Edgar Filing: ASBURY AUTOMOTIVE GROUP INC

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2007

¨	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: 001-31262

ASBURY AUTOMOTIVE GROUP, INC.

(Exact name of Registrant as specified in its charter)


Delaware		01-0609375
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

622 Third Avenue, 37th Floor New York, New York		10017
(Address of principal executive offices)		(Zip Code)

(212) 885-2500

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act:

Large Accelerated Filer ¨ Accelerated Filer x Non-Accelerated Filer ¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: The number of shares of common stock outstanding as of August 6, 2007, was 35,418,501 (net of 3,657,261 treasury shares).

ASBURY AUTOMOTIVE GROUP, INC.

INDEX

PART I — Financial Information


Item 1.	Condensed Consolidated Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006	3
	Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2007 and 2006	4
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and 2006	5
	Notes to Condensed Consolidated Financial Statements	6
	Report of Independent Registered Public Accounting Firm	24
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48
Item 4.	Controls and Procedures	49

PART II — Other Information

Item 4.	Submission of Matters to a Vote of Security Holders	50
Item 6.	Exhibits	50
	Signatures	52
	Index to Exhibits	53

PART I. FINANCIAL INFORMATION

Item 1.

Condensed Consolidated Financial Statements

ASBURY AUTOMOTIVE GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)


	June 30, 2007			December 31, 2006
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	48,680		$	129,170
Contracts-in-transit		117,136			126,012
Accounts receivable (net of allowance of $649 and $648, respectively)		146,083			167,562
Inventories		808,235			775,313
Deferred income taxes		13,961			13,961
Prepaid and other current assets		70,691			55,099
Assets held for sale		18,976			25,947

Total current assets		1,223,762			1,293,064
PROPERTY AND EQUIPMENT, net		209,471			202,584
GOODWILL		456,416			447,996
OTHER LONG-TERM ASSETS		97,907			87,193

Total assets	$	1,987,556		$	2,030,837

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Floor plan notes payable—manufacturer affiliated	$	198,333		$	319,896
Floor plan notes payable—non-manufacturer affiliated		468,976			380,881
Current maturities of long-term debt		27,225			23,144
Accounts payable		63,176			63,951
Accrued liabilities		90,553			89,296
Liabilities associated with assets held for sale		—			3,887

Total current liabilities		848,263			881,055
LONG-TERM DEBT		465,782			454,010
DEFERRED INCOME TAXES		49,780			53,991
OTHER LONG-TERM LIABILITIES		35,803			29,948
COMMITMENTS AND CONTINGENCIES (Note 12)
SHAREHOLDERS’ EQUITY:
Preferred stock, $.01 par value per share, 10,000,000 shares authorized		—			—
Common stock, $.01 par value per share, 90,000,000 shares authorized, 36,224,960 and 35,071,401 shares issued, including shares held in treasury, respectively		362			351
Additional paid-in capital		437,385			431,725
Retained earnings		203,979			196,393
Treasury stock, at cost; 3,657,261 and 1,536,706 shares held, respectively		(52,338	)		(14,559	)
Accumulated other comprehensive loss		(1,460	)		(2,077	)

Total shareholders’ equity		587,928			611,833

Total liabilities and shareholders’ equity	$	1,987,556		$	2,030,837

See Notes to Condensed Consolidated Financial Statements.

ASBURY AUTOMOTIVE GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)


	For the Three Months Ended June 30						For the Six Months Ended June 30
	2007			2006			2007			2006
REVENUES:
New vehicle	$	891,281		$	906,669		$	1,715,732		$	1,716,326
Used vehicle		395,503			378,739			773,650			731,154
Parts, service and collision repair		176,173			170,701			350,461			339,230
Finance and insurance, net		43,576			42,706			82,260			77,856

Total revenues		1,506,533			1,498,815			2,922,103			2,864,566

COST OF SALES:
New vehicle		829,059			843,724			1,593,973			1,596,331
Used vehicle		361,006			344,458			702,984			664,440
Parts, service and collision repair		84,056			84,200			168,671			168,443

Total cost of sales		1,274,121			1,272,382			2,465,628			2,429,214

GROSS PROFIT		232,412			226,433			456,475			435,352
OPERATING EXPENSES:
Selling, general and administrative		173,625			169,458			350,011			332,749
Depreciation and amortization		5,348			5,093			10,676			10,048

Income from operations		53,439			51,882			95,788			92,555
OTHER INCOME (EXPENSE):
Floor plan interest expense		(11,190	)		(11,007	)		(22,406	)		(19,944	)
Other interest expense		(9,168	)		(11,140	)		(20,954	)		(22,043	)
Interest income		1,041			1,021			3,006			1,748
Loss on extinguishment of long-term debt		(786	)		—			(18,523	)		—
Other income, net		397			480			689			824

Total other expense, net		(19,706	)		(20,646	)		(58,188	)		(39,415	)

Income before income taxes		33,733			31,236			37,600			53,140
INCOME TAX EXPENSE		12,567			11,713			14,025			19,927

INCOME FROM CONTINUING OPERATIONS		21,166			19,523			23,575			33,213
DISCONTINUED OPERATIONS, net of tax		(607	)		(519	)		(2,583	)		(1,656	)

NET INCOME	$	20,559		$	19,004		$	20,992		$	31,557

EARNINGS PER COMMON SHARE:
Basic—
Continuing operations	$	0.65		$	0.59		$	0.72		$	1.01
Discontinued operations		(0.02	)		(0.02	)		(0.08	)		(0.05	)

Net income	$	0.63		$	0.57		$	0.64		$	0.96

Diluted—
Continuing operations	$	0.64		$	0.58		$	0.70		$	0.99
Discontinued operations		(0.02	)		(0.02	)		(0.08	)		(0.05	)

Net income	$	0.62		$	0.56		$	0.62		$	0.94

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic		32,490			33,077			32,909			33,000

Diluted		33,329			33,709			33,806			33,680

See Notes to Condensed Consolidated Financial Statements.

ASBURY AUTOMOTIVE GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	For the Six Months Ended June 30
	2007			2006
CASH FLOW FROM OPERATING ACTIVITIES:
Net income	$	20,992		$	31,557
Adjustments to reconcile net income to net cash (used in) provided by operating activities-
Depreciation and amortization		10,676			10,048
Depreciation and amortization from discontinued operations		35			215
Share-based compensation		3,514			2,296
Amortization of deferred financing fees		1,284			1,158
Change in allowance for doubtful accounts		1			(405	)
Loss (gain) on sale of discontinued operations, net		2,001			(2,617	)
Loss on extinguishment of long-term debt		18,523			—
Deferred income taxes		2,738			(860	)
Other adjustments		7,229			4,222
Changes in operating assets and liabilities, net of acquisitions and divestitures-
Contracts-in-transit		8,876			19,554
Accounts receivable		10,884			(5,221	)
Proceeds from the sale of accounts receivable		10,594			9,318
Inventories		(6,997	)		(65,565	)
Prepaid and other current assets		(16,095	)		(9,156	)
Floor plan notes payable—manufacturer affiliated		(121,563	)		126,981
Accounts payable and accrued liabilities		1,120			(19,371	)
Excess tax benefits from share-based payment arrangements		(1,505	)		(519	)
Other long-term assets and liabilities		(396	)		4,050

Net cash (used in) provided by operating activities		(48,089	)		105,685
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures—internally financed		(18,577	)		(16,184	)
Capital expenditures—externally financed		(10,285	)		(7,115	)
Construction reimbursements associated with sale-leaseback agreements		3,551			3,118
Acquisitions		(34,081	)		—
Proceeds from the sale of assets		8,341			42,122
Other investing activities		(2,910	)		(746	)

Net cash (used in) provided by investing activities		(53,961	)		21,195
CASH FLOW FROM FINANCING ACTIVITIES:
Floor plan borrowings—non-manufacturer affiliated		1,388,483			1,273,177
Floor plan borrowings—acquisitions		10,674			—
Floor plan repayments—non-manufacturer affiliated		(1,314,948	)		(1,371,358	)
Payment of dividends		(13,227	)		—
Proceeds from borrowings		265,000			987
Repayments of borrowings		(266,803	)		(2,226	)
Debt issuance costs		(7,949	)		—
Sale of warrants		8,924			—
Purchase of treasury stock		(36,075	)		—
Purchase of convertible note hedge		(19,309	)		—
Proceeds from the exercise of stock options		2,924			3,924
Proceeds from the sale of assets associated with sale-leaseback agreements		3,181			—
Excess tax benefits from share-based payment arrangements		1,505			519
Purchase of treasury stock associated with share-based awards		(820	)		—

Net cash provided by (used in) financing activities		21,560			(94,977	)

Net (decrease) increase in cash and cash equivalents		(80,490	)		31,903
CASH AND CASH EQUIVALENTS, beginning of period		129,170			57,194

CASH AND CASH EQUIVALENTS, end of period	$	48,680		$	89,097

See Note 11 for supplemental cash flow information.

See Notes to Condensed Consolidated Financial Statements.

ASBURY AUTOMOTIVE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. DESCRIPTION OF BUSINESS

Asbury Automotive Group, Inc. is a national automotive retailer, operating 119 franchises (89 dealership locations) in 21 metropolitan markets within 10 states as of June 30, 2007. We offer an extensive range of automotive products and services, including new and used vehicles, vehicle maintenance, replacement parts, collision repair services, and financing, insurance and service contracts. We offer 35 domestic and foreign brands of new vehicles, including six heavy truck brands. We also operate 23 collision repair centers that serve our markets.

Our retail network is currently organized into four regions and includes nine dealership groups, each marketed under different local brands: (i) Florida (comprising our Coggin dealerships, operating primarily in Jacksonville, Fort Pierce and Orlando, and our Courtesy dealerships operating in Tampa), (ii) West (comprising our McDavid dealerships operating throughout Texas and our California dealerships operating in Los Angeles, Sacramento and Fresno), (iii) Mid-Atlantic (comprising our Crown dealerships operating in North Carolina, South Carolina and Virginia) and (iv) South (comprising our Nalley dealerships operating in Atlanta, Georgia, and our North Point dealerships operating in Little Rock, Arkansas). Our Plaza dealerships operating in St. Louis, Missouri and our Gray Daniels dealerships operating in Jackson, Mississippi remain standalone operations.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), and reflect the consolidated accounts of Asbury Automotive Group, Inc. and our wholly owned subsidiaries. All intercompany transactions have been eliminated in consolidation.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Accordingly, actual results could differ from these estimates. Estimates and assumptions are reviewed quarterly and the effects of revisions are reflected in the condensed consolidated financial statements in the period they are determined to be necessary. Refer to “Critical Accounting Estimates” in Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information on our critical estimates.

In the opinion of management, all adjustments (consisting only of normal, recurring adjustments) considered necessary for a fair presentation of the unaudited interim condensed consolidated financial statements as of June 30, 2007, and for the three and six months ended June 30, 2007 and 2006 have been included. The results of operations for the three and six months ended June 30, 2007 are not necessarily indicative of the results that may be expected for the full year. Our interim unaudited condensed consolidated financial statements should be read together with our consolidated financial statements and the notes thereto contained in our Annual Report on Form 10-K/A for the year ended December 31, 2006.

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” certain amounts reflected in the accompanying Condensed Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006, have been classified as Assets Held for Sale and Liabilities Associated with Assets Held for Sale. In addition, the accompanying Condensed Consolidated Statements of Income for the three and six months ended June 30, 2006, have been reclassified to reflect the status of our discontinued operations as of June 30, 2007.

