other material indebtedness. As of June 30, 2004, outstanding borrowings and letters of credit under the U.S. Credit Agreement amounted to $200,000 and $9,500, respectively, and outstanding letters of credit amounted to $25,000 under the Additional Facility. As of June 30, 2004 the Company was in compliance with all financial covenants under the U.S. Credit Agreement.

U.K. Credit Agreement

     The Company’s subsidiaries in the U.K. (the “UK Subsidiaries”) are party to a credit agreement with the Royal Bank of Scotland dated February 28, 2003, as amended (the “U.K. Credit Agreement”), which provides for up to £65,000 (approximately $117,500 as of June 30, 2004) in revolving and term loans to be used for acquisitions, working capital, and general corporate purposes. Loans under the U.K. Credit Agreement bear interest between LIBOR plus 0.85% and LIBOR plus 1.25%. The U.K. Credit Agreement also provides for an additional seasonally adjusted overdraft line of credit up to a maximum of £14,000. The £10,000 term loan capacity under the U.K. Credit Agreement is reduced by £2,000 every six months, with the first reduction having occurred on January 1, 2004. The £55,000 of revolving loans mature on March 31, 2007. The U.K. Credit Agreement is fully and unconditionally guaranteed on a joint and several basis by the U.K. Subsidiaries, and contains a number of significant covenants that, among other things, restrict the ability of the U.K. Subsidiaries to pay dividends, dispose of assets, incur additional indebtedness, repay other indebtedness, create liens on assets, make investments or acquisitions and engage in mergers or consolidations. In addition, the U.K. Subsidiaries are required to comply with specified ratios and tests defined in the U.K. Credit Agreement. The U.K. Credit Agreement also contains typical events of default, including change of control and non-payment of obligations. Substantially all of the U.K. Subsidiaries’ assets not pledged as security under floor plan arrangements in the U.K. are subject to security interests granted to lenders under the U.K. Credit Agreement. The U.K. Credit Agreement also has cross-default provisions that trigger a default in the event of an uncured default under other material indebtedness of the U.K. Subsidiaries. As of June 30, 2004, outstanding borrowings under the U.K. Credit Agreement amounted to approximately £22,724 ($41,071), and the Company was in compliance with all financial covenants under the U.K. Credit Agreement.

Senior Subordinated Notes

     The Company has outstanding $300,000 aggregate principal amount, 9.625% Senior Subordinated Notes due 2012 (the “Notes”). The Notes are unsecured senior subordinated notes and rank behind all existing and future senior debt, including debt under our credit agreements and floor plan indebtedness. The Notes are guaranteed by substantially all domestic subsidiaries on a senior subordinated basis. The Company can redeem all or some of the Notes at its option beginning in 2007 at specified redemption prices. In addition, the Company is allowed to redeem up to 35% of the Notes with the net cash proceeds from specified public equity offerings until 2005. Upon a change of control, each holder of Notes will be able to require the Company 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. As of June 30, 2004, the Company was in compliance with all negative covenants and there were no events of default.

8. Interest Rate Swaps

     During January 2000, the Company entered into a swap agreement of five years duration pursuant to which a notional $200,000 of its U.S. floating rate debt was exchanged for fixed rate debt. The fixed rate interest was 7.15%. In October 2002, the terms of this swap were amended pursuant to which the interest rate was reduced to 5.86% and the term of the agreement was extended for an additional three years. Effective March 2004, the Company terminated a swap agreement pursuant to which a notional $350,000 of its

11

UNITED AUTO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

U.S. floating rate debt had been exchanged for fixed rate debt. This swap had been designated as a cash flow hedge of future interest payments of the LIBOR based U.S. floor plan borrowings. The fair value of the swap upon termination was not significant.

9. Commitments and Contingent Liabilities

     From time to time, the Company is involved in litigation relating to claims arising in the normal course of business. Such issues may relate to litigation with customers, employment related lawsuits, class action lawsuits, purported class action lawsuits and actions brought by governmental authorities. As of June 30, 2004, the Company is not a party to any legal proceedings that, individually or in the aggregate, are reasonably expected to have a material adverse effect on the results of operations, financial condition or cash flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material adverse effect on the results of operations, financial condition or cash flows. The Company is a party to several class action lawsuits. While the Company believes these actions are without merit, any settlement or adverse ruling of one or more of these cases may result in the payment of significant costs and damages.

     In connection with an acquisition of dealerships completed in October 2000, the Company agreed to make a contingent payment in cash to the extent 841,476 shares of common stock issued as consideration for the acquisition are sold subsequent to the fifth anniversary of the transaction and have a market value of less than $12.00 per share at the time of sale. The Company will be forever released from this guarantee in the event the average daily closing price of its common stock for any 90 day period subsequent to the fifth anniversary of the transaction exceeds $12.00 per share. In the event the Company is required to make a payment relating to this guarantee, such payment would result in the revaluation of the common stock issued in the transaction, resulting in a reduction of additional paid-in-capital. 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. To date, no payments have been made relating to the put option. As of June 30, 2004, the maximum of future cumulative cash payments that may be required to make in connection with the put option amounted to $2.6 million.

     The Company has entered into an agreement with a third-party to jointly acquire and manage dealerships in Indiana, Illinois, Ohio, North Carolina and South Carolina. With respect to any joint venture established pursuant to this agreement, the Company is required to repurchase its partner’s interest at the end of the five-year period following the date of the acquisition, in accordance with the terms of the agreement. Pursuant to this arrangement, the Company has entered into a joint venture agreement with respect to the Honda of Mentor dealership. The Company is required to repurchase its partners’ interest in this joint venture in July 2008. The Company expects this payment to be approximately $2.7 million.

12

UNITED AUTO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

10. Condensed Consolidating Financial Information

     The following tables include condensed consolidating financial information as of June 30, 2004 and December 31, 2003 and for the three and six month periods ended June 30, 2004 and 2003 for United Auto Group, Inc. (as the issuer of the Notes), wholly-owned subsidiary guarantors, non-wholly owned subsidiary guarantors, and non-guarantor subsidiaries (primarily representing foreign entities). The condensed consolidating financial information includes certain allocations of balance sheet, income statement and cash flow items, which are not necessarily indicative of the financial position, results of operations and cash flows of these entities on a stand-alone basis. In accordance with the SEC’s Rule 3-10 of Regulation S-X, separate financial statements for each of the entities that constitute the non-wholly owned guarantors are presented within.

United Auto Group, Inc.

Condensed Consolidating Balance Sheet

(Unaudited)

June 30, 2004

											Non-wholly
											Owned			Non-
		Total					United Auto		Guarantor		Guarantor			Guarantor
		Company		Eliminations			Group, Inc.		Subsidiaries		Subsidiaries			Subsidiaries
		(In thousands)
Cash and cash equivalents		$	19,797	$	—		$	2,042	$	1,293	$	1,539		$	14,923
Accounts receivable, net			345,301		—			—		234,191		17,592			93,518
Inventories			1,263,132		—			—		874,408		63,619			325,105
Other current assets			52,213		—			5,121		20,014		665			26,413
	Total current assets		1,680,443		—			7,163		1,129,906		83,415			459,959
Property and equipment, net			430,312		—			4,363		245,207		43,299			137,443
Intangible assets			1,092,489		—			—		774,398		92,741			225,350
Other assets			86,020		(962,104	)		999,107		43,132		250			5,635
	Total Assets	$	3,289,264	$	(962,104	)	$	1,010,633	$	2,192,643	$	219,705		$	828,387
Floor plan notes payable		$	1,186,086	$	—		$	—	$	843,699	$	58,370		$	284,017
Accounts payable			190,372		—			3,509		66,697		7,169			112,997
Accrued expenses			196,016		—			1,638		67,361		35,724			91,293
Current portion of long-term debt			981		—			—		981		—			—
	Total current liabilities		1,573,455		—			5,147		978,738		101,263			488,307
Long-term debt			544,350		—			—		276,825		124,349			143,176
Other long-term liabilities			165,973		—			—		153,483		11,706			784
	Total Liabilities		2,283,778		—			5,147		1,409,046		237,318			632,267
	Total Stockholders’ Equity		1,005,486		(962,104	)		1,005,486		783,597		(17,613	)		196,120
	Total Liabilities and Stockholders’ Equity	$	3,289,264	$	(962,104	)	$	1,010,633	$	2,192,643	$	219,705		$	828,387

13

United Auto Group, Inc.

Condensed Consolidating Balance Sheet

(Unaudited)

December 31, 2003

											Non-wholly
											Owned			Non-
		Total					United Auto		Guarantor		Guarantor			Guarantor
		Company		Eliminations			Group, Inc.		Subsidiaries		Subsidiaries			Subsidiaries
		(In thousands)
Cash and cash equivalents		$	13,439	$	—		$	6,571	$	—	$	1,975		$	4,893
Accounts receivable, net			342,446		—			—		237,509		18,819			86,118
Inventories			1,166,756		—			—		790,169		58,011			318,576
Other current assets			43,090		—			581		23,757		911			17,841
	Total current assets		1,565,731		—			7,152		1,051,435		79,716			427,428
Property and equipment, net			368,504		—			4,235		232,687		29,440			102,142
Intangible assets			1,085,034		—			—		771,858		92,741			220,435
Other assets			89,968		(780,286	)		837,653		26,228		303			6,070
Assets from discontinued operations			27,944		—			—		27,944		—			—
	Total Assets	$	3,137,181	$	(780,286	)	$	849,040	$	2,110,152	$	202,200		$	756,075
Floor plan notes payable		$	1,122,065	$	—		$	—	$	773,865	$	58,907		$	289,293
Accounts payable			162,404		—			17,662		54,033		5,582			85,127
Accrued expenses			184,694		—			2,966		56,149		31,577			94,002
Current portion of long-term debt			8,574		—			—		1,460		—			7,114
	Total current liabilities		1,477,737		—			20,628		885,507		96,066			475,536
Long-term debt			643,145		—			—		410,886		108,266			123,993
Other long-term liabilities			168,111		—			—		153,748		10,446			3,917
Liabilities from discontinued operations			19,776		—			—		19,776		—			—
	Total Liabilities		2,308,769		—			20,628		1,469,917		214,778			603,446
	Total Stockholders’ Equity		828,412		(780,286	)		828,412		640,235		(12,578	)		152,629
	Total Liabilities and Stockholders’ Equity	$	3,137,181	$	(780,286	)	$	849,040	$	2,110,152	$	202,200		$	756,075

14

United Auto Group, Inc.

Condensed Consolidating Statement of Income

(Unaudited)

Three Months Ended June 30, 2004

													Non-wholly
													Owned			Non-
	Total						United Auto			Guarantor			Guarantor			Guarantor
	Company			Eliminations			Group, Inc.			Subsidiaries			Subsidiaries			Subsidiaries
	(In thousands)
Total revenues	$	2,458,627		$	—		$	—		$	1,644,278		$	124,716		$	689,633
Cost of sales		2,106,050			—			—			1,405,374			105,085			595,591
Gross profit		352,577			—			—			238,904			19,631			94,042
Selling, general, and administrative expenses		274,922						3,442			182,209			14,817			74,454
Depreciation and amortization		9,109			—			290			5,819			576			2,424
Operating income		68,546			—			(3,732	)		50,876			4,238			17,164
Floor plan interest expense		(11,182	)		—			—			(8,235	)		(378	)		(2,569	)
Other interest expense		(10,052	)		—			—			(6,042	)		(1,482	)		(2,528	)
Equity in earnings of subsidiaries		—			(50,006	)		50,006			—			—			—
Other income		6,611			—			6,611			—			—			—
Income from continuing operations before minority interests and income taxes		53,923			(50,006	)		52,885			36,599			2,378			12,067
Minority interests		(518	)		—			—			6			(508	)		(16	)
Income taxes		(20,923	)		20,602			(21,789	)		(15,083	)		(980	)		(3,673	)
Income from continuing operations		32,482			(29,404	)		31,096			21,522			890			8,378
Income from discontinued operations, net of tax		521			—			—			521			—			—
Net income	$	33,003		$	(29,404	)	$	31,096		$	22,043		$	890		$	8,378

15

United Auto Group, Inc.

