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 September 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 November 5, 2007, was 31,580,200 (net of 4,677,261 treasury shares).

ASBURY AUTOMOTIVE GROUP, INC.

INDEX


PART I — Financial Information

Item 1.	Condensed Consolidated Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006	2
	Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2007 and 2006	3
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006	4
	Notes to Condensed Consolidated Financial Statements	5
	Report of Independent Registered Public Accounting Firm	23
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47
Item 4.	Controls and Procedures	47

PART II — Other Information

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 6.	Exhibits	49
	Signatures	50
	Index to Exhibits	51

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)


	September 30, 2007			December 31, 2006
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	40,794		$	129,170
Contracts-in-transit		98,102			126,012
Accounts receivable (net of allowance of $669 and $648, respectively)		143,387			167,562
Inventories		745,428			775,313
Deferred income taxes		13,961			13,961
Prepaid and other current assets		76,120			55,099
Assets held for sale		20,228			25,947

Total current assets		1,138,020			1,293,064
PROPERTY AND EQUIPMENT, net		210,688			202,584
GOODWILL		468,123			447,996
OTHER LONG-TERM ASSETS		98,526			87,193

Total assets	$	1,915,357		$	2,030,837

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Floor plan notes payable—manufacturer affiliated	$	183,329		$	319,896
Floor plan notes payable—non-manufacturer affiliated		433,858			380,881
Current maturities of long-term debt		26,001			23,144
Accounts payable		48,822			63,951
Accrued liabilities		82,864			89,296
Liabilities associated with assets held for sale		1,377			3,887

Total current liabilities		776,251			881,055
LONG-TERM DEBT		465,671			454,010
DEFERRED INCOME TAXES		51,473			53,991
OTHER LONG-TERM LIABILITIES		34,776			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, 36,253,461 and 35,071,401 shares issued, including shares held in treasury, respectively		363			351
Additional paid-in capital		439,193			431,725
Retained earnings		215,558			196,393
Treasury stock, at cost; 4,295,161 and 1,536,706 shares held, respectively		(65,770	)		(14,559	)
Accumulated other comprehensive loss		(2,158	)		(2,077	)

Total shareholders’ equity		587,186			611,833

Total liabilities and shareholders’ equity	$	1,915,357		$	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 September 30,						For the Nine Months Ended September 30,
	2007			2006			2007			2006
REVENUES:
New vehicle	$	893,977		$	901,783		$	2,609,709		$	2,618,109
Used vehicle		378,140			388,095			1,151,790			1,119,249
Parts, service and collision repair		176,707			170,246			527,168			509,476
Finance and insurance, net		42,210			40,590			124,470			118,446

Total revenues		1,491,034			1,500,714			4,413,137			4,365,280

COST OF SALES:
New vehicle		829,977			838,231			2,423,950			2,434,562
Used vehicle		348,391			351,941			1,051,375			1,016,381
Parts, service and collision repair		84,351			83,153			253,022			251,596

Total cost of sales		1,262,719			1,273,325			3,728,347			3,702,539

GROSS PROFIT		228,315			227,389			684,790			662,741
OPERATING EXPENSES:
Selling, general and administrative		176,067			172,568			526,078			505,317
Depreciation and amortization		5,385			5,056			16,061			15,104

Income from operations		46,863			49,765			142,651			142,320
OTHER INCOME (EXPENSE):
Floor plan interest expense		(10,618	)		(10,123	)		(33,024	)		(30,067	)
Other interest expense		(9,083	)		(11,225	)		(30,037	)		(33,268	)
Interest income		900			1,523			3,906			3,271
Loss on extinguishment of long-term debt		—			(914	)		(18,523	)		(914	)
Other income, net		343			399			1,032			1,223

Total other expense, net		(18,458	)		(20,340	)		(76,646	)		(59,755	)

Income before income taxes		28,405			29,425			66,005			82,565
INCOME TAX EXPENSE		9,185			11,035			23,210			30,962

INCOME FROM CONTINUING OPERATIONS		19,220			18,390			42,795			51,603
DISCONTINUED OPERATIONS, net of tax		(210	)		(1,211	)		(2,793	)		(2,867	)

NET INCOME	$	19,010		$	17,179		$	40,002		$	48,736

EARNINGS PER COMMON SHARE:
Basic—
Continuing operations	$	0.59		$	0.55		$	1.31		$	1.56
Discontinued operations		—			(0.03	)		(0.09	)		(0.09	)

Net income	$	0.59		$	0.52		$	1.22		$	1.47

Diluted—
Continuing operations	$	0.58		$	0.54		$	1.27		$	1.52
Discontinued operations		(0.01	)		(0.03	)		(0.08	)		(0.08	)

Net income	$	0.57		$	0.51		$	1.19		$	1.44

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic		32,450			33,258			32,754			33,087

Diluted		33,244			33,841			33,693			33,853

See Notes to Condensed Consolidated Financial Statements.

ASBURY AUTOMOTIVE GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	For the Nine Months Ended September 30
	2007			2006
CASH FLOW FROM OPERATING ACTIVITIES:
Net income	$	40,002		$	48,736
Adjustments to reconcile net income to net cash provided by operating activities-
Depreciation and amortization		16,061			15,104
Depreciation and amortization from discontinued operations		35			269
Share-based compensation		4,706			3,258
Amortization of deferred financing fees		1,929			1,759
Change in allowance for doubtful accounts		21			(526	)
Loss (gain) on sale of discontinued operations, net		2,001			(2,076	)
Loss on extinguishment of long-term debt		18,523			914
Deferred income taxes		6,245			(1,221	)
Other adjustments		10,464			5,403
Changes in operating assets and liabilities, net of acquisitions and divestitures-
Contracts-in-transit		27,910			27,028
Accounts receivable		8,734			534
Proceeds from the sale of accounts receivable		15,420			14,347
Inventories		76,646			11,413
Prepaid and other current assets		(28,610	)		(25,334	)
Floor plan notes payable—manufacturer affiliated, excluding divestitures, net		(136,567	)		101,136
Floor plan notes payable—manufacturer affiliated divestitures		—			(11,252	)
Accounts payable and accrued liabilities		(21,368	)		(4,800	)
Excess tax benefits from share-based payment arrangements		(1,578	)		(1,723	)
Other long-term assets and liabilities		(965	)		5,392

Net cash provided by operating activities		39,609			188,361
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures—internally financed		(25,389	)		(22,814	)
Capital expenditures—externally financed		(15,614	)		(11,871	)
Construction reimbursements associated with sale-leaseback agreements		11,405			3,383
Acquisitions		(70,485	)		—
Proceeds from the sale of assets		8,414			43,691
Other investing activities		(3,412	)		(1,297	)

Net cash (used in) provided by investing activities		(95,081	)		11,092
CASH FLOW FROM FINANCING ACTIVITIES:
Floor plan borrowings—non-manufacturer affiliated, excluding acquisitions		2,059,553			1,838,366
Floor plan borrowings—acquisitions		22,406			—
Floor plan repayments—non-manufacturer affiliated, excluding divestitures		(2,026,108	)		(1,934,698	)
Floor plan repayments—non manufacturer affiliated divestitures		(5,384	)		(11,335	)
Payment of dividends		(20,558	)		(6,649	)
Proceeds from borrowings		265,000			987
Repayments of borrowings		(267,264	)		(17,524	)
Debt issuance costs		(7,949	)		—
Sale of warrants		8,924			—
Purchase of treasury stock		(49,507	)		—
Purchase of convertible note hedge		(19,309	)		—
Proceeds from the exercise of stock options		3,353			5,958
Proceeds from the sale of assets associated with sale-leaseback agreements		3,181			—
Excess tax benefits from share-based payment arrangements		1,578			1,723
Purchase of treasury stock associated with share-based payment arrangements		(820	)		—

