Back to GetFilings.com

Table of Contents

Form 10-K

þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003

or

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.

Registrant’s telephone number, including area code (248) 648-2500

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

Securities registered pursuant to Section 12(g) of the Act: None.

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

          Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o

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

          The aggregate market value of the voting common stock held by non-affiliates as of June 30, 2003 was $475,718,000.

          As of March 1, 2004, there were 41,819,449 shares of voting common stock outstanding.

Documents Incorporated by Reference

          Certain portions, as expressly described in this report, of the registrant’s proxy statement for the 2004 Annual Meeting of the Stockholders to be held May 21, 2004 are incorporated by reference into Part III, Items 10-14.

TABLE OF CONTENTS

i

Table of Contents

PART I

      We are the second largest automotive retailer in the United States as measured by total revenues and have the highest concentration of revenues from foreign and luxury brands among the publicly-traded automotive retailers. As of March 1, 2004, we owned and operated 137 franchises in the United States and 83 franchises internationally, primarily in the United Kingdom. We offer a full range of vehicle brands, with 78% of our revenues in 2003 generated from the combined sales of foreign brands such as Toyota, Honda, BMW, Lexus and Mercedes. In 2003, luxury brands represented 46% of our revenues. In addition to selling new and used vehicles, we generate higher-margin revenue at each of our dealerships through maintenance and repair services and the sale of higher margin products, such as third-party finance and insurance products, third-party extended service contracts and replacement and aftermarket automotive products.

      Much of our growth and success over the last four years has resulted from the experienced leadership of Roger S. Penske and our management team. Since May 1999, Mr. Penske, through Penske Corporation and its affiliates, has invested approximately $210 million in our equity securities. Since 1999, when Mr. Penske assumed leadership, our management team has improved same-store retail revenues by an average rate of 7.9% per year, grown total revenues from $3.2 billion in 1998 to $8.7 billion in 2003, and increased our income from continuing operations per diluted common share from $0.57 in 1998 to $2.07 in 2003.

      We benefit from our diversified revenue stream, which we believe helps to mitigate the historical cyclicality found in some other automotive sectors. Revenues from higher margin service and parts and finance and insurance sales are typically less cyclical than retail vehicle sales, and constitute the majority of our gross profit. The following graphic shows the percentage of our revenues by product area along with their respective contribution to our overall gross profit:

Revenue Mix		Gross Profit Mix

Business Strategy

      Our strategy is to increase our profitability by selling and maintaining the finest automotive brands in premium facilities. We believe offering our customers superior customer service in a premium location fosters a long-term relationship, which helps generate repeat and referral business, particularly in our higher-margin service and parts business. We believe our focus on developing a loyal customer base has helped to generate industry-leading same-store-sales and allowed us to increase our high margin service and parts sales. In addition, our national dealership base and international presence allows us to achieve cost savings and implement best practices, while also providing access to a broad base of potential acquisitions.

Offer Outstanding Brands in World Class Facilities

      Foreign vehicle brands have gained significant U.S. market share in the past five years, increasing from 31% to 40% of the total market. We have the highest concentration of revenues from foreign and luxury brands

1

Table of Contents

      The following chart demonstrates our total revenue by brand:

      We sell and service these brands in our world-class facilities. We believe offering these outstanding brands in world-class facilities drives repeat and referral business, particularly in our higher margin service and parts operations. Where advantageous, we attempt to aggregate our dealerships in order to build a destination location for our customers, which we believe helps to drive increased customer traffic to each of our brands at the location. We also attempt to locate our dealerships in highly concentrated or rapidly growing demographic areas. We believe these strategies allow us to benefit by leveraging our operating expenses over a larger base of dealerships.

      For example, our Scottsdale 101 Auto Mall, the nation’s largest premium luxury automobile shopping destination, features ten separate showrooms and franchises with over 450,000 square feet of facilities. Typically, customers may choose from an inventory of over 2,000 new and used vehicles, and have access to approximately 250 service bays with service capacity of approximately 1,000 vehicles per day. It also features an on/off road test course where customers may experience the uniqueness of the brands offered. We will continue to evaluate other opportunities to aggregate our facilities to reap the benefits from a destination location.

Expand Existing Revenues and Grow Higher Margin Businesses.

      We aim to grow our business through increasing same-store sales at existing dealerships and by acquiring dealerships with strategic geographic locations and future growth potential. We also focus particularly on developing our higher margin businesses: used vehicles, finance, insurance and other products, service and parts sales and collision repair.

      Same-Store Sales. We believe our emphasis on improving customer service and upgrading our facilities will result in continued increases in same-store sales. We generally offer premium showrooms and displays and

2

Table of Contents

      Targeted Acquisitions. As of December 31, 2003, approximately 94% of the automotive retail market remained unconsolidated. We believe that attractive acquisition opportunities exist both in the U.S. and abroad for well-capitalized dealership groups with experience in identifying, acquiring and integrating dealerships. We seek to acquire dealerships with strategic geographic locations and significant earnings growth potential. We focus both on larger dealership operations that will benefit from our management assistance, manufacturer relations and scale of operations, as well as individual dealerships that can be effectively integrated into our existing operations.

      Higher Margin Business. Our increased new vehicle sales assist in developing our higher margin service and parts sales and finance and insurance sales. In 2003, our retail gross margins for these operations were 48.3% for service and parts and collision repair services and 100% for finance and insurance.

      Used Vehicles. Sales of used vehicles typically generate higher gross profit margins than sales of new vehicles because of limited comparability among them and the subjective nature of their valuation. Used vehicle sales have increased in part due to an increase in the availability of late-model, low-mileage, vehicles from termination of short-term leases and the adoption of manufacturer certified programs offering high quality, under-warranty vehicles. We believe our focus on manufacturer certified programs and increased vehicle availability as a result of our scale will continue to yield additional increases in used vehicle sales.