Revenue Recognition

Revenue from the sale of new and used vehicles is recognized upon delivery, passage of title, signing of the sales contract and approval of financing. Revenue from the sale of parts, service and collision repair is recognized upon delivery of parts to the customer or at the time vehicle service or repair work is completed. Manufacturer incentives and rebates, including manufacturer holdbacks, floor plan interest assistance and certain advertising assistance, are recognized as a component of new vehicle cost of sales when earned, generally at the time the related vehicles are sold.

We receive commissions from third party lending and insurance institutions for arranging customer financing and for the sale of vehicle service contracts, credit life insurance and disability insurance to customers (collectively “F&I”). We may be charged

back (“chargebacks”) for F&I commissions in the event a contract is terminated prior to maturity. F&I commissions are recorded at the time the vehicles are sold and a reserve for future chargebacks is established based on historical operating results and the termination provisions of the applicable contracts. F&I commissions, net of estimated chargebacks, are included in Finance and insurance, net in the accompanying Condensed Consolidated Statements of Income.

Goodwill and Other Intangible Assets

Goodwill represents the excess cost of the businesses acquired over the fair market value of the identifiable net assets. We have determined that based on how we operate our business, allocate resources, and regularly review our financial data and operating results that we qualify as a single reporting unit for purposes of testing goodwill for impairment. We evaluate our operations and financial results in the aggregate by dealership. The dealership general managers are responsible for customer-facing activities, including inventory management, advertising and personnel decisions, and have the flexibility to respond to local market conditions. The corporate management team, with input from the regional management teams, is responsible for infrastructure and general strategy decisions.

The fair market value of our manufacturer franchise rights is determined at the acquisition date through discounting the projected cash flows specific to each franchise. We have determined that manufacturer franchise rights have an indefinite life as there are no legal, contractual, economic or other factors that limit their useful lives and they are expected to generate cash flows indefinitely due to the historically long lives of the manufacturers’ brand names. Due to the fact that manufacturer franchise rights are specific to the location in which we acquire a dealership, we have determined that the dealership is the reporting unit for purposes of testing for impairment.

In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” we do not amortize goodwill and franchise rights, which are deemed to have indefinite lives. We review goodwill and indefinite lived manufacturer franchise rights for impairment annually on October 1^st of each year, or more often if events or circumstances indicate that impairment may have occurred. We are subject to financial statement risk to the extent that intangible assets become impaired due to decreases in the related fair market value of our underlying businesses.

Derivative Instruments and Hedging Activities

We utilize derivative financial instruments to manage our capital structure and interest rate risk. The types of risks hedged are those relating to the variability of cash flows and changes in the fair value of our financial instruments caused by movements in interest rates. We document our risk management strategy and assess hedge effectiveness at the inception and during the term of each hedge. Derivatives are reported at fair value on the accompanying Condensed Consolidated Balance Sheets.

The changes in fair value of the effective portion of “cash flow” hedges are reported as a component of accumulated other comprehensive loss. Amounts in accumulated other comprehensive income loss are reclassified to interest expense to the extent the hedge becomes ineffective. The change in fair value of “fair value” hedges are recorded as a component of interest expense. Changes in the fair value of the associated hedged exposures are also recorded as a component of interest expense.

Measurements of hedge effectiveness are based on comparisons between the gains or losses of the actual interest rate swaps and the gains or losses of hypothetical interest rate swaps, which are designed to reflect the critical terms of the defined hedged exposures. Ineffective portions of these interest rate swaps are reported as a component of interest expense in the accompanying Condensed Consolidated Statements of Income. We recognized minor ineffectiveness during the six months ended June 30, 2007, and no ineffectiveness during the six months ended June 30, 2006.

Statements of Cash Flows —

Borrowings and repayments of floor plan notes payable to a party unaffiliated with the manufacturer of a particular new vehicle, and all floor plan notes payable relating to pre-owned vehicles, are classified as financing activities on the accompanying Condensed Consolidated Statements of Cash Flows with borrowings reflected separately from repayments. The net change in floor plan notes payable to a party affiliated with the manufacturer of a particular new vehicle is classified as an operating activity on the accompanying Condensed Consolidated Statements of Cash Flows. Borrowings of floor plan notes payable associated with inventory acquired in connection with all acquisitions are classified as a financing activity.

In November 2006, General Motors sold 51% of its financing subsidiary, General Motors Acceptance Corporation (“GMAC”), to an investment consortium led by Cerberus FIM Investors, LLC. Prior to this transaction, borrowings from and repayments to GMAC were classified net as an operating activity on our statement of cash flows as this activity was with a manufacturer affiliated lender. Subsequent to this transaction, General Motors no longer has a majority ownership of or controls

GMAC, and therefore, beginning in December 2006, borrowings from and repayments to GMAC are classified separately as a financing activity on the statement of cash flows. Floor plan notes payable related to vehicles financed after this change in control are classified as Floor plan notes payable—non-manufacturer affiliated on the accompanying Condensed Consolidated Balance Sheets. Floor plan notes payable related to vehicles financed prior to this change in control continued to be classified as Floor plan notes payable—manufacturer affiliated on the accompanying Condensed Consolidated Balance Sheets, with subsequent repayments classified as an operating activity, since these borrowings occurred while General Motors had control of GMAC.

Loaner vehicle activity accounts for a significant portion of Prepaid and Other Current Assets on the accompanying Condensed Consolidated Statements of Cash Flows. We acquire loaner vehicles through borrowings with manufacturer affiliated lenders, therefore we classify the acquisition of loaner vehicles and the related borrowings as an operating activity in Prepaid and Other Current Assets in the accompanying Condensed Consolidated Statements of Cash Flows. When loaner vehicles are taken out of loaner status they are transferred to used vehicle inventory, which is reflected as a non-cash transfer in the accompanying Condensed Consolidated Statements of Cash Flows. The cash outflow to repay loaner vehicle loans are reflected in Prepaid and Other Current Assets and the cash inflow upon the sale of a loaner vehicle is reflected in Inventory on the accompanying Condensed Consolidated Statements of Cash Flows. Therefore, the net impact of loaner vehicle activity on the accompanying Condensed Consolidated Statements of Cash Flows is a cash outflow in Prepaid and Other Current Assets and a cash inflow in Inventory.

Construction reimbursements from third parties in connection with sale-leaseback agreements for the construction of new dealership facilities or leasehold improvements to our current dealership facilities are included in investing activities in the accompanying Condensed Consolidated Statements of Cash Flows.

Proceeds from the sale of dealership facilities and the related real estate previously owned and subsequently leased back in connection with sale-leaseback agreements are reflected as financing activities in the accompanying Condensed Consolidated Statements of Cash Flows.

Externally financed capital expenditures include all expenditures that we have financed during the reporting period or intend to finance in future reporting periods through sale-leaseback transactions or mortgage financing. Internally financed capital expenditures include all capital expenditures which were paid using available cash and for which we do not intend to seek external financing.

Tax benefits related to share-based awards that are fully vested prior to the adoption of SFAS No. 123R are included as cash inflows from financing activities on the accompanying Condensed Consolidated Statements of Cash Flows. Excess tax benefits related to share-based awards that are partially vested upon or granted after the adoption of SFAS No. 123R are included as cash inflows from financing activities on the accompanying Condensed Consolidated Statements of Cash Flows.

Recent Accounting Pronouncements

In June 2006, the FASB issued FASB Interpretation (“FIN”) No. 48 “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109”. FIN 48 establishes a single model to address accounting for uncertain tax positions. FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized as well as providing guidance on derecognition, measurement classification, interest and penalties and disclosure.

We adopted the provisions of FIN 48 effective January 1, 2007 and did not make any adjustments to our liability for unrecognized tax benefits as a result of this adoption. As of January 1, 2007, we had $3.6 million of total unrecognized tax benefits. Of that amount $2.4 million, net of the federal effect, if recognized would favorably impact our effective rate in future periods. We do not expect these amounts to change materially in the next twelve months.

In connection with the adoption of FIN 48, we analyzed our filing positions in all of the federal and state jurisdictions where we are required to file tax returns, as well as all open years in these jurisdictions. We have uncertain tax positions in certain of the states in which we do business; however, none of the states individually constitute a “major” tax jurisdiction, as defined in FIN 48. Years subject to audit range as far back as 2003. The Internal Revenue Service commenced examinations of our consolidated federal returns for the years 2004 and 2005 in the first quarter of 2007, and certain of our subsidiary returns for 2003, 2004 and 2005 in the fourth quarter 2006. In addition, we have various state audits for years 2003, 2004 and 2005, being performed as of June 30, 2007. To date, no material adjustments have been proposed and we do not anticipate that these examinations will result in a material change to our financial position or results of operations.

We recognize interest and penalties related to income tax matters in income tax expense. As of June 30, 2007, we had approximately $0.7 million of accrued interest related to uncertain tax positions and no accrual for penalties. We do not expect the amount of accrued interest to change materially in the next twelve months.

3. INVENTORIES

Inventories consist of the following:


	As of
(In thousands)	June 30, 2007		December 31, 2006
New vehicles	$	634,428	$	616,275
Used vehicles		128,676		115,927
Parts and accessories		45,131		43,111

Total inventories	$	808,235	$	775,313

The lower of cost or market reserves reduced total inventory cost by $4.8 million as of June 30, 2007 and December 31, 2006. In addition to the inventories shown above, we had $4.8 million of inventory as of December 31, 2006, classified as Assets Held for Sale on the accompanying Condensed Consolidated Balance Sheets as it is associated with franchises held for sale. There was no inventory classified as Assets Held for Sale as of June 30, 2007.

4. ACQUISITIONS

During the six months ended June 30, 2007, we acquired five franchises (three dealership locations), including two heavy truck franchises, for an aggregate purchase price of $34.1 million. We financed these acquisitions through the use of $23.4 million of cash and floor plan borrowings of $10.7 million from our Committed Credit Facility for the purchase of new vehicle inventory.

The allocation of purchase price for acquisitions is as follows:


	For the Six Months Ended June 30,
(In thousands)	2007		2006
Inventory	$	11,536	—
Fixed assets		4,900	—
Goodwill		9,395	—
Franchise rights		8,250	—

Total purchase price	$	34,081	—

The allocation of purchase price to assets acquired and liabilities assumed for current year acquisitions was based on preliminary estimates of fair value and may be revised as additional information concerning valuation of such assets and liabilities becomes available.

5. GOODWILL AND MANUFACTURER FRANCHISE RIGHTS

The changes in the carrying amount of goodwill for the six months ended June 30, 2007 are as follows:


(In thousands)	For the Six Months Ended June 30, 2007
Balance, December 31, 2006	$	447,996
Current year acquisitions		9,395
Current year divestitures		(975	)

Balance, June 30, 2007	$	456,416

The changes in the carrying amount of manufacturer franchise rights, which are included in Other Long-Term Assets on the accompanying Condensed Consolidated Balance Sheets, are as follows:


(In thousands)	For the Six Months Ended June 30, 2007
Balance, December 31, 2006	$	39,518
Acquisitions		8,250
Divestitures		(2,300	)

Balance, June 30, 2007	$	45,468

During the six months ended June 30, 2007, we sold two franchises (two dealership locations) resulting in the removal of $1.0 million of goodwill and $2.3 million of manufacturer franchise rights from our Condensed Consolidated Balance Sheets.

