Penske Automotive 10Q 2005 Q3 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 September 30, 2005

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

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

As of November 3, 2005, there were 46,854,329 shares of common stock outstanding.

TABLE OF CONTENTS


		Page

PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Condensed Balance Sheets as of September 30, 2005 and December 31, 2004 (as restated)		2
	Consolidated Condensed Statements of Income for the three and nine months ended September 30, 2005 and 2004		3
	Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2005 and 2004 (as restated)		4
	Consolidated Condensed Statement of Stockholders Equity and Comprehensive Income (Loss) for the nine months ended September 30, 2005		5
	Notes to Consolidated Condensed Financial Statements		6
Item 2.	Managements Discussion and Analysis of Financial Condition and Results of Operations		22
Item 3.	Quantitative & Qualitative Disclosures About Market Risk		43
Item 4.	Controls and Procedures		44
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings		44
Item 6.	Exhibits		44
Signatures			45
Certifications			47
Amended & Restated Supplemental Indenture
Section 302 Certification of Chief Executive & Chief Financial Officers
Section 906 Certification of Chief Executive & Chief Financial Officers

UNITED AUTO GROUP, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS


						December 31,
			September 30,			2004
			2005			(Restated)

			(Unaudited)
			(In thousands, except
			per share amounts)
ASSETS
Cash and cash equivalents			$	2,694		$	15,187
Accounts receivable, net				379,922			356,625
Inventories, net				1,147,807			1,252,358
Other current assets				61,820			44,315
Assets of discontinued operations				65,333			148,921

	Total current assets			1,657,576			1,817,406
Property and equipment, net				463,084			406,783
Goodwill				1,040,472			1,038,647
Franchise value				184,620			183,084
Other assets		��		77,934			86,881

	Total Assets		$	3,423,686		$	3,532,801

LIABILITIES AND STOCKHOLDERS’ EQUITY
Floor plan notes payable			$	732,999		$	876,758
Floor plan notes payable — non-trade				282,269			320,782
Accounts payable				245,014			213,851
Accrued expenses				192,833			188,381
Current portion of long-term debt				3,556			11,367
Liabilities of discontinued operations				30,588			92,553

	Total current liabilities			1,487,259			1,703,692
Long-term debt				620,434			574,970
Other long-term liabilities				191,096			179,104

	Total liabilities			2,298,789			2,457,766

Commitments and contingent liabilities
Stockholders’ Equity
Preferred Stock, $0.0001 par value; 100 shares authorized; none issued and outstanding				—			—
Common Stock, $0.0001 par value, 80,000 shares authorized; 48,997 shares issued, including 2,153 treasury shares, at September 30, 2005; 48,636 shares issued, including 2,153 treasury shares, at December 31, 2004				5			5
Non-voting Common Stock, $0.0001 par value, 7,125 shares authorized; none issued and outstanding				—			—
Class C Common Stock, $0.0001 par value, 20,000 shares authorized; none issued and outstanding				—			—
Additional paid-in-capital				725,047			716,273
Retained earnings				379,464			305,881
Unearned compensation				(7,147	)		(4,587	)
Accumulated other comprehensive income				27,528			57,463

	Total stockholders’ equity			1,124,897			1,075,035

	Total Liabilities and Stockholders’ Equity		$	3,423,686		$	3,532,801

See Notes to Consolidated Condensed Financial Statements

UNITED AUTO GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF INCOME


			Three Months Ended						Nine Months Ended
			September 30,						September 30,

			2005			2004			2005			2004

						(Unaudited)
			(In thousands, except per share amounts)
Revenues
	New vehicle		$	1,641,443		$	1,475,564		$	4,633,416		$	4,036,802
	Used vehicle			577,209			536,063			1,710,007			1,537,829
	Finance and insurance, net			65,129			55,872			182,468			155,352
	Service and parts			287,357			251,416			840,611			707,763
	Fleet and wholesale vehicle			226,031			206,109			666,597			573,466

		Total revenues		2,797,169			2,525,024			8,033,099			7,011,212
Cost of sales
	New vehicle			1,502,073			1,350,882			4,233,643			3,692,529
	Used vehicle			524,768			490,412			1,553,220			1,403,260
	Service & parts			131,646			117,751			383,745			326,106
	Fleet and wholesale vehicle			226,931			206,977			666,447			572,490

		Total cost of sales		2,385,418			2,166,022			6,837,055			5,994,385
		Gross profit		411,751			359,002			1,196,044			1,016,827
Selling, general and administrative expenses				323,021			277,811			946,725			794,430
Depreciation and amortization				10,556			14,111			31,233			30,893

		Operating income		78,174			67,080			218,086			191,504
Floor plan interest expense				(12,869	)		(11,538	)		(40,350	)		(34,774	)
Other interest expense				(12,349	)		(10,470	)		(36,138	)		(31,287	)
Other income				—			4,858			—			11,469

		Income from continuing operations before minority interests and income taxes		52,956			49,930			141,598			136,912
Minority interests				(486	)		(669	)		(1,250	)		(1,491	)
Income taxes				(19,258	)		(17,154	)		(51,965	)		(50,924	)

		Income from continuing operations		33,212			32,107			88,383			84,497
Income (loss) from discontinued operations, net of tax				(448	)		258			469			1,075

Net income			$	32,764		$	32,365		$	88,852		$	85,572

Basic earnings per share:
	Continuing operations		$	0.71		$	0.70		$	1.91		$	1.90
	Discontinued operations			(0.01	)		0.01			0.01			0.02
	Net income			0.70			0.70			1.92			1.92

	Shares used in determining basic earnings per share			46,540			46,016			46,390			44,554

Diluted earnings per share:
	Continuing operations		$	0.70		$	0.69		$	1.88		$	1.87
	Discontinued operations			(0.01	)		0.01			0.01			0.02
	Net income			0.70			0.70			1.89			1.89

	Shares used in determining diluted earnings per share			47,124			46,567			47,005			45,198

See Notes to Consolidated Condensed Financial Statements

UNITED AUTO GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS


		Nine Months Ended
		September 30,

					2004
		2005			(Restated)

		(Unaudited)
		(In thousands)
Operating Activities:
Net income		$	88,852		$	85,572
Adjustments to reconcile net income to net cash from continuing operating activities:
	Depreciation and amortization		31,233			30,893
	Amortization of unearned compensation		2,236			1,778
	Undistributed earnings of equity method investments		(2,645	)		(1,961	)
	Income from discontinued operations, net of tax		(469	)		(1,075	)
	Gain on sale of investment		—			(11,469	)
	Minority interests		1,250			1,491
	Changes in operating assets and liabilities:
	Accounts receivable		(11,745	)		(27,749	)
	Inventories		157,198			45,571
	Floor plan notes payable		(177,552	)		18,396
	Accounts payable and accrued expenses		32,053			79,845
	Other		16,905			(8,595	)

Net cash from continuing operating activities			137,316			212,697

Investing Activities:
Purchase of equipment and improvements			(164,960	)		(148,788	)
Proceeds from sale-leaseback transactions			71,188			43,941
Dealership acquisitions, net			(61,238	)		(164,009	)
Proceeds from sale of investment			—			13,566

Net cash from continuing investing activities			(155,010	)		(255,290	)

Financing Activities:
Proceeds from borrowings under U.S. Credit Agreement			171,000			252,800
Repayments under U.S. Credit Agreement			(110,800	)		(214,800	)
Net repayments of other long-term debt			(14,640	)		(15,186	)
Net repayments of floor plan notes payable — non-trade			(51,116	)		(94,018	)
Proceeds from issuance of common stock			3,007			127,969
Dividends			(15,269	)		(13,338	)

Net cash from continuing financing activities			(17,818	)		43,427

Discontinued Operations:
Net cash from discontinued operating activities			2,679			7,150
Net cash from discontinued investing activities			34,473			2,678
Net cash from discontinued financing activities			(14,133	)		(3,933	)

Net cash from discontinued operations			23,019			5,895

Net increase (decrease) in cash and cash equivalents			(12,493	)		6,729
Cash and cash equivalents, beginning of period			15,187			13,901

Cash and cash equivalents, end of period		$	2,694		$	20,630

Supplemental disclosures of cash flow information:
Cash paid for:
	Interest	$	82,708		$	72,394
	Income taxes		26,887			11,202
Assumed/seller financed debt			5,300			5,790

See Notes to Consolidated Condensed Financial Statements

UNITED AUTO GROUP, INC.

CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME (LOSS)


													Accumulated
	Common Stock												Other
					Additional								Comprehensive			Total			Comprehensive
	Issued				Paid-In		Retained			Unearned			Income			Stockholders’			Income
	Shares		Amount		Capital		Earnings			Compensation			(Loss)			Equity			(Loss)

	(Unaudited)
	(In thousands)
Balances, January 1, 2005		46,482,604	$	5	$	716,273	$	305,881		$	(4,587	)	$	57,463		$	1,075,035		$	—
Restricted stock		154,477		—		4,796		—			(2,560	)		—			2,236			—
Exercise of options, including tax benefit of $971		206,714		—		3,978		—			—			—			3,978			—
Fair value of interest rate swap agreements, net of tax		—		—		—		—			—			2,884			2,884			2,884
Foreign currency translation		—		—		—		—			—			(32,819	)		(32,819	)		(32,819	)
Dividends								(15,269	)								(15,269	)		—
Net income		—		—		—		88,852			—			—			88,852			88,852

Balances, September 30, 2005		46,843,795	$	5	$	725,047	$	379,464		$	(7,147	)	$	27,528		$	1,124,897		$	58,917

See Notes to Consolidated Condensed Financial Statements

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 following unaudited condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations. The information presented as of September 30, 2005 and December 31, 2004 and for the three and nine month periods ended September 30, 2005 and 2004 is unaudited, but includes all 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. Certain prior period amounts have been reclassified to conform to the current year presentation. 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, 2004, which were included as part of the Company’s Annual Report on Form 10-K.


	*Balance Sheet and Cash Flows*

Certain information in the Consolidated Condensed Balance Sheets and Condensed Consolidated Statements of Cash Flows has been restated and reclassified for all periods presented to comply with the guidance under Statement of Financial Accounting Standards (“SFAS”) No. 95, “Statement of Cash Flows.” Floor plan notes payable to a party other than the manufacturer of a particular new vehicle, and all floor plan notes payable relating to pre-owned vehicles, have been reclassified as floor plan notes payable—non-trade on the Consolidated Condensed Balance Sheets, and related cash flows have been reclassified from operating activities to financing activities on the Consolidated Condensed Statement of Cash Flows. Consistent with industry practice, the Company previously reported all cash flow information relating to floor plan notes payable as operating cash flows. A reconciliation to amounts previously reported follows:


	December 31, 2004

Floor plan notes payable as previously reported	$	1,266,656
Discontinued operations		(69,116	)
Reclassification of floor plan notes payable — non-trade		(320,782	)

Reported floor plan notes payable	$	876,758

Floor plan notes payable — non-trade as previously reported	$	0
Reclassification of floor plan notes payable — non-trade		320,782

Reported floor plan notes payable — non-trade	$	320,782


	Nine Months Ended
	September 30, 2004

Net cash from continuing operating activities as previously reported	$	119,383
Discontinued operations		(704	)
Reclassification of floor plan notes payable — non-trade		94,018

Reported net cash from continuing operating activities	$	212,697

Net cash from continuing financing activities as previously reported	$	137,410
Discontinued operations		35
Reclassification of floor plan notes payable — non-trade		(94,018	)

Reported net cash from continuing financing activities	$	43,427

UNITED AUTO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)


	*Discontinued Operations*

The Company periodically sells or otherwise disposes of certain dealerships resulting in accounting for such dealerships as discontinued operations. Combined financial information regarding the dealerships accounted for as discontinued operations follows:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,

	2005			2004			2005			2004

Revenues	$	81,100		$	162,958		$	376,578		$	477,495
Pre-tax income (loss)		(440	)		431			(3,463	)		(1,262	)
Gain (loss) on disposal		(269	)		(20	)		4,207			2,974


		September 30,		December 31,
		2005		2004

Inventories		$	31,022	$	84,780
Other assets			34,311		64,141

	Total Assets	$	65,333	$	148,921

Floor plan notes payable		$	24,080	$	78,178
Other liabilities			6,508		14,375

	Total Liabilities	$	30,588	$	92,553

The Company accounts for dispositions as discontinued operations when it is evident that the operations and cash flows of a franchise being disposed of will be eliminated from on-going operations and that the Company will not have any significant continuing involvement in its operations. In reaching the determination as to whether the cash flows of a dealership will be eliminated from ongoing operations, the Company considers whether it is likely that customers will migrate to similar franchises that it owns in the same geographic market. The Company’s consideration includes an evaluation of the brands sold at the dealerships it operates in the market and their proximity to the disposed dealership. When the Company disposes of franchises, it typically does not have continuing brand representation in that market. If the franchise being disposed of is located in a complex of Company dealerships, the Company does not treat the disposition as a discontinued operation if the Company believes that the cash flows generated by the disposed franchise will be replaced by expanded operations of the remaining franchises.