      Finance, Insurance and Other Aftermarket Products. Each sale of a vehicle provides us the opportunity to assist in financing the sale, sell the customer a third party extended service contract or insurance product and sell other aftermarket products, such as cellular phones, alarms and protective coatings. In order to improve our finance and insurance business, we are focusing on enhancing and standardizing our salesperson training program and increasing our product offerings.

      Service and Parts and Collision Repair. In 2003, we added numerous service bays and collision repair centers across our dealerships in an effort to expand this higher-margin segment of our business. Unlike independent service shops, our dealerships perform manufacturer warranty work which, because it is paid for by the manufacturer, is a more dependable source of repeat business. To increase this business, our dealerships track maintenance records of customers and contact them regarding dealership promotions and maintenance schedules. Warranty work accounts for approximately 40% of our service and parts revenue, with the balance being customer-pay work. We believe that our brand-mix, superior customer service and world-class facilities each contribute to the high level of customer pay work.

      We also own 35 collision repair centers. As each of these is operated as an integral part of our dealership operations, the repair centers benefit from the dealerships’ repeat and referral business.

Offer Outstanding Customer Service.

      Our ability to generate and maintain repeat and referral business depends on our ability to deliver superior customer service. We believe that customer satisfaction contributes directly to significant increases in same-store sales. By offering outstanding brands in world class facilities, and through “one-stop” shopping convenience, competitive pricing and our knowledgeable sales staff, we aim to establish lasting relationships with our customers, which enhances our reputation in the community and creates the opportunity for significant repeat and referral business.

      The quality of customer service provided by our dealerships’ sales and service departments is measured by customer satisfaction index (“CSI”) scores, which are derived from data accumulated by manufacturers through individual customer surveys. We rely on this data to track the performance of dealership operations and use it as a factor in determining the compensation of general managers and sales and service personnel in our dealerships. The majority of our dealerships exceeded manufacturer CSI metrics in 2003.

3

Table of Contents

Maintain Diversified Revenue Stream and Variable Cost Structure.

      We believe that our diversified revenue mix may mitigate the historical cyclicality of new vehicle sales. In addition, our variable cost structure affords us flexibility in responding to economic cycles. We believe that demand for our higher margin businesses is less affected by economic cycles than demand for new vehicles, as consumers are likely to continue to purchase used vehicles and service their vehicles in spite of difficult economic times. Our dealership operations are also diversified both in terms of the brands of vehicles they offer and geographic location, including internationally, as we operate 83 dealerships abroad, predominately in the United Kingdom.

      A significant percentage of our operating expenses are variable, such as sales compensation, floor plan interest expense (inventory-secured financing) and advertising, which we can adjust over time to reflect economic trends. Variable expenses like these can be more easily managed in difficult economic times. Currently, gross profit generated from our service and parts business absorbs a substantial portion of our total operating expenses, excluding salespersons’ compensation and advertising.

Capitalize on Experienced, Growth-Oriented Leadership Team.

      In May 1999, Roger S. Penske, a forty-year automotive industry veteran, became our Chairman and Chief Executive Officer. Mr. Penske has substantial experience as a leading operator in the automotive industry and a proven record of successful integration of acquired businesses. Under Mr. Penske’s leadership, we have enhanced our management team and forged mutually productive relationships with the domestic and international automotive manufacturers and suppliers.

Leverage Scale and Implement “Best Practices”.

      As one of the nations largest automotive retailers, we aim to eliminate redundant operating costs, such as marketing, supply and administrative costs, and take advantage of our purchasing power. Our scale also assists in managing inventory across dealerships. In addition, through our brand managers, who facilitate our relationship with each manufacturer, we leverage our industry relations to foster communication and cooperation between like brand dealerships throughout our organization.

      Our senior management and dealership management meet regularly to review the operating performance of our dealerships, examine industry trends and, where appropriate, agree on specific operating improvements. Key financial information is discussed and compared to other dealerships across all markets. This frequent interaction facilitates implementation of successful strategies throughout the organization so that each of our dealerships can benefit from the successes of our other dealerships and the knowledge and experience of our senior management.

Industry Overview

      With approximately $1 trillion in aggregate annual new vehicle, used vehicle and service and parts sales, the automotive retail industry is the largest retail trade sector in the United States, accounting for over 20% of the total U.S. retail sales. The industry is highly fragmented and largely privately held. There were about 22,000 franchised dealerships nationwide as of January 1, 2003, with the ten largest automotive retail groups accounting for approximately 6% of the total industry revenue.

      Of the close to $1 trillion in aggregate annual sales, new vehicle sales represent approximately $380 billion, or 38% of total revenues, used vehicle sales represent approximately $375 billion, or 37% of total industry revenues, followed by service and parts, which represent approximately $200 billion, or 20% of total revenues. In addition to new and used vehicles, dealerships offer a wide range of other higher-margin products and services, including service and repair work, replacement parts, third party extended service contracts, financing and credit insurance. Franchised dealers contributed $83 billion, or 41%, of the approximately $200 billion service and parts sector.

4

Table of Contents

      According to industry data, the number of franchised dealerships has declined from approximately 24,000 dealerships in 1990 to approximately 22,000 dealerships today. Although significant consolidation has already taken place, the industry today remains highly fragmented, with approximately 94% of the industry’s market share remaining in the hands of smaller regional and independent players. We believe that further consolidation in the industry is likely due to increased capital requirements of dealerships, the limited number of viable alternative exit strategies for dealership owners and the desire of certain manufacturers to strengthen their brand identity by consolidating their franchised dealerships.