During the six months ended June 30, 2007, we acquired five franchises (three dealership locations), including two heavy truck franchises, resulting in the allocation of approximately $9.4 million to goodwill and approximately $8.3 million to manufacturer franchise rights.

6. ASSETS AND LIABILITIES HELD FOR SALE

Assets and liabilities classified as held for sale include (i) assets and liabilities associated with discontinued operations held for sale at each balance sheet date, and (ii) costs of completed construction projects and related reimbursements during the construction period associated with pending sale-leaseback transactions.

As of December 31, 2006, assets and liabilities associated with discontinued operations included two franchises (two dealership locations) in Arkansas. Assets associated with discontinued operations totaled $5.1 million and liabilities associated with discontinued operations totaled $3.9 million as of December 31, 2006. During the six months ended June 30, 2007, we sold the two franchises (two dealership locations) that had been held for sale as of December 31, 2006. There were no assets or liabilities associated with discontinued operations as of June 30, 2007.

Assets associated with pending sale-leaseback transactions as of June 30, 2007, and December 31, 2006, include two completed construction projects in each period totaling $7.9 million and $9.7 million, respectively. During the six months ended June 30, 2007 we received $3.6 million as the final reimbursement on one project that was completed and included in Assets Held for Sale as of December 31, 2006. As of June 30, 2007, we had not received any reimbursements associated with the remaining completed construction projects, however we expect to receive the final reimbursements during 2007.

Assets held for sale include real estate of former dealership locations not currently used in our operations totaling $11.1 million as of June 30, 2007 and December 31, 2006.

A summary of assets and liabilities held for sale is as follows:


	As of
(In thousands)	June 30, 2007		December 31, 2006
Assets:
Inventories	$	—	$	4,808
Property and equipment, net		18,976		21,139

Total assets	$	18,976	$	25,947

Liabilities:
Floor plan notes payable		—		3,887

Total liabilities		—		3,887

Net assets held for sale	$	18,976	$	22,060

Included in Prepaid and Other Current Assets on the accompanying Condensed Consolidated Balance Sheets are costs associated with construction projects, which we have definitive agreements to sell through sale-leaseback transactions but have not been completed, and therefore are not available for sale. In connection with these construction projects, we have entered into sale-leaseback agreements whereby an unaffiliated third party purchased the land and is reimbursing us for the cost of construction of

dealership facilities being constructed on the land. We capitalize the cost of the construction during the construction period and record a corresponding liability equal to the amount of any construction reimbursements. Upon completion of the construction and receipt of the final reimbursement, we remove the cost of construction and the related liability from our Condensed Consolidated Balance Sheets and commence long-term operating leases for the assets sold. The book value of assets associated with construction projects that have not been completed as of June 30, 2007 and December 31, 2006, totaled $15.1 million and $4.4 million, respectively. As of June 30, 2007 and December 31, 2006, there were no liabilities associated with these construction projects.

7. LONG-TERM DEBT

Long-term debt consists of the following:


	As of
(In thousands)	June 30, 2007			December 31, 2006
9% Senior Subordinated Notes due 2012	$	—		$	250,000
8% Senior Subordinated Notes due 2014 ($179.4 million and $182.4 million face value, respectively, net of hedging activity of $7,192 and $7,848, respectively)		172,238			174,582
7.625% Senior Subordinated Notes due 2017		150,000			—
3% Senior Subordinated Convertible Notes Due 2012		115,000			—
Mortgage notes payable		26,337			26,837
Notes payable collateralized by loaner vehicles		25,357			21,279
Capital lease obligations		3,333			3,552
Other notes payable		742			904

		493,007			477,154
Less-current portion		(27,225	)		(23,144	)

Long-term debt	$	465,782		$	454,010

Long-term Debt Refinancing

During the six months ended June 30, 2007, we completed a refinancing of our long-term debt which included (i) a repurchase of all of our $250.0 million 9% Senior Subordinated Notes due 2012 (the “9% Notes”), (ii) the issuance of $115.0 million of 3% Senior Subordinated Convertible Notes due 2012 (the “3% Notes”), which have an initial conversion price of $33.99, (iii) the issuance of $150.0 million of 7.625% Senior Subordinated Notes due 2017 (the “7.625% Notes”) and (iv) the repurchase of $3.0 million of our 8% Senior Subordinated Notes due 2014 (the “8% Notes”).

We recognized an $18.5 million loss in connection with our long-term debt refinancing. The $18.5 million loss includes (i) a $12.9 million premium on the repurchase of the 9% Notes and 8% Notes, (ii) $5.5 million of costs associated with a pro-rata write-off of unamortized debt issuance costs associated with the 9% Notes and 8% Notes, and (iii) $0.1 million of costs associated with a pro-rata write-off of the unamortized value of our terminated fair value swap associated with the 8% Notes.

In connection with the sale of our 3% Notes, we entered into convertible note hedge transactions with respect to our common stock, with Goldman, Sachs & Co. and Deutsche Bank AG, London Branch (collectively, the “Counterparties”). The convertible note hedge transactions requires the Counterparties to deliver to us, subject to customary anti-dilution adjustments, all shares issuable upon conversion of the 3% Notes.

We also entered into separate warrant transactions whereby we sold to the Counterparties warrants to acquire, subject to customary anti-dilution adjustments, shares of our common stock at a strike price of $45.09 per share. On exercise of the warrants, we are obligated to deliver a number of shares of our common stock based on the excess of the market price over the strike price.

The convertible note hedge and warrant transactions are separate contracts and are not part of the terms of the 3% Notes and will not affect the holders’ rights under the 3% Notes. Holders of the 3% Notes will not have any rights with respect to the convertible note hedge and warrant transactions. The convertible hedge and warrant transactions will generally have the effect of increasing the conversion price of the 3% Notes to $45.09, which is a 62.50% premium over the market price of our common stock at the time of pricing. The convertible note hedge and warrant transactions are expected to offset the potential dilution upon conversion of the 3% Notes in the event that the market value per share of our common stock at the time of exercise is between $33.99 and $45.09.

The warrant transactions and the underlying shares of common stock issuable upon exercise of the warrants have not been registered under the Securities Act, as amended (the “Securities Act”) or the securities laws of any other jurisdiction and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

3% Senior Subordinated Convertible Notes due 2012—

In March 2007, we issued $115.0 million in aggregate principal amount of our 3% Notes, receiving net proceeds of $111.1 million. The sale of the notes was exempt from registration pursuant to Rule 144A under the Securities Act. During the second quarter of 2007, we filed a shelf registration statement with the Securities and Exchange Commission (the “SEC”) covering the resale of the notes and the underlying common stock. The costs related to the issuance of these notes were capitalized and are being amortized to other interest expense over the term of the notes. We pay interest on these notes on March 15 and September 15 of each year until their maturity on September 15, 2012. If and when these notes are converted, we will pay cash for the principal amount of each note and, if applicable, shares of our common stock based on a daily conversion value calculated on a proportionate basis for each volume weighted average price (“VWAP”) trading day (as defined in the notes) of the relevant 30 VWAP trading day observation period. The initial conversion rate for the notes is 29.4172 shares of common stock per $1,000 principal amount of notes, which is equivalent to an initial conversion price of $33.99 per share. The conversion rate will be subject to adjustment in some events but will not be adjusted for accrued interest.

Our 3% Notes are guaranteed by all our wholly-owned current subsidiaries and all of our future domestic subsidiaries that have outstanding, incur or guarantee any other indebtedness. The terms of our 3% Notes, in certain circumstances, restrict our ability to, among other things, sell all or substantially all of our assets.

7.625% Senior Subordinated Notes due 2017—

In March 2007, we issued $150.0 million of our 7.625% Notes, receiving net proceeds of $146.0 million. The sale of the notes was exempt from registration pursuant to Rule 144A and Regulation S under the Securities Act. During the second quarter of 2007, we filed a registration statement with the SEC in connection with an exchange offer to exchange the notes for new notes with substantially identical terms that are registered under the Securities Act and, therefore, will generally be freely transferable. The costs related to the issuance of these notes were capitalized and are being amortized to other interest expense over the term of the notes. We pay interest on these notes on March 15 and September 15 of each year until their maturity on March 15, 2017. At any time during the term of the 7.625% Notes we may, at our option, choose to redeem all or a portion of these notes at a price equal to 100% of their principal amount plus the applicable premium set forth in the 7.625% Notes indenture. On or before March 15, 2010, we may, at our option, use the net proceeds of one or more equity offerings to redeem up to 35% of the aggregate principal amount of these notes at a redemption price equal to 107.625% of their principal amount plus accrued and unpaid interest thereon.

Our 7.625% Notes are guaranteed by all of our wholly-owned current subsidiaries and all of our future domestic subsidiaries that have outstanding, incur or guarantee any other indebtedness. The terms of our 7.625% Notes, in certain circumstances, restrict our ability to, among other things, incur additional indebtedness, pay dividends, repurchase our common stock and merge or sell all or substantially all our assets.

8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITY

In November 2006, we entered into an interest rate swap agreement with a notional principal amount of $150.0 million as a hedge against the changes in interest rates of our variable rate floor plan notes payable for a period of two years beginning in November 2006. The swap agreement was designated and qualifies as a cash flow hedge of future changes in interest rates of our variable rate floor plan notes payable and is not expected to contain any ineffectiveness. As of June 30, 2007, the swap agreement had a fair value of $0.2 million, which was included in Other Long-Term Assets on the accompanying Condensed Consolidated Balance Sheet.

We have an interest rate swap with a current notional principal amount of $13.8 million. The swap was designed to provide a hedge against changes in interest rates of our variable rate mortgage notes payable through maturity in June 2011. This interest rate swap qualifies for cash flow hedge accounting treatment and will contain minor ineffectiveness. Under the terms of the swap agreement, we make payments based on a fixed rate of 6.08% and receive a variable rate cash flows based on one-month LIBOR. As of June 30, 2007 and December 31, 2006, the swap agreement had a fair value of $0.4 million and $0.3 million, respectively, which was included in Other Long-Term Assets on the accompanying Condensed Consolidated Balance Sheets.

Three interest rate swap agreements terminated in March 2006, which resulted in a cash payment of $13.7 million, which equaled the fair market value of the swap agreements. Included in Accumulated Other Comprehensive Loss on our Condensed Consolidated Balance Sheet as of June 30, 2007, was $2.9 million ($1.8 million, net of tax) of unrecognized amortization related to

our two terminated cash flow swaps, which are being amortized through March 2014 as a component of Floor Plan Interest Expense on the accompanying Condensed Consolidated Statements of Income. Amortization of these terminated cash flow swaps will total $0.9 million for the year ended December 31, 2007. In addition, included as a reduction to our 8% Notes as of June 30, 2007, was $7.2 million of unrecognized amortization related to our terminated fair value swap, which is being amortized through March 2014 as a component of Other Interest Expense on the accompanying Condensed Consolidated Statements of Income. Amortization of this terminated fair value swap will total $1.1 million for the year ended December 31, 2007.

9. COMPREHENSIVE INCOME

The following table provides a reconciliation of net income to comprehensive income:


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
(In thousands)	2007			2006			2007			2006
Net income	$	20,559		$	19,004		$	20,992		$	31,557
Other comprehensive income:
Change in fair value of cash flow swaps		833			164			528			2,185
Amortization of expired cash flow swaps		224			239			448			318
Income tax expense associated with cash flow swaps		(391	)		(151	)		(359	)		(939	)

Comprehensive income	$	21,225		$	19,256		$	21,609		$	33,121

10. DISCONTINUED OPERATIONS

During 2007, we sold two franchises (two dealership locations). There were no franchises pending disposition as of June 30, 2007. The accompanying Condensed Consolidated Statements of Income for the three and six months ended June 30, 2006, have been reclassified to reflect the status of our discontinued operations as of June 30, 2007.