	*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 and goodwill, which represents the excess of cost over the fair value of tangible and identified intangible assets acquired in connection with business combinations.

UNITED AUTO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Following is a summary of the changes in the carrying amount of goodwill and franchise value during the nine months ended September 30, 2005:


				Franchise
	Goodwill			Value

Balances — January 1, 2005	$	1,038,647		$	183,084
Additions during period		19,179			7,747
Foreign currency translation		(17,354	)		(6,211	)

Balances — September 30, 2005	$	1,040,472		$	184,620

As of September 30, 2005, approximately $639,685 of the Company’s goodwill is deductible for tax purposes. The Company has established deferred tax liabilities related to the temporary differences arising from such tax deductible goodwill.


	*Share-Based Payments*

Key employees, outside directors, consultants and advisors of the Company are eligible to receive share-based payments pursuant to the terms of the Company’s 2002 Equity Compensation Plan (the “Plan”). The Plan provides for the issuance of up to 2,100 shares of common stock, stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares and other awards. As of September 30, 2005, 1,618 shares of common stock were available for grant under the Plan.

The Company elected to adopt SFAS No. 123(R), “Share-Based Payment,” effective July 1, 2005. The Company utilized the modified prospective method approach pursuant to which the Company records compensation expense for all awards granted after July 1, 2005 based on their fair value. The Company’s share-based payments are generally in the form of “non-vested shares” which are measured at their fair value as if they were vested and issued on the grant date. The Company recorded $612 of compensation expense, net of tax, related to share-based payments during the three months ended September 30, 2005.

UNITED AUTO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Prior to July 1, 2005, the Company accounted for option grants using the intrinsic value method pursuant to Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” All options were granted with a strike price at fair market value on the date of grant. As a result, no compensation expense was recorded with respect to option grants. During that time, the Company followed the disclosure only provisions of SFAS No. 123, “Accounting for Stock Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock Based Compensation — Transition and Disclosure, an Amendment of SFAS No. 123.” Had the Company elected to recognize compensation expense for option grants using the fair value method, pro forma net income and pro forma basic and diluted earnings per share would have been as follows:


			Nine Months Ended
	Three Months Ended		September 30,
	September 30,
	2004		2005			2004

Net income(1)	$	32,365	$	88,852		$	85,572
Fair value method compensation expense attributable to stock-based compensation, net of tax		289		273			923

Pro forma net income	$	32,076	$	88,579		$	84,649

Basic earnings per share	$	0.70	$	1.92		$	1.92

Pro forma basic earnings per share	$	0.70	$	1.91		$	1.90

Diluted earnings per share	$	0.70	$	1.89		$	1.89

Pro forma diluted earnings per share	$	0.69	$	1.88		$	1.87

Weighted average fair value of options granted		n/a	$	8.61			n/a
Expected dividend yield		n/a		1.6	%		n/a
Risk free interest rates		n/a		4.0	%		n/a
Expected life		n/a		5.0 years			n/a
Expected volatility		n/a		30.3	%		n/a


(1)	Includes approximately $636 of compensation expense, net of tax, related to non-vested share grants, for the three month period ended September 30, 2004 and approximately $1,409 and $1,117, respectively, for the nine month periods ended September 30, 2005 and 2004.

New Accounting Pronouncements

In October 2005, the Financial Accounting Standards Board (“FASB”) staff issued FSP FAS 13-1, “Accounting for Rental Costs Incurred During a Construction Period” (“FSP FAS 13-1”). Pursuant to FSP FAS 13-1, companies will be required to expense real estate rental costs under operating leases during periods of construction commencing January 1, 2006. FSP FAS 13-1 does not require retroactive application. The Company is currently evaluating the provisions of FSP FAS 13-1 and has not determined the impact of this pronouncement on consolidated operating results, financial position or cash flows.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections — A Replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS No. 154 requires all direct financial statement effects caused by a voluntary change in accounting principle to be applied retrospectively to prior period financial statements as if the new principle had always been applied, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change in principle. APB Opinion No. 20 and SFAS No. 3 previously required that a voluntary change in accounting principle be recognized as a cumulative effect in the period of change. SFAS No. 154 is effective for reporting periods beginning after December 15, 2005. The Company does not believe this pronouncement will have a material effect on consolidated operating results, financial position or cash flows.

UNITED AUTO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

2. Inventories

Inventories consisted of the following:


	September 30,		December 31,
	2005		2004

New vehicles	$	820,510	$	956,131
Used vehicles		262,368		236,929
Parts, accessories and other		64,929		59,298

Total net inventories	$	1,147,807	$	1,252,358

The Company receives non-refundable credits from certain of its vehicle manufacturers that reduce cost of sales when the vehicles are sold. Such credits amounted to $10,279 and $8,831 during the three months ended September 30, 2005 and 2004, respectively, and $26,771 and $24,413 during the nine months ended September 30, 2005 and 2004, respectively.

3. Business Combinations

During the nine months ended September 30, 2005, the Company acquired seven automobile dealership franchises. The aggregate consideration paid in connection with the acquisitions amounted to approximately $61,238 in cash and a seller financed note in the amount of $5,300. The consolidated condensed balance sheets include preliminary allocations of the purchase price relating to such acquisitions, resulting in the recognition of $19,179 of goodwill and $7,747 of franchise value. During the nine months ended September 30, 2004, the Company acquired twenty-eight automobile dealership franchises. The aggregate consideration paid in connection with those acquisitions amounted to approximately $164,009 in cash and the assumption of approximately $5,790 of debt. The Company’s financial statements include the results of operations of the acquired dealerships from the date of acquisition.

The following unaudited consolidated pro forma results of operations of the Company for the three and nine months ended September 30, 2005 and 2004 give effect to acquisitions consummated during the respective periods as if they had occurred on January 1, 2004.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,

	2005		2004		2005		2004

Revenues	$	—	$	2,657,178	$	8,054,166	$	7,639,348
Income from continuing operations		—		33,201		88,431		90,087
Net income		—		33,459		88,900		91,162
Net income per diluted common share	$	—	$	0.72	$	1.89	$	2.02

4. Floor Plan Notes Payable — Trade and Non-trade

The Company finances substantially all of its new and a portion of its used vehicle inventories under revolving floor plan notes payable with various lenders. In the U.S., the floor plan arrangements are due on demand; however, the Company is generally not required to make loan principal repayments prior to the sale of the financed vehicles. The Company typically makes monthly interest payments on the amount financed. In the U.K., substantially all of our floor plan arrangements are payable on demand or have an original maturity of 90 days or less. The floor plan agreements grant a security interest in substantially all of the assets of the Company’s dealership subsidiaries. Interest rates under the floor plan arrangements are variable and increase or decrease based on changes in prime or LIBOR borrowing rates. The Company classifies floor plan notes payable to a party other than the manufacturer of a particular new vehicle, and all floor plan notes payable relating to pre-owned vehicles, as floor plan notes payable — non-trade on its Consolidated Condensed Balance Sheets.

UNITED AUTO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

5. Earnings Per Share

Basic earnings per share is computed using net income and weighted average shares outstanding. Diluted earnings per share is computed using net income and weighted average shares outstanding, adjusted for the dilutive effect of stock options and restricted stock. A reconciliation of the number of shares used in the calculation of basic and diluted earnings per share for the three and nine months ended September 30, 2005 and 2004 follows:


	Three Months				Nine Months
	Ended				Ended
	September 30,				September 30,

	2005		2004		2005		2004

Weighted average shares outstanding		46,540		46,016		46,390		44,554
Effect of stock options		409		376		395		458
Effect of restricted stock		175		175		220		186

Weighted average shares outstanding, including effect of dilutive securities		47,124		46,567		47,005		45,198

6. Long-Term Debt

Long-term debt consisted of the following:


	September 30,		December 31,
	2005		2004

U.S. Credit Agreement	$	315,000	$	254,800
U.K. Credit Agreement		—		16,836
9.625% Senior Subordinated Notes due 2012		300,000		300,000
Other		8,990		14,701

Total long-term debt		623,990		586,337
Less: current portion		3,556		11,367

Net long-term debt	$	620,434	$	574,970


	*U.S. Credit Agreement*

The Company is party to a credit agreement with DaimlerChrysler Services North America LLC and Toyota Motor Credit Corporation, as amended effective October 1, 2004 (the “U.S. Credit Agreement”), which provides for up to $600,000 in revolving loans for working capital, acquisitions, capital expenditures, investments and for other general corporate purposes, and for an additional $50,000 of availability for letters of credit, through September 30, 2008. The revolving loans bear interest between defined LIBOR plus 2.60% and defined LIBOR plus 3.75%.

The U.S. Credit Agreement is fully and unconditionally guaranteed on a joint and several basis by the Company’s domestic 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 financial and other tests and ratios, each as defined in the U.S. Credit Agreement, including: a ratio of current assets to current liabilities, a fixed charge coverage ratio, a ratio of debt to stockholders’ equity, a ratio of debt to EBITDA, a ratio of domestic debt to domestic EBITDA, and a measurement of stockholders’ equity. A breach of these requirements would give rise to certain remedies under the agreement, the most severe of which is the termination of the agreement and acceleration of the amounts owed. As of September 30, 2005, the Company was in compliance with all covenants under the U.S. Credit Agreement, and management believes the Company will remain in compliance with such covenants for the foreseeable future. In making such determination, management has considered the current margin of compliance with the covenants and the Company’s expected future results of

UNITED AUTO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

operations, working capital requirements, acquisitions, capital expenditures and investments in the U.S. See “Forward Looking Statements.”

The U.S. Credit Agreement also contains typical events of default, including change of control, non-payment of obligations and cross-defaults to the Company’s other material indebtedness. Substantially all of the Company’s domestic assets not pledged as security under floor plan arrangements are subject to security interests granted to lenders under the U.S. Credit Agreement. As of September 30, 2005, outstanding borrowings and letters of credit under the U.S. Credit Agreement amounted to $315,000 and $32,500, respectively.


	*U.K. Credit Agreement*

The Company’s 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 £65,000 in revolving and term loans to be used for acquisitions, working capital, and general corporate purposes. Revolving loans under the U.K. Credit Agreement have an original maturity of 90 days or less and bear interest between defined LIBOR plus 0.85% and defined 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 £15,000. Term loan capacity under the U.K. Credit Agreement was originally £10,000, which is reduced by £2,000 every six months. As of September 30, 2005, term loan capacity under the U.K. Credit Agreement amounted to £2,000. The remaining £55,000 of revolving loan capacity matures 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, each as defined in the U.K. Credit Agreement, including: a measurement of net worth, a debt to capital ratio, an EBITDA to interest expense ratio, a measurement of maximum capital expenditures, a debt to EBITDA ratio, and a fixed charge coverage ratio. A breach of these requirements would give rise to certain remedies under the agreement, the most severe of which is the termination of the agreement and acceleration of the amounts owed. As of September 30, 2005, the Company was in compliance with all covenants under the U.K. Credit Agreement, and management believes that the Company will remain in compliance with such covenants for the foreseeable future. In making such determination, management has considered the current margin of compliance with the covenants and the Company’s expected future results of operations, working capital requirements, acquisitions, capital expenditures and investments in the U.K. See “Forward Looking Statements.”