Net cash used in financing activities		(32,904	)		(123,172	)

Net (decrease) increase in cash and cash equivalents		(88,376	)		76,281
CASH AND CASH EQUIVALENTS, beginning of period		129,170			57,194

CASH AND CASH EQUIVALENTS, end of period	$	40,794		$	133,475

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 122 franchises (92 dealership locations) in 21 metropolitan markets within 10 states as of September 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, our California dealerships operating in Los Angeles, Sacramento and Fresno and our North Point dealerships operating in Little Rock, Arkansas), (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). 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 September 30, 2007, and for the three and nine months ended September 30, 2007 and 2006 have been included. The results of operations for the three and nine months ended September 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 September 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 nine months ended September 30, 2006, have been reclassified to reflect the status of our discontinued operations as of September 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 or 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 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 nine months ended September 30, 2007 and 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 continue 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 September 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 September 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 September 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 related to uncertain tax positions to change materially in the next twelve months.

3.	INVENTORIES

Inventories consist of the following:


	As of
(In thousands)	September 30, 2007		December 31, 2006
New vehicles	$	581,160	$	616,275
Used vehicles		118,817		115,927
Parts and accessories		45,451		43,111

Total inventories	$	745,428	$	775,313

The lower of cost or market reserves reduced total inventory cost by $5.2 million and $4.8 million as of September 30, 2007 and December 31, 2006, respectively. In addition to the inventories shown above, we had $1.6 million and $4.8 million of inventory associated with franchises held for sale as of September 30, 2007 and December 31, 2006, respectively, classified as Assets Held for Sale on the accompanying Condensed Consolidated Balance Sheets.

4.	ACQUISITIONS

During the nine months ended September 30, 2007, we acquired eight franchises (six dealership locations), including two heavy truck franchises, for an aggregate purchase price of $70.5 million. We are actively pursuing the sale of one of the franchises we acquired in the third quarter of 2007. In connection with the purchase of one franchise, additional consideration may be paid to the seller if the franchise achieves specified net income levels in future periods. The additional consideration is distributable annually beginning January 1, 2009 through January 1, 2015 and we estimate the additional consideration to total approximately $2.5 million. We financed these acquisitions through the use of $48.1 million of cash and $22.4 million of floor plan borrowings from our Committed Credit Facility for the purchase of new vehicle inventory.

The allocation of purchase price for acquisitions is as follows:


	For the Nine Months Ended September 30,
(In thousands)	2007		2006
Inventory	$	24,794	$	—
Property and equipment		13,339		—
Goodwill		21,102		—
Franchise rights		11,250		—

Total purchase price	$	70,485	$	—

The allocation of purchase price to assets acquired 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 nine months ended September 30, 2007 are as follows:


(In thousands)	For the Nine Months Ended September 30, 2007
Balance, December 31, 2006	$	447,996
Current year acquisitions		21,102
Current year divestitures		(975	)

Balance, September 30, 2007	$	468,123

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 Nine Months Ended September 30, 2007
Balance, December 31, 2006	$	39,518
Acquisitions		11,250
Divestitures		(2,300	)

Balance, September 30, 2007	$	48,468

During the nine months ended September 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 nine months ended September 30, 2007, we acquired eight franchises (six dealership locations), including two heavy truck franchises, resulting in the allocation of $21.1 million to goodwill and $11.3 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 September 30, 2007, assets and liabilities associated with discontinued operations included one franchise (one dealership location). As of December 31, 2006, assets and liabilities associated with discontinued operations included two franchises (two dealership locations). Assets associated with discontinued operations totaled $9.1 million and $5.1 million as of September 30, 2007 and December 30, 2006, respectively. Liabilities associated with discontinued operations totaled $1.4 million and $3.9 million as of September 30, 2007 and December 31, 2006, respectively. During the nine months ended September 30, 2007, we sold the two franchises (two dealership locations) that had been held for sale as of December 31, 2006 and are actively pursuing the sale of one franchise (one dealership location).

Assets associated with pending sale-leaseback transactions as of December 31, 2006, include two completed construction projects totaling $9.7 million. During the nine months ended September 30, 2007, we received a final reimbursement of $9.9 million associated with these two completed construction projects and completed the related sale-leaseback transactions. In addition, we completed one additional sale-leaseback transaction during 2007 and received a final reimbursement of $1.5 million. There were no completed construction projects associated with pending sale-leaseback transactions as of September 30, 2007.

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

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


	As of
(In thousands)	September 30, 2007		December 31, 2006
Assets:
Inventories	$	1,624	$	4,808
Property and equipment, net		18,604		21,139

Total assets	$	20,228	$	25,947

Liabilities:
Floor plan notes payable		1,377		3,887

Total liabilities		1,377		3,887

Net assets held for sale	$	18,851	$	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 September 30, 2007 and December 31, 2006, totaled $20.4 million and $4.4 million, respectively. As of September 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)	September 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 $6,927 and $7,848, respectively)		172,503			174,582
7.625% Senior Subordinated Notes due 2017		150,000			—
3% Senior Subordinated Convertible Notes Due 2012		115,000			—
Mortgage notes payable		26,087			26,837
Notes payable collateralized by loaner vehicles		24,218			21,279
Capital lease obligations		3,202			3,552
Other notes payable		662			904

		491,672			477,154
Less-current portion		(26,001	)		(23,144	)

Long-term debt	$	465,671		$	454,010

Long-term Debt Refinancing

During the nine months ended September 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 transaction 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 an initial strike price of $45.09 per share, which was a 62.50% premium over the market price of our common stock at the time of pricing. The strike price was adjusted to $45.0385 in the third quarter of 2007 as a result of our decision to increase our quarterly dividend to $0.225. 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 $45.0385. 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 $45.0385.

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 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 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. This exchange offer was closed in the third quarter of 2007. 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 September 30, 2007, the swap agreement had a fair value of $0.8 million, which was included in Other Long-Term Liabilities on the accompanying Condensed Consolidated Balance Sheet.

We have an interest rate swap with a current notional principal amount of $13.7 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 September 30, 2007 and December 31, 2006, the swap agreement had a fair value of $0.1 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 September 30, 2007, was $2.7 million ($1.7 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 September 30, 2007, was $6.9 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 September 30,						For the Nine Months Ended September 30,
(In thousands)	2007			2006			2007			2006
Net income	$	19,010		$	17,179		$	40,002		$	48,736
Other comprehensive income:
Change in fair value of cash flow swaps		(1,363	)		(326	)		(835	)		1,862
Amortization of expired cash flow swaps		224			239			672			557
Income tax expense associated with cash flow swaps		441			33			82			(906	)

Comprehensive income	$	18,312		$	17,125		$	39,921		$	50,249

10.