The following table provides further information regarding our discontinued operations as of June 30, 2007, and includes the results of businesses sold prior to June 30, 2007:


	For the Three Months Ended June 30						For the Six Months Ended June 30
(Dollars in thousands)	2007			2006			2007			2006
Franchises:
Mid-line Domestic		—			4			—			6
Mid-line Import		—			1			—			2
Value		—			3			2			3
Luxury		—			1			—			1

Total		—			9			2			12

Ancillary Businesses		—			1			—			1

Revenues	$	—		$	28,853		$	1,562		$	78,496
Cost of sales		—			23,891			1,478			65,364

Gross profit		—			4,962			84			13,132
Operating expenses		685			7,431			1,806			16,945

Loss from operations		(685	)		(2,469	)		(1,722	)		(3,813	)
Other expense, net		(264	)		(535	)		(293	)		(1,063	)
Gain (loss) on disposition of discontinued operations, net		—			2,564			(2,001	)		2,617

Loss before income taxes		(949	)		(440	)		(4,016	)		(2,259	)
Income tax benefit		342			(79	)		1,433			603

Discontinued operations, net of tax	$	(607	)	$	(519	)	$	(2,583	)	$	(1,656	)

11. SUPPLEMENTAL CASH FLOW INFORMATION

During the six months ended June 30, 2007 and 2006, we made interest payments, net of amounts capitalized, totaling $39.3 million and $41.4 million, respectively. During the six months ended June 30, 2006, we received $0.5 million of proceeds associated with our interest rate swap agreement that was entered into in December 2003 in connection with the issuance of our 8% Notes.

During the six months ended June 30, 2007 and 2006, we made income tax payments totaling $5.2 million and $13.5 million, respectively.

12. COMMITMENTS AND CONTINGENCIES

A significant portion of our vehicle business involves the sale of vehicles, parts or vehicles composed of parts that are manufactured outside the United States of America. As a result, our operations are subject to customary risks of importing merchandise, including fluctuations in the relative values of currencies, import duties, exchange controls, trade restrictions, work stoppages and general political and socio-economic conditions in foreign countries. The United States of America or the countries from which our products are imported may, from time to time, impose new quotas, duties, tariffs or other restrictions, or adjust presently prevailing quotas, duties or tariffs, which may affect our operations and our ability to purchase imported vehicles and/or parts at reasonable prices.

Manufacturers may direct us to implement costly capital improvements to dealerships as a condition upon entering into franchise agreements with them. Manufacturers also typically require that their franchises meet specific standards of appearance. These factors, either alone or in combination, could cause us to divert our financial resources to capital projects from uses that management believes may be of higher long-term value, such as acquisitions.

Substantially all of our facilities are subject to federal, state and local provisions regarding the discharge of materials into the environment. Compliance with these provisions has not had, nor do we expect such compliance to have, any material effect upon our capital expenditures, net earnings, financial condition, liquidity or competitive position. We believe that our current practices and procedures for the control and disposition of such materials comply with applicable federal, state and local requirements.

From time to time, we and our dealerships are named in claims involving the manufacture and sale or lease of motor vehicles, including but not limited to the charging of administrative fees, the operation of dealerships, contractual disputes and other matters arising in the ordinary course of our business. With respect to certain of these claims, the sellers of our acquired dealerships have indemnified us. We do not expect that any potential liability from these claims will materially affect our financial condition, liquidity, results of operations or financial statement disclosures.

Our dealerships hold dealer agreements with a number of vehicle manufacturers. In accordance with the individual dealer agreements, each dealership is subject to certain rights and restrictions typical of the industry. The ability of the manufacturers to influence the operations of the dealerships or the loss of a dealer agreement could have a negative impact on our operating results.

13. STOCK-BASED COMPENSATION

A summary of options outstanding and exercisable under the Plans as of June 30, 2007, and changes during the six months then ended is presented below:


	Stock Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value*
Options outstanding-December 31, 2006	1,528,179		$	14.57
Granted	—		$	—
Exercised	(378,136	)	$	15.10
Expired / Forfeited	(13,404	)	$	14.12

Options outstanding-June 30, 2007	1,136,639		$	14.39	6.1	$	12,002,908

Options exercisable-June 30, 2007	1,078,299		$	14.43	6.1	$	11,343,705

*	Based on the closing price of our common stock on June 29, 2007, which was $24.95 per share.

Net cash received from option exercises for the six months ended June 30, 2007 was $2.9 million. The actual intrinsic value of options exercised during the six months ended June 30, 2007 was $4.9 million. The actual tax benefit from option exercises totaled $1.8 million for the six months ended June 30, 2007.

A summary of performance share units and restricted stock as of June 30, 2007, and changes during the six months ended is presented below:


	Shares		Weighted Average Grant Date Fair Value
Performance Share Units - December 31, 2006	468,125		$	20.15
Granted	215,000		$	27.09
Performance estimate	—		$	—
Vested	—		$	—
Forfeited (including 2,688 of performance estimates)	(13,938	)	$	20.31

Performance Share Units - June 30, 2007*	669,187		$	22.38

*	Includes an estimate of 90,937 out of a maximum of 462,600 issuable upon attaining certain performance metrics


	Shares		Weighted Average Grant Date Fair Value
Restricted Stock - December 31, 2006	29,728		$	21.65
Granted	58,909		$	28.07
Vested	(3,333	)	$	22.98
Forfeited	(2,500	)	$	19.81

Restricted Stock - June 30, 2007	82,804		$	26.22

Each performance share unit provides an opportunity for the employee to receive a number of shares of our common stock based on our performance during a three year period as measured against objective performance goals as determined by the compensation committee of our board of directors. The actual number of shares earned may range from 0% to 180% of the target number of shares depending upon achievement of the performance goals.

14. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

Our 8% Notes, 7.625% Notes and 3% Notes are guaranteed by all of our current subsidiaries and all of our future domestic restricted subsidiaries. The following tables set forth, on a condensed consolidating basis, our balance sheets, statements of income and statements of cash flows, for the parent company and guarantor subsidiaries for all financial statement periods presented in our interim condensed consolidated financial statements.

Condensed Consolidating Balance Sheet

As of June 30, 2007

(In thousands)


	Parent Company		Guarantor Subsidiaries		Eliminations			Condensed Consolidated
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	—	$	48,680	$	—		$	48,680
Inventories		—		808,235		—			808,235
Other current assets		—		347,871		—			347,871
Assets held for sale		—		18,976		—			18,976

Total current assets		—		1,223,762		—			1,223,762
PROPERTY AND EQUIPMENT, net		—		209,471		—			209,471
GOODWILL		—		456,416		—			456,416
OTHER LONG-TERM ASSETS		11,975		85,932		—			97,907
INVESTMENT IN SUBSIDIARIES		1,021,720		—		(1,021,720	)		—

Total assets	$	1,033,695	$	1,975,581	$	(1,021,720	)	$	1,987,556

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Floor plan notes payable—manufacturer affiliated	$	—	$	198,333	$	—		$	198,333
Floor plan notes payable—non-manufacturer affiliated		—		468,976		—			468,976
Other current liabilities		8,529		172,425		—			180,954
Liabilities associated with assets held for sale		—		—		—			—

Total current liabilities		8,529		839,734		—			848,263
LONG-TERM DEBT		437,238		28,544		—			465,782
OTHER LONG-TERM LIABILITIES		—		85,583		—			85,583
SHAREHOLDERS’ EQUITY		587,928		1,021,720		(1,021,720	)		587,928

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,033,695	$	1,975,581	$	(1,021,720	)	$	1,987,556

Condensed Consolidating Balance Sheet

As of December 31, 2006

(In thousands)


	Parent Company		Guarantor Subsidiaries		Eliminations			Condensed Consolidated
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	—	$	129,170	$	—		$	129,170
Inventories		—		775,313		—			775,313
Other current assets		—		362,634		—			362,634
Assets held for sale		—		25,947		—			25,947

Total current assets		—		1,293,064		—			1,293,064
PROPERTY AND EQUIPMENT, net		—		202,584		—			202,584
GOODWILL		—		447,996		—			447,996
OTHER LONG-TERM ASSETS		10,211		76,982		—			87,193
INVESTMENT IN SUBSIDIARIES		1,031,399		—		(1,031,399	)		—

Total assets	$	1,041,610	$	2,020,626	$	(1,031,399	)	$	2,030,837

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Floor plan notes payable—manufacturer affiliated	$	—	$	319,896	$	—		$	319,896
Floor plan notes payable—non-manufacturer affiliated		—		380,881		—			380,881
Other current liabilities		5,195		171,196		—			176,391
Liabilities associated with assets held for sale		—		3,887		—			3,887

Total current liabilities		5,195		875,860		—			881,055
LONG-TERM DEBT		424,582		29,428		—			454,010
OTHER LONG-TERM LIABILITIES		—		83,939		—			83,939
SHAREHOLDERS’ EQUITY		611,833		1,031,399		(1,031,399	)		611,833

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,041,610	$	2,020,626	$	(1,031,399	)	$	2,030,837

Condensed Consolidating Statement of Income

For the Three Months Ended June 30, 2007

(In thousands)


	Parent Company			Guarantor Subsidiaries			Eliminations			Condensed Consolidated
REVENUES	$	—		$	1,506,533		$	—		$	1,506,533
COST OF SALES		—			1,274,121			—			1,274,121

GROSS PROFIT		—			232,412			—			232,412
OPERATING EXPENSES:
Selling, general and administrative		—			173,625			—			173,625
Depreciation and amortization		—			5,348			—			5,348

Income from operations		—			53,439			—			53,439
OTHER INCOME (EXPENSE):
Floor plan interest expense		—			(11,190	)		—			(11,190	)
Other interest expense		(7,887	)		(1,281	)		—			(9,168	)
Other income, net		—			652			—			652

Total other expense, net		(7,887	)		(11,819	)		—			(19,706	)

Income before income taxes		(7,887	)		41,620			—			33,733
INCOME TAX EXPENSE		—			12,567			—			12,567
EQUITY IN EARNINGS OF SUBSIDIARIES, net of tax		28,446			—			(28,446	)		—

INCOME FROM CONTINUING OPERATIONS		20,559			29,053			(28,446	)		21,166
DISCONTINUED OPERATIONS, net of tax		—			(607	)		—			(607	)

NET INCOME	$	20,559		$	28,446		$	(28,446	)	$	20,559

Condensed Consolidating Statement of Income

For the Three Months Ended June 30, 2006

(In thousands)


	Parent Company			Guarantor Subsidiaries			Eliminations			Condensed Consolidated
REVENUES	$	—		$	1,498,815		$	—		$	1,498,815
COST OF SALES		—			1,272,382			—			1,272,382

GROSS PROFIT		—			226,433			—			226,433
OPERATING EXPENSES:
Selling, general and administrative		—			169,458			—			169,458
Depreciation and amortization		—			5,093			—			5,093

