UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended March 31, 2009

or

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

For the transition period from                      to                     

Penske Automotive Group, Inc.

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer   o		Smaller reporting company o

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

As of May 1, 2009, there were 91,530,960 shares of voting common stock outstanding.

 

 

TABLE OF CONTENTS

		Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of March 31, 2009 and December 31, 2008			3
Consolidated Condensed Statements of Income for the three months ended March 31, 2009 and 2008			4
Consolidated Condensed Statements of Cash Flows for the three months ended March 31, 2009 and 2008			5
Consolidated Condensed Statement of Equity for the three months ended March 31, 2009			6
Notes to Consolidated Condensed Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3. Quantitative & Qualitative Disclosures About Market Risk			37
Item 4. Controls and Procedures			38
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			38
Item 6. Exhibits			38
Exhibit 10.1
Exhibit 12
Exhibit 31.1
Exhibit 31.2
Exhibit 32

PENSKE AUTOMOTIVE GROUP, INC.

		March 31,				December 31,
		2009				2008
		(Unaudited)
		(In thousands, except
		per share amounts)
ASSETS
Cash and cash equivalents		$	11,458			$	20,109
Accounts receivable, net of allowance for doubtful accounts of $1,925 and $2,075			312,039				294,567
Inventories			1,360,239				1,593,267
Other current assets			91,193				88,378
Assets held for sale			8,411				9,739
Total current assets			1,783,340				2,006,060
Property and equipment, net			666,602				662,493
Goodwill			774,349				777,811
Franchise value			196,332				196,838
Equity method investments			285,338				296,487
Other long-term assets			19,154				22,460
Total assets		$	3,725,115			$	3,962,149
LIABILITIES AND EQUITY
Floor plan notes payable		$	847,711			$	968,873
Floor plan notes payable — non-trade			389,491				511,357
Accounts payable			201,798				178,811
Accrued expenses			199,085				196,274
Current portion of long-term debt			11,132				11,305
Liabilities held for sale			10,592				13,492
Total current liabilities			1,659,809				1,880,112
Long-term debt			1,008,093				1,052,060
Other long-term liabilities			228,743				221,556
Total liabilities			2,896,645				3,153,728
Commitments and contingent liabilities
Equity
Penske Automotive Group stockholders’ equity:
Preferred Stock, $0.0001 par value; 100 shares authorized; none issued and outstanding			—				—
Common Stock, $0.0001 par value, 240,000 shares authorized; 91,531 shares issued and outstanding at March 31, 2009; 91,431 shares issued and outstanding at December 31, 2008			9				9
Non-voting Common Stock, $0.0001 par value, 7,125 shares authorized; none issued and outstanding			—				—
Class C Common Stock, $0.0001 par value, 20,000 shares authorized; none issued and outstanding			—				—
Additional paid-in-capital			732,577				731,037
Retained earnings			136,027				119,745
Accumulated other comprehensive loss			(43,619	)			(45,990	)
Total Penske Automotive Group stockholders’ equity			824,994				804,801
Non-controlling interest			3,476				3,620
Total equity			828,470				808,421
Total liabilities and equity		$	3,725,115			$	3,962,149

See Notes to Consolidated Condensed Financial Statements

PENSKE AUTOMOTIVE GROUP, INC.