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 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 September 30, 2005, there were no outstanding borrowings under the U.K. Credit Agreement.


	*Senior Subordinated Notes*

The Company has outstanding $300,000 aggregate principal amount of 9.625% Senior Subordinated Notes due 2012 (the “Notes”). The Notes are unsecured senior subordinated notes and rank behind all 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. Upon a

UNITED AUTO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

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 September 30, 2005, the Company was in compliance with all covenants and there were no events of default.


7.	Interest Rate Swaps

The Company is party to an interest rate swap agreement through January 2008 pursuant to which a notional $200,000 of its U.S. floating rate debt was exchanged for fixed rate debt. The swap was designated as a cash flow hedge of future interest payments of the LIBOR based U.S. floor plan borrowings. As of September 30, 2005, the Company expects approximately $887 of interest associated with the swap to be reclassified as a charge to income over the next twelve months.


8.	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 claims may relate to litigation with customers, employment related lawsuits, class action lawsuits, purported class action lawsuits and actions brought by governmental authorities. As of September 30, 2005, the Company is not party to any legal proceedings, including class action lawsuits to which it is a party that, individually or in the aggregate, are expected to have a material adverse effect on the Company’s 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 Company’s results of operations, financial condition or cash flows.

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 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 a maximum of 108 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 September 30, 2005, the maximum future cash payment that the Company may be required to make in connection with the put option amounted to $1,300.

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 relationship 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 formation of the joint venture relationship. Pursuant to this arrangement, the Company 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 relationship in July 2008. The Company expects this payment to be approximately $2,700.

The Company typically leases its dealership facilities and corporate offices under non-cancelable operating lease agreements with expiration dates through 2035, including all option periods available to the Company. The Company’s lease arrangements typically allow for a base term with options for extension in the Company’s favor and include escalation clauses tied to the Consumer Price Index.

UNITED AUTO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)


9.	Consolidating Condensed Financial Information

The following tables include consolidating condensed financial information as of September 30, 2005 and December 31, 2004 and for the three and nine month periods ended September 30, 2005 and 2004 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 consolidating condensed 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.

CONSOLIDATING CONDENSED BALANCE SHEET

September 30, 2005


											Non-Wholly Owned Guarantor Subsidiaries

														UAG			UAG Mentor			UAG		Non-
		Total					United Auto		Guarantor		HBL			Connecticut I,			Acquisition			Central NJ,		Guarantor
		Company		Eliminations			Group, Inc.		Subsidiaries		LLC			LLC			LLC			LLC		Subsidiaries

		(Unaudited)
		(In Thousands)
Cash and cash equivalents		$	2,694	$	—		$	44	$	—	$	—		$	627		$	197		$	1,705	$	121
Accounts receivable, net			379,922		(40,384	)		40,384		232,909		8,767			4,156			1,626			1,809		130,655
Inventories, net			1,147,807		—			—		672,899		27,988			21,066			4,584			2,653		418,617
Other current assets			61,820		—			4,959		30,945		536			47			25			20		25,288
Assets of discontinued operations			65,333		—			—		65,333		—			—			—			—		—

	Total current assets		1,657,576		(40,384	)		45,387		1,002,086		37,291			25,896			6,432			6,187		574,681
Property and equipment, net			463,084		—			4,398		262,837		6,113			2,820			1,834			3,722		181,360
Intangible assets			1,225,092		—			—		868,039		68,281			20,738			3,722			—		264,312
Other assets			77,934		(1,057,163	)		1,078,294		17,651		85			120			—			—		38,947

	Total Assets	$	3,423,686	$	(1,097,547	)	$	1,128,079	$	2,150,613	$	111,770		$	49,574		$	11,988		$	9,909	$	1,059,300

Floor plan notes payable		$	732,999	$	—		$	—	$	440,312	$	10,571		$	7,577		$	3,433		$	—	$	271,106
Floor plan notes payable — non-trade			282,269		—			—		174,190		11,033			10,095			—			2,723		84,228
Accounts payable			245,014		—			2,290		73,251		6,014			1,264			284			3,064		158,847
Accrued expenses			192,833		(40,384	)		892		30,982		28,934			13,078			2,031			580		156,720
Current portion of long-term debt			3,556		—			—		3,556		—			—			—			—		—
Liabilities of discontinued operations			30,588		—			—		30,588		—			—			—			—		—

	Total current liabilities		1,487,259		(40,384	)		3,182		752,879		56,552			32,014			5,748			6,367		670,901
Long-term debt			620,434		—			—		373,135		63,151			21,361			3,842			3,107		155,838
Other long-term liabilities			191,096		—			—		175,167		10,806			556			3,875			130		562

	Total Liabilities		2,298,789		(40,384	)		3,182		1,301,181		130,509			53,931			13,465			9,604		827,301
	Total Stockholders’ Equity		1,124,897		(1,057,163	)		1,124,897		849,432		(18,739	)		(4,357	)		(1,477	)		305		231,999

	Total Liabilities and Stockholders’ Equity	$	3,423,686	$	(1,097,547	)	$	1,128,079	$	2,150,613	$	111,770		$	49,574		$	11,988		$	9,909	$	1,059,300

UNITED AUTO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

CONSOLIDATING CONDENSED BALANCE SHEET

December 31, 2004


										Non-Wholly Owned Guarantor Subsidiaries

													UAG			UAG Mentor			UAG		Non-
	Total					United Auto		Guarantor		HBL			Connecticut I,			Acquisition			Central NJ,		Guarantor
	Company		Eliminations			Group, Inc.		Subsidiaries		LLC			LLC			LLC			LLC		Subsidiaries

	(Unaudited)
	(In Thousands)
Cash and cash equivalents	$	15,187	$	—		$	13,638	$	—	$	—		$	1,424		$	125		$	—	$	—
Accounts receivable, net		356,625		(34,404	)		34,404		240,005		10,463			5,441			2,505			588		97,623
Inventories, net		1,252,358		—			—		745,643		26,085			31,523			5,085			2,996		441,026
Other current assets		44,315		—			4,589		22,064		547			12			4			—		17,099
Assets of discontinued operations		148,921		—			—		139,644		—			—			—			—		9,277

Total current assets		1,817,406		(34,404	)		52,631		1,147,356		37,095			38,400			7,719			3,584		565,025
Property and equipment, net		406,783		—			3,788		230,909		6,041			2,417			1,815			3,813		158,000
Intangible assets		1,221,731		—			—		830,837		68,281			20,738			3,722			—		298,153
Other assets		86,881		(984,847	)		1,023,923		31,773		9			234			—			—		15,789

Total Assets	$	3,532,801	$	(1,019,251	)	$	1,080,342	$	2,240,875	$	111,426		$	61,789		$	13,256		$	7,397	$	1,036,967

Floor plan notes payable	$	876,758	$	—		$	—	$	542,331	$	9,867		$	14,423		$	4,779		$	—	$	305,358
Floor plan notes payable — non-trade		320,782		—			—		221,852		12,461			13,816			—			2,495		70,158
Accounts payable		213,851		—			5,186		90,852		6,873			1,819			321			1,430		107,370
Accrued expenses		188,381		(34,404	)		121		43,578		24,695			11,637			1,921			259		140,574
Current portion of long-term debt		11,367		—			—		938		—			—			—			—		10,429
Liabilities of discontinued operations		92,553		—			—		86,710		—			—			—			—		5,843

Total current liabilities		1,703,692		(34,404	)		5,307		986,261		53,896			41,695			7,021			4,184		639,732
Long-term debt		574,970		—			—		327,042		63,151			21,361			3,842			3,021		156,553
Other long-term liabilities		179,104		—			—		163,315		10,946			1,028			3,386			58		371

Total Liabilities		2,457,766		(34,404	)		5,307		1,476,618		127,993			64,084			14,249			7,263		796,656
Total Stockholders’ Equity		1,075,035		(984,847	)		1,075,035		764,257		(16,567	)		(2,295	)		(993	)		134		240,311

Total Liabilities and Stockholders’ Equity	$	3,532,801	$	(1,019,251	)	$	1,080,342	$	2,240,875	$	111,426		$	61,789		$	13,256		$	7,397	$	1,036,967

UNITED AUTO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

CONSOLIDATING CONDENSED STATEMENT OF INCOME

Three Months Ended September 30, 2005


													Non-Wholly Owned Guarantor Subsidiaries

																UAG						UAG			Non-
	Total						United Auto			Guarantor			HBL			Connecticut, I			UAG Mentor			Central NJ,			Guarantor
	Company			Eliminations			Group, Inc.			Subsidiaries			LLC			LLC			LLC			LLC			Subsidiaries

	(Unaudited)
	(In Thousands)
Total revenues	$	2,797,169		$	—		$	—		$	1,805,462		$	66,568		$	38,787		$	14,787		$	10,167		$	861,398
Cost of sales		2,385,418			—			—			1,538,747			53,956			32,163			13,055			8,809			738,688

Gross profit		411,751			—			—			266,715			12,612			6,624			1,732			1,358			122,710
Selling, general, and administrative expenses		323,021			—			4,001			203,875			10,003			5,352			1,479			856			97,455
Depreciation and amortization		10,556			—			313			6,332			235			127			51			69			3,429

Operating income (loss)		78,174			—			(4,314	)		56,508			2,374			1,145			202			433			21,826
Floor plan interest expense		(12,869	)		—			—			(8,612	)		(287	)		(265	)		(47	)		(24	)		(3,634	)
Other interest expense		(12,349	)		—			—			(7,307	)		(1,040	)		(352	)		(288	)		(118	)		(3,244	)
Equity in earnings of subsidiaries		—			(50,495	)		50,495			—			—			—			—			—			—

Income (loss) from continuing operations before minority interests and income taxes		52,956			(50,495	)		46,181			40,589			1,047			528			(133	)		291			14,948
Minority interests		(486	)		—			—			(305	)		(64	)		(64	)		—			(53	)		—
Income taxes		(19,258	)		19,663			(17,983	)		(15,803	)		(408	)		(206	)		52			(113	)		(4,460	)

Income (loss) from continuing operations		33,212			(30,832	)		28,198			24,481			575			258			(81	)		125			10,488
Loss from discontinued operations, net of tax		(448	)		—			—			(444	)		—			—			—			—			(4	)

Net income (loss)	$	32,764		$	(30,832	)	$	28,198		$	24,037		$	575		$	258		$	(81	)	$	125		$	10,484

UNITED AUTO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

CONSOLIDATING CONDENSED STATEMENT OF INCOME

Nine Months Ended September 30, 2005


													Non-Wholly Owned Guarantor Subsidiaries

																			UAG
																UAG			Mentor			UAG			Non-
	Total						United Auto			Guarantor			HBL			Connecticut I,			Acquisition			Central NJ,			Guarantor
	Company			Eliminations			Group, Inc.			Subsidiaries			LLC			LLC			LLC			LLC			Subsidiaries

	(Unaudited)
	(In Thousands)
Total revenues	$	8,033,099		$	—		$	—		$	5,073,987		$	191,046		$	116,011		$	41,659		$	26,858		$	2,583,538
Cost of sales		6,837,055			—			—			4,312,594			154,195			96,435			36,331			23,426			2,214,074

Gross profit		1,196,044			—			—			761,393			36,851			19,576			5,328			3,432			369,464
Selling, general, and administrative expenses		946,725			—			10,357			599,049			29,766			15,664			4,269			2,428			285,192
Depreciation and amortization		31,233			—			1,105			18,483			698			348			150			204			10,245

Operating income (loss)		218,086			—			(11,462	)		143,861			6,387			3,564			909			800			74,027
Floor plan interest expense		(40,350	)		—			—			(26,944	)		(803	)		(873	)		(164	)		(76	)		(11,490	)
Other interest expense		(36,138	)		—			—			(22,533	)		(2,838	)		(949	)		(845	)		(340	)		(8,633	)
Equity in earnings of subsidiaries		—			(173,476	)		173,476			—			—			—			—			—			—