Condensed Consolidating Statement of Income

(Unaudited)

Three Months Ended June 30, 2003

													Non-wholly
													Owned			Non-
	Total						United Auto			Guarantor			Guarantor			Guarantor
	Company			Eliminations			Group, Inc.			Subsidiaries			Subsidiaries			Subsidiaries
	(In thousands)
Total revenues	$	2,191,738		$	—		$	—		$	1,615,214		$	120,309		$	456,215
Cost of sales		1,879,141			—			—			1,382,934			102,474			393,733
Gross profit		312,597			—			—			232,280			17,835			62,482
Selling, general, and administrative expenses		242,630			—			2,999			176,140			12,605			50,886
Depreciation and amortization		7,538			—			206			5,588			238			1,506
Operating income		62,429			—			(3,205	)		50,552			4,992			10,090
Floor plan interest expense		(11,412	)		—			—			(9,351	)		(364	)		(1,697	)
Other interest expense		(10,810	)		—			—			(7,813	)		(805	)		(2,192	)
Equity in earnings of subsidiaries		—			(56,379	)		56,379			—			—			—
Income from continuing operations before minority interests and income taxes		40,207			(56,379	)		53,174			33,388			3,823			6,201
Minority interests		(658	)		—			—			(62	)		(588	)		(8	)
Income taxes		(15,883	)		23,848			(22,493	)		(14,004	)		(1,617	)		(1,617	)
Income from continuing operations		23,666			(32,531	)		30,681			19,322			1,618			4,576
Income (loss) from discontinued operations, net of tax		198			—			—			815			—			(617	)
Net income	$	23,864		$	(32,531	)	$	30,681		$	20,137		$	1,618		$	3,959

16

United Auto Group, Inc.

Condensed Consolidating Statement of Income

(Unaudited)

Six Months Ended June 30, 2004

													Non-wholly
													Owned			Non-
	Total						United Auto			Guarantor			Guarantor			Guarantor
	Company			Eliminations			Group, Inc.			Subsidiaries			Subsidiaries			Subsidiaries
	(In thousands)
Total revenues	$	4,814,939		$	—		$	—		$	3,155,157		$	234,312		$	1,425,470
Cost of sales		4,118,114			—			—			2,691,783			197,497			1,228,834
Gross profit		696,825			—			—			463,374			36,815			196,636
Selling, general, and administrative expenses		551,837						6,302			367,545			28,780			149,210
Depreciation and amortization		17,923			—			558			11,546			997			4,822
Operating income		127,065			—			(6,860	)		84,283			7,038			42,604
Floor plan interest expense		(24,505	)		—			—			(18,567	)		(736	)		(5,202	)
Other interest expense		(20,817	)		—			—			(13,355	)		(2,256	)		(5,206	)
Equity in earnings of subsidiaries		—			(87,324	)		87,324			—			—			—
Other income		6,611			—			6,611			—			—			—
Income from continuing operations before minority interests and income taxes		88,354			(87,324	)		87,075			52,361			4,046			32,196
Minority interests		(828	)		—			—			7			(829	)		(6	)
Income taxes		(34,281	)		40,492			(40,012	)		(23,179	)		(1,870	)		(9,712	)
Income from continuing operations		53,245			(46,832	)		47,063			29,189			1,347			22,478
Loss from discontinued operations, net of tax		(38	)		—			—			(38	)		—			—
Net income	$	53,207		$	(46,832	)	$	47,063		$	29,151		$	1,347		$	22,478

17

United Auto Group, Inc.

Condensed Consolidating Statement of Income

(Unaudited)

Six Months Ended June 30, 2003

													Non-wholly
													Owned			Non-
	Total						United Auto			Guarantor			Guarantor			Guarantor
	Company			Eliminations			Group, Inc.			Subsidiaries			Subsidiaries			Subsidiaries
	(In thousands)
Total revenues	$	4,086,721		$	—		$	—		$	2,965,129		$	213,219		$	908,373
Cost of sales		3,498,736			—			—			2,533,098			181,263			784,375
Gross profit		587,985			—			—			432,031			31,956			123,998
Selling, general, and administrative expenses		463,262			—			6,016			335,173			23,690			98,383
Depreciation and amortization		14,538			—			282			10,768			453			3,035
Operating income		110,185			—			(6,298	)		86,090			7,813			22,580
Floor plan interest expense		(20,148	)		—			—			(16,246	)		(704	)		(3,198	)
Other interest expense		(21,092	)		—			—			(15,024	)		(1,603	)		(4,465	)
Equity in earnings of subsidiaries		—			(96,227	)		96,227			—			—			—
Income from continuing operations before minority interests, income taxes and cumulative effect of accounting change		68,945			(96,227	)		89,929			54,820			5,506			14,917
Minority interests		(1,051	)		—			—			(151	)		(889	)		(11	)
Income taxes		(27,236	)		40,704			(38,040	)		(23,507	)		(2,329	)		(4,064	)
Income from continuing operations before cumulative effect of accounting change		40,658			(55,523	)		51,889			31,162			2,288			10,842
Income (loss) from discontinued operations, net of tax		(3	)		—			—			991			—			(994	)
Income before cumulative effect of accounting change, net of tax		40,655			(55,523	)		51,889			32,153			2,288			9,848
Cumulative effect of accounting change, net of tax		(3,058	)		—			—			(3,014	)		(44	)		—
Net income	$	37,597		$	(55,523	)	$	51,889		$	29,139		$	2,244		$	9,848

18

United Auto Group, Inc.

Condensed Consolidating Statement of Cash Flows

(Unaudited)

Six Months Ended June 30, 2004

													Non-wholly
													Owned			Non-
		Total					United Auto			Guarantor			Guarantor			Guarantor
		Company			Eliminations		Group, Inc.			Subsidiaries			Subsidiaries			Subsidiaries
		(In thousands)
Net cash from operating activities		$	61,308		$	—	$	(11,952	)	$	55,642		$	4,723		$	12,895
Investing Activities:
Purchase of equipment and improvements			(90,963	)		—		(686	)		(34,073	)		(14,856	)		(41,348	)
Proceeds from sale - leaseback transactions			13,374			—		—			13,374			—			—
Dealership acquisitions, net			(3,715	)		—		—			(2,191	)		—			(1,524	)
Proceeds from sale of investments			7,703			—		7,703			—			—			—
	Net cash from investing activities		(73,601	)		—		7,017			(22,890	)		(14,856	)		(42,872	)
Financing Activities:
Net borrowings (repayments) of long-term debt			(107,052	)		—		(118,609	)		(19,533	)		16,083			15,007
Proceeds from issuance of common stock			127,343			—		127,343			—			—			—
Distributions from (to) parent			—			—		—			(18,614	)		(6,386	)		25,000
Dividends			(8,734	)		—		(8,734	)		—			—			—
	Net cash from financing activities		11,557			—		—			(38,147	)		9,697			40,007
	Net cash from discontinued operations		7,094			—		—			7,094			—			—
	Net increase (decrease) in cash and cash equivalents		6,358			—		(4,935	)		1,699			(436	)		10,030
Cash and cash equivalents, beginning of period			13,439			—		6,977			(406	)		1,975			4,893
Cash and cash equivalents, end of period		$	19,797		$	—	$	2,042		$	1,293		$	1,539		$	14,923

19

United Auto Group, Inc.

Condensed Consolidating Statement of Cash Flows

(Unaudited)

Six Months Ended June 30, 2003

													Non-wholly
													Owned			Non-
		Total					United Auto			Guarantor			Guarantor			Guarantor
		Company			Eliminations		Group, Inc.			Subsidiaries			Subsidiaries			Subsidiaries
		(In thousands)
Net cash from operating activities		$	73,668		$	—	$	6,443		$	25,190		$	10,934		$	31,101
Investing Activities:
Purchase of equipment and improvements			(83,858	)		—		(567	)		(53,216	)		(6,706	)		(23,369	)
Proceeds from sale - leaseback transactions			—			—		—			—			—			—
Dealership acquisitions, net			(72,825	)		—		—			(63,792	)		—			(9,033	)
	Net cash from investing activities		(156,683	)		—		(567	)		(117,008	)		(6,706	)		(32,402	)
Financing Activities:
Net borrowings of long-term debt			78,796			—		—			75,072			—			3,724
Proceeds from issuance of common stock			1,264			—		—			1,264			—			—
Distributions from (to) parent			—			—		—			4,722			(4,065	)		(657	)
Dividends			—			—		—			—			—			—
	Net cash from financing activities		80,060			—		—			81,058			(4,065	)		3,067
	Net cash from discontinued operations		14,935			—		—			14,935			—			—
	Net increase in cash and cash equivalents		11,980			—		5,876			4,175			163			1,766
Cash and cash equivalents, beginning of period			9,844			—		—			9,110			454			280
Cash and cash equivalents, end of period		$	21,824		$	—	$	5,876		$	13,285		$	617		$	2,046

20

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. See “Forward Looking Statements.”

Overview

     We are the second largest automotive retailer in the United States as measured by total revenues. As of June 30, 2004, we owned and operated 136 franchises in the United States and 84 franchises internationally, primarily in the United Kingdom. We offer a full range of vehicle brands. In addition to selling new and used vehicles, we generate higher-margin revenue at each of our dealerships through maintenance and repair services and the sale of higher margin products, such as third party finance and insurance products, third-party extended service contracts and replacement and aftermarket automotive products.

     New vehicle revenues include sales to retail customers and to leasing companies providing consumer automobile leasing. Used vehicle revenues include amounts received for used vehicles sold to retail customers, leasing companies providing consumer leasing and other dealers. We generate finance and insurance revenues from sales of third-party extended service contracts, other third-party insurance policies, and accessories, as well as from fees for placing third-party finance and lease contracts. Service and parts revenues include fees paid for repair and maintenance service, the sale of replacement parts, the sale of aftermarket accessories and collision 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 personnel, including commissions and related bonuses. General and administrative expenses include compensation for administration, finance, legal and general management personnel, rent, insurance, utilities and other outside services. A significant portion of our selling expenses are variable, and a significant portion of our general and administrative expenses are subject to our control, allowing us to adjust them over time to reflect economic trends.

     Floor plan interest expense relates to indebtedness incurred in connection with the acquisition of new and used vehicle inventories. Other interest expense consists of interest charges on all of our interest-bearing debt, other than interest relating to floor plan financing.

     We have acquired a number of dealerships each year since our inception. 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.

     The future success of our business will likely be dependent on, among other things, our ability to consummate and integrate acquisitions, our ability to increase sales of higher margin products, especially service and parts sales, our ability to realize returns on our significant capital investment in new and upgraded dealerships, and the success of our international operations. See “Forward Looking Statements.”

Critical Accounting Policies and Estimates

     The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires the application of accounting policies that often involve making estimates and employing judgment. Such judgments influence the reported amounts of the assets, liabilities, revenues and expenses in the Company’s consolidated condensed financial statements. Management, on an ongoing basis, reviews these estimates and assumptions. Management’s determination that modifications in

21

assumptions and estimates are appropriate may result in a material change in our future results of operations or financial position as reported in the condensed consolidated financial statements.

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

Revenue Recognition

Vehicle, Parts and Service Sales

     We record revenue when vehicles are delivered and title has passed to the customer, when vehicle service or repair work is performed and when parts are delivered. Sales promotions that we offer to customers are accounted for as a reduction to the sales price at the time of sale. Incentives, rebates and holdbacks offered directly to us by manufacturers are recognized as earned in accordance with the manufacturer program rules.

Finance and Insurance Sales

     We arrange financing for customers through various financial institutions and receive a commission from the lender equal to the difference between the interest rates charged to customers and the interest rates set by the financing institution. We also receive commissions from the sale of various third-party insurance products to customers, including credit, life, and health insurance policies and extended service contracts. These commissions are recorded as revenue at the time the customer enters into the contract. We are not the obligor under any of these contracts. In the case of finance contracts, a customer may prepay or fail to pay their contract, thereby terminating the contract. Customers may also terminate extended service contracts, which are fully paid at purchase, and become eligible for refunds of unused premiums. In these circumstances, a portion of the commissions we receive may be charged back to us based on the relevant terms of the contracts. The revenue we record relating to commissions is net of an estimate of the ultimate amount of chargebacks we will be required to pay. Such estimate of chargeback exposure is based on our historical chargeback experience arising from similar contracts, including the impact of refinance and default rates on retail finance contracts and cancellation rates on extended service contracts and other insurance products.

Intangible Assets

Useful Lives

     Our principal intangible assets relate to our franchise agreements with vehicle manufacturers, which represent the estimated value of franchises acquired in business combinations consummated subsequent to July 1, 2001, and goodwill, which represents the excess of cost over the fair value of tangible and identified intangible assets acquired in connection with business combinations. We believe the franchise value of our dealerships have an indefinite life based on the following facts:

•  Automotive retailing is a mature industry and is based on franchise agreements with the vehicle manufacturers;

•  There are no known changes or events that would alter the automotive retailing franchise environment;

•  Certain franchise agreement terms are indefinite;

•  Franchise agreements that have limited terms have historically been renewed without substantial cost;

•  Our industry’s history shows that manufacturers rarely terminate franchise agreements; and

•  State franchise laws are typically in favor of the franchisee and limit the franchisor’s ability to terminate the franchise agreement without substantial cause.