		Three Months Ended March 31,
		2009				2008
		(Unaudited)
		(In thousands, except per share amounts)
Revenue:
New vehicle		$	972,127			$	1,625,950
Used vehicle			614,630				794,063
Finance and insurance, net			48,409				73,877
Service and parts			327,554				359,142
Distribution			80,113				63,770
Fleet and wholesale			115,043				258,535
Total revenues			2,157,876				3,175,337
Cost of sales:
New vehicle			900,750				1,489,357
Used vehicle			558,650				728,295
Service and parts			150,453				157,885
Distribution			68,314				53,617
Fleet and wholesale			111,418				257,696
Total cost of sales			1,789,585				2,686,850
Gross profit			368,291				488,487
Selling, general and administrative expenses			313,002				394,072
Depreciation and amortization			12,872				13,291
Operating income			42,417				81,124
Floor plan interest expense			(9,515	)			(17,026	)
Other interest expense			(14,494	)			(11,911	)
Debt discount amortization			(3,638	)			(3,496	)
Equity in earnings of affiliates			714				1,392
Gain on debt repurchase			10,429				—
Income from continuing operations before income taxes			25,913				50,083
Income taxes			(9,717	)			(17,809	)
Income from continuing operations			16,196				32,274
Income from discontinued operations, net of tax			6				57
Net income			16,202				32,331
Less: (Loss) income attributable to non-controlling interests			(80	)			435
Net income attributable to Penske Automotive Group common stockholders		$	16,282			$	31,896
Basic earnings per share attributable to Penske Automotive Group common stockholders:
Continuing operations		$	0.18			$	0.33
Discontinued operations			0.00				0.00
Net income		$	0.18			$	0.34
Shares used in determining basic earnings per share			91,481				95,137
Diluted earnings per share attributable to Penske Automotive Group common stockholders:
Continuing operations		$	0.18			$	0.33
Discontinued operations			0.00				0.00
Net income		$	0.18			$	0.33
Shares used in determining diluted earnings per share			91,501				95,252
Amounts attributable to Penske Automotive Group common stockholders:
Income from continuing operations		$	16,196			$	32,274
Less: (Loss) income attributable to non-controlling interests			(80	)			435
Income from continuing operations, net of tax			16,276				31,839
Income from discontinued operations, net of tax			6				57
Net income		$	16,282			$	31,896
Cash dividends per share		$	—			$	0.09

See Notes to Consolidated Condensed Financial Statements

PENSKE AUTOMOTIVE GROUP, INC.

		Three Months Ended March 31,
		2009				2008
		(Unaudited)
		(In thousands)
Operating Activities:
Net income		$	16,202			$	32,331
Adjustments to reconcile net income to net cash from continuing operating activities:
Depreciation and amortization			12,872				13,291
Debt discount amortization			3,638				3,496
Undistributed earnings of equity method investments			(714	)			(1,392	)
Income from discontinued operations, net of tax			(6	)			(57	)
Deferred income taxes			12,191				3,163
Gain on debt repurchase			(10,733	)			—
Changes in operating assets and liabilities:
Accounts receivable			(17,402	)			(52,660	)
Inventories			250,341				(131,566	)
Floor plan notes payable			(121,202	)			123,767
Accounts payable and accrued expenses			23,090				55,179
Other			7,588				(9,159	)
Net cash from continuing operating activities			175,865				36,393
Investing Activities:
Purchase of equipment and improvements			(27,529	)			(47,154	)
Proceeds from sale-leaseback transactions			—				3,676
Dealership acquisitions net, including repayment of sellers’ floor plan notes payable of $5,784 and $0, respectively			(11,476	)			—
Other			12,679				(1,500	)
Net cash from continuing investing activities			(26,326	)			(44,978	)
Financing Activities:
Proceeds from borrowings under U.S. credit agreement revolving credit line			147,000				138,200
Repayments under U.S. credit agreement revolving credit line			(77,000	)			(138,200	)
Repayments under U.S. credit agreement term loan			(10,000	)			—
Repurchase 3.5% senior subordinated convertible notes			(51,425	)			—
Net repayments of other long-term debt			(43,333	)			(226	)
Net (repayments) borrowings of floor plan notes payable — non-trade			(121,866	)			24,632
Dividends			—				(8,550	)
Net cash from continuing financing activities			(156,624	)			15,856
Discontinued operations:
Net cash from discontinued operating activities			1,911				(9,380	)
Net cash from discontinued investing activities			(761	)			(816	)
Net cash from discontinued financing activities			(2,716	)			9,962
Net cash from discontinued operations			(1,566	)			(234	)
Net change in cash and cash equivalents			(8,651	)			7,037
Cash and cash equivalents, beginning of period			20,109				14,798
Cash and cash equivalents, end of period		$	11,458			$	21,835
Supplemental disclosures of cash flow information:
Cash paid for:
Interest		$	16,416			$	20,060
Income taxes			533				660

See Notes to Consolidated Condensed Financial Statements

PENSKE AUTOMOTIVE GROUP, INC.