Income from operations		—			51,882			—			51,882
OTHER INCOME (EXPENSE):
Floor plan interest expense		—			(11,007	)		—			(11,007	)
Other interest expense		(9,756	)		(1,384	)		—			(11,140	)
Other income, net		—			1,501			—			1,501

Total other expense, net		(9,756	)		(10,890	)		—			(20,646	)

Income before income taxes		(9,756	)		40,992			—			31,236
INCOME TAX EXPENSE		—			11,713			—			11,713
EQUITY IN EARNINGS OF SUBSIDIARIES, net of tax		28,760			—			(28,760	)		—

INCOME FROM CONTINUING OPERATIONS		19,004			29,279			(28,760	)		19,523
DISCONTINUED OPERATIONS, net of tax		—			(519	)		—			(519	)

NET INCOME	$	19,004		$	28,760		$	(28,760	)	$	19,004

Condensed Consolidating Statement of Income

For the Six Months Ended June 30, 2007

(In thousands)


	Parent Company			Guarantor Subsidiaries			Eliminations			Condensed Consolidated
REVENUES	$	—		$	2,922,103		$	—		$	2,922,103
COST OF SALES		—			2,465,628			—			2,465,628

GROSS PROFIT		—			456,475			—			456,475
OPERATING EXPENSES:
Selling, general and administrative		—			350,011			—			350,011
Depreciation and amortization		—			10,676			—			10,676

Income from operations		—			95,788			—			95,788
OTHER INCOME (EXPENSE):
Floor plan interest expense		—			(22,406	)		—			(22,406	)
Other interest expense		(17,490	)		(3,464	)		—			(20,954	)
Other expense, net		—			(14,828	)		—			(14,828	)

Total other expense, net		(17,490	)		(40,698	)		—			(58,188	)

Income before income taxes		(17,490	)		55,090			—			37,600
INCOME TAX EXPENSE		—			14,025			—			14,025
EQUITY IN EARNINGS OF SUBSIDIARIES, net of tax		38,482			—			(38,482	)		—

INCOME FROM CONTINUING OPERATIONS		20,992			41,065			(38,482	)		23,575
DISCONTINUED OPERATIONS, net of tax		—			(2,583	)		—			(2,583	)

NET INCOME	$	20,992		$	38,482		$	(38,482	)	$	20,992

Condensed Consolidating Statement of Income

For the Six Months Ended June 30, 2006

(In thousands)


	Parent Company			Guarantor Subsidiaries			Eliminations			Condensed Consolidated
REVENUES	$	—		$	2,864,566		$	—		$	2,864,566
COST OF SALES		—			2,429,214			—			2,429,214

GROSS PROFIT		—			435,352			—			435,352
OPERATING EXPENSES:
Selling, general and administrative		—			332,749			—			332,749
Depreciation and amortization		—			10,048			—			10,048

Income from operations		—			92,555			—			92,555
OTHER INCOME (EXPENSE):
Floor plan interest expense		—			(19,944	)		—			(19,944	)
Other interest expense		(19,302	)		(2,741	)		—			(22,043	)
Other income, net		—			2,572			—			2,572

Total other expense, net		(19,302	)		(20,113	)		—			(39,415	)

Income before income taxes		(19,302	)		72,442			—			53,140
INCOME TAX EXPENSE		—			19,927			—			19,927
EQUITY IN EARNINGS OF SUBSIDIARIES, net of tax		50,859			—			(50,859	)		—

INCOME FROM CONTINUING OPERATIONS		31,557			52,515			(50,859	)		33,213
DISCONTINUED OPERATIONS, net of tax		—			(1,656	)		—			(1,656	)

NET INCOME	$	31,557		$	50,859		$	(50,859	)	$	31,557

Condensed Consolidating Statement of Cash Flows

For the Six Months Ended June 30, 2007

(In thousands)


	Parent Company			Guarantor Subsidiaries			Eliminations		Condensed Consolidated
CASH FLOW FROM OPERATING ACTIVITIES	$	(14,156	)	$	(33,933	)	$	—	$	(48,089	)
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures		—			(28,862	)		—		(28,862	)
Other investing activities		—			(25,099	)		—		(25,099	)

Net cash used in investing activities		—			(53,961	)		—		(53,961	)
CASH FLOW FROM FINANCING ACTIVITIES
Floor plan borrowings — non-manufacturer affiliated		—			1,399,157			—		1,399,157
Floor plan repayments — non-manufacturer affiliated		—			(1,314,948	)		—		(1,314,948	)
Proceeds from borrowings		265,000			—			—		265,000
Payment of dividends		—			(13,227	)		—		(13,227	)
Debt issuance costs		(7,949	)		—			—		(7,949	)
Proceeds from the sale of assets associated with sale-leaseback agreements		—			3,181			—		3,181
Repayments of borrowings		(265,898	)		(905	)		—		(266,803	)
Intercompany financing		23,003			(23,003	)		—		—
Other financing activities		—			(42,851	)		—		(42,851	)

Net cash provided by financing activities		14,156			7,404			—		21,560

Net decrease in cash and cash equivalents		—			(80,490	)		—		(80,490	)
Cash and cash equivalents, beginning of period		—			129,170			—		129,170

Cash and cash equivalents, end of period	$	—		$	48,680		$	—	$	48,680

Condensed Consolidating Statement of Cash Flows

For the Six Months Ended June 30, 2006

(In thousands)


	Parent Company			Guarantor Subsidiaries			Eliminations		Condensed Consolidated
CASH FLOW FROM OPERATING ACTIVITIES	$	(19,302	)	$	124,987		$	—	$	105,685
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures		—			(23,299	)		—		(23,299	)
Other investing activities		—			44,494			—		44,494

Net cash provided by investing activities		—			21,195			—		21,195
CASH FLOW FROM FINANCING ACTIVITIES
Floor plan borrowings — non-manufacturer affiliated		—			1,273,177			—		1,273,177
Floor plan repayments — non-manufacturer affiliated		—			(1,371,358	)		—		(1,371,358	)
Proceeds from borrowings		—			987			—		987
Payment of dividends		—			—			—		—
Debt issuance costs		—			—			—		—
Proceeds from the sale of assets associated with sale-leaseback agreements		—			—			—		—
Repayments of borrowings		—			(2,226	)		—		(2,226	)
Intercompany financing		19,302			(19,302	)		—		—
Other financing activities		—			4,443			—		4,443

Net cash provided by (used in) financing activities		19,302			(114,279	)		—		(94,977	)

Net increase in cash and cash equivalents					31,903			—		31,903
Cash and cash equivalents, beginning of period		—			57,194			—		57,194

Cash and cash equivalents, end of period	$	—		$	89,097		$	—	$	89,097

15. SUBSEQUENT EVENTS

On July 25, 2007, our board of directors declared a $0.225 per share cash dividend payable on August 20, 2007 to shareholders of record as of August 6, 2007.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Asbury Automotive Group, Inc.:

We have reviewed the accompanying condensed consolidated balance sheet of Asbury Automotive Group, Inc. and subsidiaries (the “Company”) as of June 30, 2007, and the related condensed consolidated statements of income for the three-month and six-month periods ended June 30, 2007 and 2006, and of cash flows for the six-month periods ended June 30, 2007 and 2006. These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Asbury Automotive Group, Inc. and subsidiaries as of December 31, 2006, and the related consolidated statements of income, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated March 8, 2007, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2006 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ DELOITTE & TOUCHE LLP

New York, New York

August 8, 2007

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

We are one of the largest automotive retailers in the United States operating 119 franchises (89 dealership locations) in 21 metropolitan markets within 10 states as of June 30, 2007. We offer an extensive range of automotive products and services, including new and used vehicles, vehicle maintenance, replacement parts, collision repair services, and financing, insurance and service contracts. We offer 35 domestic and foreign brands of new vehicles, including six heavy truck brands. We also operate 23 collision repair centers that serve our markets.

We developed our dealership portfolio through the acquisition of large, locally branded dealership groups operating throughout the United States. We complemented these large dealership groups with the purchase of numerous single point dealerships and small dealership groups in our existing market areas (referred to as “tuck-in acquisitions”). We continue to use tuck-in acquisitions to increase the number of vehicle brands we offer in a particular regional area and to create a larger gross profit base over which to spread overhead costs. Our retail network is currently organized into four regions and includes nine dealership groups: (i) Florida (comprising our Coggin dealerships, operating primarily in Jacksonville and Orlando, and our Courtesy dealerships operating in Tampa), (ii) West (comprising our McDavid dealerships operating throughout Texas and our California dealerships operating in Los Angeles, Sacramento and Fresno), (iii) Mid-Atlantic (comprising our Crown dealerships operating in North Carolina, South Carolina and Virginia), and (iv) South (comprising our Nalley dealerships operating in Atlanta, Georgia and our North Point dealerships operating in Little Rock, Arkansas). Our Plaza dealerships operating in St. Louis, Missouri and our Gray Daniels dealerships operating in Jackson, Mississippi, remain standalone operations.

Our revenues are derived primarily from four offerings: (i) the sale of new vehicles to individual retail customers (“new retail”) and the sale of new vehicles to commercial customers (“fleet”) (the terms “new retail” and “fleet” being collectively referred to as “new”); (ii) the sale of used vehicles to individual retail customers (“used retail”) and the sale of used vehicles to other dealers at auction (“wholesale”) (the terms “used retail” and “wholesale” being collectively referred to as “used”); (iii) maintenance and collision repair services and the sale of automotive parts (collectively referred to as “fixed operations”); and (iv) the arrangement of vehicle financing and the sale of various insurance and warranty products (collectively referred to as “F&I”). We evaluate the results of our new and used vehicle sales based on unit volumes and gross profit per vehicle retailed (“PVR”), our fixed operations based on aggregate gross profit, and F&I based on dealership generated F&I PVR. We assess the organic growth of our revenue and gross profit by comparing the year-to-year results of stores that we have operated for at least twelve full months.

The organic growth of our business is dependent upon the execution of our balanced automotive retailing and service business strategy, as well as our strong brand mix, which is heavily weighted towards luxury and mid-line import brands. Sales of vehicles (particularly new vehicles) have historically fluctuated with general macroeconomic conditions, including consumer confidence, availability of consumer credit, fuel prices and manufacturer incentives. We believe that any future negative trends in new vehicle sales will be mitigated by (i) the stability of our fixed operations, (ii) increased used vehicle sales, (iii) our variable cost structure and (iv) our advantageous brand mix. Historically, our brand mix has been less affected by market volatility than the U.S. automobile industry as a whole. We expect the recent industry-wide gain in market share of the luxury and mid-line import brands to continue in the near future.

Our gross profit margin varies with our revenue mix. The sale of new vehicles generally results in lower gross profit margin than used vehicle sales and fixed operations. As a result, when used vehicles and fixed operations revenue increases as a percentage of total revenue, we expect our overall gross profit margin to increase. We continue to implement new initiatives specifically designed to accelerate the growth of our high margin businesses and to leverage our selling, general and administrative (“SG&A”) expense structure.

SG&A expenses consist primarily of fixed and incentive-based compensation, advertising, rent, insurance, utilities and other customary operating expenses. A significant portion of our selling expenses is variable (such as sales commissions), or controllable (such as advertising), generally allowing our cost structure to adapt in response to trends in our business. We evaluate commissions paid to salespeople as a percentage of retail vehicle gross profit and all other SG&A expenses in the aggregate as a percentage of total gross profit.