     Intangible assets with finite lives are amortized over their estimated useful lives.

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Impairment Testing

     Intangible assets are reviewed for impairment on at least an annual basis. Franchise value impairment is assessed through a comparison of an estimate of its fair value with its carrying value. If the carrying value of a franchise exceeds its estimated fair value, an impairment loss is recognized in an amount equal to that excess. We also evaluate the remaining useful life of our franchises in connection with the annual impairment testing to determine whether events and circumstances continue to support an indefinite useful life. Goodwill impairment is assessed at the “reporting unit” level. We have three “regions,” each of which has been determined to be a reporting unit based on the fact that discrete financial information is available for each region and each region’s operating results are regularly reviewed by our executive management team. If the carrying amount of a reporting unit is determined to exceed its estimated fair value, an impairment loss is recognized in an amount equal to that excess.

Investments

     Investments include marketable securities and investments in businesses accounted for under the equity method. Marketable securities include investments in debt and equity securities. Marketable securities held by us are typically classified as available for sale and are stated at fair value in our balance sheet with unrealized gains and losses included in other comprehensive income, a separate component of stockholders’ equity. Declines in investment values that are deemed to be other than temporary would result in an impairment charge reducing the investments’ carrying value to fair value. A majority of our investments are in joint venture relationships that are more fully described in “Joint Ventures” in this Management’s Discussion and Analysis. Such joint ventures are accounted for under the equity method, pursuant to which we record our proportionate share of joint venture income each period.

Self-Insurance

     We retain risk relating to certain of our general liability insurance, workers’ compensation insurance and employee medical benefits in the United States. As a result, we are likely to be responsible for a majority of the claims and losses incurred under these programs. The amount of risk we retain varies by program, but we typically pay per occurrence deductibles and, for certain exposures, have pre-determined maximum exposure limits for each insurance period. The majority of losses, if any, above the pre-determined exposure limits are typically paid by third-party insurance carriers. Our estimate of future losses is prepared by management using the Company’s historical loss experience and industry based development factors.

Income Taxes

     Tax regulations may require items to be included in the tax return at different times than the items are reflected in the financial statements. Some of these differences are permanent, such as expenses which are not deductible on our tax return, and some are timing differences, such as the timing of depreciation expense. Timing differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in our tax return in future years for which we have already recorded the tax effect in our financial statements. Deferred tax liabilities generally represent expenses recognized in our financial statements for which payment has been deferred or deductions taken on our tax return which have not yet been recognized as expense in our financial statements. We establish valuation allowances for our deferred tax assets if the amount of expected future taxable income is not likely to allow for the use of the deduction or credit.

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Results of Operations

Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003

Total Retail Data

							2004 vs. 2003
	2004			2003			Change			% Change
Total retail unit sales		67,771			66,971			800			1.2	%
Total same store retail unit sales		62,115			65,000			(2,885	)		(4.4	)%
Total retail sales revenue	$	2,249.2		$	2,031.5		$	217.7			10.7	%
Total same store retail sales revenue	$	2,014.2		$	1,952.6		$	61.6			3.2	%
Total retail gross profit	$	351.8		$	312.2		$	39.6			12.7	%
Total retail gross margin		15.6	%		15.4	%		0.2	%		1.3	%

Units

     Retail data includes retail new vehicle, retail used vehicle, finance and insurance and service and parts transactions. Retail unit sales of vehicles increased by 800 units, or 1.2%, from 2003 to 2004. The increase is due to a 3,685 unit increase from net dealership acquisitions during the period, offset by a 2,885 unit, or 4.4%, decrease in same store retail unit sales. The same store decrease is due primarily to lower new and used unit sales of the domestic brands.

Revenues

     Retail sales revenue increased $217.7 million, or 10.7%, from 2003 to 2004. The increase is due to: (1) a $61.6 million, or 3.2%, increase in same store revenues and (2) a $156.1 million increase from net dealership acquisitions during the period. The same store revenue increase is due to (1) a $1,494, or 5.2%, increase in average new vehicle revenue per unit, which increased revenue by $63.8 million, (2) a $2,131, or 10.5%, increase in average used vehicle revenue per unit, which increased revenue by $47.6 million, (3) a $12, or 1.5%, increase in average finance and insurance revenue per unit, which increased revenue by $0.7 million, and (4) a $20.6 million, or 9.5%, increase in service and parts revenues, partially offset by the 4.4% decrease in retail unit sales which decreased revenue by $71.1 million.

Gross Profit

     Retail gross profit increased $39.6 million, or 12.7%, from 2003 to 2004. The increase is due to (1) the 1.2% increase in retail unit sales, which increased gross profit $2.9 million, (2) a $177, or 7.2%, increase in average gross profit per new vehicle retailed, which increased gross profit by $7.8 million, (3) a $209, or 11.0%, increase in average gross profit per used vehicle retailed, which increased gross profit by $4.8 million, and (4) a $24.1 million, or 22.4%, increase in service and parts gross profit.

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New Vehicle Data

							2004 vs. 2003
	2004			2003			Change			% Change
New retail unit sales		45,140			43,932			1,208			2.7	%
Same store new retail unit sales		42,184			42,664			(480	)		(1.1	)%
New retail sales revenue	$	1,400.6		$	1,280.8		$	119.8			9.4	%
Same store new retail sales revenue	$	1,280.1		$	1,231.0		$	49.1			4.0	%
New retail sales revenue per unit	$	31,028		$	29,153		$	1,875			6.4	%
Same store new retail sales revenue per unit	$	30,346		$	28,852		$	1,494			5.2	%
Gross profit — new	$	119.0		$	108.0		$	11.0			10.1	%
Average gross profit per new vehicle retailed	$	2,636		$	2,459		$	177			7.2	%
Gross margin % — new		8.5	%		8.4	%		0.1	%		1.2	%

Units

     Retail unit sales of new vehicles increased 1,208 units, or 2.7%, from 2003 to 2004. The increase is due to a 1,688 unit increase from net dealership acquisitions during the period, offset by a 480 unit, or 1.1%, decrease in same store retail unit sales. The same store decrease is due primarily to lower new unit sales of the domestic brands, offset by growth in our international operations.

Revenues

     New vehicle retail sales revenue increased $119.8 million, or 9.4%, from 2003 to 2004. The increase is due to: (1) a $49.1 million, or 4.0%, increase in same store revenues and (2) a $70.7 million increase from net dealership acquisitions during the period. The same store revenue increase is due to a $1,494, or 5.2%, increase in comparative average selling prices per unit, which increased revenue by $63.7 million, offset by the 1.1% decrease in retail unit sales, which decreased revenue by $14.6 million.

Gross Profit

     Retail gross profit from new vehicle sales increased $11.0 million, or 10.1%, from 2003 to 2004. The increase is due to: (1) the 2.7% increase in new retail unit sales, which increased gross profit by $3.2 million, and a $177, or 7.2%, increase in average gross profit per new vehicle retailed, which increased gross profit by $7.8 million.

Used Vehicle Data

							2004 vs. 2003
	2004			2003			Change			% Change
Used retail unit sales		22,631			23,039			(408	)		(1.8	)%
Same store used retail unit sales		19,931			22,336			(2,405	)		(10.8	)%
Used retail sales revenue	$	531.8		$	474.0		$	57.8			12.2	%
Same store used retail sales revenue	$	448.5		$	455.0		$	(6.5	)		(1.4	)%
Used retail sales revenue per unit	$	23,498		$	20,573		$	2,925			14.2	%
Same store used retail sales revenue per unit	$	22,502		$	20,371		$	2,131			10.5	%
Gross profit — used	$	47.9		$	44.0		$	3.9			8.9	%
Average gross profit per used vehicle retailed	$	2,117		$	1,908		$	209			11.0	%
Gross margin % — used		9.0	%		9.3	%		(0.3	)%		(3.2	)%

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Units

     Retail unit sales of used vehicles decreased 408 units, or 1.8%, from 2003 to 2004. The decrease is due to a 2,405 unit, or 10.8%, decrease in same store used retail unit sales, offset by a 1,997 unit increase from net dealership acquisitions during the period. We believe that the same store decrease is due primarily to a challenging used vehicle market in the United States during the second quarter of 2004 based in part on the relative affordability of new vehicles.

Revenues

     Used vehicle retail sales revenue increased $57.8 million, or 12.2%, from 2003 to 2004. The increase is due to a $64.3 million increase from net dealership acquisitions during the period, offset by a $6.5 million, or 1.4%, decrease in same store revenues. The same store revenue decrease is due to the 10.8% decrease in retail unit sales, which decreased revenue by $54.1 million, offset by a $2,131, or 10.5%, increase in comparative average selling prices per vehicle which increased revenue by $47.6 million.

Gross Profit

     Retail gross profit from used vehicle sales increased $3.9 million, or 8.9%, from 2003 to 2004. The increase is due to a $209, or 11.0%, increase in average gross profit per used vehicle retailed, which increased gross profit by $4.8 million, offset by the 10.8% decrease in used retail unit sales, which decreased gross profit by $0.9 million.

Finance and Insurance Data

					2004 vs. 2003
	2004		2003		Change			% Change
Total retail unit sales		67,771		66,971		800			1.2	%
Total same store retail unit sales		62,115		65,000		(2,885	)		(4.4	)%
Finance and insurance revenue	$	53.3	$	52.7	$	0.6			1.3	%
Same store finance and insurance revenue	$	49.6	$	51.1	$	(1.5	)		(3.1	)%
Finance and insurance revenue per unit	$	787	$	786	$	1			0.1	%
Same store finance and insurance revenue per unit	$	798	$	786	$	12			1.5	%

     Finance and insurance revenue increased $0.6 million, or 1.3%, from 2003 to 2004. The increase is due to a $2.1 million increase from net dealership acquisitions during the period, offset by a $1.5 million, or 3.1%, decrease in same store revenues. The same store revenue decrease is due to the 4.4% decrease in retail unit sales, which decreased revenue by $2.2 million, partly offset by a $12, or 1.5%, increase in comparative average finance and insurance revenue per unit, which increased revenue by $0.7 million.

Service and Parts Data

							2004 vs. 2003
	2004			2003			Change			% Change
Service and parts revenue	$	263.5		$	224.1		$	39.4			17.6	%
Same store service and parts revenue	$	236.1		$	215.5		$	20.6			9.5	%
Gross profit	$	131.6		$	107.5		$	24.1			22.4	%
Same store gross profit	$	116.7		$	103.2		$	13.5			13.1	%
Gross margin		49.9	%		48.0	%		1.9	%		4.0	%
Same store gross margin		49.4	%		47.9	%		1.5	%		3.1	%

     Service and parts revenue increased $39.4 million, or 17.6%, from 2003 to 2004. The increase is due to: (1) a $20.6 million, or 9.5%, increase in same store revenues and (2) an $18.8 million increase from net dealership acquisitions during the period. We believe that our service and parts business is being positively

26

impacted by increases in total retail unit sales at our dealerships and capacity increases in our service and parts operations resulting from our facility improvement and expansion programs.

     Service and parts gross profit increased $24.1 million, or 22.4%, from 2003 to 2004. The increase is due to: (1) a $13.5 million, or 13.1%, increase in same store gross profit and (2) a $10.6 million increase from net dealership acquisitions during the period.

Selling, General and Administrative

     Selling, general and administrative “SG&A” expenses increased $32.3 million, or 13.3%, from $242.6 million to $274.9 million. The aggregate increase is primarily due to (1) a $13.2 million, or 5.7%, increase in same store SG&A and (2) a $19.1 million increase from net dealership acquisitions during the period. The increase in same store SG&A is due in large part to (1) a net increase in variable selling expenses, including increases in variable compensation as a result of the 12.7% increase in retail gross profit over the prior year, (2) increased rent and related costs due in part to our facility improvement and expansion program and, (3) increased advertising and promotion caused by the overall competitiveness of the retail vehicle market.

     SG&A expenses increased as a percentage of total revenue from 11.1% to 11.2% and as a percentage of gross profit from 77.6% to 78.0%.

Depreciation and Amortization

     Depreciation and amortization increased $1.6 million, or 20.8%, from $7.5 million to $9.1 million. The increase is due to (1) a $1.3 million, or 16.9%, increase in same store depreciation and amortization and (2) a $0.3 million increase from net dealership acquisitions during the period. The same store increase is due in large part to our facility improvement and expansion program.

Floor Plan Interest Expense

     Floor plan interest expense decreased $0.2 million, or 2.1%, from $11.4 million to $11.2 million. The decrease is due to a $0.8 million, or 7.1%, decrease in same store floor plan interest expense, offset by a $0.6 million increase from net dealership acquisitions during the period. The same store decrease is primarily due to a decrease in our weighted average borrowing rate during 2004 compared to 2003, offset in part by an increase in average inventories during 2004 compared to 2003.