Income (loss) from continuing operations before minority interests and income taxes		141,598			(173,476	)		162,014			94,384			2,746			1,742			(100	)		384			53,904
Minority interests		(1,250	)		—			—			(805	)		(165	)		(208	)		—			(72	)		—
Income taxes		(51,965	)		71,227			(66,542	)		(38,157	)		(1,094	)		(702	)		42			(142	)		(16,597	)

Income (loss) from continuing operations		88,383			(102,249	)		95,472			55,422			1,487			832			(58	)		170			37,307
Income (loss) from discontinued operations, net of tax		469			—			—			654			—			—			—			—			(185	)

Net income (loss)	$	88,852		$	(102,249	)	$	95,472		$	56,076		$	1,487		$	832		$	(58	)	$	170		$	37,122

UNITED AUTO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

CONSOLIDATING CONDENSED STATEMENT OF INCOME

Three Months Ended September 30, 2004


													Non-Wholly Owned Guarantor Subsidiaries

																UAG			UAG Mentor			UAG			Non-
	Total						United Auto			Guarantor			HBL			Connecticut I,			Acquisition			Central NJ,			Guarantor
	Company			Eliminations			Group, Inc.			Subsidiaries			LLC			LLC			LLC			LLC			Subsidiaries

	(Unaudited)
	(In Thousands)
Total revenues	$	2,525,024		$	—		$	—		$	1,621,078		$	64,424		$	39,429		$	12,928		$	7,200		$	779,965
Cost of sales		2,166,022			—			—			1,393,803			53,516			33,421			11,287			6,177			667,818

Gross profit		359,002			—			—			227,275			10,908			6,008			1,641			1,023			112,147
Selling, general, and administrative expenses		277,811			—			3,844			181,839			8,893			4,690			1,370			672			76,503
Depreciation and amortization		14,111			—			183			5,817			526			129			52			23			7,381

Operating income (loss)		67,080			—			(4,027	)		39,619			1,489			1,189			219			328			28,263
Floor plan interest expense		(11,538	)		—			—			(8,013	)		(163	)		(198	)		(41	)		(10	)		(3,113	)
Other interest expense		(10,470	)		—			—			(7,110	)		(1,027	)		(166	)		(255	)		(63	)		(1,849	)
Other income		4,858			—			—			—			—			—			—			—			4,858
Equity in earnings of subsidiaries		—			(63,606	)		63,606			—			—			—			—			—			—

Income (loss) from continuing operations before minority interests and income taxes		49,930			(63,606	)		59,579			24,496			299			825			(77	)		255			28,159
Minority interests		(669	)		—			—			(220	)		(19	)		(103	)		—			(48	)		(279	)
Income taxes		(17,154	)		23,979			(22,461	)		(9,248	)		(113	)		(311	)		29			(96	)		(8,933	)

Income (loss) from continuing operations		32,107			(39,627	)		37,118			15,028			167			411			(48	)		111			18,947
Income (loss) from discontinued operations, net of tax		258			—			—			291			—			—			—			—			(33	)

Net income (loss)	$	32,365		$	(39,627	)	$	37,118		$	15,319		$	167		$	411		$	(48	)	$	111		$	18,914

UNITED AUTO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

CONSOLIDATING CONDENSED STATEMENT OF INCOME

Nine Months Ended September 30, 2004


													Non-Wholly Owned Guarantor Subsidiaries

																UAG			UAG Mentor			UAG			Non-
	Total						United Auto			Guarantor			HBL			Connecticut, I			Acquisition			Central NJ,			Guarantor
	Company			Eliminations			Group, Inc.			Subsidiaries			LLC			LLC			LLC			LLC			Subsidiaries

	(Unaudited)
	(In Thousands)
Total revenues	$	7,011,212		$	—		$	—		$	4,500,250		$	187,358		$	119,722		$	40,014		$	7,200		$	2,156,668
Cost of sales		5,994,385			—			—			3,843,416			155,419			101,206			35,094			6,177			1,853,073

Gross profit		1,016,827			—			—			656,834			31,939			18,516			4,920			1,023			303,595
Selling, general, and administrative expenses		794,430			—			10,146			518,852			25,484			14,152			4,097			672			221,027
Depreciation and amortization		30,893			—			741			16,573			1,178			372			154			23			11,852

Operating income (loss)		191,504			—			(10,887	)		121,409			5,277			3,992			669			328			70,716
Floor plan interest expense		(34,774	)		—			—			(25,478	)		(520	)		(504	)		(114	)		(10	)		(8,148	)
Other interest expense		(31,287	)		—			—			(20,465	)		(2,441	)		(498	)		(765	)		(63	)		(7,055	)
Other income		11,469			—			—			—			—			—			—			—			11,469
Equity in earnings of subsidiaries		—			(157,541	)		157,541			—			—			—			—			—			—

Income (loss) from continuing operations before minority interests and income taxes		136,912			(157,541	)		146,654			75,466			2,316			2,990			(210	)		255			66,982
Minority interests		(1,491	)		—			—			(697	)		(128	)		(339	)		—			(48	)		(279	)
Income taxes		(50,924	)		67,196			(62,473	)		(31,911	)		(1,039	)		(1,294	)		68			(96	)		(21,375	)

Income (loss) from continuing operations		84,497			(90,345	)		84,181			42,858			1,149			1,357			(142	)		111			45,328
Income (loss) from discontinued operations, net of tax		1,075			—			—			1,122			—			—			—			—			(47	)

Net income (loss)	$	85,572		$	(90,345	)	$	84,181		$	43,980		$	1,149		$	1,357		$	(142	)	$	111		$	45,281

UNITED AUTO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS

Nine Months Ended September 30, 2005


										Non-Wholly Owned Guarantor Subsidiaries

													UAG			UAG Mentor			UAG			Non-
	Total			United Auto			Guarantor			HBL			Connecticut I,			Acquisition			Central NJ,			Guarantor
	Company			Group, Inc.			Subsidiaries			LLC			LLC			LLC			LLC			Subsidiaries

	(Unaudited)
	(In Thousands)
Net cash from operating activities	$	137,316		$	(11,879	)	$	103,422		$	5,853		$	6,449		$	667		$	1,504		$	31,300

Investing Activities:
Purchase of equipment and improvements		(164,960	)		(1,715	)		(93,939	)		(770	)		(5,550	)		(169	)		(113	)		62,704	)
Proceeds from sale — leaseback transactions		71,188			—			49,347			—			4,799			—			—			17,042
Dealership acquisitions, net		(61,238	)		—			(41,443	)		—			—			—			—			(19,795	)

Net cash from investing activities		(155,010	)		(1,715	)		(86,035	)		(770	)		(751	)		(169	)		(113	)		(65,457	)

Financing Activities:
Net borrowings (repayments) of long-term debt		45,560			12,262			30,219			—			—			—			86			2,993
Net borrowings (repayments) of floor plan notes payable — non-trade		(51,116	)		—			(60,265	)		(1,428	)		(3,721	)		—			228			14,070
Proceeds from issuance of common stock		3,007			3,007			—			—			—			—			—			—
Distributions from (to) parent		—			—			(6,926	)		(3,655	)		(2,774	)		(426	)		—			13,781
Dividends		(15,269	)		(15,269	)		—			—			—			—			—			—
			��
Net cash from financing activities		(17,818	)		—			(36,972	)		(5,083	)		(6,495	)		(426	)		314			30,844

Net cash from discontinued operations		23,019			—			19,585			—			—			—			—			3,434

Net increase (decrease) in cash and cash equivalents		(12,493	)		(13,594	)		—			—			(797	)		72			1,705			121
Cash and cash equivalents, beginning of period		15,187			13,638			—			—			1,424			125			—			—

Cash and cash equivalents, end of period	$	2,694		$	44		$	—		$	—		$	627		$	197		$	1,705		$	121

UNITED AUTO GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS

Nine Months Ended September 30, 2004


													Non-Wholly Owned Guarantor Subsidiaries

													UAG			UAG Mentor			UAG			Non-
	Total			United Auto			Guarantor			HBL			Connecticut I,			Acquisition			Central NJ,			Guarantor
	Company			Group, Inc.			Subsidiaries			LLC			LLC			LLC			LLC			Subsidiaries

	(Unaudited)
	(In Thousands)
Net cash from operating activities	$	212,697		$	(2,207	)	$	159,192		$	11,503		$	1,930		$	6,189		$	(838	)	$	36,928

Investing Activities:
Purchase of equipment and improvements		(148,788	)		(447	)		(55,231	)		(18,438	)		(1,005	)		(81	)		(3,591	)		(69,995	)
Proceeds from sale — leaseback transactions		43,941			—			37,467			—			—			—			—			6,474
Dealership acquisitions, net		(164,009	)		—			(113,841	)		—			—			—			—			(50,168	)
Proceeds from sale of investment		13,566			—			—			—			—			—			—			13,566

Net cash from investing activities		(255,290	)		(447	)		(131,605	)		(18,438	)		(1,005	)		(81	)		(3,591	)		(100,123	)

Financing Activities:
Net borrowings (repayments) of long-term debt		22,814			(114,631	)		99,497			18,671			—			—			3,032			16,245
Net borrowings (repayments) of floor plan notes payable — non-trade		(94,018	)		—			(83,637	)		(7,111	)		(87	)		(5,926	)		1,327			1,416
Proceeds from issuance of common stock		127,969			127,969			—			—			—			—			—			—
Distributions from (to) parent		—			—			(49,989	)		(5,871	)		(1,130	)		(126	)		70			57,046
Dividends		(13,338	)		(13,338	)		—			—			—			—			—			—

Net cash from financing activities		43,427			—			(34,129	)		5,689			(1,217	)		(6,052	)		4,429			74,707

Net cash from discontinued operations		5,895			—			8,829			—			—			—			—			(2,934	)

Net increase (decrease) in cash and cash equivalents		6,729			(2,654	)		2,287			(1,246	)		(292	)		56			—			8,578
Cash and cash equivalents, beginning of period		13,901			6,571			1,099			1,246			644			85			—			4,256

Cash and cash equivalents, end of period	$	20,630		$	3,917		$	3,386		$	—		$	352		$	141		$	—		$	12,834


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 September 30, 2005, we owned and operated 165 franchises in the United States and 102 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 and placement of higher margin products, such as third party finance and insurance products, third-party extended service contracts and replacement and aftermarket automotive products.

Our results for the nine months ended September 30, 2005 include a $1.9 million ($1.2 million after tax), or $0.03 per share, severance charge. Third quarter 2004 results include a $4.9 million ($3.1 million after tax), or $0.07 per share, gain resulting from the sale of an investment, an $8.4 million ($5.3 million after tax), or $0.11 per share, gain resulting from a refund of UK consumption taxes, and a $1.4 million, or $0.03 per share, reduction of income tax expense resulting from a revision of our estimated annual effective tax rate. These gains were offset in part by non-cash charges of $7.8 million ($4.9 million after tax), or $0.11 per share, principally in connection with the planned relocation of certain UK franchises as part of our ongoing facility enhancement program. Our results for the nine months ended September 30, 2004 include these items as well as a $6.6 million ($4.1 million after tax), or $0.09 per share, gain resulting from the sale of an investment in the second quarter 2004.

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 automobile leasing and other dealers. We generate finance and insurance revenues from sales of third-party extended service contracts and other third-party insurance policies, as well as from fees for facilitating the sale of third-party finance and lease contracts and certain other products. Service and parts revenues include fees paid for repair and maintenance services, the sale of replacement parts, the sale of aftermarket accessories and collision repairs.