DISCONTINUED OPERATIONS

During 2007, we sold two franchises (two dealership locations). As of September 30, 2007, one franchise (one dealership) was pending disposition. The accompanying Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2006, have been reclassified to reflect the status of our discontinued operations as of September 30, 2007. The following table provides further information regarding our discontinued operations as of September 30, 2007, and includes the results of businesses sold prior to September 30, 2007:


	For the Three Months Ended September 30, 2007									For the Three Months Ended September 30, 2006
(Dollars in thousands)	Sold			Pending Disposition			Total			Sold			Pending Disposition (a)		Total
Franchises:
Mid-line Domestic		—			—			—			3			—		3
Mid-line Import		—			1			1			—			—		—
Value		—			—			—			2			—		2
Luxury		—			—			—			1			—		1

Total		—			1			1			6			—		6

Ancillary Businesses		—			—			—			1			—		1

Revenues	$	—		$	315		$	315		$	22,413		$	—	$	22,413
Cost of sales		—			274			274			18,884			—		18,884

Gross profit		—			41			41			3,529			—		3,529
Operating expenses		371			54			425			4,786			—		4,786

Loss from operations		(371	)		(13	)		(384	)		(1,257	)		—		(1,257	)
Other income (expense), net		52			(3	)		49			(140	)		—		(140	)
Gain (loss) on disposition of discontinued operations, net		—			—			—			(541	)		—		(541	)

Loss before income taxes		(319	)		(16	)		(335	)		(1,938	)		—		(1,938	)
Income tax benefit		119			6			125			727			—		727

Discontinued operations, net of tax	$	(200	)	$	(10	)	$	(210	)	$	(1,211	)	$	—	$	(1,211	)

(a)	The franchise pending disposition as of September 30, 2007, was acquired in the third quarter of 2007, and immediately placed into discontinued operations; therefore, no prior year results are included in discontinued operations.


	For the Nine Months Ended September 30, 2007									For the Nine Months Ended September 30, 2006
(Dollars in thousands)	Sold			Pending Disposition			Total			Sold			Pending Disposition (a)		Total
Franchises:
Mid-line Domestic		—			—			—			6			—		6
Mid-line Import		—			1			1			2			—		2
Value		—			—			—			3			—		3
Luxury		—			—			—			1			—		1

Total		—			1			1			12			—		12


Ancillary Businesses		—			—			—			1			—		1


Revenues	$	1,530		$	315		$	1,845		$	100,910		$	—	$	100,910
Cost of sales		1,478			274			1,752			84,249			—		84,249

Gross profit		52			41			93			16,661			—		16,661
Operating expenses		2,338			54			2,392			21,731			—		21,731

Loss from operations		(2,286	)		(13	)		(2,299	)		(5,070	)		—		(5,070	)
Other expense, net		(48	)		(3	)		(51	)		(1,202	)		—		(1,202	)
(Loss) gain on disposition of discontinued operations, net		(2,001	)		—			(2,001	)		2,076			—		2,076

Loss before income taxes		(4,335	)		(16	)		(4,351	)		(4,196	)		—		(4,196	)
Income tax benefit		1,552			6			1,558			1,329			—		1,329

Discontinued operations, net of tax	$	(2,783	)	$	(10	)	$	(2,793	)	$	(2,867	)	$	—	$	(2,867	)

(a)	The franchise pending disposition as of September 30, 2007, was acquired in the third quarter of 2007, and immediately placed into discontinued operations; therefore, no prior year results are included in discontinued operations.

11.

SUPPLEMENTAL CASH FLOW INFORMATION

During the nine months ended September 30, 2007 and 2006, we made interest payments, net of amounts capitalized, totaling $66.0 million and $60.6 million, respectively. During the nine months ended September 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 nine months ended September 30, 2007 and 2006, we made income tax payments totaling $14.2 million and $18.5 million, respectively.

During 2007, we paid two $0.20 per share dividends totaling $13.2 million and one $0.225 per share dividend totaling $7.4 million. During 2007, we purchased 1.9 million shares of our common stock for $49.5 million.

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, dividends and share repurchases.

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.

In connection with the purchase of one franchise, additional consideration may be paid to the seller if the franchise achieves specified net income levels in future periods. The additional consideration is distributable annually beginning January 1, 2009 through January 1, 2015 and we estimate the additional consideration to total approximately $2.5 million.

13.

STOCK-BASED COMPENSATION

A summary of options outstanding and exercisable under the Plans as of September 30, 2007, and changes during the nine 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	(406,637	)	$	15.10
Expired / Forfeited	(13,404	)	$	14.12

Options outstanding-September 30, 2007	1,108,138		$	14.37	5.9	$	6,028,271

Options exercisable-September 30, 2007	1,067,966		$	14.39	5.8	$	5,788,376

*	Based on the closing price of our common stock on September 28, 2007, which was $19.81 per share.

Net cash received from option exercises for the nine months ended September 30, 2007, was $3.4 million. The actual intrinsic value of options exercised during the nine months ended September 30, 2007, was $5.1 million. The actual tax benefit from option exercises totaled $1.9 million for the nine months ended September 30, 2007.

A summary of performance share units and restricted stock as of September 30, 2007, and changes during the nine 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	(48,594	)	$	22.98
Vested	—		$	—
Forfeited (including 2,813 of performance estimates)	(15,063	)	$	20.64

Performance Share Units - September 30, 2007*	619,468		$	22.28

*	Includes an estimate of 42,218 out of a maximum of 461,800 issuable upon attaining certain performance metrics

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.


	Shares		Weighted Average Grant Date Fair Value
Restricted Stock - December 31, 2006	29,728		$	21.65
Granted	58,909		$	28.07
Vested	(6,665	)	$	21.40
Forfeited	(2,500	)	$	19.81

Restricted Stock - September 30, 2007	79,472		$	26.49

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 September 30, 2007

(In thousands)


	Parent Company		Guarantor Subsidiaries		Eliminations			Condensed Consolidated
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	—	$	40,794	$	—		$	40,794
Inventories		—		745,428		—			745,428
Other current assets		—		331,570		—			331,570
Assets held for sale		—		20,228		—			20,228

Total current assets		—		1,138,020		—			1,138,020
PROPERTY AND EQUIPMENT, net		—		210,688		—			210,688
GOODWILL		—		468,123		—			468,123
OTHER LONG-TERM ASSETS		11,625		86,901		—			98,526
INVESTMENT IN SUBSIDIARIES		1,014,283		—		(1,014,283	)		—

Total assets	$	1,025,908	$	1,903,732	$	(1,014,283	)	$	1,915,357

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Floor plan notes payable—manufacturer affiliated	$	—	$	183,329	$	—		$	183,329
Floor plan notes payable—non-manufacturer affiliated		—		433,858		—			433,858
Other current liabilities		1,219		156,468		—			157,687
Liabilities associated with assets held for sale		—		1,377		—			1,377

Total current liabilities		1,219		775,032		—			776,251
LONG-TERM DEBT		437,503		28,168		—			465,671
OTHER LONG-TERM LIABILITIES		—		86,249		—			86,249
SHAREHOLDERS’ EQUITY		587,186		1,014,283		(1,014,283	)		587,186

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,025,908	$	1,903,732	$	(1,014,283	)	$	1,915,357

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 September 30, 2007

(In thousands)


	Parent Company			Guarantor Subsidiaries			Eliminations			Condensed Consolidated
REVENUES	$	—		$	1,491,034		$	—		$	1,491,034
COST OF SALES		—			1,262,719			—			1,262,719

GROSS PROFIT		—			228,315			—			228,315
OPERATING EXPENSES:
Selling, general and administrative		—			176,067			—			176,067
Depreciation and amortization		—			5,385			—			5,385