																		Accumulated				Total
		Common Stock								Additional								Other				Stockholders’ Equity
		Issued								Paid-in				Retained				Comprehensive				Attributable to Penske				Non-controlling				Total
		Shares				Amount				Capital				Earnings				Loss				Automotive Group				Interest				Equity
		(Unaudited)
		(Dollars in thousands)
Balance, January 1, 2009			91,430,781			$	9			$	731,037			$	119,745			$	(45,990	)		$	804,801			$	3,620			$	808,421
Equity compensation			100,179				—				1,540				—				—				1,540				—				1,540
Distributions to non-controlling interests			—				—				—				—				—				—				(64	)			(64	)
Foreign currency translation			—				—				—				—				2,208				2,208				—				2,208
Other			—				—				—				—				163				163				—				163
Net income			—				—				—				16,282				—				16,282				(80	)			16,202
Balance, March 31, 2009			91,530,960			$	9			$	732,577			$	136,027			$	(43,619	)		$	824,994			$	3,476			$	828,470

See Notes to Consolidated Condensed Financial Statements

PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)

1. Interim Financial Statements

Basis of Presentation

The following unaudited consolidated condensed financial statements of Penske Automotive Group, Inc. (the “Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included in the Company’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the SEC rules and regulations. The information presented as of March 31, 2009 and December 31, 2008 and for the three month periods ended March 31, 2009 and 2008 is unaudited, but includes all adjustments which the management of the Company believes to be necessary for the fair presentation of results for the periods presented. The consolidated condensed financial statements for prior periods have been revised for entities which have been treated as discontinued operations through March 31, 2009 and the results for interim periods are not necessarily indicative of results to be expected for the year. These consolidated condensed financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2008, which are included as part of the Company’s Annual Report on Form 10-K.

Results for the quarter ended March 31, 2009 include a $10,429 pre-tax gain relating to the repurchase of $68,740 aggregate principal amount of 3.5% senior subordinated convertible notes.

In June 2008, the Company acquired a 9% limited partnership interest in Penske Truck Leasing Co., L.P. (“PTL”), a leading global transportation services provider, from subsidiaries of General Electric Capital Corporation (collectively, “GE Capital”) in exchange for $219,000. PTL operates and maintains more than 200,000 vehicles and serves customers in North America, South America, Europe and Asia. Product lines include full-service leasing, contract maintenance, commercial and consumer truck rental and logistics services, including transportation and distribution center management and supply chain management.

Discontinued Operations

The Company accounts for dispositions as discontinued operations when it is evident that the operations and cash flows of the business being disposed of will be eliminated from on-going operations and that the Company will not have any significant continuing involvement in its operations.

In evaluating whether the cash flows of a dealership will be eliminated from ongoing operations in its retail segment, the Company considers whether it is likely that customers will migrate to similar franchises that it owns in the same geographic market. The Company’s consideration includes an evaluation of the brands sold at other dealerships it operates in the market and their proximity to the disposed dealership. When the Company disposes of franchises, it typically does not have continuing brand representation in that market. If the franchise being disposed of is located in a complex of Company owned dealerships, the Company does not treat the disposition as a discontinued operation if the Company believes that the cash flows previously generated by the disposed franchise will be replaced by expanded operations of the remaining franchises. The results of operations during the three months ended March 31, 2009 and 2008 and the net assets as of March 31, 2009 and December 31, 2008 of dealerships accounted for as discontinued operations were immaterial.

Estimates

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

Accounting Changes

The Company adopted FASB Staff Position (“FSP”) APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” effective January 1, 2009. Pursuant to FSP APB 14-1, the Company was required to account separately for the debt and equity components of its 3.5% Senior Subordinated Convertible Notes. The value ascribed to the debt component was determined using a fair value methodology, with the residual representing the equity component. The equity component was recorded as an increase in equity, with the debt discount being amortized as additional interest expense over the expected life of the instrument. The Company has applied the provisions of this standard retrospectively to all periods presented herein in accordance with SFAS No. 154, “Accounting Changes and Error Corrections.” As a result of this accounting change, the Company’s retained earnings as of January 1, 2008 decreased by $13,884 from $587,566 as originally reported to $573,682.

PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

The Company adopted FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” effective January 1, 2009, which requires that unvested share-based payment awards with non-forfeitable rights to dividends or dividend equivalents be considered participating securities that must be included in the computation of EPS pursuant to the two-class method. The Company has applied the provisions of this standard retrospectively to all periods presented herein in accordance with SFAS No. 154. As a result, basic weighted average shares outstanding increased by 666 shares and 802 shares for the three months ended March 31, 2009 and 2008, respectively. Diluted shares outstanding increased by 587 and 595 shares for the three months ended March 31, 2009 and 2008, respectively.