We and Sirius Satellite Radio Inc. (“Sirius”) have agreed to jointly promote Sirius Satellite Radio service. Pursuant to the terms of our arrangement with Sirius, our domestic dealerships endeavor to order a significant percentage of eligible vehicles with a factory installed Sirius radio. We and Sirius have also agreed to jointly market the Sirius service under a best efforts arrangement. Our costs relating to such marketing initiatives are expensed as incurred. As compensation for our efforts, we received warrants to purchase ten million shares of Sirius common stock at $2.392 per share that are earned ratably on an annual basis through January 2009. Two million of these warrants were earned in 2004 and vested in the first quarter of 2005. We exercised the warrants and sold the underlying stock we received upon vesting. The earning of these warrants may accelerate based on us attaining specified subscription targets. Since we can reasonably estimate the number of warrants that will be earned pursuant to the ratable schedule, the estimated fair value (based on current fair value) of those warrants is being recognized ratably during each annual period. We measure the fair value of the warrants earned ratably on the date they are earned as there are no significant disincentives for non-performance.

We also received an additional ten million warrants to purchase Sirius common stock at $2.392 per share which are earned upon our sale of certain units pertaining to specified brands. Two hundred thousand of these warrants have been earned and vested during 2005. We exercised the warrants and sold the underlying stock we received upon vesting. An additional thirty five thousand of these warrants were earned during the third quarter 2005 and will vest during the fourth quarter 2005. Since we cannot reasonably estimate the number of

warrants that will be earned subject to the sale of certain units pertaining to specified brands, the fair value of those warrants is being recognized when they are earned.

The value of Sirius stock has been and is expected to be subject to significant fluctuations, which may result in variability in the amount we earn under this arrangement. The warrants may be cancelled if certain performance targets are not met or upon the termination of our arrangement. We may not be able to achieve any of the performance targets outlined in the warrants.

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. Our gross profit generally varies across product lines, with vehicle sales usually resulting in lower gross profit margins and our other revenues 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. 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, 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 judgments. Such judgments influence the assets, liabilities, revenues and expenses in our financial statements. Management, on an ongoing basis, reviews these estimates and assumptions. Management may determine that modifications in assumptions and estimates are required, which may result in a material change in our results of operations or financial position.

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


	*Revenue Recognition*


	Vehicle, Parts and Service Sales

We record revenue when vehicles are delivered and title has passed to the customer, when vehicle service or repair work is performed and when parts are delivered to our customers. Sales promotions that we offer to customers are accounted for as a reduction of sales at the time of sale. Rebates and other incentives offered directly to us by manufacturers are recognized as earned.


	Finance and Insurance Sales

We arrange financing for customers through various financial institutions and receive a commission from the lender equal to either the difference between the interest rates charged to customers and the interest rates set by the financing institution or a flat fee. We also receive commissions for facilitating the sale of various

third-party insurance products to customers, including credit and life insurance policies and extended service contracts. These commissions are recorded as revenue at the time the customer enters into the contract. 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*

Our principal intangible assets relate to our franchise agreements with vehicle manufacturers, which represent the estimated value of franchises acquired in business combinations, and goodwill, which represents the excess of cost over the fair value of tangible and identified intangible assets acquired in connection with business combinations. Intangible assets other than goodwill are required to be amortized over their estimated useful lives. We believe the franchise values 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; and

	•	Our history shows that manufacturers have not terminated franchise agreements.


	*Impairment Testing*

Intangible assets are reviewed for impairment on at least an annual basis. Franchise value impairment is assessed through a comparison of the net book value of our franchises with their estimated fair 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 lives 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. If the carrying amount of the goodwill attributable to a reporting unit is determined to exceed its estimated fair value, an impairment loss is recognized in an amount equal to that excess. The fair value of the goodwill attributable to our reporting units is determined using a discounted cash flow approach, which includes assumptions regarding revenue and profitability growth, residual values and our cost of capital. If future events and circumstances cause significant changes in the underlying assumptions which result in a reduction of our estimates of fair value, we may incur an impairment charge.


	*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 Venture Relationships” below. Such joint venture

relationships are accounted for under the equity method, pursuant to which we record our proportionate share of the joint venture’s 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, and for certain exposures, we have pre-determined maximum exposure limits for certain insurance periods. The majority of losses, if any, above any pre-determined exposure limits are paid by third-party insurance carriers. Our estimate of future losses is prepared by management using our historical loss experience and industry based development factors.


	*Income Taxes*

Tax regulations may require items to be included in our 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 an 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.


	*New Accounting Pronouncements*

In October 2005, the Financial Accounting Standards Board (“FASB”) staff issued FSP FAS 13-1, “Accounting for Rental Costs Incurred During a Construction Period” (“FSP FAS 13-1”). Pursuant to FSP FAS 13-1, companies will be required to expense real estate rental costs under operating leases during periods of construction commencing January 1, 2006. FSP FAS 13-1 does not require retroactive application. We are currently evaluating the provisions of FSP FAS 13-1 and have not determined the impact of this pronouncement on our consolidated operating results, financial position or cash flows.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections — A Replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS No. 154 requires all direct financial statement effects caused by a voluntary change in accounting principle to be applied retrospectively to prior period financial statements as if the new principle had always been applied, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change in principle. APB Opinion No. 20 and SFAS No. 3 previously required that a voluntary change in accounting principle be recognized as a cumulative effect in the period of change. We do not believe this pronouncement will have a material effect on our consolidated operating results, financial position or cash flows.

Results of Operations

The following tables present comparative financial data relating to our operating performance in the aggregate and on a “same store” basis. Dealership results are only included in same store comparisons when we have consolidated the entity during the entirety of both periods being compared. As an example, if a dealership was acquired on January 15, 2004, the results of the acquired entity would be included in quarterly same store comparisons beginning with the second quarter of 2005 and in annual same store comparisons beginning with 2006.


	*Three Months Ended September 30, 2005 Compared to Three Months Ended September 30, 2004 (in millions, except unit and per unit amounts)*

Total Retail Data


					2005 vs. 2004

	2005		2004		Change		% Change

Total retail unit sales		74,047		68,170		5,877		8.6	%
Total same store retail unit sales		68,188		65,544		2,644		4.0	%
Total retail sales revenue	$	2,571.1	$	2,318.9	$	252.2		10.9	%
Total same store retail sales revenue	$	2,393.5	$	2,237.9	$	155.6		7.0	%
Total retail gross profit	$	412.7	$	359.9	$	52.8		14.7	%
Total same store retail gross profit	$	385.7	$	345.2	$	40.5		11.7	%
Total retail gross margin		16.0%		15.5%		0.5%		3.2	%
Total same store retail gross margin		16.1%		15.4%		0.7%		4.5	%


	*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 5,877 units, or 8.6%, from 2004 to 2005. The increase is due to a 3,233 unit increase from net dealership acquisitions during the period, coupled with a 2,644 unit, or 4.0%, increase in same store retail unit sales. The same store increase is due to an increase in retail unit sales at our premium and volume foreign brands, offset by a decrease in retail unit sales at our domestic brands.


	*Revenues*

Retail sales revenue increased $252.2 million, or 10.9%, from 2004 to 2005. The increase is due to a $96.6 million increase from net dealership acquisitions during the period, coupled with a $155.6 million, or 7.0%, increase in same store revenues. The same store revenue increase is due to (1) a $569, or 1.8%, increase in average new vehicle revenue per unit, which increased revenue by $25.4 million, (2) an $866, or 3.5%, increase in average used vehicle revenue per unit, which increased revenue by $18.2 million, (3) an $84, or 10.2%, increase in average finance and insurance revenue per unit, which increased revenue by $5.5 million, (4) a $20.6 million, or 8.5%, increase in service and parts revenues, and (5) the 4.0% increase in retail unit sales which increased revenue by $85.9 million.


	*Gross Profit*

Retail gross profit increased $52.8 million, or 14.7%, from 2004 to 2005. The increase is due to a $12.3 million increase from net dealership acquisitions during the period, coupled with a $40.5 million, or 11.7%, increase in same store retail gross profit. The same store retail gross profit increase is due to (1) a $110, or 4.1%, increase in average gross profit per new vehicle retailed, which increased retail gross profit by $4.9 million, (2) a $224, or 10.7%, increase in average gross profit per used vehicle retailed, which increased retail gross profit by $4.7 million, (3) the $84, or 10.2%, increase in average finance and insurance revenue per unit, which increased retail gross profit by $5.5 million, (4) a $15.8 million, or 12.3%, increase in service and parts gross profit, and (5) the 4.0% increase in retail unit sales, which increased retail gross profit by $9.6 million.

New Vehicle Data


							2005 vs. 2004

	2005			2004			Change			% Change

New retail unit sales		51,171			46,409			4,762			10.3%
Same store new retail unit sales		46,826			44,529			2,297			5.2%
New retail sales revenue	$	1,641.4		$	1,475.6		$	165.8			11.2%
Same store new retail sales revenue	$	1,520.9		$	1,420.9		$	100.0			7.0%
New retail sales revenue per unit	$	32,078		$	31,795		$	283			0.9%
Same store new retail sales revenue per unit	$	32,479		$	31,910		$	569			1.8%
Gross profit — new	$	139.4		$	124.7		$	14.7			11.8%
Same store gross profit — new	$	130.2		$	119.0		$	11.2			9.4%
Average gross profit per new vehicle retailed	$	2,724		$	2,687		$	37			1.4%
Same store average gross profit per new vehicle retailed	$	2,781		$	2,671		$	110			4.1%
Gross margin % — new		8.5	%		8.4	%		0.1	%		1.2%
Same store gross margin % — new		8.6	%		8.4	%		0.2	%		2.4%


	*Units*

Retail unit sales of new vehicles increased 4,762 units, or 10.3%, from 2004 to 2005. The increase is due to a 2,465 unit increase from net dealership acquisitions during the period, coupled with a 2,297 unit, or 5.2%, increase in same store retail unit sales. The same store increase is due to an increase in retail unit sales at our premium and volume foreign brands, offset by a decrease in retail unit sales at our domestic brands.


	*Revenues*

New vehicle retail sales revenue increased $165.8 million, or 11.2%, from 2004 to 2005. The increase is due to a $65.8 million increase from net dealership acquisitions during the period, coupled with a $100.0 million, or 7.0%, increase in same store revenues. The same store revenue increase is due to the 5.2% increase in retail unit sales, which increased revenue by $74.6 million, and the $569, or 1.8%, increase in comparative average selling prices per unit, which increased revenue by $25.4 million.


	*Gross Profit*

Retail gross profit from new vehicle sales increased $14.7 million, or 11.8%, from 2004 to 2005. The increase is due to a $3.5 million increase from net dealership acquisitions during the period, coupled with an $11.2 million, or 9.4%, increase in same store gross profit. The same store increase is due to the 5.2% increase in retail unit sales, which increased gross profit by $6.3 million, and the $110, or 4.1%, increase in average gross profit per vehicle retailed, which increased gross profit by $4.9 million.

Used Vehicle Data


							2005 vs. 2004

	2005			2004			Change			% Change

Used retail unit sales		22,876			21,761			1,115			5.1%
Same store used retail unit sales		21,362			21,015			347			1.7%
Used retail sales revenue	$	577.2		$	536.1		$	41.1			7.7%
Same store used retail sales revenue	$	547.9		$	520.8		$	27.1			5.2%
Used retail sales revenue per unit	$	25,232		$	24,634		$	598			2.4%
Same store used retail sales revenue per unit	$	25,649		$	24,783		$	866			3.5%
Gross profit — used	$	52.4		$	45.7		$	6.7			14.7%
Same store gross profit — used	$	49.5		$	44.0		$	5.5			12.5%
Average gross profit per used vehicle retailed	$	2,292		$	2,098		$	194			9.2%
Same store average gross profit per used vehicle retailed	$	2,318		$	2,094		$	224			10.7%
Gross margin % — used		9.1	%		8.5	%		0.6	%		7.1%
Same store gross margin % — used		9.0	%		8.4	%		0.6	%		7.1%


	*Units*

Retail unit sales of used vehicles increased 1,115 units, or 5.1%, from 2004 to 2005. The increase is due to a 768 unit increase from net dealership acquisitions during the period, coupled with a 347 unit, or 1.7%, increase in same store used retail unit sales. The same store increase is due to an increase in retail unit sales at our premium and volume foreign brands, offset by a decrease in retail unit sales at our domestic brands.