Our operations are generally subject to seasonal variations as we tend to generate more revenue and operating income in the second and third quarters than in the first and fourth quarters of the calendar year. Generally, the seasonal variations in our operations are caused by factors relating to weather conditions, changes in manufacturer incentive programs, model changeovers and consumer buying patterns, among other things. Over the past several years, certain automobile manufacturers have used a combination of vehicle pricing and financing incentive programs to generate increased customer demand for new vehicles. We anticipate that the manufacturers will continue to use these incentive programs to drive demand for their product offerings.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2007, Compared to the Three Months Ended June 30, 2006


	For the Three Months Ended June 30,
	2007			% of Gross Profit		2006			% of Gross Profit		Increase (Decrease)			% Change
	(In thousands except per share data)
REVENUES:
New vehicle	$	891,281				$	906,669				$	(15,388	)	(2	)%
Used vehicle		395,503					378,739					16,764		4	%
Parts, service and collision repair		176,173					170,701					5,472		3	%
Finance and insurance, net		43,576					42,706					870		2	%

Total revenues		1,506,533					1,498,815					7,718		1	%

COST OF SALES		1,274,121					1,272,382					1,739		—	%

GROSS PROFIT		232,412		100	%		226,433		100	%		5,979		3	%
OPERATING EXPENSES:
Selling, general and administrative		173,625		75	%		169,458		75	%		4,167		2	%
Depreciation and amortization		5,348		2	%		5,093		2	%		255		5	%

Income from operations		53,439		23	%		51,882		23	%		1,557		3	%
OTHER INCOME (EXPENSE):
Floor plan interest expense		(11,190	)	(4	)%		(11,007	)	(4	)%		183		2	%
Other interest expense		(9,168	)	(4	)%		(11,140	)	(5	)%		(1,972	)	(18	)%
Interest income		1,041		—	%		1,021		—	%		20		2	%
Loss on extinguishment of long-term debt		(786	)	—	%		—		—	%		(786	)	NM
Other income, net		397		—	%		480		—	%		(83	)	(17	)%

Total other expense, net		(19,706	)	(8	)%		(20,646	)	(9	)%		(940	)	(5	)%

Income before income taxes		33,733		15	%		31,236		14	%		2,497		8	%
INCOME TAX EXPENSE		12,567		6	%		11,713		5	%		854		7	%

INCOME FROM CONTINUING OPERATIONS		21,166		9	%		19,523		9	%		1,643		8	%
DISCONTINUED OPERATIONS, net of tax		(607	)	—	%		(519	)	(1	)%		88		17	%

NET INCOME	$	20,559		9	%	$	19,004		8	%	$	1,555		8	%

EARNINGS PER COMMON SHARE (DILUTED):
Continuing operations	$	0.64				$	0.58				$	0.06		10	%
Discontinued operations		(0.02	)				(0.02	)

Net income	$	0.62				$	0.56				$	0.06		11	%

Net income and income from continuing operations increased $1.6 million (8%) during the 2007 period. During the 2007 period we recognized $0.6 million (net of tax) of costs associated with the repurchase of the remaining $11.9 million of our 9% Senior Subordinated Notes due 2012 (the “9% Notes”) and $0.3 million (net of tax) of costs associated with a secondary offering of our common stock. During the 2006 period, we recognized a $2.1 million (net of tax) gain from the sale of our interest in a pool of extended service contracts (“corporate generated F&I gain”) and $0.9 million (net of tax) of costs associated with abandoned strategic projects (collectively “the adjusting items”). Excluding the adjusting items, adjusted income from continuing operations increased $3.7 million (20%).

The following discussion excludes the impact of the adjusting items as we believe that excluding these items provides a more accurate representation of our year over year financial performance. Please refer to “Reconciliation of Non-GAAP Financial information” for more information. The $3.7 million (20%) increase in adjusted income from continuing operations was primarily a result of (i) the performance of our fixed operations and F&I businesses, which generated $5.6 million (6%) and $4.3 million (11%), respectively, of incremental adjusted gross profit during the 2007 period, and (ii) a 70 basis point improvement in our adjusted selling, general and administrative expense (“SG&A”) as a percentage of gross profit. In addition, our other interest expense decreased $2.0 million due to a lower average effective interest rate on our long-term debt as a result of our long-term debt refinancing, which was substantially completed during the first quarter of 2007 and finalized in the second quarter of 2007.

The $7.7 million (1%) increase in total revenues was a result of a $16.8 million (4%) increase in used vehicle revenue, a $5.5 million (3%) increase in fixed operations revenue and a $5.0 million (13%) increase in dealership generated F&I revenue,

partially offset by a $15.4 million (2%) decrease in new vehicle revenue. The increase in used vehicle revenue includes an $8.4 million (3%) increase in retail revenue and an $8.3 million (10%) increase in wholesale revenue. The decrease in new vehicle revenue includes a $30.1 million (3%) decrease in new retail revenue partially offset by a $14.7 million (47%) increase in fleet revenue. The decrease in new retail revenue includes a $46.7 million (45%) decrease in new vehicle revenue from heavy truck sales due to changes in emission laws in 2007, which increased the average sale price of heavy truck vehicles resulting in increased demand for heavy trucks in 2006 and lower demand in 2007.

Total gross profit increased $6.0 million (3%) and total adjusted gross profit increased $9.4 million (4%). The increase in total adjusted gross profit was a result of a $5.6 million (6%) increase in fixed operations gross profit and a $4.3 million (11%) increase in adjusted F&I gross profit, both of which contributed to an overall 50 basis point increase in our total adjusted gross profit margin.


	For the Three Months Ended June 30,								Increase (Decrease)			% Change
New Vehicle —	2007				2006				Increase (Decrease)			% Change
	(In thousands, except unit and PVR data)
Revenue:
New retail revenue—same store(1)
Luxury	$	281,828	34	%	$	262,599	30	%	$	19,229		7	%
Mid-line import		362,271	43	%		366,513	42	%		(4,242	)	(1	)%
Mid-line domestic		122,399	15	%		131,570	15	%		(9,171	)	(7	)%
Value		11,140	1	%		11,176	1	%		(36	)	—	%

Total light vehicle retail revenue- same store		777,638				771,858				5,780		1	%
Heavy trucks		57,014	7	%		103,762	12	%		(46,748	)	(45	)%

Total new retail revenue—same store(1)		834,652	100	%		875,620	100	%		(40,968	)	(5	)%
New retail revenue—acquisitions		10,907				—

Total new retail revenues		845,559				875,620				(30,061	)	(3	)%

Fleet revenue—same store(1)		45,722				31,049				14,673		47	%
Fleet revenue—acquisitions		—				—

Total fleet revenue		45,722				31,049				14,673		47	%

New vehicle revenue, as reported	$	891,281			$	906,669			$	(15,388	)	(2	)%

New retail units:
New retail units—same store(1)
Luxury		5,999	22	%		5,803	21	%		196		3	%
Mid-line import		14,992	56	%		15,107	54	%		(115	)	(1	)%
Mid-line domestic		4,292	16	%		4,646	17	%		(354	)	(8	)%
Value		577	2	%		528	2	%		49		9	%

Total light vehicle retail units- same store		25,860				26,084				(224	)	(1	)%
Heavy trucks		975	4	%		1,698	6	%		(723	)	(43	)%

Total new retail units—same store(1)		26,835	100	%		27,782	100	%		(947	)	(3	)%
New retail units—acquisitions		343				—

Retail units—actual		27,178				27,782				(604	)	(2	)%
Fleet units—actual		1,934				1,858				76		4	%

Total new units—actual		29,112				29,640				(528	)	(2	)%

Total light vehicle units — same store(1)(2)		27,794				27,942				(148	)	(1	)%
Total light vehicle units — acquisitions (2)		343				—

Total light vehicle units — actual(2)		28,137				27,942				195		1	%

New revenue PVR—same store(1)	$	31,103			$	31,518			$	(415	)	(1	)%

New revenue PVR—actual	$	31,112			$	31,518			$	(406	)	(1	)%

(1)	Same store amounts include the results of dealerships for the identical months for each period presented in the comparison, commencing with the first full month in which the dealership was owned by us.

(2)	Includes light vehicle and fleet unit sales


	For the Three Months Ended June 30,										Increase (Decrease)			% Change
	2007					2006					Increase (Decrease)			% Change
	(In thousands, except PVR data)
Gross Profit:
New retail gross profit—same store(1)
Luxury	$	22,332		37	%	$	21,456		35	%	$	876		4	%
Mid-line import		26,116		43	%		25,999		42	%		117		—	%
Mid-line domestic		8,859		15	%		9,730		16	%		(871	)	(9	)%
Value		703		1	%		716		1	%		(13	)	(2	)%

Total light vehicle retail gross profit-same store		58,010					57,901					109		—	%
Heavy trucks		2,537		4	%		3,783		6	%		(1,246	)	(33	)%

Total new retail gross profit—same store(1)		60,547		100	%		61,684		100	%		(1,137	)	(2	)%
New retail gross profit—acquisitions		827					—

Total retail gross profit		61,374					61,684					(310	)	(1	)%

Fleet gross profit—same store(1)		848					1,261					(413	)	(33	)%
Fleet gross profit—acquisitions		—					—

Total fleet gross profit		848					1,261					(413	)	(33	)%

New vehicle gross profit, as reported	$	62,222				$	62,945				$	(723	)	(1	)%

New gross profit PVR—same store(1)	$	2,256				$	2,220				$	36		2	%

New gross profit PVR—actual	$	2,258				$	2,220				$	38		2	%

New retail gross margin—same store(1)		7.3	%				7.0	%				0.3	%	4	%

New retail gross margin—actual		7.3	%				7.0	%				0.3	%	4	%

(1)	Same store amounts include the results of dealerships for the identical months for each period presented in the comparison, commencing with the first full month in which the dealership was owned by us.

The $15.4 million (2%) decrease in new vehicle revenues includes a $46.7 million (45%) decrease in heavy truck sales. The decrease in heavy truck sales was as a result of (i) changes in emission laws in January 2007, which increased demand for heavy trucks in 2006 and (ii) a weaker freight hauling market in the first half of 2007. Same store light vehicle revenue increased $5.8 million (1%) despite a challenging new retail sales environment, primarily as a result of increased unit sales and increased revenue PVR of luxury vehicles. The increase in same store light vehicle revenue from luxury vehicles was partially offset by decreases in same store light vehicle revenue from our mid-line domestic and mid-line import brands. Mid-line domestic same store light vehicle revenue decreased in the 2007 period as a result of lower unit volumes and lower revenue PVR as these brands continue to lower sales prices in an effort to maintain market share. The decrease in mid-line import revenue was due mainly to lower unit sales during the 2007 period. Our total same store light vehicle unit sales decreased 1%, outperforming the overall U.S. light vehicle industry, which decreased 2%. This was a result of our strong brand mix, which is heavily weighted toward luxury and mid-line import brands that continue to increase their market share.

The $0.7 million (1%) decrease in new vehicle gross profit includes a $1.2 million (33%) decrease in gross profit from the sale of heavy trucks. Same store light vehicle gross profit was flat during the 2007 period as improved gross profit from the sale of luxury vehicles, driven by increased unit sales, was offset by decreased gross profit from the sale of mid-line domestic vehicles. Our retail gross margin improved 30 basis points as a result of a shift in the mix of unit sales away from heavy trucks, which have a lower gross margin than light vehicles. We were able to maintain flat gross profit from the sale of mid-line import vehicles despite lower unit sales and revenue PVR as a result of our ability to capitalize on manufacturer incentive programs.