Income from operations		—			46,863			—			46,863
OTHER INCOME (EXPENSE):
Floor plan interest expense		—			(10,618	)		—			(10,618	)
Other interest expense		(7,886	)		(1,197	)		—			(9,083	)
Other income, net		—			1,243			—			1,243

Total other expense, net		(7,886	)		(10,572	)		—			(18,458	)

(Loss) income before income taxes		(7,886	)		36,291			—			28,405
INCOME TAX EXPENSE		—			9,185			—			9,185
EQUITY IN EARNINGS OF SUBSIDIARIES, net of tax		26,896			—			(26,896	)		—

INCOME FROM CONTINUING OPERATIONS		19,010			27,106			(26,896	)		19,220
DISCONTINUED OPERATIONS, net of tax		—			(210	)		—			(210	)

NET INCOME	$	19,010		$	26,896		$	(26,896	)	$	19,010

Condensed Consolidating Statement of Income

For the Three Months Ended September 30, 2006

(In thousands)


	Parent Company			Guarantor Subsidiaries			Eliminations			Condensed Consolidated
REVENUES	$	—		$	1,500,714		$	—		$	1,500,714
COST OF SALES		—			1,273,325			—			1,273,325

GROSS PROFIT		—			227,389			—			227,389
OPERATING EXPENSES:
Selling, general and administrative		—			172,568			—			172,568
Depreciation and amortization		—			5,056			—			5,056

Income from operations		—			49,765			—			49,765
OTHER INCOME (EXPENSE):
Floor plan interest expense		—			(10,123	)		—			(10,123	)
Other interest expense		(10,156	)		(1,069	)		—			(11,225	)
Other (expense) income, net		(914	)		1,922			—			1,008

Total other expense, net		(11,070	)		(9,270	)		—			(20,340	)

(Loss) income before income taxes		(11,070	)		40,495			—			29,425
INCOME TAX EXPENSE		—			11,035			—			11,035
EQUITY IN EARNINGS OF SUBSIDIARIES, net of tax		28,249			—			(28,249	)		—

INCOME FROM CONTINUING OPERATIONS		17,179			29,460			(28,249	)		18,390
DISCONTINUED OPERATIONS, net of tax		—			(1,211	)		—			(1,211	)

NET INCOME	$	17,179		$	28,249		$	(28,249	)	$	17,179

Condensed Consolidating Statement of Income

For the Nine Months Ended September 30, 2007

(In thousands)


	Parent Company			Guarantor Subsidiaries			Eliminations			Condensed Consolidated
REVENUES	$	—		$	4,413,137		$	—		$	4,413,137
COST OF SALES		—			3,728,347			—			3,728,347

GROSS PROFIT		—			684,790			—			684,790
OPERATING EXPENSES:
Selling, general and administrative		—			526,078			—			526,078
Depreciation and amortization		—			16,061			—			16,061

Income from operations		—			142,651			—			142,651
OTHER INCOME (EXPENSE):
Floor plan interest expense		—			(33,024	)		—			(33,024	)
Other interest expense		(25,909	)		(4,128	)		—			(30,037	)
Other (expense) income, net		(18,523	)		4,938			—			(13,585	)

Total other expense, net		(44,432	)		(32,214	)		—			(76,646	)

(Loss) income before income taxes		(44,432	)		110,437			—			66,005
INCOME TAX EXPENSE		—			23,210			—			23,210
EQUITY IN EARNINGS OF SUBSIDIARIES, net of tax		84,434			—			(84,434	)		—

INCOME FROM CONTINUING OPERATIONS		40,002			87,227			(84,434	)		42,795
DISCONTINUED OPERATIONS, net of tax		—			(2,793	)		—			(2,793	)

NET INCOME	$	40,002		$	84,434		$	(84,434	)	$	40,002

Condensed Consolidating Statement of Income

For the Nine Months Ended September 30, 2006

(In thousands)


	Parent Company			Guarantor Subsidiaries			Eliminations			Condensed Consolidated
REVENUES	$	—		$	4,365,280		$	—		$	4,365,280
COST OF SALES		—			3,702,539			—			3,702,539

GROSS PROFIT		—			662,741			—			662,741
OPERATING EXPENSES:
Selling, general and administrative		—			505,317			—			505,317
Depreciation and amortization		—			15,104			—			15,104

Income from operations		—			142,320			—			142,320
OTHER INCOME (EXPENSE):
Floor plan interest expense		—			(30,067	)		—			(30,067	)
Other interest expense		(30,202	)		(3,066	)		—			(33,268	)
Other (expense) income, net		(914	)		4,494			—			3,580

Total other expense, net		(31,116	)		(28,639	)		—			(59,755	)

(Loss) income before income taxes		(31,116	)		113,681			—			82,565
INCOME TAX EXPENSE		—			30,962			—			30,962
EQUITY IN EARNINGS OF SUBSIDIARIES, net of tax		79,852			—			(79,852	)		—

INCOME FROM CONTINUING OPERATIONS		48,736			82,719			(79,852	)		51,603
DISCONTINUED OPERATIONS, net of tax		—			(2,867	)		—			(2,867	)

NET INCOME	$	48,736		$	79,852		$	(79,852	)	$	48,736

Condensed Consolidating Statement of Cash Flows

For the Nine Months Ended September 30, 2007

(In thousands)


	Parent Company			Guarantor Subsidiaries			Condensed Consolidated
CASH FLOW FROM OPERATING ACTIVITIES	$	(29,885	)	$	69,494		$	39,609
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures		—			(41,003	)		(41,003	)
Other investing activities		—			(54,078	)		(54,078	)

Net cash used in investing activities		—			(95,081	)		(95,081	)
CASH FLOW FROM FINANCING ACTIVITIES
Floor plan borrowings — non-manufacturer affiliated		—			2,081,959			2,081,959
Floor plan repayments — non-manufacturer affiliated		—			(2,031,492	)		(2,031,492	)
Proceeds from borrowings		265,000			—			265,000
Payment of dividends		—			(20,558	)		(20,558	)
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	)		(1,366	)		(267,264	)
Contributions/(distributions)		38,732			(38,732	)		—
Other financing activities		—			(55,781	)		(55,781	)

Net cash provided by financing activities		29,885			(62,789	)		(32,904	)

Net decrease in cash and cash equivalents		—			(88,376	)		(88,376	)
Cash and cash equivalents, beginning of period		—			129,170			129,170

Cash and cash equivalents, end of period	$	—		$	40,794		$	40,794

Condensed Consolidating Statement of Cash Flows

For the Nine Months Ended September 30, 2006

(In thousands)


	Parent Company			Guarantor Subsidiaries			Condensed Consolidated
CASH FLOW FROM OPERATING ACTIVITIES	$	(28,627	)	$	216,988		$	188,361
CASH FLOW FROM INVESTING ACTIVITIES		—
Capital expenditures		—			(34,685	)		(34,685	)
Other investing activities		—			45,777			45,777

Net cash provided by investing activities		—			11,092			11,092
CASH FLOW FROM FINANCING ACTIVITIES
Floor plan borrowings — non-manufacturer affiliated		—			1,838,366			1,838,366
Floor plan repayments — non-manufacturer affiliated		—			(1,946,033	)		(1,946,033	)
Proceeds from borrowings		—			987			987
Payment of dividends		—			(6,649	)		(6,649	)
Repayments of borrowings		(14,850	)		(2,674	)		(17,524	)
Contributions/(distributions)		43,477			(43,477	)		—
Other financing activities		—			7,681			7,681

Net cash provided by (used in) financing activities		28,627			(151,799	)		(123,172	)

Net increase in cash and cash equivalents		—			76,281			76,281
Cash and cash equivalents, beginning of period		—			57,194			57,194

Cash and cash equivalents, end of period	$	—		$	133,475		$	133,475

15.