	*Revenues*

Used vehicle retail sales revenue increased $41.1 million, or 7.7%, from 2004 to 2005. The increase is due to a $14.0 million increase from net dealership acquisitions during the period, and a $27.1 million, or 5.2%, increase in same store revenues. The same store revenue increase is due to the $866, or 3.5%, increase in comparative average selling prices per vehicle, which increased revenue by $18.2 million, coupled with the 1.7% increase in retail unit sales, which increased revenue by $8.9 million.


	*Gross Profit*

Retail gross profit from used vehicle sales increased $6.7 million, or 14.7%, from 2004 to 2005. The increase is due to a $1.2 million increase from net dealership acquisitions during the period, coupled with a $5.5 million, or 12.5%, increase in same store gross profit. The increase in same store gross profit is due to the $224, or 10.7%, increase in average gross profit per used vehicle retailed, which increased gross profit by $4.7 million, coupled with the 1.7% increase in retail unit sales, which increased gross profit by $0.8 million.

Finance and Insurance Data


					2005 vs. 2004

	2005		2004		Change		% Change

Total retail unit sales		74,047		68,170		5,877		8.6%
Total same store retail unit sales		68,188		65,544		2,644		4.0%
Finance and insurance revenue	$	65.1	$	55.9	$	9.2		16.5%
Same store finance and insurance revenue	$	61.9	$	54.0	$	7.9		14.7%
Finance and insurance revenue per unit	$	880	$	820	$	60		7.3%
Same store finance and insurance revenue per unit	$	908	$	824	$	84		10.2%

Finance and insurance revenue increased $9.2 million, or 16.5%, from 2004 to 2005. The increase is due to a $1.3 million increase from net dealership acquisitions during the period, coupled with a $7.9 million, or

14.7%, increase in same store revenues. The same store revenue increase is due to the $84, or 10.2%, increase in comparative average finance and insurance revenue per unit, which increased revenue by $5.5 million, and the 4.0% increase in retail unit sales, which increased revenue by $2.4 million. Approximately $38 of the $84 increase in comparative average finance and insurance revenue per unit was due to our Sirius Satellite Radio promotion arrangement.

Service and Parts Data


							2005 vs. 2004

	2005			2004			Change			% Change

Service and parts revenue	$	287.4		$	251.4		$	36.0			14.3%
Same store service and parts revenue	$	262.8		$	242.2		$	20.6			8.5%
Gross profit	$	155.7		$	133.7		$	22.0			16.5%
Same store gross profit	$	144.1		$	128.3		$	15.8			12.3%
Gross margin		54.2	%		53.2	%		1.0	%		1.9%
Same store gross margin		54.8	%		53.0	%		1.8	%		3.4%


	*Revenues*

Service and parts revenue increased $36.0 million, or 14.3%, from 2004 to 2005. The increase is due to a $15.4 million increase from net dealership acquisitions during the period, coupled with a $20.6 million, or 8.5%, increase in same store revenues. We believe that our service and parts business is being positively impacted by the growth in total retail unit sales at our dealerships in recent years, enhancements of maintenance programs and certified pre-owned programs offered by certain manufacturers, and capacity increases in our service and parts operations resulting from our facility improvement and expansion programs.


	*Gross Profit*

Service and parts gross profit increased $22.0 million, or 16.5%, from 2004 to 2005. The increase is due to a $6.2 million increase from net dealership acquisitions during the period, coupled with a $15.8 million, or 12.3%, increase in same store gross profit. The same store gross profit increase is due to the $20.6 million, or 8.5%, increase in revenues, which increased gross profit by $11.4 million, and a 3.4% increase in gross margin, which increased gross profit by $4.4 million.

Selling, General and Administrative

Selling, general and administrative “SG&A” expenses increased $45.2 million, or 16.3%, from $277.8 million to $323.0 million. The increase is primarily due to an $11.1 million increase from net dealership acquisitions during the period, coupled with a $34.1 million, or 12.8%, increase in same store SG&A. The increase in same store SG&A is due in large part to a net increase in variable selling expenses, including increases in variable compensation, as a result of the 11.7% increase in retail gross profit over the prior year, increased rent and other property costs and the effect of a refund of U.K. consumption taxes in the prior year. SG&A expenses increased as a percentage of total revenue from 11.0% to 11.5%, and increased as a percentage of gross profit from 77.4% to 78.5%.

Depreciation and Amortization

Depreciation and amortization decreased $3.5 million, or 25.2%, from $14.1 million to $10.6 million. The decrease is due to a $3.9 million, or 27.9%, decrease in same store depreciation and amortization, offset by a $0.4 million increase from net dealership acquisitions during the period. The same store decrease is due primarily to the effect of costs incurred in 2004 related to the planned relocation of certain U.K. franchises, offset by increases due in large part to our facility improvement and expansion program.

Floor Plan Interest Expense

Floor plan interest expense increased $1.4 million, or 11.5%, from $11.5 million to $12.9 million. The increase is due to a $0.6 million increase from net dealership acquisitions during the period, coupled with a $0.8 million, or 7.3%, increase in same store floor plan interest expense. The same store increase is due primarily to an increase in our weighted average borrowing rate during 2005 compared to 2004.

Other Interest Expense

Other interest expense increased $1.8 million, or 17.9%, from $10.5 million to $12.3 million. The increase is due primarily to an increase in our weighted average borrowing rate during 2005 versus 2004, coupled with an increase in average outstanding indebtedness in 2005 versus 2004.

Income Taxes

Income taxes increased $2.1 million, or 12.3%, from $17.2 million to $19.3 million. The increase is reflective of the fact that the third quarter 2004 effective rate was 34.4% in order to adjust our annual 2004 effective rate from 38.8 to 37.2%. Our estimated 2005 annual effective tax rate is 36.7%.


	*Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30, 2004 (dollars in millions, except per unit amounts)*

Total Retail Data


							2005 vs. 2004

	2005			2004			Change			% Change

Total retail unit sales		209,474			190,682			18,792			9.9%
Total same store retail unit sales		186,270			184,484			1,786			1.0%
Total retail sales revenue	$	7,366.5		$	6,437.7		$	928.8			14.4%
Total same store retail sales revenue	$	6,480.3		$	6,193.3		$	287.0			4.6%
Total retail gross profit	$	1,195.9		$	1,015.9		$	180.0			17.7%
Total same store retail gross profit	$	1,057.2		$	974.0		$	83.2			8.5%
Total retail gross margin		16.2	%		15.8	%		0.4	%		2.5%
Total same store retail gross margin		16.3	%		15.7	%		0.6	%		3.8%


	*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 18,792 units, or 9.9%, from 2004 to 2005. The increase is due to a 17,006 unit increase from net dealership acquisitions during the period, coupled with a 1,786 unit, or 1.0%, increase in same store retail unit sales. The same store increase is due to an increase in retail unit sales at our premium and volume foreign brands, offset by a decrease in retail unit sales at our domestic brands.


	*Revenues*

Retail sales revenue increased $928.8 million, or 14.4%, from 2004 to 2005. The increase is due to a $641.8 million increase from net dealership acquisitions during the period, coupled with a $287.0 million, or 4.6%, increase in same store revenues. The same store revenue increase is due to (1) a $688, or 2.2%, increase in average new vehicle revenue per unit, which increased revenue by $84.9 million, (2) a $1,081, or 4.5%, increase in average used vehicle revenue per unit, which increased revenue by $66.1 million, (3) an $85, or 10.3%, increase in average finance and insurance revenue per unit, which increased revenue by $15.7 million, (4) a $53.1 million, or 7.8%, increase in service and parts revenues, and (5) a $67.2 million net increase resulting from new and used unit sales volume increases.


	*Gross Profit*

Retail gross profit increased $180.0 million, or 17.7%, from 2004 to 2005. The increase is due to a $96.8 million increase from net dealership acquisitions during the period, coupled with an $83.2 million, or 8.5%, increase in same store retail gross profit. The same store retail gross profit increase is due to (1) a $99, or 3.7%, increase in average gross profit per new vehicle retailed, which increased retail gross profit by $12.2 million, (2) a $232, or 11.0%, increase in average gross profit per used vehicle retailed, which increased retail gross profit by $14.2 million, (3) the $85, or 10.3%, increase in average finance and insurance revenue per unit which increased retail gross profit by $15.7 million, (4) a $34.1 million, or 9.3%, increase in service and parts gross profit, and (5) a $7.0 million net increase resulting from new and used unit sales volume increases.

New Vehicle Data


							2005 vs. 2004

	2005			2004			Change			% Change

New retail unit sales		142,508			127,333			15,175			11.9%
Same store new retail unit sales		126,314			123,374			2,940			2.4%
New retail sales revenue	$	4,633.4		$	4,036.8		$	596.6			14.8%
Same store new retail sales revenue	$	4,067.8		$	3,888.3		$	179.5			4.6%
New retail sales revenue per unit	$	32,513		$	31,703		$	810			2.6%
Same store new retail sales revenue per unit	$	32,204		$	31,516		$	688			2.2%
Gross profit — new	$	399.8		$	344.3		$	55.5			16.1%
Same store gross profit — new	$	348.5		$	328.2		$	20.3			6.2%
Average gross profit per new vehicle retailed	$	2,805		$	2,704		$	101			3.7%
Same store average gross profit per new vehicle retailed	$	2,759		$	2,660		$	99			3.7%
Gross margin % — new		8.6	%		8.5	%		0.1	%		1.2%
Same store gross margin % — new		8.6	%		8.4	%		0.2	%		2.4%


	*Units*

Retail unit sales of new vehicles increased 15,175 units, or 11.9%, from 2004 to 2005. The increase is due to a 12,235 unit increase from net dealership acquisitions during the period, coupled with a 2,940 unit, or 2.4%, increase in same store retail unit sales. The same store increase is due to an increase in retail unit sales at our premium and volume foreign brands, offset by a decrease in retail unit sales at our domestic brands.


	*Revenues*

New vehicle retail sales revenue increased $596.6 million, or 14.8%, from 2004 to 2005. The increase is due to a $417.1 million increase from net dealership acquisitions during the period, coupled with a $179.5 million, or 4.6%, increase in same store revenues. The same store revenue increase is due to the 2.4% increase in retail unit sales, which increased revenue by $94.6 million, coupled with the $688, or 2.2%, increase in comparative average selling prices per unit, which increased revenue by $84.9 million.


	*Gross Profit*

Retail gross profit from new vehicle sales increased $55.5 million, or 16.1%, from 2004 to 2005. The increase is due to a $35.2 million increase from net dealership acquisitions during the period, coupled with a $20.3 million, or 6.2%, increase in same store gross profit. The same store increase is due to the 2.4% increase in retail unit sales, which increased gross profit by $8.1 million, coupled with the $99, or 3.7%, increase in average gross profit per vehicle retailed, which increased gross profit by $12.2 million.

Used Vehicle Data


							2005 vs. 2004

	2005			2004			Change			% Change

Used retail unit sales		66,966			63,349			3,617			5.7	%
Same store used retail unit sales		59,956			61,110			(1,154	)		(1.9	)%
Used retail sales revenue	$	1,710.0		$	1,537.8		$	172.2			11.2	%
Same store used retail sales revenue	$	1,512.7		$	1,475.7		$	37.0			2.5	%
Used retail sales revenue per unit	$	25,535		$	24,276		$	1,259			5.2	%
Same store used retail sales revenue per unit	$	25,230		$	24,149		$	1,081			4.5	%
Gross profit — used	$	156.8		$	134.6		$	22.2			16.5	%
Same store gross profit — used	$	140.9		$	129.5		$	11.4			8.8	%
Average gross profit per used vehicle retailed	$	2,341		$	2,124		$	217			10.2	%
Same store average gross profit per used vehicle retailed	$	2,350		$	2,118		$	232			11.0	%
Gross margin % — used		9.2	%		8.8	%		0.4	%		4.5	%
Same store gross margin % — used		9.3	%		8.8	%		0.5	%		5.7	%


	*Units*

Retail unit sales of used vehicles increased 3,617 units, or 5.7%, from 2004 to 2005. The increase is due to a 4,771 unit increase from net dealership acquisitions during the period, offset by a 1,154 unit, or 1.9%, decrease in same store used retail unit sales. The same store decrease is due to a decrease in retail unit sales at our domestic brands, offset by an increase in retail unit sales at our premium and volume foreign brands. We believe that the same store decrease in domestic brands was due in part to the continued challenging used vehicle market in the U.S. during the first nine months of 2005, based in part on the relative affordability of new vehicles due to continued incentive spending by certain manufacturers.