Other Interest Expense

     Other interest expense decreased $0.7 million, or 0.7%, from $10.8 million to $10.1 million. The decrease is due primarily to the reduction of outstanding indebtedness with the proceeds of the March 26, 2004 sale of common stock.

Other Income

     Other income of $6.6 million during the three months ended June 30, 2004 related to the sale of an investment.

Income Taxes

     Income taxes increased $5.0 million, or 31.7%, from $15.9 million to $20.9 million. The increase is due primarily to an increase in pre-tax income compared with 2003, offset by a reduction in our effective rate resulting from an increase in the relative proportion of our income from our U.K. operations, which are taxed at a lower rate.

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Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003

Total Retail Data

							2004 vs. 2003
	2004			2003			Change			% Change
Total retail unit sales		132,550			124,813			7,737			6.2	%
Total same store retail unit sales		121,280			122,224			(944	)		(0.8	)%
Total retail sales revenue	$	4,403.1		$	3,785.5		$	617.6			16.3	%
Total same store retail sales revenue	$	3,941.1		$	3,688.6		$	252.5			6.8	%
Total retail gross profit	$	694.8		$	587.9		$	106.9			18.2	%
Total retail gross margin		15.8	%		15.5	%		0.3	%		1.9	%

Units

     Retail data includes retail new vehicle, retail used vehicle, finance and insurance and service and parts transactions. Retail unit sales of vehicles increased by 7,737 units, or 6.2%, from 2003 to 2004. The increase is due to an 8,681 unit increase from net dealership acquisitions during the period, offset by a 944 unit, or 0.8%, decrease in same store retail unit sales. The same store decrease is due primarily to lower new and used unit sales of the domestic brands.

Revenues

     Retail sales revenue increased $617.6 million, or 16.3%, from 2003 to 2004. The increase is due to: (1) a $252.5 million, or 6.8%, increase in same store revenues and (2) a $365.1 million increase from net dealership acquisitions during the period. The same store revenue increase is due to (1) a $1,646, or 5.7%, increase in average new vehicle revenue per unit, which increased revenue by $131.2 million, (2) a $1,843, or 9.0%, increase in average used vehicle revenue per unit, which increased revenue by $78.3 million (3) an $18, or 2.3%, increase in average finance and insurance revenue per unit, which increased revenue by $2.2 million and (4) a $50.2 million, or 12.0%, increase in service and parts revenues, partially offset by the 0.8% decrease in retail unit sales which decreased revenue by $9.4 million.

Gross Profit

     Retail gross profit increased $106.9 million, or 18.2%, from 2003 to 2004. The increase is due to (1) the 6.2% increase in retail unit sales, which increased gross profit $25.8 million, (2) a $210, or 8.6%, increase in average gross profit per new vehicle retailed, which increased gross profit by $17.0 million, (3) a $191, or 9.9%, increase in average gross profit per used vehicle retailed, which increased gross profit by $8.3 million, (4) an $8, or 0.9%, increase in average finance and insurance revenue per unit, which increased gross profit by $0.9 million and (5) a $54.9 million, or 26.6%, increase in service and parts gross profit.

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New Vehicle Data

							2004 vs. 2003
	2004			2003			Change			% Change
New retail unit sales		87,261			81,305			5,956			7.3	%
Same store new retail unit sales		81,221			79,684			1,537			1.9	%
New retail sales revenue	$	2,717.0		$	2,357.3		$	359.7			15.3	%
Same store new retail sales revenue	$	2,476.3		$	2,298.3		$	178.0			7.7	%
New retail sales revenue per unit	$	31,136		$	28,994		$	2,142			7.4	%
Same store new retail sales revenue per unit	$	30,489		$	28,843		$	1,646			5.7	%
Gross profit — new	$	231.6		$	198.7		$	32.9			16.5	%
Average gross profit per new vehicle retailed	$	2,654		$	2,444		$	210			8.6	%
Gross margin % — new		8.5	%		8.4	%		0.1	%		1.2	%

Units

     Retail unit sales of new vehicles increased 5,956 units, or 7.3%, from 2003 to 2004. The increase is due to: (1) a 1,537 unit, or 1.9%, increase in same store retail unit sales and (2) a 4,419 unit increase from net dealership acquisitions during the period. We believe that the same store increase is due in part to our favorable brand mix, which includes a concentration of foreign and luxury nameplates, offset by lower new unit sales of the domestic brands.

Revenues

     New vehicle retail sales revenue increased $359.7 million, or 15.3%, from 2003 to 2004. The increase is due to: (1) a $178.0 million, or 7.7%, increase in same store revenues and (2) a $181.7 million increase from net dealership acquisitions during the period. The same store revenue increase is due to the 1.9% increase in retail unit sales, which increased revenue by $46.8 million, and a $1,646, or 5.7%, increase in comparative average selling prices per unit, which increased revenue by $131.2 million.

Gross Profit

     Retail gross profit from new vehicle sales increased $32.9 million, or 16.5%, from 2003 to 2004. The increase is due to: (1) the 7.3% increase in new retail unit sales, which increased gross profit by $15.8 million, and a $210, or 8.6%, increase in average gross profit per new vehicle retailed, which increased gross profit by $17.1 million.

Used Vehicle Data

							2004 vs. 2003
	2004			2003			Change			% Change
Used retail unit sales		45,289			43,508			1,781			4.1	%
Same store used retail unit sales		40,059			42,540			(2,481	)		(5.8	)%
Used retail sales revenue	$	1,056.7		$	898.5		$	158.2			17.7	%
Same store used retail sales revenue	$	896.5		$	873.6		$	22.9			2.6	%
Used retail sales revenue per unit	$	23,333		$	20,652		$	2,681			13.0	%
Same store used retail sales revenue per unit	$	22,380		$	20,537		$	1,843			9.0	%
Gross profit — used	$	95.4		$	83.4		$	12.0			14.4	%
Average gross profit per used vehicle retailed	$	2,107		$	1,916		$	191			9.9	%
Gross margin % — used		9.0	%		9.3	%		(0.3	)%		(3.8	)%

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Units

     Retail unit sales of used vehicles increased 1,781 units, or 4.1%, from 2003 to 2004. The increase is due to a 4,262 unit increase from net dealership acquisitions during the period, offset by a 2,481 unit, or 5.8%, decrease in same store used retail unit sales. We believe that the same store decrease is due primarily to a challenging used vehicle market in the United States during the second quarter of 2004 based in part on the relative affordability of new vehicles.

Revenues

     Used vehicle retail sales revenue increased $158.2 million, or 17.7%, from 2003 to 2004. The increase is due to: (1) a $22.9 million, or 2.6%, increase in same store revenues and (2) a $135.3 million increase from net dealership acquisitions during the period. The same store revenue increase is due to a $1,843, or 9.0%, increase in comparative average selling prices per vehicle, which increased revenue by $78.4 million, offset by the 5.8% decrease in retail unit sales, which decreased revenue by $55.5 million.

Gross Profit

     Retail gross profit from used vehicle sales increased $12.0 million, or 14.4%, from 2003 to 2004. The increase is due to: (1) the 4.1% increase in used retail unit sales, which increased gross profit by $3.8 million, and (2) a $191, or 9.9%, increase in average gross profit per used vehicle retailed, which increased gross profit by $8.2 million.

Finance and Insurance Data

					2004 vs. 2003
	2004		2003		Change			% Change
Total retail unit sales		132,550		124,813		7,737			6.2	%
Total same store retail unit sales		121,280		122,224		(944	)		(0.8	)%
Finance and insurance revenue	$	106.4	$	99.2	$	7.2			7.3	%
Same store finance and insurance revenue	$	98.6	$	97.2	$	1.4			1.5	%
Finance and insurance revenue per unit	$	803	$	795	$	8			0.9	%
Same store finance and insurance revenue per unit	$	813	$	795	$	18			2.3	%

     Finance and insurance revenue increased $7.2 million, or 7.3%, from 2003 to 2004. The increase is due to: (1) a $1.4 million, or 1.5%, increase in same store revenues and (2) a $5.8 million increase from net dealership acquisitions during the period. The same store revenue increase is due to an $18, or 2.3%, increase in comparative average finance and insurance revenue per unit, which increased revenue by $2.2 million, offset by a 0.8% decrease in retail unit sales, which decreased revenue by $0.8 million.

Service and Parts Data

							2004 vs. 2003
	2004			2003			Change			% Change
Service and parts revenue	$	523.0		$	430.5		$	92.5			21.5	%
Same store service and parts revenue	$	469.7		$	419.5		$	50.2			12.0	%
Gross profit	$	261.5		$	206.6		$	54.9			26.6	%
Same store gross profit	$	232.3		$	201.2		$	31.1			15.4	%
Gross margin		50.0	%		48.0	%		2.0	%		4.2	%
Same store gross margin		49.5	%		48.0	%		1.5	%		3.1	%

     Service and parts revenue increased $92.5 million, or 21.5%, from 2003 to 2004. The increase is due to: (1) a $50.2 million, or 12.0%, increase in same store revenues and (2) a $42.3 million increase from net dealership acquisitions during the period. We believe that our service and parts business is being positively

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impacted by the increases in retail unit sales at our dealerships and capacity increases in our service and parts operations resulting from our facility improvement and expansion programs.

     Service and parts gross profit increased $54.9 million, or 26.6%, from 2003 to 2004. The increase is due to: (1) a $31.1 million, or 15.4%, increase in same store gross profit and (2) a $23.8 million increase from net dealership acquisitions during the period.

Selling, General and Administrative

     Selling, general and administrative “SG&A” expenses increased $88.5 million, or 19.1%, from $463.3 million to $551.8 million. The aggregate increase is primarily due to (1) a $45.8 million, or 10.2%, increase in same store SG&A and (2) a $42.7 million increase from net dealership acquisitions during the period. The increase in same store SG&A expenses is due in large part to (1) a net increase in variable selling expenses, including increases in variable compensation as a result of the 18.2% increase in retail gross profit over the prior year, (2) increased rent and related costs due in part to our facility improvement and expansion program and, (3) increased advertising and promotion caused by the overall competitiveness of the retail vehicle market.

     SG&A expenses increased as a percentage of total revenue from 11.3% to 11.5% and increased as a percentage of gross profit from 78.8% to 79.2%.

Depreciation and Amortization

     Depreciation and amortization increased $3.4 million, or 23.3%, from $14.5 million to $17.9 million. The increase is due to (1) a $2.7 million, or 19.0%, increase in same store depreciation and amortization and (2) a $0.7 million increase from net dealership acquisitions during the period. The same store increase is due in large part to our facility improvement and expansion program.

Floor Plan Interest Expense

     Floor plan interest expense increased $4.4 million, or 21.9%, from $20.1 million to $24.5 million. The increase is due to: (1) a $3.1 million, or 15.7%, increase in same store floor plan interest expense and (2) a $1.3 million increase from net dealership acquisitions during the period. The same store increase is primarily due to an increase in average inventories during 2004 compared to 2003.

Other Interest Expense

     Other interest expense decreased $0.3 million, or 1.3%, from $21.1 million to $20.8 million. The decrease is due primarily to the reduction of outstanding indebtedness with the proceeds of the March 26, 2004 sale of common stock.

Other Income

     Other income of $6.6 million during the six months ended June 30, 2004 related to the sale of an investment.

Income Taxes

     Income taxes increased $7.1 million, or 26.1%, from $27.2 million to $34.3 million. The increase is due primarily to an increase in pre-tax income compared with 2003, offset by a reduction in our effective rate resulting from an increase in the relative proportion of our income from our U.K. operations, which are taxed at a lower rate.

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Liquidity and Capital Resources

     Our cash requirements are primarily for working capital, the acquisition of new dealerships, the improvement and expansion of existing facilities, the construction of new facilities and dividends. Historically, these cash requirements have been met through cash flow from operations, borrowings under our credit agreements (including floor plan arrangements), the issuance of debt securities, sale-leaseback transactions and the issuance of equity securities. As of June 30, 2004, we had working capital of $107.0 million.

     As of June 30, 2004, we had approximately $19.8 million of cash available to fund operations and future acquisitions. In addition, as of June 30, 2004, $490.0 million and £54.0 million ($100.0 million) was available for borrowing under our U.S. Credit Agreement and our U.K. Credit Agreement, respectively. Availability under the U.S. Credit Agreement may be limited by a borrowing base collateral requirement (in general, the borrowing base is equal to certain tangible assets plus $300.0 million) and other conditions discussed below. Borrowings under the U.S. Credit Agreement used to finance the cost of acquisitions and capital construction projects will typically increase tangible assets, allowing the Company to access borrowing capacity which might not be available due to the base collateral limitation.