      New vehicle unit sales are cyclical and, historically, fluctuations are influenced by factors such as interest rates, fuel prices, unemployment, inflation, weather, the level of personal discretionary spending, credit availability and consumer confidence. However, from a profitability perspective, automotive retailers have historically been less vulnerable than automobile manufacturers to declines in new vehicle sales. Historically, automotive retailers’ pre-tax profit margins have remained relatively stable, even in recessionary periods, while the average pre-tax profit margins of the three largest U.S. automobile manufacturers have fluctuated during the comparable periods. This has largely been due to a more flexible expense structure (a significant portion of the automotive retail industry’s costs are variable, relating to sales personnel, advertising and inventory finance cost) and a more diversified revenue stream. In addition, automobile manufacturers typically increase dealer incentives when sales are slow in part to meet production quotas set by contracts with labor unions, which further increases the volatility in profitability for automobile manufacturers and decreases the volatility for automotive retailers.

Acquisitions

      We have completed a number of dealership acquisitions since January 2001. Our financial statements include the results of operations of the acquired dealerships from the date of acquisition.

      In March 2002, we acquired the Sytner Group, plc. one of the leading retailers of luxury vehicles in the United Kingdom. At that time, the Sytner Group operated 62 franchises. Since March 2002, the Sytner Group has acquired or been awarded 20 additional franchises and now operates 79 franchises. Sytner’s franchises include: Alpina, Audi, Bentley, BMW, Chrysler, Ferrari, Jaguar, Jeep, Land Rover, Lexus, Maserati, Mercedes-Benz, Mini, Porsche, Rolls Royce, Saab, Smart, Toyota, Volkswagen and Volvo. Revenues attributable to the Sytner Group for the years ended December 31, 2003 and 2002 were $1.7 billion and $1.0 billion, respectively.

      The following table sets forth information with respect to our current domestic dealerships acquired or opened since January 2001:

5

Table of Contents

      In addition, in July 2001, we invested in the Tulsa Auto Collection, a group of dealerships owned indirectly by Ford Motor Company, in Tulsa, Oklahoma, consisting of seven dealerships representing the Ford, Jaguar and Mazda brands. We currently own 50% of the Tulsa Auto Collection. We also are a 50% investor in six dealerships in Germany, and a minority investor in two dealerships in Mexico. Since 2001, we also have divested 20 dealerships. We expect to continue to pursue acquisitions and related transactions in the future, although there can be no assurance that we will succeed in this strategy.

Dealership Operations

      Franchises. The following chart reflects our franchises by location:

6

Table of Contents

      The following chart reflects our dealership mix by franchise:

      Management. Each dealership or group of dealerships has independent operational and financial management responsible for day-to-day operations. We believe experienced local managers are better qualified to make day-to-day decisions concerning successful operation of the dealership and can be more responsive to our customers’ needs. Our local dealership management not only have experience in the automotive industry but also are familiar with the local dealership’s market. Our regional management oversees operations at the individual dealerships and supports the dealerships operationally and administratively.

      New Vehicle Sales. New vehicle sales represented 60% of our revenue and 34% of our gross profit in 2003. As of March 1, 2004, we sold over forty brands of domestic and import family, sports and luxury cars, light trucks and sport utility vehicles through 220 franchises in 20 states, Puerto Rico, the U.K. and Brazil. As of March 1, 2004, we sold the following brands: Acura, Alpina, Aston Martin, Audi, BMW, Buick, Cadillac, Chevrolet, Chrysler, Dodge, Ferrari, Ford, GMC Truck, Honda, Hummer, Hyundai, Infiniti, Jaguar, Jeep, Land Rover, Lexus, Lincoln-Mercury, Lotus, Maybach, Mazda, Maserati, Mercedes Benz, Mini, Nissan, Pontiac, Porsche, Rolls Royce, Bentley, SAAB, Scion, Smart, Suzuki, Toyota, Volvo and Volkswagen.

      Our customers finance their purchases of new vehicles through both traditional financing sources as well as through consumer automobile leasing companies. Lease transactions are typically provided to consumers by short term financing sources. Off lease vehicles returned to the finance sources provide us a market of low mileage, late model vehicles for our used vehicle sales operations. Short-term leases also give us the opportunity to obtain repeat business from customers on a more regular basis than traditional purchase transactions.

      Our new vehicles are acquired by our dealerships directly from the manufacturer. Because of our long term presence in the automotive retail market, the reputation of our management team, our dedication to building and maintaining positive relationships with our manufacturers, and our consistent high sales volume from our dealerships, we believe that we can obtain high quality, in demand models for our customers. At December 31, 2003, our dealerships maintained on average a 57 day supply of new vehicles. Our dealerships finance the purchase of new vehicles from the manufacturers through floor plan financing provided by the manufacturers’ captive finance companies.

      Used Vehicle Sales. Used vehicle sales represented 27% of our revenue and 13% of our gross profit in 2003. We generally acquire used vehicles from auctions open only to authorized new vehicle dealers, public auctions, trade-ins in connection with new purchases and lease expirations or terminations. We clean, repair and recondition, as necessary, generally at our own service facilities, all used vehicles we acquire for resale. Used vehicles account for a significant portion of the revenues at each of our dealerships. Used vehicles typically sell for lower prices than new vehicles, but often generate higher margins and are less cyclical, especially at our domestic dealerships.

7

Table of Contents

      We believe growth opportunities relating to used vehicle sales exist due to decreased customer concerns regarding used vehicles as more well respected dealerships are engaging in the sale of high-quality, low-mileage, late model used vehicles, coupled with the proliferation of manufacturer certification processes for these vehicles. To improve customer confidence in our used vehicle inventory, each of our dealerships participates in any available manufacturer certification processes for used vehicles. If certification is obtained, the used vehicle owner is typically provided the benefits and warranties similar to those offered to new vehicle owners by the applicable manufacturer. In addition, we offer for sale third-party extended service contracts on all of our used vehicles. During 2003, our dealerships maintained on average a 36 day supply of used vehicles.