	*Revenues*

Used vehicle retail sales revenue increased $172.2 million, or 11.2%, from 2004 to 2005. The increase is due to a $135.2 million increase from net dealership acquisitions during the period, coupled with a $37.0 million, or 2.5%, increase in same store revenues. The same store revenue increase is due to the $1,081, or 4.5%, increase in comparative average selling prices per vehicle, which increased revenue by $64.9 million, offset by the 1.9% decrease in retail unit sales, which decreased revenue by $27.9 million.


	*Gross Profit*

Retail gross profit from used vehicle sales increased $22.2 million, or 16.5%, from 2004 to 2005. The increase is due to a $10.8 million increase from net dealership acquisitions during the period, coupled with an $11.4 million, or 8.8%, increase in same store gross profit. The increase in same store gross profit is due to the $232, or 11.0%, increase in average gross profit per vehicle retailed, which increased gross profit by $13.9 million, offset by the 1.9% decrease in retail unit sales, which decreased gross profit by $2.5 million.

Finance and Insurance Data


					2005 vs. 2004

	2005		2004		Change		% Change

Total retail unit sales		209,474		190,682		18,792		9.9%
Total same store retail unit sales		186,270		184,484		1,786		1.0%
Finance and insurance revenue	$	182.5	$	155.4	$	27.1		17.4%
Same store finance and insurance revenue	$	169.0	$	151.6	$	17.4		11.5%
Finance and insurance revenue per unit	$	871	$	815	$	56		6.9%
Same store finance and insurance revenue per unit	$	907	$	822	$	85		10.3%

Finance and insurance revenue increased $27.1 million, or 17.4%, from 2004 to 2005. The increase is due to a $9.7 million increase from net dealership acquisitions during the period, coupled with a $17.4 million, or 11.5%, increase in same store revenues. The same store revenue increase is due to the $85, or 10.3%, increase in comparative average finance and insurance revenue per unit, which increased revenue by $15.7 million, coupled with the 1.0% increase in retail unit sales, which increased revenue by $1.7 million. Approximately $27 of the $85 increase in comparative average finance and insurance revenue per unit was due to our Sirius Satellite Radio promotion arrangement.

Service and Parts Data


							2005 vs. 2004

	2005			2004			Change			% Change

Service and parts revenue	$	840.6		$	707.8		$	132.8			18.8%
Same store service and parts revenue	$	730.8		$	677.7		$	53.1			7.8%
Gross profit	$	456.9		$	381.7		$	75.2			19.7%
Same store gross profit	$	398.9		$	364.8		$	34.1			9.3%
Gross margin		54.3	%		53.9	%		0.4	%		0.7%
Same store gross margin		54.6	%		53.8	%		0.8	%		1.5%


	*Revenues*

Service and parts revenue increased $132.8 million, or 18.8%, from 2004 to 2005. The increase is due to a $79.7 million increase from net dealership acquisitions during the period, coupled with a $53.1 million, or 7.8%, increase in same store revenues. We believe that our service and parts business is being positively impacted by the growth in total retail unit sales at our dealerships in recent years, enhancements of maintenance programs and certified pre-owned programs offered by certain manufacturers, and capacity increases in our service and parts operations resulting from our facility improvement and expansion programs.


	*Gross Profit*

Service and parts gross profit increased $75.2 million, or 19.7%, from 2004 to 2005. The increase is due to a $41.1 million increase from net dealership acquisitions during the period, coupled with a $34.1 million, or 9.3%, increase in same store gross profit. The same store gross profit increase is due to the $53.1 million, or 7.8%, increase in revenues, which increased gross profit by $29.0 million, and a 1.5% increase in gross margin, which increased gross profit by $5.1 million.

Selling, General and Administrative

SG&A expenses increased $152.3 million, or 19.2%, from $794.4 million to $946.7 million. The increase is primarily due to a $78.8 million increase from net dealership acquisitions during the period, coupled with a $73.5 million, or 9.7%, increase in same store SG&A. The increase in same store SG&A is due in large part to a net increase in variable selling expenses, including increases in variable compensation as a result of the 8.5% increase in retail gross profit over the prior year, increased rent and other property costs, severance charges as

we rationalized our cost structure in certain markets, and the effect of a refund of U.K. consumption taxes in the prior year. SG&A expenses increased as a percentage of total revenue from 11.3% to 11.8%, and increased as a percentage of gross profit from 78.1% to 79.2%.

Depreciation and Amortization

Depreciation and amortization increased $0.3 million, or 1.1%, from $30.9 million to $31.2 million. The increase is due to a $2.3 million increase from net dealership acquisitions during the period, offset by a $2.0 million, or 6.6%, decrease in same store depreciation and amortization. The same store decrease is due primarily to the effect of costs incurred in 2004 related to the planned relocation of certain U.K. franchises, offset by increases due in large part to our facility improvement and expansion program.

Floor Plan Interest Expense

Floor plan interest expense increased $5.6 million, or 16.0%, from $34.8 million to $40.4 million. The increase is due to a $3.4 million increase from net dealership acquisitions during the period, coupled with a $2.2 million, or 6.5%, increase in same store floor plan interest expense. The same store increase is primarily due to an increase in our weighted average borrowing rate during 2005 compared to 2004.

Other Interest Expense

Other interest expense increased $4.8 million, or 15.5%, from $31.3 million to $36.1 million. The increase is due primarily to an increase in our weighted average borrowing rate during 2005 versus 2004, coupled with an increase in average outstanding indebtedness in 2005 versus 2004.

Income Taxes

Income taxes increased $1.1 million, or 2.0%, from $50.9 million to $52.0 million. The increase is due primarily to an increase in 2005 pre-tax income compared with 2004.

Liquidity and Capital Resources

Our cash requirements are primarily for working capital, inventory financing, 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 and floor plan arrangements, the issuance of debt securities, sale-leaseback transactions and the issuance of equity securities. As of September 30, 2005, we had working capital of $170.3 million, including $2.7 million of cash, available to fund the Company’s operations and capital commitments. In addition, we had $252.5 million and £57.0 million ($100.3 million) available for borrowing under our U.S. credit agreement and our U.K. credit agreement, respectively, the terms of which are discussed below.

We paid a cash dividend on our common stock on September 1, 2005 of eleven cents per share. On October 19, 2005, we declared a cash dividend on our common stock of twelve cents per share payable on December 1, 2005 to shareholders of record on November 10, 2005. 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.

We have grown primarily through the acquisition of automotive dealerships. We believe that our cash flow from 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. In connection with such potential significant acquisitions, 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 substantially all of our new and a portion of our used vehicle inventories under revolving floor plan notes payable with various lenders. In the U.S., the floor plan arrangements are due on demand; however, we are generally not required to make loan principal repayments prior to the sale of the financed vehicles. We typically make monthly interest payments on the amount financed. In the U.K., substantially all of our floor plan arrangements are payable on demand or have an original maturity of 90 days or less. 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 changes in prime or LIBOR borrowing rates. Total outstanding borrowings under floor plan arrangements amounted to $1,015.3 million as of September 30, 2005, of which $298.5 million related to inventory held by our U.K. subsidiaries.


	*U.S. Credit Agreement*

Our credit agreement with DaimlerChrysler Services North America LLC and Toyota Motor Credit Corporation, as amended effective October 1, 2004 (the “U.S. Credit Agreement”) provides for up to $600.0 million in revolving loans for working capital, acquisitions, capital expenditures, investments and for other general corporate purposes, and for an additional $50.0 million of availability for letters of credit, through September 30, 2008. The revolving loans bear interest between defined LIBOR plus 2.60% and defined LIBOR plus 3.75%.

The U.S. Credit Agreement is fully and unconditionally guaranteed on a joint and several basis by our domestic subsidiaries and contains a number of significant covenants that, among other things, restrict our ability to dispose of assets, incur additional indebtedness, repay other indebtedness, create liens on assets, make investments or acquisitions and engage in mergers or consolidations. We are also required to comply with specified financial and other tests and ratios, each as defined in the U.S. Credit Agreement, including: a ratio of current assets to current liabilities, a fixed charge coverage ratio, a ratio of debt to stockholders’ equity, a ratio of debt to EBITDA, a ratio of domestic debt to domestic EBITDA, and a measurement of stockholders’ equity. A breach of these requirements would give rise to certain remedies under the agreement, the most severe of which is the termination of the agreement and acceleration of the amounts owed. As of September 30, 2005, we were in compliance with all covenants under the U.S. Credit Agreement, and management believes that we will remain in compliance with such covenants for the foreseeable future. In making such determination, management has considered the current margin of compliance with the covenants and the Company’s expected future results of operations, working capital requirements, acquisitions, capital expenditures and investments in the U.S. See “Forward Looking Statements.”

The U.S. Credit Agreement also contains typical events of default, including change of control, non-payment of obligations and cross-defaults to our other material indebtedness. 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. As of September 30, 2005, outstanding borrowings and letters of credit under the U.S. Credit Agreement amounted to $315.0 million and $32.5 million, respectively.


	*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 in revolving and term loans to be used for acquisitions, working capital, and general corporate purposes. Revolving loans under the U.K. Credit Agreement have an original maturity of 90 days or less and bear interest between defined LIBOR plus 0.85% and defined 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 £15.0 million. Term loan capacity under the U.K. Credit Agreement was originally £10.0 million, which is reduced by £2.0 million every six months. As of September 30, 2005, term loan capacity under the U.K.

Credit Agreement amounted to £2.0 million. The remaining £55.0 million of revolving loan capacity matures 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, each as defined in the U.K. Credit Agreement, including: a measurement of net worth, a debt to capital ratio, an EBITDA to interest expense ratio, a measurement of maximum capital expenditures, a debt to EBITDA ratio and a fixed charge coverage ratio. A breach of these requirements would give rise to certain remedies under the agreement, the most severe of which is the termination of the agreement and acceleration of the amounts owed. As of September 30, 2005, we were in compliance with all covenants under the U.K. Credit Agreement, and management believes that we will remain in compliance with such covenants for the foreseeable future. In making such determination, management has considered the current margin of compliance with the covenants and the Company’s expected future results of operations, working capital requirements, acquisitions, capital expenditures and investments in the U.K. See “Forward Looking Statements.”


	*Senior Subordinated Notes*

We have outstanding $300.0 million aggregate principal amount of 9.625% Senior Subordinated Notes due 2012 (the “Notes”). The Notes are unsecured senior subordinated notes and rank behind all 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. 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 September 30, 2005, we were in compliance with all covenants and there were no events of default.


	*Interest Rate Swaps*

We are party to an interest rate swap agreement through January 2008 pursuant to which a notional $200.0 million of our U.S. floating rate debt was exchanged for fixed rate debt. The swap was designated as a cash flow hedge of future interest payments of the LIBOR based U.S. floor plan borrowings. As of September 30, 2005, we expect approximately $0.9 million of interest associated with the swap to be reclassified as a charge to income over the next twelve months.


	*Other Financing Arrangements*

In the past, we have entered into sale-leaseback transactions to finance certain property acquisitions and capital expenditures, pursuant to which we sell property and/or leasehold improvements to a third-party and agree to lease those assets back for a certain period of time. We believe we will continue to utilize these types of transactions in the future. Such sales generate proceeds which vary from period to period.