SUBSEQUENT EVENTS

In October 2007, our board of directors declared a $0.225 per share cash dividend payable on November 19, 2007 to shareholders of record as of November 5, 2007.

In October 2007, we acquired one luxury franchise (one dealership location) for an aggregate purchase price of $45.6 million including $11.8 million of real estate. We financed the acquisition with $30.1 million of cash, $7.2 million of floor plan borrowings from our Committed Credit Facility and $8.3 million of mortgage borrowings. The acquisition of this franchise in Princeton, NJ increases our metropolitan markets to 22 and number of states to 11.

In October 2007, we signed an agreement with Toyota Motor Company, which allows our Toyota and Lexus subsidiaries to be guarantors of amounts borrowed under our Committed Credit Facility.

In connection with our current stock repurchase program, we have repurchased 0.4 million shares of our common stock for $7.5 million subsequent to September 30, 2007.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

New York, New York

We have reviewed the accompanying condensed consolidated balance sheet of Asbury Automotive Group, Inc. and subsidiaries (the “Company”) as of September 30, 2007, and the related condensed consolidated statements of income for the three-month and nine-month periods ended September 30, 2007 and 2006, and of cash flows for the nine-month periods ended September 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, shareholders’ 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

November 5, 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 122 franchises (92 dealership locations) in 21 metropolitan markets within 10 states as of September 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, Fort Pierce and Orlando, and our Courtesy dealerships operating in Tampa), (ii) West (comprising our McDavid dealerships operating throughout Texas, our California dealerships operating in Los Angeles, Sacramento and Fresno and our North Point dealerships operating in Little Rock, Arkansas), (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). 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, interest rates, availability of consumer credit, fuel prices and manufacturer incentives. We generally believe that any future negative trends in new vehicle sales will be mitigated by (i) our advantageous brand mix (ii) the stability of our fixed operations, (iii) used vehicle sales and (iv) our variable cost structure. 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 as the mid-line domestic manufacturers reduce production in the U.S.

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. The seasonal variations in our operations are usually 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 September 30, 2007, Compared to the Three Months Ended September 30, 2006


	For the Three Months Ended September 30,
	2007			% of Gross Profit		2006			% of Gross Profit		Increase (Decrease)			% Change
	(In thousands except per share data)
REVENUES:
New vehicle	$	893,977				$	901,783				$	(7,806	)	(1	)%
Used vehicle		378,140					388,095					(9,955	)	(3	)%
Parts, service and collision repair		176,707					170,246					6,461		4	%
Finance and insurance, net		42,210					40,590					1,620		4	%

Total revenues		1,491,034					1,500,714					(9,680	)	(1	)%

COST OF SALES		1,262,719					1,273,325					(10,606	)	(1	)%

GROSS PROFIT		228,315		100	%		227,389		100	%		926		—	%
OPERATING EXPENSES:
Selling, general and administrative		176,067		77	%		172,568		76	%		3,499		2	%
Depreciation and amortization		5,385		2	%		5,056		2	%		329		7	%

Income from operations		46,863		21	%		49,765		22	%		(2,902	)	(6	)%
OTHER INCOME (EXPENSE):
Floor plan interest expense		(10,618	)	(5	)%		(10,123	)	(5	)%		495		5	%
Other interest expense		(9,083	)	(4	)%		(11,225	)	(5	)%		(2,142	)	(19	)%
Interest income		900		—	%		1,523		1	%		(623	)	(41	)%
Loss on extinguishment of long-term debt		—		—	%		(914	)	—	%		(914	)	(100	)%
Other income, net		343		—	%		399		—	%		(56	)	(14	)%

Total other expense, net		(18,458	)	(8	)%		(20,340	)	(9	)%		(1,882	)	(9	)%

Income before income taxes		28,405		12	%		29,425		13	%		(1,020	)	(4	)%
INCOME TAX EXPENSE		9,185		4	%		11,035		5	%		(1,850	)	(17	)%

INCOME FROM CONTINUING OPERATIONS		19,220					18,390					830		5	%
DISCONTINUED OPERATIONS, net of tax		(210	)	8	%		(1,211	)	8	%		(1,001	)	(83	)%

NET INCOME	$	19,010		8	%	$	17,179		8	%	$	1,831		11	%

EARNINGS PER COMMON SHARE (DILUTED):
Continuing operations	$	0.58				$	0.54				$	0.04		7	%
Discontinued operations	$	(0.01	)			$	(0.03	)				0.02		67	%

Net income	$	0.57				$	0.51				$	0.06		12	%

Net income increased $1.8 million (11%) during the 2007 period as a result of a $0.8 million increase in income from continuing operations and a $1.0 million decrease in net losses from discontinued operations. During the 2006 period, we recognized $0.8 million (net of tax) of costs associated with a secondary offering of our common stock, for which we received no proceeds and a $0.6 million (net of tax) loss on the extinguishment of long-term debt (collectively “the adjusting items”). Excluding the adjusting items, adjusted income from continuing operations decreased $0.6 million (3%).

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. Despite a challenging retail sales and overall weak economic environment, our fixed operations and F&I businesses contributed incremental gross profit of $5.3 million (6%) and $1.6 million (4%), respectively. However, the results of our fixed operations and F&I businesses were offset by (i) the performance of our used vehicle business, which generated $6.4 million (18%) lower gross profit during a softening economic environment, and (ii) a 160 basis point increase in our adjusted selling, general and administrative expense (“SG&A”) as a percentage of gross profit. Included in the 160 basis point increase of adjusted SG&A as a percentage of gross profit was 80 basis points of increased outside service expense associated with (i) abandoned acquisition and real estate projects and (ii) legal settlement costs. In addition, our other interest expense decreased $2.1 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 $9.7 million (1%) decrease in total revenues was a result of a $10.0 million (3%) decrease in used vehicle revenue, and a $7.8 million (1%) decrease in new vehicle revenue, partially offset by a $6.5 million (4%) increase in fixed operations revenue and a $1.6 million (4%) increase in F&I revenue. The decrease in used vehicle revenue includes a $16.6 million (6%) decrease in retail revenue, partially offset by a $6.7 million (8%) increase in wholesale revenue. The decrease in new vehicle revenue includes a $22.1 million (27%) decrease in heavy truck revenue, a $5.7 million (1%) decrease in new light vehicle retail revenue partially offset by $16.2 million of new vehicle revenue from acquisitions, and a $3.9 million (10%) increase in fleet revenue.

The $0.9 million increase in total gross profit was primarily a result of a $5.3 million (6%) increase in fixed operations gross profit, and a $1.6 million (4%) increase in F&I gross profit, partially offset by a $6.4 million (18%) decrease in used vehicle gross profit. Our total gross profit margin increased 10 basis points to 15.3% from 15.2%.