     We paid a cash dividend on our common stock on June 1, 2004. The dividend was in the amount of ten cents per share. Future quarterly or other cash dividends will depend upon our earnings, capital requirements, financial condition, restrictions on any then existing indebtedness and other factors considered relevant by our Board of Directors.

     Our principal source of growth has come from acquisitions of automotive dealerships. We believe that our cash flow provided by operating activities and our existing capital resources, including the liquidity provided by our credit agreements and floor plan financing arrangements, will be sufficient to fund our 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 agreements to finance significant additional acquisitions. In certain circumstances, a public equity offering could require the prior approval of certain 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.

Inventory Financing

     We finance the majority of our new and a portion of our used vehicle inventory under revolving floor plan financing arrangements between our subsidiaries and various lenders. In the U.S., 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. In the U.K., we pay interest only for 90 days, after which we repay the floor plan indebtedness with cash flow from operations or borrowings under our credit agreements. The floor plan agreements grant a security interest in substantially all of the assets of our automotive dealership subsidiaries. Interest rates under the floor plan arrangements are variable and increase or decrease based on movements in the prime rate or LIBOR. Outstanding borrowings under floor plan arrangements amounted to $1,186.1 million as of June 30, 2004, of which $246.1 million related to inventory held by our U.K. subsidiaries.

U.S. Credit Agreement

     We are party to a credit agreement with DaimlerChrysler Services North America LLC and Toyota Motor Credit Corporation, dated December 22, 2002, as amended (the “U.S. Credit Agreement”), which provides for up to $700.0 million in revolving loans to be used for acquisitions, working capital, letters of credit, the repurchase of common stock and general corporate purposes. We are also party to an additional $50.0 million standby letter of credit facility provided by DaimlerChrysler Services North America LLC (the “Additional Facility”). Revolving loans under the U.S. Credit Agreement mature on August 3, 2005 and bear interest between LIBOR plus 2.00% and LIBOR plus 3.00%. The U.S. Credit Agreement is fully and unconditionally guaranteed on a joint and several basis by our domestic automotive dealership subsidiaries and contains a number of significant covenants that, among other things, restrict our ability to dispose of assets,

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incur additional indebtedness, repay other indebtedness, create liens on assets, make investments or acquisitions and engage in mergers or consolidations. We do not currently believe that such covenants will materially affect our acquisition or operating strategy. We are also required to comply with specified ratios and tests defined in the U.S. Credit Agreement. The U.S. Credit Agreement also contains typical events of default, including change of control and non-payment of obligations. Availability under the revolving portion of the U.S. Credit Agreement is subject to a collateral-based borrowing limitation, which is determined based on our allowable domestic tangible assets. Substantially all of our domestic assets not pledged as security under floor plan arrangements are subject to security interests granted to lenders under the U.S. Credit Agreement. Our U.S. Credit Agreement, the subordinated notes discussed below and borrowings under floor plan financing arrangements have cross-default provisions that trigger a default in the event of an uncured default under other material indebtedness. As of June 30, 2004, outstanding borrowings and letters of credit under the U.S. Credit Agreement amounted to $200.0 million and $9.5 million, respectively, and outstanding letters of credit amounted to $25.0 million under the Additional Facility. As of June 30, 2004 we were in compliance with all financial covenants under the U.S. Credit Agreement.

U.K. Credit Agreement

     Our subsidiaries in the U.K. (the “U.K. subsidiaries”) are party to a credit agreement with the Royal Bank of Scotland dated February 28, 2003, as amended (the “U.K. Credit Agreement”), which provides for up to £65.0 million (approximately $117.5 million as of June 30, 2004) in revolving and term loans to be used for acquisitions, working capital, and general corporate purposes. Loans under the U.K. Credit Agreement bear interest between LIBOR plus 0.85% and LIBOR plus 1.25%. The U.K. Credit Agreement also provides for an additional seasonally adjusted overdraft line of credit up to a maximum of £14.0 million. Our £10.0 million term loan capacity under the U.K. credit agreement is reduced by £2.0 million every six months, with the first reduction having occurred on January 1 2004. The £55.0 million of revolving loans mature on March 31, 2007. The U.K. Credit Agreement is fully and unconditionally guaranteed on a joint and several basis by our U.K. Subsidiaries, and contains a number of significant covenants that, among other things, restrict the ability of the U.K. Subsidiaries to pay dividends, dispose of assets, incur additional indebtedness, repay other indebtedness, create liens on assets, make investments or acquisitions and engage in mergers or consolidations. We do not currently believe that such covenants will materially affect our acquisition or operating strategy. In addition, the U.K. Subsidiaries are required to comply with specified ratios and tests defined in the U.K. Credit Agreement. The U.K. Credit Agreement also contains typical events of default, including change of control and non-payment of obligations. Substantially all of the U.K. Subsidiaries’ assets not pledged as security under the floor plan arrangements are subject to security interests granted to lenders under the U.K. Credit Agreement and the U.K. Credit Agreement has cross-default provisions that trigger a default in the event of an uncured default under other material indebtedness of the U.K. Subsidiaries. As of June 30, 2004, outstanding borrowings under the U.K. Credit Agreement amounted to approximately £22.7 million ($41.1 million), and we were in compliance with all financial covenants under the U.K. Credit Agreement.

Senior Subordinated Notes

     We have outstanding $300.0 million aggregate principal amount, 9.625% Senior Subordinated Notes due 2012 (the “Notes”). The Notes are unsecured senior subordinated notes and rank behind all existing and future senior debt, including debt under our credit agreements and floor plan indebtedness. The Notes are guaranteed by substantially all of our domestic subsidiaries on a senior subordinated basis. We can redeem all or some of the Notes at our option beginning in 2007 at specified redemption prices. In addition, we are allowed to redeem up to 35% of the Notes with the net cash proceeds from specified public equity offerings until 2005. 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. As of June 30, 2004 we were in compliance with all negative covenants and there were no events of default.

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Interest Rate Swaps

     During January 2000, we entered into a swap agreement of five years duration pursuant to which a notional $200.0 million of our U.S. floating rate debt was exchanged for fixed rate debt. The fixed rate interest was 7.15%. In October 2002, the terms of this swap were amended pursuant to which the interest rate was reduced to 5.86% and the term of the agreement was extended for an additional three years. Effective March 2004, we terminated a swap agreement pursuant to which a notional $350.0 million of our U.S. floating rate debt had been exchanged for fixed rate debt. This swap had been designated as a cash flow hedge of future interest payments of our LIBOR based U.S. floor plan borrowings. The fair value of the swap upon termination was not significant.

Other Financing Arrangements

     In the past, we have entered into sale-leaseback transactions to finance certain acquisitions and capital expenditures, pursuant to which we sell property to a third-party and agree to lease that property back for a certain period of time. We believe we will continue to finance certain acquisitions and capital expenditures in this fashion in the future. Commitments under such leases are included in the table of contractual payment obligations below.

Capital Transaction

     On March 26, 2004, we sold an aggregate of 4,050,000 shares of our common stock to Mitsui & Co., Ltd. and Mitsui & Co. (U.S.A.), Inc. for $119.4 million, or $29.49 per share. The proceeds of the sale were used for general corporate purposes which included reducing outstanding indebtedness under our credit agreements.

Cash Flows

     Cash and cash equivalents increased by $6.4 million and $12.0 million during the six months ended June 30, 2004 and 2003, respectively. The major components of these changes are discussed below.

Cash Flows from Operating Activities

     Cash provided by operating activities was $61.3 million and $73.7 million during the six months ended June 30, 2004 and 2003, respectively. Cash flows from operating activities include net income adjusted for non-cash items, non-operating items and the effects of changes in working capital.

Cash Flows from Investing Activities

     Cash used in investing activities was $73.6 million and $156.7 million during the six months ended June 30, 2004 and 2003, respectively. Cash flows from investing activities consist primarily of cash used for capital expenditures, proceeds from sale-leaseback transactions and net expenditures for dealership acquisitions. Capital expenditures were $91.0 million and $83.6 million during the six months ended June 30, 2004 and 2003, respectively. Capital investments relate primarily to improvements to our existing dealership facilities and the construction of new facilities. Proceeds from sale-leaseback transactions were $13.4 million during the six months ended June 30, 2004. Cash used in business acquisitions, net of cash acquired, was $3.7 million and $72.8 million for the six months ended June 30, 2004 and 2003, respectively. Cash flows from investing activities include $7.7 million of proceeds received from the sale of an investment during the six months ended June 30, 2004.

Cash Flows from Financing Activities

     Cash provided by financing activities was $11.6 million and $80.1 million for the six months ended June 30, 2004 and 2003, respectively. Cash flows from financing activities include net borrowings or repayments of long-term debt, proceeds from issuance of common stock, including proceeds from the exercise of stock options, repurchases of common stock and dividends. During the six months ended June 30, 2004 and 2003, we received proceeds of $127.3 million and $1.3 million, respectively from the issuance of common

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stock. During the six months ended June 30, 2004 we had net repayments of long-term debt of $107.0 million and during the six months ended June 30, 2003 we had net borrowings of long-term debt of $78.8 million. During the six months ended June 30, 2004 we paid $8.7 million of cash dividends to our shareholders.

Contractual Payment Obligations

     The table below sets forth our best estimates as to the amounts and timing of future payments for our most significant contractual obligations as of June 30, 2004. The information in the table reflects future unconditional payments and is based upon, among other things, the terms of any relevant agreements. Future events, including the amount of borrowings under our credit agreements and floor plan arrangements and purchases or refinancing of our securities, could cause actual payments to differ significantly from these amounts. See “— Forward-Looking Statements.”

	Payments due in
	Total		2004		2005		2006		2007		2008		Thereafter
	(In millions)
Floorplan Notes Payable(A)	$	1,186.1	$	1,186.1	$	—	$	—	$	—	$	—	$	—
U.S. Credit Agreement(B)		200.0		—		200.0		—		—		—		—
U.K. Credit Agreement(B)		41.1		—		—		—		41.1		—		—
9.625% Senior Subordinated Notes		300.0		—		—		—		—		—		300.0
Other Debt		4.3		1.0		1.1		0.8		0.5		0.9		—
Operating Lease Commitments		1,377.8		56.9		110.4		106.1		102.7		100.4		901.3
Deferred Acquisition Payments		27.2		8.2		8.2		8.1		—		2.7		—
Termination Costs		11.6		4.6		7.0		—		—		—		—
	$	3,148.1	$	1,256.8	$	326.7	$	115.0	$	144.3	$	104.0	$	1,201.3

(A)	Floor plan notes payable are revolving financing arrangements. Payments are generally made as required pursuant to the floorplan borrowing agreements.
(B)	Commitments under letters of credit expire concurrently with the expiration of our credit facilities.

     We expect that the amounts above will be funded through cash provided by operations. In the case of balloon payments at the end of the term of our debt instruments, we expect to be able to refinance such instruments as they expire in the normal course of business.

Commitments

     In connection with an acquisition of dealerships completed in October 2000, we agreed to make a contingent payment in cash to the extent 841,476 shares of common stock issued as consideration for the acquisition are sold subsequent to the fifth anniversary of the transaction and have a market value of less than $12.00 per share at the time of sale. We will be forever released from this guarantee in the event the average daily closing price of our common stock for any 90 day period subsequent to the fifth anniversary of the transaction exceeds $12.00 per share. In the event we are required to make a payment relating to this guarantee, such payment would result in the revaluation of the common stock issued in the transaction, resulting in a reduction of additional paid-in-capital. We have further granted the seller a put option pursuant to which we 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. To date, no payments have been made by us relating to the put option. As of June 30, 2004, the maximum of future cumulative cash payments we may be required to make in connection with the put option amounted to $2.6 million.

     We have entered into an agreement with a third-party to jointly acquire and manage dealerships in Indiana, Illinois, Ohio, North Carolina and South Carolina. With respect to any joint venture established pursuant to this agreement, we are required to repurchase our partner’s interest at the end of the five-year period following the date of the acquisition in accordance with the terms of the agreement. Pursuant to this

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arrangement, we have entered into a joint venture agreement with respect to the Honda of Mentor dealership. We are required to repurchase our partners’ interest in this joint venture in July 2008. We expect this payment to be approximately $2.7 million.

Related Party Transactions

Stockholders Agreement

     Roger S. Penske, our Chairman of the Board and Chief Executive Officer, is also Chairman of the Board and Chief Executive Officer of Penske Corporation, and through entities affiliated with Penske Corporation, our largest stockholder owning about 41% of our outstanding stock. Mitsui & Co., Ltd. and Mitsui & Co. (USA), Inc. (collectively, “Mitsui”) own approximately 15% of our outstanding common stock. Mitsui, Penske Corporation and other affiliates of Penske Corporation (International Motor Cars Group I, LLC and International Motors Cars Group II, LLC (the “PCP Entities”), and Penske Automotive Holdings Corp.) are parties to a stockholders agreement. Under the stockholders agreement, the Penske affiliated companies agreed to vote their shares for one director who is a representative of Mitsui. In turn, Mitsui agreed to vote their shares for up to fourteen directors voted for by the Penske affiliated companies. This agreement terminates in March 2014, upon the mutual consent of the parties or when either party no longer owns any of our common stock.