We expect our light vehicle unit sales, revenue and gross profit to outperform the U.S. light retail unit sales environment as we believe the luxury and mid-line import brands will continue to increase market share. However, we expect heavy trucks unit sales, revenue and gross profit to continue to decrease significantly in 2007 as compared to 2006 as a result of the impact of the new emission laws on heavy truck demand and a weaker freight hauling market.


	For the Three Months Ended June 30,						Increase (Decrease)			% Change
Used Vehicle —	2007			2006			Increase (Decrease)			% Change
	(In thousands, except unit and PVR data)
Revenue:
Retail revenues—same store(1)	$	296,339		$	292,396		$	3,943		1	%
Retail revenues—acquisitions		4,500			—

Total used retail revenues		300,839			292,396			8,443		3	%

Wholesale revenues—same store(1)		93,341			86,343			6,998		8	%
Wholesale revenues—acquisitions		1,323			—

Total wholesale revenues		94,664			86,343			8,321		10	%

Used vehicle revenue, as reported	$	395,503		$	378,739		$	16,764		4	%

Gross Profit:
Retail gross profit—same store(1)	$	34,195		$	35,527		$	(1,332	)	(4	)%
Retail gross profit—acquisitions		506			—

Total used retail gross profit		34,701			35,527			(826	)	(2	)%

Wholesale gross profit—same store(1)		(217	)		(1,246	)		1,029		83	%
Wholesale gross profit—acquisitions		13			—

Total wholesale gross profit		(204	)		(1,246	)		1,042		84	%

Used vehicle gross profit, as reported	$	34,497		$	34,281		$	216		1	%

Used retail units—same store(1)		16,146			16,196			(50	)	—	%
Used retail units—acquisitions		255			—

Used retail units—actual		16,401			16,196			205		1	%

Used revenue PVR—same store(1)	$	18,354		$	18,054		$	300		2	%

Used revenue PVR—actual	$	18,343		$	18,054		$	289		2	%

Used gross profit PVR—same store(1)	$	2,118		$	2,194		$	(76	)	(3	)%

Used gross profit PVR—actual	$	2,116		$	2,194		$	(78	)	(4	)%

Used retail gross margin—same store(1)		11.5	%		12.2	%		(0.7	)%	(6	)%

Used retail gross margin—actual		11.5	%		12.2	%		(0.7	)%	(6	)%

(1)	Same store amounts include the results of dealerships for the identical months for each period presented in the comparison, commencing with the first full month in which the dealership was owned by us.

The $16.8 million (4%) increase in used vehicle revenues was a result of a $300 (2%) increase in same store used revenue PVR and an $8.3 million (10%) increase in wholesale revenues. The $0.2 million (1%) increase in used vehicle gross profit was a result of a $1.0 million (84%) increase in wholesale gross profit, partially offset by a $0.8 million (2%) decrease in gross profit from used retail sales. Our comparison from the prior year continues to be difficult as we have benefited in recent years from (i) targeted initiatives, including the building of experienced used vehicle teams in each of our regions and our investments in technology to better value trade-ins and improve inventory management and (ii) strong used vehicle sales in the 2006 period in Houston and Mississippi in the aftermath of hurricane Katrina. In addition, we experienced a very strong used vehicle wholesale environment during the quarter. Although the acquisition of used inventory is balanced between trade-ins and purchases from auctions, the strong wholesale environment had the impact of significantly increasing the cost to acquire used vehicle inventory, increasing pressure on our used retail margins and used retail unit sales. However, the impact of the strong wholesale environment on our used retail gross profit was more than offset by the $1.0 million (84%) increase in our wholesale gross profit as we were able to obtain good prices for our vehicles at auction. We expect used vehicle revenues and gross profit to continue to increase in the future as we execute our current initiatives, increase our focus on sub-prime customers and increase our focus on our training initiatives.


	For the Three Months Ended June 30,						Increase (Decrease)			% Change
Fixed Operations —	2007			2006			Increase (Decrease)			% Change
	(In thousands)
Revenue:
Revenues—same store(1)
Parts and service	$	157,850		$	155,000		$	2,850		2	%
Collision repair		16,031			15,701			330		2	%

Total revenue—same store(1)		173,881			170,701			3,180		2	%
Revenues—acquisitions		2,292			—

Parts, service and collision repair revenue, as reported	$	176,173		$	170,701		$	5,472		3	%

Gross Profit:
Gross profit—same store(1)
Parts and service	$	81,943		$	78,311		$	3,632		5	%
Collision repair		8,829			8,190			639		8	%

Total gross profit—same store(1)		90,772			86,501			4,271		5	%
Gross profit—acquisitions		1,345			—

Parts, service and collision repair gross profit, as reported	$	92,117		$	86,501		$	5,616		6	%

Parts and service gross margin—same store(1)		52.2	%		50.7	%		1.5	%	3	%

Collision repair gross margin—same store(1)		55.1	%		52.2	%		2.9	%	6	%

(1)	Same store amounts include the results of dealerships for the identical months for each period presented in the comparison, commencing with the first full month in which the dealership was owned by us.

The $5.5 million (3%) increase in fixed operations revenues and $5.6 million (6%) increase in fixed operations gross profit was primarily due to an 8% and 9% increase in our “customer pay” parts and service revenue and gross profit, respectively. We continue to experience decreases in our warranty business as warranty revenue decreased $0.9 million (3%) as a result of improvements in the quality vehicles produced in recent years. As a result, we have focused on our customer pay business and expect our fixed operations sales to continue to grow as we (i) continue to invest in additional service capacity, (ii) upgrade equipment, (iii) expand our product offerings, (iv) capitalize on our regional training programs and (v) add service advisors and skilled technicians to meet anticipated future demand, especially from the increased market share of the luxury import and mid-line import brands.


	For the Three Months Ended June 30,				Increase (Decrease)			% Change
Finance and Insurance, net—	2007		2006		Increase (Decrease)			% Change
	(In thousands, except PVR data)
Dealership generated F&I—same store(1)	$	43,093	$	38,614	$	4,479		12	%
Dealership generated F&I—acquisitions		483		—

Dealership generated F&I, net		43,576		38,614		4,962		13	%
Corporate generated F&I		—		692		(692	)	NM
Corporate generated F&I gain		—		3,400		(3,400	)	NM

Finance and insurance, net as reported	$	43,576	$	42,706	$	870		2	%

Dealership generated F&I PVR-same store (1) (2)	$	1,003	$	878	$	125		14	%

Dealership generated F&I PVR-actual (2)	$	1,000	$	878	$	122		14	%

F&I PVR-actual	$	1,000	$	971	$	29		3	%

(1)	Same store amounts include the results of dealerships for the identical months for each period presented in the comparison, commencing with the first full month in which the dealership was owned by us.

(2)	Refer to “Reconciliation of Non-GAAP Financial Information” for further discussion regarding dealership generated F&I gross profit PVR.

The $0.9 million (2%) increase in F&I includes the impact of the $3.4 million corporate generated F&I gain during the 2006 period. As a result of this sale, we no longer receive any corporate generated F&I. Dealership generated F&I increased $5.0

million (13%) as a result of the $125 (14%) increase in same store dealership generated F&I PVR. The increase in same store dealership generated F&I PVR was attributable to three main areas (i) a renegotiated contract with our primary service contract provider in the second quarter of 2006, which contributed an incremental $12 PVR, (ii) increased penetration rates on sales of our aftermarket products and services and (iii) lengthening in finance contract terms in the first half of 2007. We anticipate F&I will increase in the future as a result of (i) increased retail unit sales, (ii) the maturation of F&I programs and (iii) improvement of the F&I operations at our under-performing franchises.


	For the Three Months Ended June 30,										% of Gross Profit Increase (Decrease)			% of Gross Profit % Change
Selling, General and Administrative —	2007			% of Gross Profit		2006			% of Gross Profit		% of Gross Profit Increase (Decrease)			% of Gross Profit % Change
	(In thousands)
Personnel costs	$	78,822		33.9	%	$	77,778		34.3	%		(0.4	)%	(1	)%
Sales compensation		26,521		11.4	%		26,388		11.7	%		(0.3	)%	(3	)%
Share-based compensation		1,619		0.7	%		927		0.4	%		0.3	%	75	%
Outside services		14,421		6.2	%		14,329		6.3	%		(0.1	)%	(2	)%
Advertising		12,972		5.6	%		12,570		5.6	%		—	%	—	%
Rent		14,377		6.2	%		13,234		5.8	%		0.4	%	7	%
Utilities		4,424		1.9	%		4,310		1.9	%		—	%	—	%
Insurance		3,149		1.4	%		3,766		1.7	%		(0.3	)%	(18	)%
Other		17,320		7.4	%		16,156		7.1	%		0.3	%	4	%

Selling, general and administrative	$	173,625		74.7	%	$	169,458		74.8	%		(0.1	)%	—	%
Adjustments to SG&A:
Secondary offering expenses		(270	)				—
Abandoned strategic project expenses		—					(1,417	)

Adjusted selling, general and administrative	$	173,355		74.6	%	$	168,041		75.3	%		(0.7	)%	(1	)%

Gross profit	$	232,412				$	226,433
Corporate generated F&I gain		—					(3,400	)

Adjusted gross profit	$	232,412				$	223,033				$	9,379		4	%

SG&A expense as a percentage of gross profit was 74.7% during the 2007 period as compared to 74.8% during the 2006 period. SG&A expenses during the 2007 period include $0.3 million of costs associated with a secondary offering of our common stock, for which we received no proceeds. SG&A expenses during the 2006 period include $1.4 million of costs associated with certain abandoned strategic projects. Excluding these items, adjusted SG&A expense as a percentage of adjusted gross profit decreased 70 basis points to 74.6% during the 2007 period. The improvement in adjusted SG&A as a percentage of adjusted gross profit is a result of several expense control initiatives, especially in the area of personnel and sales compensation, and continued leveraging of our fixed overhead and organizational structure by increasing total adjusted gross profit by $9.4 million (4%). In addition, our insurance costs continue to improve as we continue to focus on training and the lack of any significant weather events in our markets during the 2007 period. We anticipate that we will continue to lower our SG&A expense as a percentage of gross profit in the future as we continue to consolidate certain back office functions and continue to leverage our fixed cost structure, partially offset by increased rent expense as we continue to add service capacity.

Depreciation and Amortization—

The $0.3 million (5%) increase in depreciation and amortization expense was a result of property and equipment acquired during 2007 and 2006. We expect depreciation and amortization to increase in the future as a result of previous and future capital expenditure projects to remodel and upgrade our facilities and expand our service capacity.

Other Income (Expense)—

The $0.2 million (2%) increase in floor plan interest expense was attributable to higher interest rates and higher average inventory levels, partially offset by increased equity in our vehicle inventory. We expect floor plan expense to fluctuate with changes in our inventory levels in the near future as we anticipate that short-term interest rates will remain at their current level.

The $2.0 million (18%) decrease in other interest expense was primarily attributable to a lower effective rate on our long-term debt as a result of our long-term debt refinancing, which was substantially completed in the first quarter of 2007 and finalized in the second quarter of 2007. In the second quarter of 2006 we had $200.0 million of 8% Senior Subordinated Notes due 2014

(“8% Notes”) and $250.0 million of our 9% Notes. In connection with our long-term debt refinancing, we issued $115.0 million of 3% Convertible Notes due 2012 and $150.0 million of 7.625% Senior Subordinated Notes due 2017 and repurchased all of our 9% Notes and as of June 30, 2007 have repurchased $20.6 million of our 8% Notes.