      Vehicle Finance, Extended Service and Insurance Sales. Finance and insurance sales represented 2% of our revenue and 17% of our gross profit in 2003. At our customers’ option, our dealerships arrange third party financing for our customers’ vehicle purchases, sell third party vehicle extended service contracts and arrange third party insurance in connection with vehicle financing. While these services are generally non-recourse to us, we are subject to chargebacks in certain circumstances such as default under a financing arrangement or other circumstances. We receive a portion of the cost of financing paid by the customer as fee income for each financed sale, however, we generally are limited in the amount of revenue per transaction we may receive from certain finance products by these finance companies. We also offer for sale other aftermarket products, such as cellular phones, alarms and protective coatings.

      Service and Parts Sales. Service and parts sales represented 11% of our revenue and 36% of our gross profit in 2003. We generate service and parts sales at each of our dealerships, primarily relating to the vehicle models sold at that dealership. We perform both warranty and non-warranty work. Our service and parts revenues have increased each year, in large part due to our increased service capacity and increasingly complex technology in vehicles, which makes it difficult for independent repair facilities to maintain, diagnose problems in and repair today’s automobiles. As part of our agreements with our manufacturers, we obtain all equipment required by the manufacturer and needed to service and maintain each make of vehicle sold at any particular dealership.

      A goal of each of our dealerships is to make each vehicle purchaser a customer of our service and parts department. Our dealerships keep detailed records of our customers’ maintenance and service history and many dealerships send reminders to customers when vehicles are due for periodic maintenance or service. Many of our dealerships also have extended evening and weekend service hours to add convenience for our customers. We also own 35 collision repair centers, each of which is operated as an integral part of our dealership operations.

      Internet Presence. In order to enhance our customer service, each of our dealerships maintains its own website, and our corporate website, www.unitedauto.com, provides a link to each of our dealership websites allowing consumers to source information and communicate directly with our dealerships locally. In addition, many automotive manufacturers’ websites link to our dealerships’ websites.

      According to industry analysts, the majority of car buyers nationwide will consult the Internet for new and pre-owned automotive information. The Internet is generating better-informed consumers and improving the efficiency of the sales process. Using our dealership websites, consumers can electronically search our inventory for vehicles that meet their model, feature requirements and price range. Our websites provide a service for the entire purchase process, including detailed information about vehicle availability, photos, prices, promotions, specifications, reviews, and financial applications. We believe these features make it easier for consumers to meet all of their automotive research needs. Customers can contact dedicated Internet sales consultants on line via unitedauto.com, the dealership websites or third party lead providers.

      We have also partnered with CarsDirect.com, a leading online car buying service which provides consumers with a full menu of research features. Consumers can also use CarsDirect.com to either buy a vehicle online or be sent to a network of dealerships in their market, including most of our dealerships. Research features include detailed safety ratings and reviews, financing, extended warranties, insurance quotes, anti-theft products and trade-in appraisals.

8

Table of Contents

Management Information Systems

      The Company consolidates financial, accounting and operational data received from our domestic dealers through an exclusive private communications network. The data from these dealers is gathered and processed through individual dealer management systems. All of our domestic dealerships use hardware and software from ADP, Inc. or the Reynolds and Reynolds Company for their management system. Each dealership is allowed to tailor the operational capabilities of that system locally, but we require that they follow our standardized accounting procedures.

      Our private communication network allows us to extract and aggregate information from the two systems in a consistent format to generate consolidating financial and operational data. The system also allows us to access detailed information for each dealership in the U.S., individually, as a group, or on a consolidated basis. Information we can access includes, among other things, inventory, cash, unit sales, the mix of new and used vehicle sales and sales of aftermarket products and services. Our ability to access this data allows us to continually analyze these dealerships’ operating results and financial position so as to identify areas for improvement. Our technology also enables us to quickly integrate dealerships or dealership groups we acquire in the U.S.

      Our foreign dealership financial, accounting and operational data is processed through dealer management systems provided by a number of local software providers. Financial and operational information is aggregated following U.S. policies and accounting requirements and in the Company’s U.S. reporting format to ensure consistency of results among our worldwide operations.

Marketing

      We believe that our marketing programs have contributed to our sales growth. Our advertising and marketing efforts are focused at the local market level, with the aim of building both our new and repeat sales and service business. We utilize many different media for our marketing activities, including newspapers, magazines, television, radio and the Internet. We also assist our local management in running special marketing events to generate sales such as tent sales or local product placement. Automobile manufacturers supplement our local and regional advertising efforts by producing large advertising campaigns to support their brands, promote attractive financing packages and draw traffic to local area dealerships. We believe that our ability to obtain favorable terms and other valuable concessions from advertising media should enable us to realize continued cost savings in marketing. In an effort to realize increased efficiencies, we are focusing on common marketing metrics across the Company, as well as negotiating enterprise arrangements for many marketing resources.

Agreements with Vehicle Manufacturers

      Each of our dealerships operates under separate franchise agreements with the manufacturers of each brand of vehicle sold at the dealership. These agreements contain provisions and standards governing almost every aspect of the operations of the dealership, including ownership, management, personnel, training, maintenance of minimum working capital and in some cases net worth, maintenance of minimum lines of credit, advertising and marketing, facilities, signs, products and services, acquisitions of other dealerships (including restrictions on how many dealerships can be acquired or operated in any given market), inventory, warranties offered to customers, maintenance of minimum amounts of insurance, achievement of minimum customer service standards, information systems and monthly financial reporting. Typically, the general manager and/or the owner of a dealership may not be changed without the manufacturer’s consent.