Other Related Party Interests

     James A. Hislop, one of our directors, is the President, Chief Executive Officer and a managing member of Penske Capital Partners (who is the managing member of the PCP Entities), a director of Penske Corporation and a managing director of Transportation Resource Partners, an organization affiliated with Roger S. Penske which undertakes investments in transportation related industries. Mr. Penske also is a managing member of Penske Capital Partners. Richard J. Peters, one of our directors, is a director of Penske Corporation and a managing director of Transportation Resource Partners. Robert H. Kurnick, Jr., our Executive Vice President and General Counsel, is also the President and a director of the Penske Corporation and Paul F. Walters, our Executive Vice President — Human Resources serves in a similar human resources capacity for Penske Corporation.

Mitsui Transaction

     On March 26, 2004, we sold an aggregate of 4,050,000 shares of common stock to Mitsui & Co., Ltd. and Mitsui & Co. (U.S.A.), Inc. for $119,435, or $29.49 per share. The proceeds of the sale were used for general corporate purposes which included reducing outstanding indebtedness under the Company’s credit agreements.

Other Transactions

     We are currently a tenant under a number of non-cancelable lease agreements with Automotive Group Realty, LLC (“AGR”), a wholly-owned subsidiary of Penske Corporation. From time to time we may sell AGR real property and improvements which are subsequently leased by AGR to us. The sale of each parcel of property is valued at a price which is either independently confirmed by a third party appraiser or at the price for which we purchased the property from an independent third party. In addition, we sometimes pay and/or receive fees to/from Penske Corporation and its affiliates for services rendered in the normal course of business, or to reimburse payments made to third parties on each others behalf. Payments made relating to services rendered reflect the provider’s cost or an amount mutually agreed upon by both parties, which we believe represent terms at least as favorable as those that could be obtained from an unaffiliated third party negotiated on an arm’s length basis.

     We are currently a tenant under a number of non-cancelable lease agreements with Samuel X. DiFeo and members of his family. Mr. DiFeo is our President and Chief Operating Officer. We believe that the terms of these transactions are at least as favorable as those that could be obtained from an unaffiliated third party negotiated on an arm’s length basis.

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     We have entered in to joint ventures with certain related parties as more fully discussed below.

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 other investors. We may also provide these subsidiaries with working capital and other debt financing at costs that are based on our incremental borrowing rate.

     An entity controlled by one of our directors, Lucio A. Noto (the “Investor”) owns a 7.5% interest in one of our subsidiaries, UAG Connecticut I, LLC, which entitles the Investor to 20% of the operating profits of UAG Connecticut I. In addition, the Investor has an option to purchase up to a 20% interest in UAG Connecticut I for specified amounts.

     We own and operate three BMW dealerships in and around Munich, Germany in which we own a 50% interest. We own and operate Lexus and Toyota dealerships in and around Frankfurt, Germany in which we own a 50% interest. We own and operate two Toyota dealerships in Mexico in which we own a 48.7% interest and 45% interest. We also own and operate the Honda of Mentor dealership in Ohio in which we own a 70% interest.

     We own and operate certain Mercedes-Benz, Audi and Porsche dealerships in the U.S. through HBL, LLC. We own a 90% interest in HBL, LLC. Roger Penske, Jr. owns the remaining 10% interest. We own and operate certain dealerships in Brazil in which we own a 90.6% interest. One of our joint venture partners in Brazil is Roger S. Penske, Jr. who owns a 4.7% interest.

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 U.S. 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. The greatest U.S. seasonalities exist with the dealerships we operate in the northeastern and upper mid-western U.S., for which the second and third quarters are the strongest with respect to vehicle-related sales. Our U.K. operations generally experience higher volumes of vehicle sales in the first and third quarters of each year due in part to vehicle registration practices in the U.K. The service and parts business at all dealerships experiences relatively modest seasonal fluctuations.

Effects of Inflation

     We believe that inflation rates 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.

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Forward Looking Statements

     This quarterly report on 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 may 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 ability to access the remaining availability under our credit agreements;

•  our liquidity;

•  interest rates;

•  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 or successfully integrate acquisitions, we may not be able to achieve desired results from our acquisition strategy;

•  we may not be able to satisfy our capital requirements for making acquisitions, dealership renovation projects or 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 may 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 interest rates, consumer confidence, fuel prices and credit availability;

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

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•  if we lose key personnel, especially our Chief Executive Officer, 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;

•  because most customers finance the cost of purchasing a vehicle, increased interest rates may adversely affect our vehicle sales;

•  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 may be subject to increased competition and may 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 dealership operations may be affected by severe weather or other periodic business interruptions;

•  our principal stockholders have substantial influence over us and may make decisions with which other 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 level of indebtedness may limit our ability to obtain financing for acquisitions and may 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 our European operations;

•  our overseas operations subject us to foreign currency risk; and

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

     Furthermore,

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

•  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 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.

39

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     Interest Rates. We are exposed to market risk from changes in the interest rates on a significant portion of our outstanding indebtedness. Outstanding balances under our U.S. and U.K. credit agreements bear interest at a variable rate based on a margin over LIBOR, as defined. Based on the amount outstanding as of June 30, 2004, a 100 basis point change in interest rates would result in an approximate $2.4 million change to our annual interest expense. Similarly, amounts outstanding under floor plan financing arrangements bear interest at a variable rate based on a margin over defined LIBOR or prime rate. We continually evaluate our exposure to interest rate fluctuations and follow established policies and procedures to implement strategies designed to manage the amount of variable rate indebtedness outstanding at any point in time in an effort to mitigate the effect of interest rate fluctuations on our earnings and cash flows. We are currently party to a swap agreement pursuant to which a notional $200.0 million of our floating rate floor plan debt was exchanged for 5.86% fixed rate debt through January 2008. Based on an average of the aggregate amounts outstanding under our floor plan financing arrangements subject to variable interest payments, a 100 basis point change in interest rates would result in an approximate $8.2 million change to our annual interest expense.

     Interest rate fluctuations affect the fair market value of our fixed rate debt, including the Notes and certain seller financed promissory notes, but, with respect to such fixed rate instruments, do not impact our earnings or cash flows.

     Foreign Currency Exchange Rates. As of June 30, 2004 the Company has operations in the U.K. and Brazil and has investments in Germany and Mexico. In each of these markets, the local currency is the functional currency. Due to the Company’s intent to remain permanently invested in these foreign markets, we do not hedge against foreign currency fluctuations. Other than the U.K., the Company’s foreign operations are not significant. In the event we change our intent with respect to the investment in any of our international operations, the Company would expect to implement strategies designed to manage those risks in an effort to mitigate the effect of foreign currency fluctuations on the Company’s earnings and cash flows.

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

Item 4. Disclosure Controls and Procedures

     We maintain disclosure controls and procedures designed to ensure that both non-financial and financial information required to be disclosed in our periodic reports is recorded, processed, summarized and reported in a timely fashion. Based on the second quarter evaluation, the principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective. In addition, we maintain internal controls designed to provide the Company with the information it requires for accounting and financial reporting purposes. There were no changes in our internal controls over financial reporting that occurred during our second quarter of 2004 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

Item 1. Legal Proceedings

     From time to time, we are involved in litigation relating to claims arising in the normal course of business. Such issues may relate to litigation with customers, employment related lawsuits, class action lawsuits, purported class action lawsuits and actions brought by governmental authorities. As of June 30, 2004, we are not a party to any legal proceedings that, individually or in the aggregate, are reasonably expected to have a

40

material adverse effect on our results of operations, financial condition or cash flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material adverse effect on our results of operations, financial condition or cash flows. We are a party to several class action lawsuits. While we believe these actions are without merit, any settlement or adverse ruling of one or more of these cases may result in the payment of significant costs and damages.

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

     Prior to May 21, 2004, we retained a classified Board of Directors such that the stockholders only were able to elect the directors comprising one of the three classes for a three-year term. On May 21, 2004, at our annual stockholders meeting, the stockholders voted to amend our certificate of incorporation and bylaws to eliminate the classification of our Board of Directors. Following the meeting, our directors are each subject to election for a one-year term.

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, 2004.

     (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 eleven nominees listed in the proxy statement were elected.

     (c) The following matters were voted upon at the Annual Meeting:

     1. A proposal to amend our certificate of incorporation and bylaws to eliminate the classification of our Board of Directors. The results of the vote follow:

For	Against	Abstain	Non-Vote
43,719,563	376,487	309,396	n/a

     2. The election of eleven directors. The results of the vote follow:

Nominee	For		Against
John Barr		43,875,542		529,904
Michael R. Eisenson		43,870,343		535,103
James A. Hislop		43,967,733		437,713
Hiroshi Ishikawa		44,032,647		372,979
William Lovejoy		44,063,024		342,422
Eustace W. Mita		39,669,541		4,735,905
Lucio A. Noto		43,923,358		482,088
Roger S. Penske		43,937,933		467,513
Richard J. Peters		43,967,772		437,674
Ronald G. Steinhart		43,932,249		473,197
H. Brian Thompson		43,934,260		471,186

     3. A proposal to adopt the United Auto Group, Inc. Management Incentive Plan. The results of the vote follow:

For	Against	Abstain	Non-Vote
39,515,739	346,802	339,478	4,203,429

41

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

     (a) Exhibits

3.1	Certificate of Amendment of Restated Certificate of Incorporation.
3.2	Third Restated Certificate of Incorporation (Composite Copy).
3.3	Certificate of Amendment of Bylaws.
3.4	Bylaws (Composite Copy).
4.1	Supplemental Agreement dated March 30, 2004 between The Royal Bank of Scotland plc acting as agent for National Westminster Bank Plc and Sytner Group Limited.
4.2	Supplemental Agreement dated May 25, 2004 between The Royal Bank of Scotland plc acting as agent for National Westminster Bank Plc and Sytner Group Limited.
31.1	Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
32	Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

     (b) Reports on Form 8-K.

     The Company filed the following Current Reports on Form 8-K during the quarter ended June 30, 2004:

     1. April 27, 2004, reporting under Items 5, 7 and 12 its first quarter financial results and other information.

     2. April 29, 2004, reporting under Items 5 and 7 the anticipated payment of a dividend in the amount of $0.10 per share on June 1, 2004 to holders of record as of May 10, 2004.

42

HBL, LLC

CONDENSED BALANCE SHEETS

		June 30,			December 31,
		2004			2003
		(Unaudited)
		(In thousands)
ASSETS
Cash and cash equivalents		$	—		$	1,246
Accounts receivable, net			9,718			11,460
Inventories			28,085			26,360
Other current assets			657			894
	Total current assets		38,460			39,960
Property and equipment, net			37,429			23,926
Goodwill			68,281			68,281
Other assets			8			2
	Total Assets	$	144,178		$	132,169
LIABILITIES AND MEMBERS’ DEFICIT
Liabilities
Floor plan notes payable		$	25,318		$	29,052
Accounts payable			5,299			3,635
Accrued expenses			16,811			15,413
	Total current liabilities		47,428			48,100
Long-term debt			99,146			83,063
Other long term liabilities			3,702			3,684
	Total Liabilities		150,276			134,847
Commitments and Contingent Liabilities
Members’ Deficit
Members’ Deficit			(6,098	)		(2,678	)
	Total Liabilities and Members’ Deficit	$	144,178		$	132,169

See Notes to Condensed Financial Statements

43

HBL, LLC

CONDENSED STATEMENTS OF INCOME

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2004			2003			2004			2003
		(Unaudited)						(Unaudited)
		(In thousands)						(In thousands)
New vehicle sales		$	35,076		$	33,652		$	65,803		$	57,238
Used vehicle sales			15,398			14,968			28,112			24,868
Finance and insurance			1,364			1,415			2,387			2,316
Service and parts			10,662			8,385			20,418			15,017
Fleet sales			555			1,410			555			2,311
Wholesale vehicle sales			3,857			3,388			7,585			5,782
	Total revenues		66,912			63,218			124,860			107,532
Cost of sales			55,611			53,627			103,829			90,772
	Gross profit		11,301			9,591			21,031			16,760
Selling, general and administrative expenses			9,057			6,832			17,243			12,410
	Operating income		2,244			2,759			3,788			4,350
Floor plan interest expense			(176	)		(140	)		(357	)		(267	)
Other interest expense			(836	)		(593	)		(1,414	)		(1,179	)
	Net income	$	1,232		$	2,026		$	2,017		$	2,904