The following tables summarize the effect of the accounting changes resulting from the adoption of FSP APB 14-1 and FSP EITF 03-6-1, which required retrospective application, on our consolidated condensed financial statements.

		2009												2008
		As												As
		calculated												calculated
		under												under
		previous				Effect of								previous				Effect of
		accounting				changes				As reported				accounting				changes				As reported
Statement of Income for the three months ended March 31:
Other interest expense			14,606				(112	)			14,494				12,023				(112	)			11,911
Debt discount amortization			—				3,638				3,638				—				3,496				3,496
Income tax expense			11,123				(1,406	)			9,717				19,159				(1,350	)			17,809
Income from continuing operations attributable to Penske Automotive Group common stockholders			18,396				(2,120	)			16,276				33,873				(2,034	)			31,839
Net income attributable to Penske Automotive Group common stockholders			18,402				(2,120	)			16,282				33,930				(2,034	)			31,896
Income from continuing operations attributable to Penske Automotive Group common stockholders per basic common share			0.20				(0.02	)			0.18				0.36				(0.03	)			0.33
Net income attributable to Penske Automotive Group common stockholders per basic common share			0.20				(0.02	)			0.18				0.36				(0.02	)			0.34
Shares used in determining basic earnings per share			90,815				666				91,481				94,335				802				95,137
Income from continuing operations attributable to Penske Automotive Group common stockholders per diluted common share			0.20				(0.02	)			0.18				0.36				(0.03	)			0.33
Net income attributable to Penske Automotive Group common stockholders per diluted common share			0.20				(0.02	)			0.18				0.36				(0.02	)			0.33
Shares used in determining diluted earnings per share			90,914				587				91,501				94,657				595				95,252

		2009												2008
		As												As
		calculated												calculated
		under												under
		previous				Effect of				As				previous				Effect of				As
		accounting				changes				reported				accounting				changes				reported
Balance Sheet as of March 31, 2009 and December 31, 2008:
Other current assets			91,560				(367	)			91,193				88,828				(450	)			88,378
Other long-term assets			19,521				(367	)			19,154				23,022				(562	)			22,460
Long-term debt			1,034,418				(26,325	)			1,008,093				1,087,932				(35,872	)			1,052,060
Other long-term liabilities			218,701				10,042				228,743				207,771				13,785				221,556
Additional paid-in-capital			689,484				43,093				732,577				687,944				43,093				731,037
Retained earnings			163,571				(27,544	)			136,027				141,763				(22,018	)			119,745

PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

		2009												2008
		As												As
		calculated												calculated
		under												under
		previous				Effect of								previous				Effect of
		accounting				changes				As reported				accounting				changes				As reported
Statement of Cash Flows for the three months ended March 31:
Net income			18,322				(2,120	)			16,202				34,365				(2,034	)			32,331
Debt discount amortization			—				3,638				3,638				—				3,496				3,496
Deferred income taxes			13,597				(1,406	)			12,191				4,513				(1,350	)			3,163
Other			7,700				(112	)			7,588				(9,047	)			(112	)			(9,159	)
Net cash from continuing operating activities			175,865				—				175,865				36,393				—				36,393

The Company adopted SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements an Amendment of ARB No. 51,” pursuant to which the Company reclassified its minority interest liabilities to equity relating to the Company’s non-wholly owned consolidated subsidiaries and amended the presentation of income attributable to non-controlling interests on the income statement. Prior period statements have been reclassified to conform to the current year presentation. There were no changes in the Company’s ownership interest of non-wholly owned consolidated subsidiaries during the period that would impact equity attributable to Penske Automotive Group.

The Company adopted FSP FAS 157-2, which deferred the provisions of SFAS No. 157, “Fair Value Measurements,” for non-financial assets and liabilities until January 1, 2009. The adoption of FAS FAS 157-2 did not have a material effect on the Company’s operating results, financial position or cash flows during the period.