      In exchange for complying with these provisions and standards, we are granted the non-exclusive right to sell the manufacturer’s brand of vehicles and related parts and services at our dealerships. The agreements also grant us a non-exclusive license to use each manufacturer’s trademarks, service marks and designs in connection with our sales and service of its brands at our dealerships. Some of our franchise agreements expire after a specified period of time, ranging from one to five years. The agreements also permit the manufacturer to terminate or not renew the agreement for a variety of causes, including failure to adequately operate the dealership, insolvency or bankruptcy, impairment of the dealer’s reputation or financial standing,

9

Table of Contents

      Our agreements with manufacturers usually give the manufacturers the right, in some circumstances (including upon a merger, sale, or change of control of the Company, or in some cases a material change in our business or capital structure), to acquire from us, at fair market value, the dealerships that sell the manufacturers’ brands. In particular, our agreement with General Motors Corporation provides that, upon a proposed sale of 20% or more of our voting stock to any other person or entity (other than for passive investment) or another manufacturer, an extraordinary corporate transaction (such as a merger, reorganization or sale of a material amount of assets) or a change of control of our board of directors, General Motors has the right to acquire at fair market value, all assets, properties and business of any General Motors dealership owned by us. In addition, General Motors has a right of first refusal if we propose to sell any General Motors dealer to a third party. Our agreements with other major manufacturers contain provisions similar to the General Motors provisions. Some of the agreements also prohibit us from pledging, or impose significant limitations on our ability to pledge, the capital stock of some of our subsidiaries to lenders.

Competition

      For new vehicle sales, we compete primarily with other franchised dealers in each of our marketing areas. We do not have any cost advantage in purchasing new vehicles from the manufacturer, and typically we rely on our world-class facilities, advertising and merchandising, sales expertise, service reputation and the location of our dealerships to sell new vehicles. Each of our markets may include a number of well-capitalized competitors that have extensive automobile dealership managerial experience and strong retail locations and facilities. We compete with dealers that sell the same brands of new vehicles that we sell and with dealers that sell other brands of new vehicles that we do not represent in a particular market. Our new vehicle dealership competitors have franchise agreements with the various vehicle manufacturers and, as such, generally have access to new vehicles on the same terms as us. In recent years, automotive dealers have also faced increased competition in the sale of new vehicles from independent leasing companies and on-line purchasing services and warehouse clubs. Due to lower overhead and sales costs, these companies may be capable of operating on smaller gross profit margins and offering lower sales prices than franchised dealers.

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

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

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

      According to various industry sources, the automotive retail industry is served by approximately 22,000 franchised automotive dealerships, approximately 55,000 independent used vehicle dealerships and

10

Table of Contents

      We believe that a growing number of consumers are utilizing the Internet, to differing degrees, in connection with the purchase of vehicles. Accordingly, we may face increased pressures from on-line automotive websites, including those developed by automobile manufacturers and other dealership groups. Consumers use the Internet to compare prices for vehicles and related services, which may cause reduced margins for new vehicles, used vehicles and related services.

Employees and Labor Relations

      As of December 31, 2003, we employed approximately 13,000 people, approximately 400 of whom are covered by collective bargaining agreements with labor unions. We consider our relations with our employees to be satisfactory. Our policy is to motivate our key managers through, among other things, variable compensation programs tied principally to dealership profitability and the Company’s equity incentive compensation plans. Due to our reliance on vehicle manufacturers, we may be adversely affected by labor strikes or work stoppages at the manufacturers’ facilities.

Environmental Matters

      We are subject to a wide range of foreign, federal, state and local environmental laws and regulations, including those governing discharges into the air and water, the operation and removal of aboveground and underground storage tanks, the use, handling, storage and disposal of hazardous substances and other materials and the investigation and remediation of contamination. As with automotive dealerships generally, and service, parts and body shop operations in particular, our business involves the generation, use, handling and contracting for recycling or disposal of hazardous or toxic substances or wastes, including environmentally sensitive materials such as motor oil, waste motor oil and filters, transmission fluid, antifreeze, refrigerant, waste paint and lacquer thinner, batteries, solvents, lubricants, degreasing agents, gasoline and diesel fuels. Similar to many of our competitors, we have incurred and will continue to incur, capital and operating expenditures and other costs in complying with such laws and regulations.

      Our operations involving the management of hazardous and other environmentally sensitive materials are subject to requirements of the Federal Resource Conservation and Recovery Act, or RCRA, and comparable state statutes. Our business also involves the operation of storage tanks containing such materials. Storage tanks are subject to periodic testing, containment, upgrading and removal under RCRA and comparable state statutes. Furthermore, investigation or remediation may be necessary in the event of leaks or other discharges from current or former underground or aboveground storage tanks. In addition, water quality protection programs under the federal Water Pollution Control Act (commonly known as the Clean Water Act), the Safe Drinking Water Act and comparable state and local programs govern certain discharges from some of our operations. Similarly, certain air emissions from our operations, such as auto body painting, may be subject to the federal Clean Air Act and related state and local laws. Various health and safety standards promulgated by the Occupational Safety and Health Administration of the United States Department of Labor and related state agencies also apply to our operations.

      We may also have liability in connection with materials that were sent to third-party recycling, treatment, and/or disposal facilities under the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, and comparable state statutes. These statutes impose liability for investigation and remediation of contamination without regard to fault or the legality of the conduct which contributed to the contamination. Responsible parties under these statutes may include the owner or operator of the site where the contamination occurred and companies that disposed or arranged for the disposal of the hazardous substances released at these sites.