See Notes to Condensed Financial Statements

44

HBL, LLC

CONDENSED STATEMENTS OF CASH FLOW

		Six Months Ended
		June 30,
		2004			2003
		(Unaudited)
		(In thousands)
Operating activities:
Net income		$	2,017		$	2,904
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization			652			169
Changes in operating assets and liabilities:
Accounts receivable			1,742			(1,541	)
Inventories			(1,725	)		(3,108	)
Floor plan notes payable			(3,734	)		2,452
Accounts payable and accrued expenses			3,062			3,333
Other			249			(640	)
Net cash from operating activities			2,263			3,569
Investing activities:
Purchase of equipment and improvements			(14,155	)		(4,824	)
Net cash from investing activities			(14,155	)		(4,824	)
Financing activities:
Distributions			(5,437	)		(2,825	)
Funding from UAG			16,083			4,080
Net cash from financing activities			10,646			1,255
Net change in cash and cash equivalents			(1,246	)		—
Cash and cash equivalents, beginning of period			1,246			—
Cash and cash equivalents, end of period		$	—		$	—
Supplemental disclosures of cash flow information:
Cash paid for:
	Interest	$	357		$	267

See Notes to Condensed Financial Statements

45

HBL, LLC

CONDENSED STATEMENT OF MEMBERS’ DEFICIT

	Members’ Deficit
	(Unaudited)
	(In thousands)
Balance, January 1, 2004	$	(2,678	)
Distributions		(5,437	)
Net income		2,017
Balance, June 30, 2004	$	(6,098	)

See Notes to Condensed Financial Statements

46

HBL, LLC

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(In thousands)

1. Interim Financial Statements

Organization

     HBL, LLC (the “Company”) is engaged in the sale of new and used motor vehicles and related products and services, including vehicle service and parts, third-party finance and insurance products and other aftermarket products. The Company operates dealerships pursuant to franchise agreements with Mercedes-Benz, Maybach, Audi and Porsche. In March 2003, the Company was awarded an Aston Martin franchise, which began operations during the third quarter of 2003. In accordance with the individual franchise agreements, the dealerships are subject to certain rights and restrictions typical of the industry. The ability of the manufacturers to influence the operations of the dealerships, or the loss of a franchise agreement, could have a negative impact on the Company’s operating results.

     The Company, a Delaware limited liability company, is a majority-owned subsidiary of HBL Holdings, Inc. (“Holdings”), which is a Delaware corporation that is wholly-owned by Lantzsch-Andreas Enterprises, Inc. (“LAE”). LAE is a wholly-owned subsidiary of United Auto Group, Inc. (“UAG”). On December 31, 2001, Holdings sold a 10% member interest in the Company to Roger Penske, Jr. The Company is operated pursuant to an operating agreement between UAG and Roger Penske, Jr.

Basis of Presentation

     The information presented as of June 30, 2004 and December 31, 2003 and for the three and six month periods ended June 30, 2004 and 2003 is unaudited, but includes all adjustments (consisting only of normal and recurring adjustments) which the management of 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. In order to maintain consistency and comparability of financial information between periods presented, certain reclassifications have been made to the Company’s prior year condensed financial statements to conform to the current year presentation.

Estimates

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

Goodwill

     Goodwill represents the push down of UAG’s excess of cost over the fair value of tangible and identified intangible assets acquired in connection with the purchase of the Company. Goodwill is not amortized, but is subject to, at a minimum, an annual impairment test. If the carrying value of any of the Company’s intangible assets exceeds its fair market value, an impairment loss would be recorded. The Company uses a discounted cash flow model to determine the fair market value of goodwill.

47

HBL, LLC

NOTES TO CONDENSED FINANCIAL STATEMENTS — (Continued)

2. Inventories

     Inventories consisted of the following:

		June 30,		December 31,
		2004		2003
New vehicles		$	21,152	$	19,579
Used vehicles			5,108		4,966
Parts, accessories and other			1,825		1,815
	Total inventories	$	28,085	$	26,360

3. Floor Plan Notes Payable

     The Company finances the majority of its new and a portion of its used vehicle inventory under revolving floor plan financing arrangements. The Company typically makes monthly interest payments on the amount financed, but is not required to make loan principal repayments prior to the sale of new and used vehicles. The floor plan agreements grant a security interest in substantially all of the Company’s assets. Interest rates on the floor plan agreements are variable and increase or decrease based on movements in LIBOR.

4. Long Term Debt

     Long-term debt represents the push down of UAG’s debt incurred when UAG acquired the Company, as well as other advances from UAG. The interest expense included in these financial statements reflects UAG’s weighted average interest rate of 3.11% and 3.34% on this indebtedness during 2004 and 2003, respectively. UAG borrowed these funds under a credit agreement which is fully and unconditionally guaranteed on a joint and several basis by the majority of its domestic automotive dealership subsidiaries, including the Company. Substantially all of the Company’s assets that are not pledged as security under floor plan financing agreements and the Company’s member interests are subject to security interests granted to lenders under UAG’s credit agreement.

     UAG has outstanding $300,000 aggregate principal amount, 9.625% Senior Subordinated Notes due 2012 (the “Notes”). The Notes are unsecured senior subordinated notes and rank behind all of UAG’s existing and future senior debt, including debt under UAG’s credit agreements and floor plan indebtedness. The Notes are fully and unconditionally guaranteed on a joint and several basis by the majority of UAG’s domestic automotive dealership subsidiaries, including the Company.

5. Related Party Transactions

     From time to time, the Company pays and/or receives fees from UAG and its affiliates for services rendered in the normal course of business. These transactions reflect the provider’s cost or an amount mutually agreed upon by both parties. It is the Company’s belief that the payments relating to these transactions are on terms at least as favorable as those which could be obtained from an unrelated third party. In addition, management fees of $198, $225, $423 and $450 were charged to the Company by UAG or its affiliates during the three and six month periods ended June 30, 2004 and 2003, respectively.

     During 2004, the Company received $16,083 from UAG in net support of its facility upgrade, which is included long-term debt in the accompanying condensed balance sheets.

6. Commitments and Contingencies

     From time to time, the Company is involved in litigation relating to claims arising out of operations in the normal course of business. As of June 30, 2004, the Company is not a party to any legal proceedings that, individually or in the aggregate, are reasonably expected to have a material adverse effect on the Company’s results of operations, financial condition or cash flow.

48

UAG CONNECTICUT I, LLC

CONDENSED BALANCE SHEETS

		June 30,		December 31,
		2004		2003
		(Unaudited)
		(In thousands)
ASSETS
Cash and cash equivalents		$	1,058	$	644
Accounts receivable, net			5,834		5,821
Inventories			29,582		25,331
Other current assets			8		14
	Total current assets		36,482		31,810
Property and equipment, net			3,986		3,587
Goodwill			20,738		20,738
Other assets			242		302
	Total Assets	$	61,448	$	56,437
LIABILITIES AND MEMBERS’ CAPITAL
Liabilities
Floor plan notes payable		$	27,395	$	23,929
Accounts payable			1,547		1,946
Accrued expenses			4,670		4,002
	Total current liabilities		33,612		29,877
Long-term debt			21,361		21,361
Other long-term liabilities			—		21
	Total Liabilities		54,973		51,259
Commitments and Contingent Liabilities
Members’ Capital
Members’ capital			6,475		5,178
	Total Liabilities and Members’ Capital	$	61,448	$	56,437

See Notes to Condensed Financial Statements

49

UAG CONNECTICUT I, LLC

CONDENSED STATEMENTS OF INCOME

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2004			2003			2004			2003
		(Unaudited)
		(In thousands)
New vehicle sales		$	26,404		$	25,262		$	49,569		$	48,180
Used vehicle sales			6,541			7,657			12,603			13,321
Finance and insurance			369			483			807			814
Service and parts			7,003			6,429			13,653			12,016
Wholesale vehicle sales			2,500			1,345			5,380			3,327
	Total revenues		42,817			41,176			82,012			77,658
Cost of sales			36,241			34,801			69,505			65,939
	Gross profit		6,576			6,375			12,507			11,719
Selling, general and administrative expenses			4,838			4,558			9,705			8,942
	Operating income		1,738			1,817			2,802			2,777
Floor plan interest expense			(164	)		(185	)		(306	)		(367	)
Other interest expense			(166	)		(180	)		(332	)		(360	)
	Net income	$	1,408		$	1,452		$	2,164		$	2,050

See Notes to Condensed Financial Statements

50

UAG CONNECTICUT I, LLC

CONDENSED STATEMENTS OF CASH FLOW

		Six Months Ended
		June 30,
		2004			2003
		(Unaudited)
		(In thousands)
Operating activities:
Net income		$	2,164		$	2,050
Adjustments to reconcile net income to net cash from operating activities:
	Depreciation and amortization		243			225
	Changes in operating assets and liabilities:
	Accounts receivable		(14	)		(145	)
	Inventories		(4,251	)		4,445
	Floor plan notes payable		3,466			(4,513	)
	Accounts payable and accrued expenses		269			789
	Other		45			(994	)
Net cash from operating activities			1,922			1,857
Investing activities:
Purchase of equipment and improvements			(641	)		(670	)
Net cash from investing activities			(641	)		(670	)
Financing activities:
Distributions			(867	)		(1,160	)
Net cash from financing activities			(867	)		(1,160	)
Net change in cash and cash equivalents			414			27
Cash and cash equivalents, beginning of period			644			454
Cash and cash equivalents, end of period		$	1,058		$	481
Supplemental disclosures of cash flow information:
Cash paid for:
	Interest	$	306		$	367

See Notes to Condensed Financial Statements

51

UAG CONNECTICUT I, LLC

CONDENSED STATEMENT OF MEMBERS’ CAPITAL

	Members’ Capital
	(Unaudited)
	(In thousands)
Balance, January 1, 2004	$	5,178
Distributions		(867	)
Net income		2,164
Balance, June 30, 2004	$	6,475

See Notes to Condensed Financial Statements

52

UAG CONNECTICUT I, LLC

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(In thousands)

1. Interim Financial Statements

Organization

     UAG Connecticut I, LLC (the “Company”) is engaged in the sale of new and used motor vehicles and related products and services, including vehicle service and parts, third-party finance and insurance products and other aftermarket products. The Company operates dealerships pursuant to franchise agreements with Mercedes-Benz, Audi and Porsche. In accordance with the individual franchise agreements, the dealerships are subject to certain rights and restrictions typical of the industry. The ability of the manufacturers to influence the operations of the dealerships, or the loss of a franchise agreement, could have a negative impact on the Company’s operating results.

     The Company, a Delaware limited liability company, is a majority-owned subsidiary of UAG Connecticut, LLC, a Delaware corporation that is a wholly-owned subsidiary of United Auto Group, Inc. (“UAG”). The remaining interest in the Company is held by Noto Holdings, LLC. The Company is operated pursuant to an operating agreement between UAG and Noto Holdings, LLC.

Basis of Presentation

     The information presented as of June 30, 2004 and December 31, 2003 and for the three and six month periods ended June 30, 2004 and 2003 is unaudited, but includes all adjustments (consisting only of normal and recurring adjustments) which the management of 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. In order to maintain consistency and comparability of financial information between periods presented, certain reclassifications have been made to the Company’s prior year condensed financial statements to conform to the current year presentation.

Estimates

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

Goodwill

     Goodwill represents the push down of UAG’s excess of cost over the fair value of tangible and identified intangible assets acquired in connection with the purchase of the Company. Goodwill is not amortized, but is subject to, at a minimum, an annual impairment test. If the carrying value of any of the Company’s intangible assets exceeds its fair market value, an impairment loss would be recorded. The Company uses a discounted cash flow model to determine the fair market value of goodwill.

53

UAG CONNECTICUT I, LLC

NOTES TO CONDENSED FINANCIAL STATEMENTS — (Continued)

2. Inventories

     Inventories consisted of the following:

		June 30,		December 31,
		2004		2003
New vehicles		$	24,199	$	20,455
Used vehicles			3,867		3,275
Parts, accessories and other			1,516		1,601
	Total inventories	$	29,582	$	25,331

3. Floor Plan Notes Payable

     The Company finances the majority of its new and a portion of its used vehicle inventory under revolving floor plan financing arrangements. The Company typically makes monthly interest payments on the amount financed, but is not required to make loan principal repayments prior to the sale of new and used vehicles. The floor plan agreements grant a security interest in substantially all of the Company’s assets. Interest rates on the floor plan agreements are variable and increase or decrease based on movements in LIBOR.