New Vehicles —


	For the Three Months Ended September 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	$	272,636	33	%	$	264,410	31	%	$	8,226		3	%
Mid-line import		362,072	42	%		363,454	42	%		(1,382	)	—
Mid-line domestic		131,515	16	%		142,962	17	%		(11,447	)	(8	)%
Value		9,777	1	%		10,914	1	%		(1,137	)	(10	)%

Total light vehicle retail revenue- same store		776,000				781,740				(5,740	)	(1	)%
Heavy trucks		58,923	7	%		81,034	9	%		(22,111	)	(27	)%

Total new retail revenue—same store(1)		834,923	100	%		862,774	100	%		(27,851	)	(3	)%
New retail revenue—acquisitions		16,166				—

Total new retail revenues		851,089				862,774				(11,685	)	(1	)%

Fleet revenue—same store(1)		42,888				39,009				3,879		10	%
Fleet revenue—acquisitions		—				—

Total fleet revenue		42,888				39,009				3,879		10	%

New vehicle revenue, as reported	$	893,977			$	901,783			$	(7,806	)	(1	)%

New retail units:
New retail units—same store(1)
Luxury		5,885	22	%		5,993	22	%		(108	)	(2	)%
Mid-line import		14,957	56	%		15,028	54	%		(71	)	—	%
Mid-line domestic		4,407	16	%		4,956	18	%		(549	)	(11	)%
Value		501	2	%		520	2	%		(19	)	(4	)%

Total light vehicle retail units- same store		25,750				26,497				(747	)	(3	)%
Heavy trucks		964	4	%		1,288	5	%		(324	)	(25	)%

Total new retail units—same store(1)		26,714	100	%		27,785	100	%		(1,071	)	(4	)%
New retail units—acquisitions		512				—

Retail units—actual		27,226				27,785				(559	)	(2	)%
Fleet units—actual		2,135				1,891				244		13	%

Total new units—actual		29,361				29,676				(315	)	(1	)%

Total light vehicle units — same store(1)(2)		27,885				28,388				(503	)	(2	)%
Total light vehicle units — acquisitions (2)		512				—

Total light vehicle units — actual(2)		28,397				28,388				9		—	%

New revenue PVR—same store(1)	$	31,254			$	31,052			$	202		1	%

New revenue PVR—actual	$	31,260			$	31,052			$	208		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 September 30,										Increase (Decrease)			% Change
	2007					2006					Increase (Decrease)			% Change
	(In thousands, except PVR data)
Gross Profit:
New retail gross profit—same store(1)
Luxury	$	21,370		34	%	$	21,318		34	%	$	52		—
Mid-line import		28,183		45	%		26,692		43	%		1,491		6	%
Mid-line domestic		9,650		16	%		10,589		17	%		(939	)	(9	)%
Value		584		1	%		822		1	%		(238	)	(29	)%

Total light vehicle retail gross profit-same store		59,787					59,421					366		1	%
Heavy trucks		2,236		4	%		3,123		5	%		(887	)	(28	)%

Total new retail gross profit—same store(1)		62,023		100	%		62,544		100	%		(521	)	(1	)%
New retail gross profit—acquisitions		1,291					—		—

Total retail gross profit		63,314					62,544					770		1	%

Fleet gross profit—same store(1)		686					1,008					(322	)	(32	)%
Fleet gross profit—acquisitions		—					—

Total fleet gross profit		686					1,008					(322	)	(32	)%

New vehicle gross profit, as reported	$	64,000				$	63,552				$	448		1	%

New gross profit PVR—same store(1)	$	2,322				$	2,251				$	71		3	%

New gross profit PVR—actual	$	2,325				$	2,251				$	74		3	%

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	%

(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 $7.8 million (1%) decrease in new vehicle revenues was primarily a result of a $22.1 million (27%) decrease in heavy truck revenue. The decrease in heavy truck revenue was as a result of lower unit sales and revenue PVR from (i) changes in emission laws in January 2007, which pulled forward demand for heavy trucks into 2006 and (ii) a weaker freight hauling market during 2007. Same store light vehicle revenue decreased $5.7 million (1%) during a challenging retail sales and overall weak economic environment, primarily as a result of an 11% decrease in unit sales from mid-line domestic brands as these brands continue to lose market share to mid-line import and luxury brands. Same store light vehicle revenue from our luxury brands increased $8.2 million (3%) with an increase in revenue PVR as a result of a shift towards higher priced luxury models as luxury brands continue to offer attractive products to customers that appeared to be less affected by the weak economic environment. Our total same store light vehicle unit sales decreased 2%, outperforming the overall U.S. light vehicle industry, which decreased 5%. 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 $0.4 million (1%) increase in new vehicle gross profit was due to a $1.5 million (6%) increase in same store gross profit from the sale of mid-line import vehicles despite flat unit sales as a result of our ability to capitalize on manufacturer incentive programs. The increase in same store gross profit from our mid-line import brands was partially offset by a $0.9 million (28%) decrease in gross profit from the sale of heavy trucks and a $0.9 million (9%) decrease in gross profit from the sale of mid-line domestic vehicles as these brands experienced an 11% decline in retail unit sales. Our retail gross margin improved 20 basis points in part due to a shift in the mix of unit sales away from heavy trucks, which have a lower gross margin than light vehicles.

We expect our light vehicle unit sales, revenue and gross profit to outperform industry-wide U.S. light retail unit sales 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 over the remainder of 2007 and into the first quarter of 2008 as compared to the prior year period as a result of the adverse impact of the new emission laws on heavy truck demand and a weaker freight hauling market.

Used Vehicles —


	For the Three Months Ended September 30,						Increase (Decrease)			% Change
Used Vehicle —	2007			2006			Increase (Decrease)			% Change
	(In thousands, except unit and PVR data)
Revenue:
Retail revenues—same store(1)	$	278,514		$	300,752		$	(22,238	)	(7	)%
Retail revenues—acquisitions		5,589			—

Total used retail revenues		284,103			300,752			(16,649	)	(6	)%

Wholesale revenues—same store(1)		91,010			87,343			3,667		4	%
Wholesale revenues—acquisitions		3,027			—

Total wholesale revenues		94,037			87,343			6,694		8	%

Used vehicle revenue, as reported	$	378,140		$	388,095		$	(9,955	)	(3	)%

Gross Profit:
Retail gross profit—same store(1)	$	30,660		$	36,332		$	(5,672	)	(16	)%
Retail gross profit—acquisitions		577			—

Total used retail gross profit		31,237			36,332			(5,095	)	(14	)%

Wholesale gross profit—same store(1)		(1,425	)		(178	)		(1,247	)	NM
Wholesale gross profit—acquisitions		(63	)		—

Total wholesale gross profit		(1,488	)		(178	)		(1,310	)	NM

Used vehicle gross profit, as reported	$	29,749		$	36,154		$	(6,405	)	(18	)%

Used retail units—same store(1)		15,172			16,941			(1,769	)	(10	)%
Used retail units—acquisitions		282			—

Used retail units—actual		15,454			16,941			(1,487	)	(9	)%

Used revenue PVR—same store(1)	$	18,357		$	17,753		$	604		3	%

Used revenue PVR—actual	$	18,384		$	17,753		$	631		4	%

Used gross profit PVR—same store(1)	$	2,021		$	2,145		$	(124	)	(6	)%

Used gross profit PVR—actual	$	2,021		$	2,145		$	(124	)	(6	)%

Used retail gross margin—same store(1)		11.0	%		12.1	%		(1.1	)%	(9	)%

Used retail gross margin—actual		11.0	%		12.1	%		(1.1	)%	(9	)%

(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 $10.0 million (3%) decrease in used vehicle revenues was a result of a $22.2 million (7%) decrease in same store retail revenue, partially offset by a $6.7 million (8%) increase in wholesale revenues. The $6.4 million (18%) decrease in used vehicle gross profit was a result of a $5.1 million (14%) decrease in retail gross profit and a $1.3 million decrease in wholesale gross profit. 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.