11

Table of Contents

      We believe that we do not have any material environmental liabilities and that compliance with environmental laws and regulations will not, individually or in the aggregate, have a material adverse effect on our results of operations, financial condition or cash flows. However, soil and groundwater contamination is known to exist at certain of our current or former properties. Further, environmental laws and regulations are complex and subject to change. In addition, in connection with our acquisitions, it is possible that we will assume or become subject to new or unforeseen environmental costs or liabilities, some of which may be material. Compliance with current, amended, new or more stringent laws or regulations, stricter interpretations of existing laws or the future discovery of environmental conditions could require additional expenditures by us, and such expenditures could be material.

Insurance

      Due to the nature of the automotive retail industry and the large inventory maintained by dealerships, automotive retail dealerships generally require significant levels of insurance covering a broad variety of risks. The business is subject to substantial risk of property loss due to the significant concentration of property values at dealership locations, including vehicles and parts. Other potential liabilities arising out of our operations involve claims by employees, customers or third parties for personal injury or property damage and potential fines and penalties in connection with alleged violations of regulatory requirements.

      Accordingly, we have purchased liability and property insurance subject to specified deductibles and loss retentions. We also purchase umbrella and excess insurance to provide insurance in excess of our primary liability insurance. The level of risk we retain may change in the future as insurance market conditions or other factors affecting the economics of purchasing insurance change. Although we have, subject to limitations and exclusions, substantial insurance, we may be exposed to uninsured or underinsured losses that could have a material adverse effect on our results of operations, financial condition or cash flows.

Available Information

      United Auto’s internet website address is www.unitedauto.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange Act are available free of charge through our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission. We are incorporated in the State of Delaware in December 1990 and began dealership operations in October 1992.

Item 2.     Properties

      We seek to structure our operations so as to minimize the ownership of real property. As a result, we lease or sublease substantially all of our dealerships and other facilities. These leases are generally for a period of between five and 20 years and are typically structured to include renewal options for an additional five to ten years in our favor. We lease office space in Bloomfield Hills, Michigan and Secaucus, New Jersey for our administrative headquarters and other corporate related activities. We believe that our facilities are sufficient for our needs and are in good repair.

Item 3.     Legal Proceedings

      From time to time, we are involved in litigation relating to claims arising out of our operations in the normal course of business. Such issues may relate to litigation with customers, employment related lawsuits, class action lawsuits, purported class action lawsuits and actions brought by governmental authorities. As of March 1, 2004, we are not a party to any legal proceedings that, individually or in the aggregate, are reasonably expected to have a material adverse effect on our results of operations, financial condition or cash flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material adverse effect on our results of operations, financial condition or cash flows. We are a party to several class action lawsuits. While we believe these actions are without merit,

12

Table of Contents

Item 4.     Submission of Matters to a Vote of Security-Holders

      No matter was submitted to a vote of security holders during the fourth quarter of the year ended December 31, 2003.

13

Table of Contents

PART II

Item 5.     Market for Registrant’s Common Equity and Related Stockholder Matters

      Our common stock has been traded on the New York Stock Exchange under the symbol “UAG” since October 23, 1996. As of March 1, 2004, there were 220 holders of record of our common stock.

      The following table shows the high and low per share sales prices of our common stock as reported on the New York Stock Exchange Composite Tape for each quarter of 2003 and 2002.

      We paid our first cash dividend on our common stock on December 1, 2003 and paid an additional dividend on March 1, 2004. Both dividends were in the amount of ten cents per share. Future quarterly or other cash dividends will depend upon our earnings, capital requirements, financial condition, restrictions on any existing indebtedness and other factors considered relevant by the Board of Directors.

      The indenture governing our 9 5/8% senior subordinated notes contains certain limitations on our ability to pay dividends. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.” We are a holding company whose assets consist primarily of the direct or indirect ownership of the capital stock of our operating subsidiaries. Consequently, our ability to pay dividends is dependent upon the earnings of our subsidiaries and their ability to distribute earnings and other advances and payments to us. Also, pursuant to the automobile franchise agreements to which our dealerships are subject, all dealerships are required to maintain a certain amount of working capital, which could limit our subsidiaries’ ability to pay dividends.

14

Table of Contents

      The following table sets forth our selected historical consolidated financial and other data as of and for each of the five years in the period ended December 31, 2003, which has been derived from our audited consolidated financial statements. During the periods presented, we made a number of acquisitions, each of which has been accounted for using the purchase method of accounting. Accordingly, our financial statements include the results of operations of the acquired dealerships from the date of acquisition. As a result of the acquisitions, our period to period results of operations vary depending on the dates of the acquisitions and this selected financial data is not necessarily indicative of our future results. During 2003 and 2002, the Company sold four and five dealerships, respectively, which have been treated as discontinued operations in accordance with SFAS No. 144. You should read this selected consolidated financial data in conjunction with our audited consolidated financial statements and related footnotes included elsewhere in this report.

15

Table of Contents

      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 March 1, 2004, we owned and operated 137 franchises in the United States and 83 franchises internationally, primarily in the United Kingdom. We offer a full range of vehicle brands, however, 78% of our revenues in 2003 came from the combined sales of foreign brands such as Toyota, Honda, BMW, Lexus and Mercedes. In 2003, luxury brands represented 46% of our revenues. In addition to selling new and used vehicles, we generate higher-margin revenue at each of our dealerships through maintenance and repair services and the sale of higher margin products, such as third party finance and insurance products, third-party extended service contracts and replacement and aftermarket automotive products.