The Company adopted FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets,” which amends the factors that should be considered in developing renewal or extension assumptions used in connection with the determination of the useful life of a recognized intangible asset under SFAS No. 142,“Goodwill and Other Intangible Assets” on January 1, 2009. The guidance in FSP 142-3 for determining the useful life of a recognized intangible asset is being applied to intangible assets acquired after adoption, with related disclosure requirements being applied to all intangible assets recognized as of, and subsequent to, adoption. The adoption of FSP FAS 142-3 did not have a material effect on the Company’s operating results, financial position or cash flows during the period.

The Company adopted SFAS No. 141(R) “Business Combinations,” including FSP FAS 141(R)-1, an amendment to SFAS No. 141(R), effective January 1, 2009. SFAS No. 141(R) requires almost all assets acquired and liabilities assumed in business combinations to be recorded at fair value as of the acquisition date, liabilities related to contingent consideration to be remeasured at fair value in each subsequent reporting period, acquisition related costs to be expensed as incurred, and restructuring costs expected, but not obligated to occur as a result of the business combination, to be expensed subsequent to the acquisition. FSP FAS 141(R)-1 requires that pre-acquisition contingencies be recognized at fair value if the acquisition-date fair value of that asset or liability can be determined during the measurement period. The provisions of these pronouncements are applicable on a prospective basis to all business combinations subsequent to the effective date. The adoption of these pronouncements did not have a material impact to the Company’s operating results, financial position or cash flows during the period.

2. Inventories

Inventories consisted of the following:

		March 31,				December 31,
		2009				2008
New vehicles		$	1,013,168			$	1,251,727
Used vehicles			265,268				259,474
Parts, accessories and other			81,803				82,066
Total inventories		$	1,360,239			$	1,593,267

PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

The Company receives non-refundable credits from certain vehicle manufacturers that reduce cost of sales when the vehicles are sold. Such credits amounted to $4,215 and $6,297 during the three months ended March 31, 2009 and 2008, respectively.

3. Business Combinations

The Company’s acquired five retail automotive franchises during the three months ended March 31, 2009. The Company made no acquisitions during the three months ended March 31, 2008. The fair value of the assets acquired and liabilities assumed may be subject to adjustment pending completion of final valuation. A summary of the aggregate consideration paid and the aggregate amounts of the assets acquired and liabilities assumed during the three months ended March 31, 2009 follows:

		March 31,
		2009
Inventory		$	5,815
Other current assets			129
Property and equipment			4,367
Goodwill			1,657
Franchise value			749
Current liabilities			(1,241	)
Cash used in dealership acquisitions		$	11,476

4. Intangible Assets

Following is a summary of the changes in the carrying amount of goodwill and franchise value for the three months ended March 31, 2009:

						Franchise
		Goodwill				Value
Balances — January 1, 2009		$	777,811			$	196,838
Additions			1,657				749
Deletions			—				—
Foreign currency translation			(5,119	)			(1,255	)
Balance — March 31, 2009		$	774,349			$	196,332

During the fourth quarter 2008, the Company determined that the carrying value of the goodwill in four of its five reporting units exceeded fair value, and recorded an estimated pre-tax non-cash impairment charge of $606,349. The Company finalized the goodwill impairment assessment during the first quarter of 2009, and determined that no adjustment to the estimate recorded in 2008 was required.

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

The Company finances substantially all of its new and a portion of its used vehicle inventories under revolving floor plan arrangements with various lenders. In the U.S., the floor plan arrangements are due on demand; however, the Company has not historically been required to repay floor plan advances prior to the sale of the vehicles that have been financed. The Company typically makes monthly interest payments on the amount financed. Outside the U.S., substantially all of the floor plan arrangements are payable on demand or have an original maturity of 90 days or less, and the Company is generally required to repay floor plan advances at the earlier of the sale of the vehicles that have been financed or the stated maturity. All of the floor plan agreements grant a security interest in substantially all of the assets of the Company’s dealership subsidiaries, and in the U.S. are guaranteed by the Company’s parent. Interest rates under the floor plan arrangements are variable and increase or decrease based on changes in the prime rate, defined LIBOR or Euro Interbank Offer Rate. The Company classifies floor plan notes payable to a party other than the manufacturer of a particular new vehicle, and all floor plan notes payable relating to pre-owned vehicles, as floor plan notes payable — non-trade on its consolidated condensed balance sheets, and classifies related cash flows as a financing activity on its consolidated condensed statements of cash flows.

PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

6. Earnings Per Share

Basic earnings per share is computed using net income attributable to Penske Automotive Group common stockholders and weighted average shares of voting common stock outstanding. Diluted earnings per share is computed using net income attributable to Penske Automotive Group common stockholders and the weighted average shares of voting common stock outstanding, adjusted for the dilutive effect of stock options. A reconciliation of the number of shares used in the calculation of basic and diluted earnings per share for the three months ended March 31, 2009 and 2008 follows:

		Three Months Ended March 31,
		2009				2008
Weighted average number of common shares outstanding			91,481				95,137
Effect of stock options			20				115
Weighted average number of common shares outstanding, including effect of dilutive securities			91,501				95,252

As of March 31, 2009, 227 stock options have been excluded from the calculation of diluted earnings per share because the effect of such securities was anti-dilutive. There were no anti-dilutive stock options as of March 31, 2008. In addition, the Company has senior subordinated convertible notes outstanding which, under certain circumstances discussed in Note 7, may be converted to voting common stock. As of March 31, 2009 and 2008, no shares related to the senior subordinated convertible notes were included in the calculation of diluted earnings per share because the effect of such securities was not dilutive.

7. Long-Term Debt

Long-term debt consisted of the following:

		March 31,				December 31,
		2009				2008
U.S. credit agreement — revolving credit line		$	70,000			$	—
U.S. credit agreement — term loan			199,000				209,000
U.K. credit agreement — revolving credit line			22,955				59,831
U.K. credit agreement — term loan			22,786				25,752
U.K. credit agreement — seasonally adjusted overdraft line of credit			4,651				9,502
7.75% senior subordinated notes due 2016			375,000				375,000
3.5% senior subordinated convertible notes due 2026, net of debt discount			279,935				339,128
Mortgage facilities			42,022				42,243
Other			2,876				2,909
Total long-term debt			1,019,225				1,063,365
Less: current portion			(11,132	)			(11,305	)
Net long-term debt		$	1,008,093			$	1,052,060

U.S. Credit Agreement

The Company is party to a $479,000 credit agreement with DCFS USA LLC and Toyota Motor Credit Corporation, as amended (the “U.S. Credit Agreement”), which provides for up to $250,000 in revolving loans for working capital, acquisitions, capital expenditures, investments and for other general corporate purposes, a non-amortizing term loan originally funded for $219,000, and for an additional $10,000 of availability for letters of credit, through September 30, 2011. The revolving loans bear interest at defined LIBOR plus 1.75%, subject to an incremental 0.50% for uncollateralized borrowings in excess of a defined borrowing base. The term loan, which bears interest at defined LIBOR plus 2.50%, may be prepaid at any time, but then may not be re-borrowed. The Company repaid $10,000 of this term loan in the first quarter of 2009.

The U.S. Credit Agreement is fully and unconditionally guaranteed on a joint and several basis by the Company’s domestic subsidiaries and contains a number of significant covenants that, among other things, restrict the Company’s ability to dispose of assets, incur additional indebtedness, repay other indebtedness, pay dividends, create liens on assets, make investments or acquisitions and engage in mergers or consolidations. The Company is also required to comply with specified financial and other tests and ratios, each as defined in the U.S. Credit Agreement, including: a ratio of current assets to current liabilities, a fixed charge coverage ratio, a ratio of debt to stockholders’ equity and a ratio of debt to EBITDA. A breach of these requirements would give rise to certain remedies under the agreement, the most severe of which is the termination of the agreement and acceleration of the amounts owed. As of March 31, 2009, the Company was in compliance with all covenants under the U.S. Credit Agreement.

PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

The U.S. Credit Agreement also contains typical events of default, including change of control, non-payment of obligations and cross-defaults to the Company’s other material indebtedness. Substantially all of the Company’s domestic assets are subject to security interests granted to lenders under the U.S. Credit Agreement. As of March 31, 2009, $70,000 of revolving loans, $199,000 of term loans and $500 of letters of credit were outstanding under this facility.