Cash Flows

We finance substantially all of our new and a portion of our used vehicle inventories under revolving floor plan notes payable with various lenders. Historically, we have reported all cash flows arising in connection with changes in floor plan notes payable as an operating activity. In the third quarter of 2005, we reclassified floor plan notes payable to a party other than the manufacturer of a particular new vehicle, and all floor plan notes

payable relating to pre-owned vehicles, as floor plan notes payable—non-trade, and have reclassified related cash flows as a financing activity to comply with the guidance under SFAS No. 95, “Statement of Cash Flows.” As a result, the Consolidated Condensed Statement of Cash Flows for the nine months ended September 30, 2004 has been restated, resulting in a $94.0 million increase in cash flows from continuing operating activities and a corresponding decrease in cash flows from continuing financing activities. The Company is in the process of determining the impact of reclassifying floor plan notes payable — non-trade on previously filed balance sheets and statements of cash flows. The Company currently estimates that approximately $380.0 million of floor plan notes payable — non-trade will be reclassified as of December 31, 2003, and that the reclassification of cash flows attributable to floor plan notes payable — non-trade from operating activities to financing activities will increase cash flows from continuing operating activities and decrease cash flows from continuing financing activities by approximately $60.0 million for the year ended December 31, 2004 and decrease cash flows from continuing operating activities and increase cash flows from continuing financing activities by approximately $150.0 million and $48.0 million, respectively, for the years ended December 31, 2003 and 2002.

Cash and cash equivalents decreased by $12.5 million and increased by $6.7 million during the nine months ended September 30, 2005 and 2004, respectively. The major components of these changes are discussed below.


	*Cash Flows from Operating Activities*

Cash provided by operating activities was $137.3 million and $212.7 million during the nine months ended September 30, 2005 and 2004, respectively. Cash flows from operating activities include net income adjusted for non-cash items and the effects of changes in working capital.

We believe that changes in aggregate floor plan liabilities are directly linked to changes in vehicle inventory and, therefore, are an integral part of understanding changes in our working capital and operating cash flow. Consequently, we have provided below a reconciliation of cash flow from operating activities as reported in our Condensed Consolidated Statement of Cash Flows as if all changes in vehicle floor plan were classified as an operating activity.


	Nine Months Ended
	September 30,

	2005			2004

Net cash from operating activities as reported	$	137,316		$	212,697
Floor plan notes payable — non-trade as reported		(51,116	)		(94,018	)

Net cash from operating activities including all floor plan notes payable	$	86,200		$	118,679


	*Cash Flows from Investing Activities*

Cash used in investing activities was $155.0 million and $255.3 million during the nine months ended September 30, 2005 and 2004, 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 $165.0 million and $148.8 million during the nine months ended September 30, 2005 and 2004, respectively. Capital expenditures relate primarily to improvements to our existing dealership facilities and the construction of new facilities. Proceeds from sale-leaseback transactions were $71.2 million and $43.9 million during the nine months ended September 30, 2005 and 2004, respectively. Cash used in business acquisitions, net of cash acquired, was $61.2 million and $164.0 million during the nine months ended September 30, 2005 and 2004, respectively. During the nine months ended September 30, 2004, cash from investing activities also included $13.6 million of proceeds received from the sale of an investment.


	*Cash Flows from Financing Activities*

Cash used in financing activities was $17.8 million during the nine months ended September 30, 2005. Cash provided by financing activities was $43.4 million during the nine months ended September 30, 2004. Cash flows from financing activities include net borrowings or repayments of long-term debt, net borrowings or repayments of floor plan notes payable — non-trade, proceeds from the issuance of common stock, including proceeds from the exercise of stock options, and dividends. We had net borrowings of long-term debt of $45.6 million and $22.8 million during the nine months ended September 30, 2005 and 2004, respectively. We made net repayments of floor plan notes payable — non-trade of $51.1 million and $94.0 million during the nine months ended September 30, 2005 and 2004, respectively. We received proceeds of $3.0 million and $128.0 million, respectively, from the issuance of common stock during the nine months ended September 30, 2005 and 2004, respectively. We paid $15.3 million and $13.3 million, of cash dividends to our stockholders during the nine months ended September 30, 2005 and 2004, respectively.


	*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 a maximum of 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 September 30, 2005, the maximum future cash payment we may be required to make in connection with the put option is $1.3 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 relationship 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 formation of the joint venture relationship. Pursuant to this arrangement, we entered into a joint venture agreement with respect to our Honda of Mentor dealership in Ohio. 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 approximately 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 certain other affiliates of Penske Corporation are parties to a stockholders agreement pursuant to which 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.


	*Mitsui Transaction*

On March 26, 2004, we sold an aggregate of 4,050,000 shares of common stock to Mitsui for $119.4 million. Proceeds from the sale were used for general corporate purposes, which included reducing outstanding indebtedness under our credit agreements.


	*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, a director of Penske Corporation and a managing director of Transportation Resource Partners, an organization which undertakes investments in transportation related industries. Roger S. Penske also is a managing member of Penske Capital Partners and Transportation Resource Partners. Richard J. Peters, one of our directors, is a director of Penske Corporation and a managing director of Transportation Resource Partners. Eustace W. Mita and Lucio A. Noto (two of our directors) are investors in Transportation Resource Partners. One of our board members, Mr. Hiroshi Ishikawa, serves as our Executive Vice President — International Business Development and serves in a similar capacity for Penske Corporation. Robert H. Kurnick, Jr., our Executive Vice President and General Counsel, is also the President and a director of Penske Corporation and Paul F. Walters, our Executive Vice President — Human Resources serves in a similar human resources capacity for Penske Corporation.


	*Other Transactions*

We are currently a tenant under a number of non-cancelable lease agreements with Automotive Group Realty, LLC and its subsidiaries (together “AGR”), which are subsidiaries 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 independently confirmed by a third party appraiser. During the nine months ended September 30, 2005, we sold $3.3 million of property to AGR. There were no gains or losses associated with such sales.

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.

In February 2005, we acquired a 7% interest in a mobile vehicle washing company in exchange for $2.4 million. Transportation Resource Partners, an organization discussed above under “Other Related Party Interests,” simultaneously acquired a controlling interest in this company on the same financial terms as our investment. On April 29, 2005, we acquired a 23% interest in a provider of outsourced vehicle management solutions in exchange for $4.5 million. Transportation Resource Partners simultaneously acquired a controlling interest in this company on the same financial terms as our investment. We and several other investors, including Transportation Resource Partners, entered into a stockholders agreement relating to this investment which, among other things, provides us with specified management rights and rights to purchase additional shares and restricts our ability to transfer shares. We have also entered into a management agreement which provides that we and other investors (or their affiliates) are to be provided ongoing management fees.

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

Joint Venture Relationships

From time to time we enter into joint venture relationships in the ordinary course of business, pursuant to which we operate 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. As of September 30, 2005, our joint venture relationships are as follows:


		Ownership
Location	Dealerships	Interest

Fairfield, Connecticut	Mercedes-Benz, Audi, Porsche		92.20%	(A)
Edison, New Jersey	Ferrari, Maserati		70.00%
Tysons Corner, Virginia	Mercedes-Benz, Maybach, Audi, Porsche, Aston Martin,		90.00%	(B)
Las Vegas, Nevada	Ferrari, Maserati		50.00%
Mentor, Ohio	Honda		70.00%
Munich, Germany	BMW, Mini		50.00%
Frankfurt, Germany	Lexus, Toyota		50.00%
Aachen, Germany	Audi, Volkswagen, Lexus, Toyota		50.00%
Mexico	Toyota		48.70%
Mexico	Toyota		45.00%


(A)	An entity controlled by one of our directors, Lucio A. Noto (the “Investor”), owns a 7.8% interest in this joint venture as of September 30, 2005, which entitles the Investor to 20% of the operating profits of the joint venture. In addition, the Investor has an option to purchase up to a 20% interest in the joint venture for specified amounts.


(B)	Roger S. Penske, Jr. owns a 10% interest in this joint venture.

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 severe winters. The greatest U.S. seasonality exists at the dealerships we operate in northeastern and upper mid-western states, 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 primarily 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.

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 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 in the various countries in which we operate dealerships;

	•	our ability to access the remaining availability under our credit agreements and other capital;

	•	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 our filings with the Securities and Exchange Commission. Important factors that could cause actual results to differ materially from our expectations include the following:


	•	the ability of automobile manufacturers to exercise significant control over our operations, since 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;

	•	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 foreign dealerships are not afforded the same legal franchise protections as those in the U.S. so we could be subject to additional competition from other local dealerships in those markets.;

	•	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;

	•	our overseas operations subject our profitability to fluctuations relating to changes in foreign currency valuations; and

	•	we are a holding company that relies 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.


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 September 30, 2005, a 100 basis point change in interest rates would result in an approximate $3.2 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 LIBOR or prime rates. 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 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 $10.0 million change to our annual interest expense.

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

Foreign Currency Exchange Rates.As of September 30, 2005, we have invested in franchised dealership operations in the U.K., 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. In the event we change our intent with respect to the investment in any of our international operations, we would expect to implement strategies designed to manage those risks in an effort to mitigate the effect of foreign currency fluctuations on our earnings and cash flows. A ten percent change in average exchange rates versus the U.S. Dollar would have resulted in an approximate $235.5 million change to our revenues for the nine months ended September 30, 2005.

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.	*Controls and Procedures*

Under the supervision and with the participation of the Company’s management, including the principal executive and financial officers, the Company conducted an evaluation of the effectiveness of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of September 30, 2005. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the principal executive and financial officers, to allow timely discussions regarding required disclosure. Based upon this evaluation, the Company’s principal executive and financial officers concluded that our disclosure controls and procedures were effective as of September 30, 2005. In addition, we maintain internal controls designed to provide us with the information required for accounting and financial reporting purposes. There were no changes in our internal controls over financial reporting that occurred during our third quarter of 2005 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION


Item 1.	*Legal Proceedings*

From time to time, we are involved in litigation relating to claims arising in the normal course of business. Such claims may relate to litigation with customers, employment-related lawsuits, class action lawsuits, purported class action lawsuits and actions brought by governmental authorities. As of September 30, 2005, we were not a party to any legal proceedings, including class action lawsuits to which we are a party that, individually or in the aggregate, are reasonably expected to have a material adverse effect on our results of operations, financial condition or cash flows. 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.


Item 6.	*Exhibits*


4	.1	Amended and Restated Supplemental Indenture dated as of November 3, 2005 among us, as Issuer, and certain of our domestic subsidiaries, as Guarantors, and J.P. Morgan Trust Company, N.A. (as successor in interest to Bank One Trust Company, N.A.), as Trustee.
4	.2	Extension Notice dated September 15, 2005 relating to Second Amended and Restated Credit Agreement, dated as of September 8, 2004, among us, DaimlerChrysler Services North America, LLC and Toyota Motor Credit Corporation (incorporated by reference to exhibit 99.1 to our Form 8-K filed on September 19, 2005).
31		Rule 13a-14(a)/15(d)-14(a) Certifications.
32		Section 1350 Certifications.

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: November 14, 2005


	By:	/s/James R. Davidson



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

Date: November 14, 2005

EXHIBIT INDEX


Exhibits
Number			Description

	4	.1	Amended and Restated Supplemental Indenture dated as of November 3, 2005 among us, as Issuer, and certain of our domestic subsidiaries, as Guarantors, and J.P. Morgan Trust Company, N.A. (as successor in interest to Bank One Trust Company, N.A.), as Trustee.
	4	.2	Extension Notice dated September 15, 2005 relating to Second Amended and Restated Credit Agreement, dated as of September 8, 2004, among us, DaimlerChrysler Services North America, LLC and Toyota Motor Credit Corporation (incorporated by reference to exhibit 99.1 to our Form 8-K filed on September 19, 2005).
	31		Rule 13a-14(a)/15(d)-14(a) Certifications.
	32		Section 1350 Certifications.

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	8th grade Avg

Penske Automotive (PAG) 10-Q2005 Q3 Quarterly report

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