The $0.8 million loss on extinguishment of long-term debt was a result of the repurchase of the remaining $11.9 million of our 9% Notes in connection with the refinancing of our long-term debt. Included in the $0.8 million loss is (i) a $0.5 million premium on the repurchase of the 9% Notes and (ii) $0.3 million of costs associated with the remaining unamortized debt issuance costs associated with the 9% Notes. Other interest expense will decrease by $7.9 million on an annual basis as a result of this debt refinancing. In addition, our board of directors has authorized us to repurchase up to an additional $19.4 million of our senior subordinated notes.

Income Tax Expense—

The $0.9 million (7%) increase in income tax expense was a result of a $2.5 million (8%) increase in our income before income taxes, and the effect of reducing our estimated annual effective tax rate 20 basis points from 37.5% to 37.3% in the second quarter of 2007, principally as a result of a reorganization of our legal entities in Texas. As we operate nationally, our effective tax rate is dependent upon our geographic revenue mix. We evaluate our effective tax rate periodically based on our revenue sources. We will continue to evaluate our effective tax rate in the future, and expect that our future annual effective tax rate will be between 37% and 38%.

Discontinued Operations—


	For the Three Months Ended June 30,
	2007			2006
	(In thousands)
Franchises		—			9

Net operating losses from sold or closed franchises, net of tax	$	(580	)	$	(1,578	)
Net divestiture (expense) income including net gain (loss) on sale of franchises, net of tax		(27	)		1,059

Discontinued operations, net of tax	$	(607	)	$	(519	)

During the three months ended June 30, 2007, we did not sell any franchises or place any franchises into discontinued operations. The $0.6 million loss from discontinued operations for the 2007 period primarily includes rent expense on idle or subleased properties associated with sold franchises and miscellaneous legal expenses associated with sold franchises or ancillary businesses. The $0.5 million loss from discontinued operations for the 2006 period is a result of (i) $1.1 million, net of tax, of divestiture income primarily associated with the sale of three franchises during the second quarter of 2006 and (ii) $1.6 million, net of tax, of net operating losses of franchises sold in 2007 and the last six months of 2006.

We continuously evaluate the financial and operating results of our dealerships, specifically the 10% contributing the least amount of operating income, and we will look to divest dealerships that do not meet our expectations. We do not currently have any franchises held for sale and based on the performance of our current brand mix, we do not anticipate a significant amount of divestitures in the near future.

Six Months Ended June 30, 2007, Compared to the Six Months Ended June 30, 2006


	For the Six Months Ended June 30,										Increase (Decrease)			% Change
	2007			% of Gross Profit		2006			% of Gross Profit		Increase (Decrease)			% Change
	(In thousands, except per share data)
REVENUES:
New vehicle	$	1,715,732				$	1,716,326				$	(594	)	—	%
Used vehicle		773,650					731,154					42,496		6	%
Parts, service and collision repair		350,461					339,230					11,231		3	%
Finance and insurance, net		82,260					77,856					4,404		6	%

Total revenues		2,922,103					2,864,566					57,537		2	%

COST OF SALES		2,465,628					2,429,214					36,414		1	%

GROSS PROFIT		456,475		100	%		435,352		100	%		21,123		5	%
OPERATING EXPENSES:
Selling, general and administrative		350,011		77	%		332,749		76	%		17,262		5	%
Depreciation and amortization		10,676		2	%		10,048		3	%		628		6	%

Income from operations		95,788		21	%		92,555		21	%		3,233		3	%
OTHER INCOME (EXPENSE):
Floor plan interest expense		(22,406	)	(5	)%		(19,944	)	(4	)%		2,462		12	%
Other interest expense		(20,954	)	(5	)%		(22,043	)	(5	)%		(1,089	)	(5	)%
Interest income		3,006		1	%		1,748		—	%		1,258		72	%
Loss on extinguishment of long-term debt		(18,523	)	(4	)%		—		—	%		(18,523	)	NM
Other income, net		689		—			824		—	%		(135	)	(16	)%

Total other expense, net		(58,188	)	(13	)%		(39,415	)	(9	)%		18,773		48	%

Income before income taxes		37,600		8	%		53,140		12	%		(15,540	)	(29	)%
INCOME TAX EXPENSE		14,025		3	%		19,927		4	%		(5,902	)	(30	)%

INCOME FROM CONTINUING OPERATIONS		23,575		5	%		33,213		8	%		(9,638	)	(29	)%
DISCONTINUED OPERATIONS, net of tax		(2,583	)	—	%		(1,656	)	(1	)%		927		56	%

NET INCOME	$	20,992		5	%	$	31,557		7	%	$	(10,565	)	(33	)%

EARNINGS PER COMMON SHARE (DILUTED):
Continuing Operations	$	0.70				$	0.99				$	(0.29	)	(29	)%
Discontinued Operations		(0.08	)				(0.05	)

Net income	$	0.62				$	0.94				$	(0.32	)	(34	)%

Net income and income from continuing operations decreased $10.6 million (33%) and $9.6 million (29%), respectively, during the 2007 period. Included in net income and income from continuing operations was (i) $11.6 million (net of tax) of costs associated with the repurchase of all $250.0 million of our 9% Notes and $3.0 million of our 8% Notes and (ii) $0.3 million of costs (net of tax) associated with a secondary offering of our common stock. During the 2006 period we recognized a $2.1 million (net of tax) gain from the sale of our interest in a pool of extended service contracts and $1.0 million (net of tax) of costs associated with abandoned strategic projects. Excluding the adjusting items mentioned above, adjusted income from continuing operations increased $5.2 million (16%).

The following discussion excludes the impact of the adjusting items as we believe that excluding these items provides a more accurate representation of our year over year financial performance. Please refer to “Reconciliation of Non-GAAP Financial Information” for more information. The $5.2 million (16%) increase in adjusted income from continuing operations was primarily a result of (i) the performance of our fixed operations and F&I businesses, which generated $11.0 million (6%) and $7.8 million (10%), respectively, of incremental adjusted gross profit during the 2007 period and (ii) a 60 basis point improvement in our adjusted selling, general and administrative expenses (“SG&A”) as a percentage of adjusted gross profit.

The $57.5 million (2%) increase in total revenues was a result of a $42.5 million (6%) increase in used vehicle revenue, an $11.2 million (3%) increase in fixed operations revenue and a $9.5 million (13%) increase in dealership generated F&I revenue, while new vehicle revenue was flat as a $17.4 million (1%) decrease in new retail revenue was partially offset by a $16.8 million (21%) increase in fleet revenue. The decrease in new retail revenue includes a $51.1 million (31%) decrease in new vehicle revenue

from heavy truck sales due to changes in emission laws in 2007 and a weaker freight hauling market. The increase in used vehicle revenue is primarily attributable to a $38.6 million (7%) increase in retail revenue.

Total gross profit increased $21.1 million (5%) and total adjusted gross profit increased $24.5 million (6%). The increase in total adjusted gross profit was a result of an $11.0 million (6%) increase in fixed operations gross profit and a $7.8 million (10%) increase in adjusted F&I gross profit, both of which contributed to an overall 50 basis point increase in our total adjusted gross profit margin.


	For the Six Months Ended June 30,								Increase (Decrease)			% Change
New Vehicle —	2007				2006				Increase (Decrease)			% Change
	(In thousands, except unit and PVR data)
Revenues:
New retail revenues—same store(1)
Luxury	$	546,784	34	%	$	510,808	31	%	$	35,976		7	%
Mid-line import		682,324	43	%		683,717	42	%		(1,393	)	—	%
Mid-line domestic		240,423	15	%		253,594	16	%		(13,171	)	(5	)%
Value		21,734	1	%		21,428	1	%		306		1	%

Total light vehicle retail revenues—same store(1)		1,491,265				1,469,547				21,718		1	%
Heavy trucks		115,700	7	%		166,880	10	%		(51,180	)	(31	)%

Total new retail revenue—same store(1)		1,606,965	100	%		1,636,427	100	%		(29,462	)	(2	)%
New retail revenues—acquisitions		12,074				—

Total new retail revenues		1,619,039				1,636,427				(17,388	)	(1	)%

Fleet revenues—same store(1)		96,693				79,899				16,794		21	%
Fleet revenues—acquisitions		—				—

Total fleet revenues		96,693				79,899				16,794		21	%

New vehicle revenues, as reported	$	1,715,732			$	1,716,326			$	(594	)	—	%

New retail units:
New retail units—same store(1)
Luxury		11,518	23	%		11,310	22	%		208		2	%
Mid-line import		28,075	55	%		27,871	54	%		204		1	%
Mid-line domestic		8,393	16	%		8,940	17	%		(547	)	(6	)%
Value		1,094	2	%		1,010	2	%		84		8	%

Total light vehicle retail units—same store(1)		49,080				49,131				(51	)	—
Heavy trucks		1,992	4	%		2,774	5	%		(782	)	(28	)%

Total new retail units—same store(1)		51,072	100	%		51,905	100	%		(833	)	(2	)%
New retail units—acquisitions		398				—

Retail units—actual		51,470				51,905				(435	)	(1	)%
Fleet units—actual		4,672				4,293				379		9	%

Total new units—actual		56,142				56,198				(56	)	—	%

Total light vehicle units – same store(1)(2)		53,752				53,424				328		1	%
Total light vehicle units – acquisitions(2)		398				—

Total light vehicle units – actual(2)		54,150				53,424				726		1	%

New revenue PVR—same store(1)	$	31,465			$	31,527			$	(62	)	—	%

New revenue PVR—actual	$	31,456			$	31,527			$	(71	)	—	%

(1)	Same store amounts include the results of dealerships for the identical months for each period presented in the comparison, commencing with the first full month in which the dealership was owned by us.

(2)	Includes light vehicle and fleet unit sales


	For the Six Months Ended June 30,										Increase (Decrease)			% Change
	2007					2006					Increase (Decrease)			% Change
	(In thousands, except PVR data)
Gross Profit:
New retail gross profit—same store(1)
Luxury	$	43,896		37	%	$	41,246		35	%	$	2,650		6	%
Mid-line import		50,185		42	%		48,843		41	%		1,342		3	%
Mid-line domestic		17,653		15	%		19,634		17	%		(1,981	)	(10	)%
Value		1,441		1	%		1,644		1	%		(203	)	(12	)%

Total light vehicle retail gross profit—same store(1)		113,175					111,367					1,808		2	%
Heavy trucks		5,781		5	%		6,546		6	%		(765	)	(12	)%

Total new retail gross profit		118,956		100	%		117,913		100	%		1,043		1	%

New retail gross profit—acquisitions		890					—

Total retail gross profit		119,846					117,913					1,933		2	%

Fleet gross profit—same store(1)		1,913					2,082					(169	)	(8	)%
Fleet gross profit—acquisitions		—					—

Total fleet gross profit		1,913					2,082					(169	)	(8	)%

New vehicle gross profit, as reported	$	121,759				$	119,995				$	1,764		1	%

New gross profit PVR—same store(1)	$	2,329				$	2,272				$	57		3	%

New gross profit PVR—actual	$	2,328				$	2,272				$	56		2	%

New retail gross margin—same store(1)		7.4	%				7.2	%				0.2	%	3	%

New retail gross margin—actual		7.4	%				7.2	%				0.2	%	3	%