4. Long Term Debt

     Long-term debt represents the push down of UAG’s debt incurred when UAG acquired the Company. The interest expense included in these financial statements reflects UAG’s weighted average interest rate of 3.11% and 3.34% on this indebtedness during 2004 and 2003, respectively. UAG borrowed these funds under a credit agreement which is fully and unconditionally guaranteed on a joint and several basis by the majority of its domestic automotive dealership subsidiaries, including the Company. Substantially all of the Company’s assets that are not pledged as security under floor plan financing agreements and the Company’s member interests are subject to security interests granted to lenders under UAG’s credit agreement.

     UAG has outstanding $300,000 aggregate principal amount, 9.625% Senior Subordinated Notes due 2012 (the “Notes”). The Notes are unsecured senior subordinated notes and rank behind all of UAG’s existing and future senior debt, including debt under UAG’s credit agreements and floor plan indebtedness. The Notes are fully and unconditionally guaranteed on a joint and several basis by the majority of UAG’s domestic automotive dealership subsidiaries, including the Company.

5. Related Party Transactions

     From time to time, the Company pays and/or receives fees from UAG and its affiliates for services rendered in the normal course of business. These transactions reflect the provider’s cost or an amount mutually agreed upon by both parties. It is the Company’s belief that the payments relating to these transactions are on terms at least as favorable as those which could be obtained from an unrelated third party. In addition, management fees of $102, $109, $207 and $218 were charged to the Company by UAG or its affiliates during the three and six month periods ended June 30, 2004 and 2003, respectively.

     Noto Holdings, LLC, and entity controlled by one of UAG’s directors, Lucio A. Noto (the “Investor”), holds a 7.5% interest in the Company, which entitles the Investor to 20% of the operating profits of the Company. In addition, the Investor has an option to purchase up to a 20% interest in the Company for specified amounts. The Investor has also guaranteed 20% of the Company’s lease obligation to Automotive Group Realty, LLC (“AGR”), the landlord of the facility at which the dealerships operate and a wholly owned subsidiary of Penske Corporation. In exchange for that guarantee, the Investor will be entitled to 20% of any appreciation of the property, which appreciation would otherwise accrue to AGR at the time of sale,

54

UAG CONNECTICUT I, LLC

NOTES TO CONDENSED FINANCIAL STATEMENTS — (Continued)

and the Investor is responsible to AGR for any corresponding depreciation of the property at the time of sale, which obligation shall be secured solely by the Investor’s ownership interest in the Company.

6. Commitments and Contingencies

     From time to time, the Company is involved in litigation relating to claims arising out of operations in the normal course of business. As of June 30, 2004, the Company is not a party to any legal proceedings that, individually or in the aggregate, are reasonably expected to have a material adverse effect on the Company’s results of operations, financial condition or cash flow.

55

UAG MENTOR ACQUISITION, LLC

CONDENSED BALANCE SHEETS

		June 30,		December 31,
		2004		2003
		(Unaudited)
		(In thousands)
ASSETS
Cash and cash equivalents		$	481	$	85
Accounts receivable, net			2,038		1,538
Inventories			5,952		6,320
Other current assets			—		3
	Total current assets		8,471		7,946
Property and equipment, net			1,884		1,926
Goodwill			3,722		3,722
	Total Assets	$	14,077	$	13,594
LIABILITIES AND MEMBERS’ CAPITAL
Liabilities
Floor plan notes payable		$	5,657	$	5,926
Accounts payable			323		211
Accrued expenses			942		520
	Total current liabilities		6,922		6,657
Long-term debt			3,842		3,842
Other long-term liabilities			3,005		2,570
	Total Liabilities		13,769		13,069
Commitments and Contingent Liabilities
Members’ Capital
Members’ capital			308		525
	Total Liabilities and Members’ Capital	$	14,077	$	13,594

See Notes to Condensed Financial Statements

56

UAG MENTOR ACQUISITION, LLC

CONDENSED STATEMENTS OF INCOME

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2004			2003			2004			2003
		(Unaudited)
		(In thousands)
New vehicle sales		$	11,258		$	11,880		$	20,570		$	20,662
Used vehicle sales			1,587			2,088			2,889			3,824
Finance and insurance			225			313			430			552
Service and parts			1,152			1,074			2,253			1,975
Wholesale vehicle sales			765			560			1,298			1,016
	Total revenues		14,987			15,915			27,440			28,029
Cost of sales			13,233			14,046			24,163			24,552
	Gross profit		1,754			1,869			3,277			3,477
Selling, general and administrative expenses			1,498			1,453			2,829			2,790
Operating income			256			416			448			687
Floor plan interest expense			(38	)		(39	)		(73	)		(70	)
Other interest expense			(480	)		(32	)		(510	)		(65	)
	Income (loss) before cumulative effect of accounting change		(262	)		345			(135	)		552
Cumulative effect of accounting change, net of tax			—			—			—			(44	)
	Net income (loss)	$	(262	)	$	345		$	(135	)	$	508

See Notes to Condensed Financial Statements

57

UAG MENTOR ACQUISITION, LLC

CONDENSED STATEMENTS OF CASH FLOW

		Six Months Ended
		June 30,
		2004			2003
		(Unaudited)
		(In thousands)
Operating activities:
Net income (loss)		$	(135	)	$	508
Adjustments to reconcile net income (loss) to net cash from operating activities:
Depreciation and amortization			103			59
Cumulative effect of accounting change			—			44
Changes in operating assets and liabilities:
Accounts receivable			(500	)		41
Inventories			368			(480	)
Floor plan notes payable			(269	)		1,395
Accounts payable and accrued expenses			532			(109	)
Other			440			(30	)
Net cash from operating activities			539			1,428
Investing activities:
Purchase of equipment and improvements			(61	)		(1,212	)
Net cash from investing activities			(61	)		(1,212	)
Financing activities:
Distributions			(82	)		(80	)
Net cash from financing activities			(82	)		(80	)
Net change in cash and cash equivalents			396			136
Cash and cash equivalents, beginning of period			85			—
Cash and cash equivalents, end of period		$	481		$	136
Supplemental disclosures of cash flow information:
Cash paid for:
	Interest	$	73		$	70

See Notes to Condensed Financial Statements

58

UAG MENTOR ACQUISITION, LLC

CONDENSED STATEMENT OF MEMBERS’ CAPITAL

	Members’ Capital
	(Unaudited)
	(In thousands)
Balance, January 1, 2004	$	525
Distributions		(82	)
Net loss		(135	)
Balance, June 30, 2004	$	308

See Notes to Condensed Financial Statements

59

UAG MENTOR ACQUISITION, LLC

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(In thousands)

1.  Interim Financial Statements

Organization

     UAG Mentor Acquisition, LLC (the “Company”) is engaged in the sale of new and used motor vehicles and related products and services, including vehicle service and parts, third-party finance and insurance products and other aftermarket products. The Company operates a dealership pursuant to a franchise agreement with the Honda Automobile Division of American Honda Motor Co., Inc. In accordance with the franchise agreement, the dealership is subject to certain rights and restrictions typical of the industry. The ability of the manufacturer to influence the operations of the dealership, or the loss of the franchise agreement, could have a negative impact on the Company’s operating results.

     The Company, a Delaware limited liability company, is a majority-owned subsidiary of United Auto Group, Inc. (“UAG”). On July 1, 2003, UAG sold a 30% member interest in the Company to YAG Mentor Investors, LLC. The Company is operated pursuant to an operating agreement between UAG and YAG Mentor Investors, LLC.

Basis of Presentation

     The information presented as of June 30, 2004 and December 31, 2003 and for the three and six month periods ended June 30, 2004 and 2003 is unaudited, but includes all adjustments (consisting only of normal and recurring adjustments) which the management of 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. In order to maintain consistency and comparability of financial information between periods presented, certain reclassifications have been made to the Company’s prior year condensed financial statements to conform to the current year presentation.

Accounting Change

     In March 2003, the Financial Accounting Standards Board’s (“FASB”) Emerging Issues Task Force (“EITF”) finalized Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Cash Consideration Received from a Vendor” (“EITF 02-16”). EITF 02-16 addresses the accounting treatment for vendor allowances and provides that cash consideration received from a vendor should be presumed to be a reduction of the price of the vendors’ product and should therefore be shown as a reduction in the purchase price of the merchandise. To the extent that the cash consideration represents a reimbursement of a specific incremental and identifiable cost, then those vendor allowances should be used to offset such costs. Historically, the company recorded non-refundable floor plan credits and certain other non-refundable credits when received. As a result of EITF 02-16, these credits are now presumed to be reductions in the cost of purchased inventory and are deferred until the related vehicle is sold. In accordance with EITF 02-16, the Company recorded a cumulative effect of accounting change as of January 1, 2003, the date of adoption, that decreased net income for 2003 by $44.

Estimates

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

60

UAG MENTOR ACQUISITION, LLC

NOTES TO CONDENSED FINANCIAL STATEMENTS — (Continued)

Goodwill

     Goodwill represents the push down of UAG’s excess of cost over the fair value of tangible and identified intangible assets acquired in connection with the purchase of the Company. Goodwill is not amortized, but is subject to, at a minimum, an annual impairment test. If the carrying value of any of the Company’s intangible assets exceeds its fair market value, an impairment loss would be recorded. The Company uses a discounted cash flow model to determine the fair market value of goodwill.

2. Inventories

     Inventories consisted of the following:

		June 30,		December 31,
		2004		2003
New vehicles		$	5,094	$	5,309
Used vehicles			635		801
Parts, accessories and other			223		210
	Total inventories	$	5,952	$	6,320

3. Floor Plan Notes Payable

     The Company finances the majority of its new and a portion of its used vehicle inventory under revolving floor plan financing arrangements. The Company typically makes monthly interest payments on the amount financed, but is not required to make loan principal repayments prior to the sale of new and used vehicles. The floor plan agreements grant a security interest in substantially all of the Company’s assets. Interest rates on the floor plan agreements are variable and increase or decrease based on movements in LIBOR.

4. Long Term Debt

     Long-term debt represents the push down of UAG’s debt incurred when UAG acquired the Company. The interest expense included in these financial statements reflects UAG’s weighted average interest rate of 3.11% and 3.34% on this indebtedness during 2004 and 2003, respectively. UAG borrowed these funds under a credit agreement which is fully and unconditionally guaranteed on a joint and several basis by the majority of its domestic automotive dealership subsidiaries, including the Company. Substantially all of the Company’s assets that are not pledged as security under floor plan financing agreements and the Company’s member interests are subject to security interests granted to lenders under UAG’s credit agreement.

     UAG has outstanding $300,000 aggregate principal amount, 9.625% Senior Subordinated Notes due 2012 (the “Notes”). The Notes are unsecured senior subordinated notes and rank behind all of UAG’s existing and future senior debt, including debt under UAG’s credit agreements and floor plan indebtedness. The Notes are fully and unconditionally guaranteed on a joint and several basis by the majority of UAG’s domestic automotive dealership subsidiaries, including the Company.

5. Related Party Transactions

     From time to time, the Company pays and/or receives fees from UAG and its affiliates for services rendered in the normal course of business. These transactions reflect the provider’s cost or an amount mutually agreed upon by both parties. It is the Company’s belief that the payments relating to these transactions are on terms at least as favorable as those which could be obtained from an unrelated third party. In addition, management fees of $23 and $46 were charged to the Company by UAG or its affiliates during the three and six month periods ended June 30, 2004 and 2003, respectively.

61

UAG MENTOR ACQUISITION, LLC

NOTES TO CONDENSED FINANCIAL STATEMENTS — (Continued)

6. Commitments and Contingencies

     From time to time, the Company is involved in litigation relating to claims arising out of operations in the normal course of business. As of June 30, 2004, the Company is not a party to any legal proceedings that, individually or in the aggregate, are reasonably expected to have a material adverse effect on the Company’s results of operations, financial condition or cash flow.

62

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

Chief Executive Officer

Date: August 9, 2004

By:  /s/ JAMES. R. DAVIDSON

James R. Davidson

Executive Vice President — Finance

(Chief Accounting Officer)

Date: August 9, 2004

63

EXHIBIT INDEX

Exhibits
Number:		Description
	3.1	Certificate of Amendment of Restated Certificate of Incorporation.
	3.2	Third Restated Certificate of Incorporation (Composite Copy).
	3.3	Certificate of Amendment of Bylaws.
	3.4	Bylaws (Composite Copy).
	4.1	Supplemental Agreement dated March 30, 2004 between The Royal Bank of Scotland plc acting as agent for National Westminster Bank Plc and Sytner Group Limited.
	4.2	Supplemental Agreement dated May 25, 2004 between The Royal Bank of Scotland plc acting as agent for National Westminster Bank Plc and Sytner Group Limited.
	31.1	Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
	31.2	Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
	32	Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002.