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

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

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

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

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

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

Critical Accounting Policies and Estimates

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

16

Table of Contents

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

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

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

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

	•	Automotive retailing is a mature industry and is based on franchise agreements with the vehicle manufacturers;
	•	There are no known changes or events that would alter the automotive retailing franchise environment;
	•	Certain franchise agreement terms are indefinite;
	•	Franchise agreements that have limited terms have historically been renewed without substantial cost;
	•	Our industry’s history shows that manufacturers rarely terminate franchise agreements; and
	•	State franchise laws are typically in favor of the franchisee and limit the franchisor’s ability to terminate the franchise agreement without substantial cause.

      Intangible assets are amortized over their estimated useful lives.

17

Table of Contents

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

      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 Consolidated Balance Sheets with unrealized gains and losses included in Other Comprehensive Income. Our investments are reviewed on at least an annual basis for impairment. Declines in investment values that are deemed to be other than temporary would result in an impairment charge adjusting the investments’ carrying value to fair value. A majority of our investments are in joint venture relationships that are more fully described in “Joint Ventures” in this Management’s Discussion and Analysis. Such joint ventures are accounted for under the equity method, under which we record our proportionate share of joint venture income each period.

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

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

New Accounting Pronouncements

      Statement of Financial Accounting Standards (“SFAS”) No. 149, “Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities” was issued in April 2003. SFAS No. 149 clarifies the circumstances under which a contract with an initial net investment meets the characteristics of a derivative and clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 amends certain other existing pronouncements. SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and should be applied prospectively. We do

18

Table of Contents

      SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” was issued in May 2003. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003. This statement establishes standards for an issuer’s classification and measurement of certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a freestanding financial instrument that is within its scope as a liability (or an asset in some circumstances). We do not expect SFAS No. 150 to have a material impact on our consolidated financial position, result of operations or cash flows.

      FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of APB No. 50 (“FIN 46”), was issued in January 2003. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. In December 2003, the FASB issued FIN No. 46 (Revised) (“FIN 46-R”) to address certain FIN 46 implementation issues. FIN 46-R also deferred the effective date of FIN 46 for entities not considered special-purpose entities to the first reporting period that ends after March 15, 2004. We do not expect FIN 46 to have a material impact on our consolidated financial position, result of operations or cash flows.

Results of Operations

     (in millions, except unit and per unit amounts)

      Retail data includes new vehicle, used vehicle, finance and insurance and service and parts transactions. Retail unit sales of vehicles increased by 31,306, or 13.8%, from 2002 to 2003 and increased by 35,083, or 18.2%, from 2001 to 2002. The increase from 2002 to 2003 is due to: (1) an 8,101, or 4.1%, increase in same store retail unit sales and (2) a 23,205 unit increase from net dealership acquisitions during the year. The increase from 2001 to 2002 is due to: (1) a 1,747, or 1.0%, increase in same store retail unit sales and (2) a 33,336 unit increase from net dealership acquisitions during the year. We believe that the same store increases during 2003 and 2002 are due in part to our favorable brand mix, which includes a higher concentration of foreign and luxury nameplates that have been increasing market share in the U.S. and aggressive incentive programs offered by domestic nameplate manufacturers beginning in the fourth quarter of 2001 that have helped sustain the overall new vehicle sales environment.

      Retail sales revenue increased $1,376.7 million, or 20.7%, from 2002 to 2003 and increased $1,450.9 million, or 27.9%, from 2001 to 2002. The increase from 2002 to 2003 is due to: (1) a $354.9 million, or 6.5%, increase in same store revenues and (2) a $1,021.8 million increase from net dealership acquisitions during the year. The same store revenue increase is due to (1) a 4.1% increase in retail unit sales, which increased revenue by $183.3 million, (2) an $868, or 3.2%, increase in average new vehicle revenue per unit, which increased revenue by $117.1 million, (3) a $47, or 6.9%, increase in average finance and insurance revenue per unit, which increased revenue by $9.2 million and (4) a $45.3 million, or 7.3%, increase in service and parts

19

Table of Contents

      Retail gross profit increased $209.9 million, or 20.3%, from 2002 to 2003 and increased $245.0 million, or 31.1%, from 2001 to 2002. The increase from 2002 to 2003 is due to (1) a 13.8% increase in retail unit sales, which increased gross profit $94.2 million, (2) a $98, or 2.3%, increase in average gross profit per vehicle retailed, which increased gross profit by $15.8 million, (3) a $48, or 6.4%, increase in average finance and insurance revenue per unit which increased gross profit by $10.9 million and (4) an $89.0 million, or 25.0%, increase in service and parts gross profit. The increase from 2001 to 2002 is due to (1) an 18.2% increase in retail unit sales, which increased gross profit by $103.8 million, (2) a $365, or 9.3%, increase in average gross profit per vehicle retailed, which increased gross profit by $33.9 million, (3) a $44, or 6.2%, increase in average finance and insurance revenue per unit, which increased gross profit by $8.5 million and (4) a $98.8 million, or 38.5%, increase in service and parts gross profit.

      Retail unit sales of new vehicles increased 16,934, or 11.0%, from 2002 to 2003 and increased 22,909, or 17.5%, from 2001 to 2002. The increase from 2002 to 2003 is due to: (1) a 3,600, or 2.7%, increase in same store retail unit sales and (2) a 13,334 unit increase from net dealership acquisitions during the year. The increase from 2001 to 2002 is due to: (1) a 2,641, or 2.3%, increase in same store retail unit sales and (2) a 20,268 unit increase from net dealership acquisitions during the year. We believe that these increases during 2003 and 2002 are due in part to our favorable brand mix, which includes a concentration of foreign and luxury nameplates that have been increasing market share in the U.S. and aggressive incentive programs offered by domestic nameplate manufacturers beginning in the fourth quarter of 2001 that have helped sustain the overall new vehicle sales environment.