The very strong used vehicle wholesale environment during the second quarter 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 in the third quarter. In addition, we believe used vehicle customers were attracted to competitively priced mid-line import and mid-line domestic new vehicles as a result of manufacturer incentive programs. We are closely managing our sub-prime business and continue to believe there is opportunity to improve our used vehicle profitability by offering appropriately priced used vehicle inventory.

During the third quarter of 2007, we began a strategic initiative to lower our used vehicle inventory in preparation for the slower automotive retail selling season and realigned our inventory to serve the broader used vehicle market. Although we experienced increased wholesale losses during the 2007 period while lowering our used vehicle inventory, we believe we have improved the quality of our used vehicle inventory. We expect that this improvement in our used vehicle inventory should mitigate the impact of the slower automotive retail selling season on our used vehicle performance. We expect used vehicle revenues and gross profit to be flat to negative as compared to the prior year and into the first quarter of 2008.

Fixed Operations —


	For the Three Months Ended September 30,						Increase (Decrease)			% Change
Fixed Operations —	2007			2006			Increase (Decrease)			% Change
	(In thousands)
Revenue:
Revenues—same store(1)
Parts and service	$	155,298		$	153,031		$	2,267		1	%
Collision repair		18,177			17,215			962		6	%

Total revenue—same store(1)		173,475			170,246			3,229		2	%
Revenues—acquisitions		3,232			—

Parts, service and collision repair revenue, as reported	$	176,707		$	170,246		$	6,461		4	%

Gross Profit:
Gross profit—same store(1)
Parts and service	$	80,344		$	77,367		$	2,977		4	%
Collision repair		10,223			9,726			497		5	%

Total gross profit—same store(1)		90,567			87,093			3,474		4	%
Gross profit—acquisitions		1,789			—

Parts, service and collision repair gross profit, as reported	$	92,356		$	87,093		$	5,263		6	%

Parts and service gross margin—same store(1)		51.7	%		50.6	%		1.1	%	2	%

Collision repair gross margin—same store(1)		56.2	%		56.5	%		(0.3	)%	(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.

The $6.5 million (4%) increase in fixed operations revenues and $5.3 million (6%) increase in fixed operations gross profit was primarily due to a 9% and 11% 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 $1.4 million (4%) as a result of improvements in the quality of vehicles produced in recent years, which has decreased our higher margin repair work. 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.

Finance and Insurance, net —


	For the Three Months Ended September 30,				Increase (Decrease)		% Change
Finance and Insurance, net—	2007		2006		Increase (Decrease)		% Change
	(In thousands, except PVR data)
Finance and insurance, net—same store(1)	$	41,543	$	40,590	$	953	2	%
Finance and insurance, net—acquisitions		667		—

Finance and insurance, net as reported	$	42,210	$	40,590	$	1,620	4	%

F&I PVR-same store (1)	$	992	$	908	$	84	9	%

F&I PVR-actual	$	989	$	908	$	81	9	%

(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 $1.6 million (4%) increase in F&I as a result of the $84 (9%) increase in same store F&I PVR. The increase in same store F&I PVR was attributable to (i) increased penetration rates on sales of our aftermarket products and services and (ii) lengthening in finance contract terms during 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 retrospective programs, (iii) improvement of the F&I operations at our lower-performing franchises and (iv) as we continue to refine and enhance the menu of products we offer our customers.

Selling, General and Administrative (SG&A) —


	For the Three Months Ended September 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	$	78,304	34.3	%	$	78,969		34.7	%	(0.4	)%	(1.2	)%
Sales compensation		25,094	11.0	%		26,520		11.7	%	(0.7	)%	(6.0	)%
Share-based compensation		1,192	0.5	%		962		0.4	%	0.1	%	25.0	%
Outside services		16,985	7.4	%		14,541		6.4	%	1.0	%	15.6	%
Advertising		13,437	5.9	%		12,794		5.6	%	0.3	%	5.4	%
Rent		14,648	6.4	%		13,675		6.0	%	0.4	%	6.7	%
Utilities		4,842	2.1	%		4,628		2.0	%	0.1	%	5.0	%
Insurance		4,602	2.0	%		3,684		1.6	%	0.4	%	25.0	%
Other		16,963	7.4	%		16,795		7.4	%	0.0	%	0.0	%

Selling, general and administrative	$	176,067	77.1	%	$	172,568		75.9	%	1.2	%	2	%
Adjustments to SG&A:
Secondary offering expenses		—				(846	)

Adjusted selling, general and administrative	$	176,067	77.1	%	$	171,722		75.5	%	1.6	%	2	%

Gross profit	$	228,315			$	227,389

SG&A expense as a percentage of gross profit was 77.1% during the 2007 period as compared to 75.9% during the 2006 period. SG&A expenses during the 2006 period include $0.8 million of costs associated with a secondary offering of our common stock from which we did not receive any proceeds. Excluding this item, adjusted SG&A expense as a percentage of gross profit increased 160 basis points to 77.1% during the 2007 period. Approximately $1.7 million (80 basis points) of the increase in adjusted SG&A expenses during the 2007 period was the result of (i) increased outside service expense associated with abandoned acquisition and real estate projects and (ii) legal settlement costs. The remaining 80 basis point deterioration in adjusted SG&A as a percentage of adjusted gross profit was primarily a result of the performance of our used vehicle business, which generated $6.4 million less used vehicle gross profit than the 2006 period. Our SG&A results,

however, were partially offset by several expense control initiatives, predominantly in the area of personnel and sales compensation. We anticipate that we will 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 expand our service capacity with financing through sale-leaseback transactions.

Depreciation and Amortization—

The $0.3 million (2%) 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 $0.5 million (5%) increase in floor plan interest expense was attributable to higher average inventory levels and higher interest rates, partially offset by increased equity in our vehicle inventory. We expect floor plan expense to fluctuate with changes in our inventory levels and LIBOR rates in the near future.

The $2.1 million (19%) 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 third quarter of 2006 we had $185.0 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 September 30, 2007 have repurchased $20.6 million of our 8% Notes. Our board of directors has authorized us to repurchase up to an additional $19.4 million of our Senior Subordinated Notes.

The $0.9 million loss on extinguishment of long-term debt during the 2006 period was a result of repurchase of $15.0 million of our 8% Notes. Included in the $0.9 million loss is a $0.7 million write-off of a portion of the unamortized value of our terminated fair value swap and a $0.4 million write-off of a portion of the unamortized debt issuance costs associated with the 8% Notes, offset by a $0.2 million market discount on the 8% Notes.

Income Tax Expense—

The $1.9 million (17%) decrease in income tax expense was a result of (i) a $1.0 million (4%) decrease in our income before income taxes, (ii) $0.6 million related to the reversal of a deferred tax asset valuation allowance related to a tax benefit we now expect to realize, (iii) $0.6 million related to tax credits recognized for employing individuals in the Katrina affected areas and (iv) 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 September 30,
	2007			2006
	(In thousands)
Franchises		1			6

Net operating losses from sold or closed franchises, net of tax	$	(200	)	$	(765	)
Net operating losses from franchises held for sale, net of tax		(10	)		—
Net divestiture (expense) income including net gain (loss) on sale of franchises, net of tax		—			(446	)

Discontinued operations, net of tax	$	(210	)	$	(1,211	)

During the three months ended September 30, 2007, we did not sell any franchises and placed one mid-line import franchise into discontinued operations. The $0.2 million loss from discontinued operations for the 2007 period primarily includes rent expense on idle or subleased properties associated with sold franchises and legal expenses associated with sold franchises or ancillary businesses. The $1.2 million loss from discontinued operations for the 2006 period is a result of (i) $0.4 million, net of tax, of divestiture losses primarily associated with the sale of an ancillary business during the third quarter of 2006 and (ii) $0.8 million, net of tax, of net operating losses of franchises sold in 2007 and the last three months of 2006.