      New vehicle retail sales revenue increased $760.4 million, or 17.7%, from 2002 to 2003 and increased $821.4 million, or 23.7%, from 2001 to 2002. The increase from 2002 to 2003 is due to: (1) a $218.6 million, or 5.9%, increase in same store revenues and (2) a $541.8 million increase from net dealership acquisitions during the year. The same store revenue increase is due to a 2.7% increase in retail unit sales, which increased revenue by $101.5 million, and a 3.2% increase in comparative average selling prices per unit, which increased revenue by $117.1 million. The increase from 2001 to 2002 is due to: (1) a $153.1 million, or 5.0%, increase in same store revenues and (2) a $668.3 million increase from net dealership acquisitions during the year. The same store revenue increase is due to a 2.3% increase in retail unit sales, which increased revenue by

20

Table of Contents

      Retail gross profit from new vehicle sales increased $58.5 million, or 16.1%, from 2002 to 2003 and increased $75.7 million, or 26.3%, from 2001 to 2002. The increase from 2002 to 2003 is due to: (1) an 11.0% increase in new retail unit sales, which increased gross profit by $41.9 million, and a $108, or 4.6%, increase in average gross profit per new vehicle retailed, which increased gross profit by $16.6 million. The increase from 2001 to 2002 is due to: (1) a 17.5% increase in new retail unit sales, which increased gross profit by $54.2 million, and a $164, or 7.5%, increase in average gross profit per new vehicle retailed, which increased gross profit by $21.5 million.

      Retail unit sales of used vehicles increased 14,372, or 19.4%, from 2002 to 2003 and increased 12,174, or 19.7%, from 2001 to 2002. The increase from 2002 to 2003 is due to: (1) a 4,501, or 7.3%, increase in same store used retail unit sales and (2) a 9,871 unit increase from net dealership acquisitions during the year. The increase from 2001 to 2002 is due to a 13,068 unit increase from net dealership acquisitions during the year, offset partially by an 894, or 1.6%, decrease in same store used retail unit sales.

      Used vehicle retail sales revenue increased $414.2 million, or 28.9%, from 2002 to 2003 and increased $412.9 million, or 40.5%, from 2001 to 2002. The increase from 2002 to 2003 is due to: (1) a $76.0 million, or 7.3%, increase in same store revenues and (2) a $338.2 million increase from net dealership acquisitions during the year. The same store revenue increase is due to a 7.3% increase in retail unit sales, which increased revenue by $76.2 million, offset somewhat by a slight decrease in comparative average selling prices per vehicle, which decreased revenue by $0.2 million. The increase from 2001 to 2002 is due to: a $418.1 million increase from net dealership acquisitions during the year, offset somewhat by a $5.2 million, or 0.6%, decrease in same store revenues. The same store revenue decrease is due to a 1.6% decrease in retail unit sales, which decreased revenue by $14.8 million, offset somewhat by a $174, or 1.1%, increase in comparative average selling prices per unit, which increased revenue by $9.6 million.

      Retail gross profit from used vehicle sales increased $26.5 million, or 18.7%, from 2002 to 2003 and increased $35.7 million, or 33.7%, from 2001 to 2002. The increase from 2002 to 2003 is due to: (1) a 19.4% increase in used retail unit sales, which increased gross profit by $27.3 million, offset somewhat by a $10, or 0.5%, decrease in average gross profit per used vehicle retailed, which decreased gross profit by $0.8 million. The increase from 2001 to 2002 is due to: (1) a 19.7% increase in used retail unit sales, which increased gross profit by $23.3 million, and a $200, or 11.7%, increase in average gross profit per used vehicle retailed, which increased gross profit by $12.4 million.

21

Table of Contents

      Finance and insurance revenue increased $35.9 million, or 21.0%, from 2002 to 2003 and increased $34.8 million, or 25.6%, from 2001 to 2002. The increase from 2002 to 2003 is due to: (1) a $15.0 million, or 11.3%, increase in same store revenues and (2) a $20.9 million increase from net dealership acquisitions during the year. The same store revenue increase is due to (1) the 4.1% increase in retail unit sales, which increased revenue by $5.9 million and (2) a $47, or 6.9%, increase in comparative average finance and insurance revenue per unit, which increased revenue by $9.1 million. The increase from 2001 to 2002 is due to: (1) an $11.4 million, or 10.4%, increase in same store revenues and (2) a $23.4 million increase from net dealership acquisitions during the year. The same store revenue increase is due to (1) a 1.0% increase in retail unit sales, which increased revenue by $1.2 million and (2) a $59, or 9.3%, increase in comparative average finance and insurance revenue per unit, which increased revenue by $10.2 million.

      Service and parts revenue increased $166.2 million, or 22.0%, from 2002 to 2003 and increased $181.8 million, or 31.8%, from 2001 to 2002. The increase from 2002 to 2003 is due to: (1) a $45.3 million, or 7.3%, increase in same store revenues and (2) a $120.9 million increase from net dealership acquisitions during the year. The increase from 2001 to 2002 is due to: (1) a $30.2 million, or 5.9%, increase in same store revenues and (2) a $151.6 million increase from net dealership acquisitions during the year. We believe that our service and parts business is being positively impacted by increases in retail unit sales at our dealerships and capacity increases in our service and parts operations resulting from our facility improvement and expansion programs.

      Fleet revenues increased $6.3 million, or 5.8%, from 2002 to 2003 and decreased $30.3 million, or 21.9%, from 2001 to 2002. We have generally elected to de-emphasize low margin fleet business, however, opportunities to obtain such business are considered on a case by case basis. We may elect to selectively pursue fleet opportunities in circumstances where we believe we will be able to generate higher margin service and parts revenues throughout the life cycle of the fleet vehicle.

22

Table of Contents