We continuously evaluate the financial and operating results of our dealerships, specifically the 10% contributing the lowest level of return on invested capital, and we will look to divest dealerships that do not meet our expectations.

Nine Months Ended September 30, 2007, Compared to the Nine Months Ended September 30, 2006


	For the Nine Months Ended September 30,										Increase (Decrease)			% Change
	2007			% of Gross Profit		2006			% of Gross Profit		Increase (Decrease)			% Change
	(In thousands, except per share data)
REVENUES:
New vehicle	$	2,609,709				$	2,618,109				$	(8,400	)	—	%
Used vehicle		1,151,790					1,119,249					32,541		3	%
Parts, service and collision repair		527,168					509,476					17,692		4	%
Finance and insurance, net		124,470					118,446					6,024		5	%

Total revenues		4,413,137					4,365,280					47,857		1	%

COST OF SALES		3,728,347					3,702,539					25,808		1	%

GROSS PROFIT		684,790		100	%		662,741		100	%		22,049		3	%
OPERATING EXPENSES:
Selling, general and administrative		526,078		77	%		505,317		76	%		20,761		4	%
Depreciation and amortization		16,061		2	%		15,104		2	%		957		6	%

Income from operations		142,651		22	%		142,320		22	%		331		—	%
OTHER INCOME (EXPENSE):
Floor plan interest expense		(33,024	)	(5	)%		(30,067	)	(5	)%		2,957		10	%
Other interest expense		(30,037	)	(4	)%		(33,268	)	(5	)%		(3,231	)	(10	)%
Interest income		3,906		1	%		3,271		1	%		635		19	%
Loss on extinguishment of long-term debt		(18,523	)	(3	)%		(914	)	—	%		17,609		NM
Other income, net		1,032		—	%		1,223		—	%		(191	)	(16	)%

Total other expense, net		(76,646	)	(11	)%		(59,755	)	(9	)%		16,891		28	%

Income before income taxes		66,005		10	%		82,565		13	%		(16,560	)	(20	)%
INCOME TAX EXPENSE		23,210		3	%		30,962		5	%		(7,752	)	(25	)%

INCOME FROM CONTINUING OPERATIONS		42,795					51,603					(8,808	)	(17	)%
DISCONTINUED OPERATIONS, net of tax		(2,793	)	—	%		(2,867	)	—	%		(74	)	(3	)%

NET INCOME	$	40,002		6	%	$	48,736		7	%	$	(8,734	)	(18	)%

EARNINGS PER COMMON SHARE (DILUTED):
Continuing Operations	$	1.27				$	1.52				$	(0.25	)	(16	)%
Discontinued Operations		(0.08	)				(0.08	)				—		—	%

Net income	$	1.19				$	1.44				$	(0.25	)	(17	)%

Net income and income from continuing operations decreased $8.7 million (18%) and $8.8 million (17%), respectively, during the 2007 period. Included in net income and income from continuing operations during the 2007 period 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, (ii) $1.9 million of retirement benefits expense associated with the retirement of our former CEO and (iii) $0.3 million of costs (net of tax) associated with a secondary offering of our common stock from which we did not receive any proceeds. During the 2006 period we recognized (i) a $2.1 million (net of tax) gain from the sale of our interest in a pool of extended service contracts, (ii) $0.8 million of costs (net of tax) associated with a secondary offering of our common stock from which we did not receive any proceeds, (iii) $0.6 million of costs associated with the repurchase of $15.0 million of our 8% Notes, and (iv) $1.0 million (net of tax) of costs associated with abandoned strategic projects (the adjusting items for the 2007 and

2006 period being collectively referred to “the adjusting items”). Excluding the adjusting items mentioned above, adjusted income from continuing operations increased $4.6 million (9%).

The $47.9 million (1%) increase in total revenues was a result of a $32.5 million (3%) increase in used vehicle revenue, a $17.7 million (3%) increase in fixed operations revenue and $6.0 million (5%) increase in F&I revenue, partially offset by an $8.4 million decrease in new vehicle revenue. The increase in used vehicle revenue was primarily attributable to a $21.9 million (3%) increase in used retail revenue. The decrease in new vehicle revenue was primarily attributable to a $73.3 million (30%) decrease in heavy truck revenue.

Total gross profit increased $22.0 million (3%) and total adjusted gross profit increased $25.4 million (4%). The increase in total adjusted gross profit was a result of a $16.3 million (6%) increase in fixed operations gross profit and a $6.0 million (5%) increase in F&I gross profit, both of which contributed to an overall 40 basis point increase in our total adjusted gross profit margin.


	For the Nine Months Ended September 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	$	819,431	34	%	$	775,199	31	%	$	44,232		6	%
Mid-line import		1,044,378	43	%		1,047,199	42	%		(2,821	)	—	%
Mid-line domestic		371,945	15	%		396,547	16	%		(24,602	)	(6	)%
Value		31,511	1	%		32,341	1	%		(803	)	(3	)%

Total light vehicle retail revenues—same store(1)		2,267,265				2,251,286				15,979		1	%
Heavy trucks		174,623	7	%		247,915	10	%		(73,292	)	(30	)%

Total new retail revenue—same store(1)		2,441,888	100	%		2,499,201	100	%		(57,313	)	(2	)%
New retail revenues—acquisitions		28,240				—

Total new retail revenues		2,470,128				2,499,201				(29,073	)	(1	)%

Fleet revenues—same store(1)		139,581				118,908				20,673		17	%
Fleet revenues—acquisitions		—				—

Total fleet revenues		139,581				118,908				20,673		17	%

New vehicle revenues, as reported	$	2,609,709			$	2,618,109			$	(8,400	)	—	%

New retail units:
New retail units—same store(1)
Luxury		17,403	22	%		17,303	22	%		100		1	%
Mid-line import		43,032	55	%		42,899	54	%		133		—	%
Mid-line domestic		12,800	17	%		13,896	17	%		(1,096	)	(8	)%
Value		1,595	2	%		1,530	2	%		65		4	%

Total light vehicle retail units—same store(1)		74,830				75,628				(798	)	(1	)%
Heavy trucks		2,956	4	%		4,062	5	%		(1,106	)	(27	)%

Total new retail units—same store(1)		77,786	100	%		79,690	100	%		(1,904	)	(2	)%
New retail units—acquisitions		910				—

Retail units—actual		78,696				79,690				(994	)	(1	)%
Fleet units—actual		6,807				6,184				623		10	%

Total new units—actual		85,503				85,874				(371	)	—	%

Total light vehicle units – same store(1)(2)		81,637				81,812				(175	)	—	%
Total light vehicle units – acquisitions(2)		910				—

Total light vehicle units – actual(2)		82,547				81,812				735		1	%

New revenue PVR—same store(1)	$	31,392			$	31,362			$	31		—

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