U.K. Credit Agreement

The Company’s subsidiaries in the U.K. (the “U.K. Subsidiaries”) are party to an agreement with the Royal Bank of Scotland plc, as agent for National Westminster Bank plc, as amended, which provides for a funded term loan, a revolving credit agreement and a seasonally adjusted overdraft line of credit (collectively, the “U.K. Credit Agreement”) to be used to finance acquisitions, working capital, and general corporate purposes. The U.K. Credit Agreement provides for (1) up to £80,000 in revolving loans through August 31, 2011, which bears interest between a defined LIBOR plus 1.0% and defined LIBOR plus 1.6%, (2) a term loan originally funded for £30,000 which bears interest between 6.29% and 6.89% and is payable ratably in quarterly intervals until fully repaid on June 30, 2011, and (3) a seasonally adjusted overdraft line of credit for up to £20,000 that bears interest at the Bank of England Base Rate plus 1.75%, and matures on August 31, 2011.

The U.K. Credit Agreement is fully and unconditionally guaranteed on a joint and several basis by the U.K. Subsidiaries, and contains a number of significant covenants that, among other things, restrict the ability of the U.K. Subsidiaries to pay dividends, dispose of assets, incur additional indebtedness, repay other indebtedness, create liens on assets, make investments or acquisitions and engage in mergers or consolidations. In addition, the U.K. Subsidiaries are required to comply with specified ratios and tests, each as defined in the U.K. Credit Agreement, including: a ratio of earnings before interest and taxes plus rental payments to interest plus rental payments (as defined), a measurement of maximum capital expenditures, and a debt to EBITDA ratio (as defined). A breach of these requirements would give rise to certain remedies under the agreement, the most severe of which is the termination of the agreement and acceleration of the amounts owed. As of March 31, 2009, the U.K. subsidiaries were in compliance with all covenants under the U.K. Credit Agreement.

The U.K. Credit Agreement also contains typical events of default, including change of control and non-payment of obligations and cross-defaults to other material indebtedness of the U.K. Subsidiaries. Substantially all of the U.K. Subsidiaries’ assets are subject to security interests granted to lenders under the U.K. Credit Agreement. As of March 31, 2009, outstanding loans under the U.K. Credit Agreement amounted to £35,124 ($50,392), including £15,882 ($22,786) under the term loan.

7.75% Senior Subordinated Notes

On December 7, 2006, the Company issued $375,000 aggregate principal amount of 7.75% senior subordinated notes (the “7.75% Notes”) due 2016. The 7.75% Notes are unsecured senior subordinated notes and are subordinate to all existing and future senior debt, including debt under the Company’s credit agreements, mortgages and floor plan indebtedness. The 7.75% Notes are guaranteed by substantially all of the Company’s wholly-owned domestic subsidiaries on an unsecured senior subordinated basis. Those guarantees are full and unconditional and joint and several. The Company can redeem all or some of the 7.75% Notes at its option beginning in December 2011 at specified redemption prices, or prior to December 2011 at 100% of the principal amount of the notes plus an applicable “make-whole” premium, as defined. In addition, the Company may redeem up to 40% of the 7.75% Notes at specified redemption prices using the proceeds of certain equity offerings before December 15, 2009. Upon certain sales of assets or specific kinds of changes of control, the Company is required to make an offer to purchase the 7.75% Notes. The 7.75% Notes also contain customary negative covenants and events of default. As of March 31, 2009, the Company was in compliance with all negative covenants and there were no events of default.

Senior Subordinated Convertible Notes

On January 31, 2006, the Company issued $375,000 aggregate principal amount of 3.50% senior subordinated convertible notes due 2026 (the “Convertible Notes”). The Convertible Notes mature on April 1, 2026, unless earlier converted, redeemed or purchased by the Company, as discussed below. The Convertible Notes are unsecured senior subordinated obligations and are subordinate to all future and existing debt under the Company’s credit agreements, mortgages and floor plan indebtedness. The Convertible Notes are guaranteed on an unsecured senior subordinated basis by substantially all of the Company’s wholly-owned domestic subsidiaries. Those guarantees are full and unconditional and joint and several. The Convertible Notes also contain customary negative covenants and events of default. As of March 31, 2009, the Company was in compliance with all negative covenants and there were no events of default.

Holders of the convertible notes may convert them based on a conversion rate of 42.7796 shares of common stock per $1,000 principal amount of the Convertible Notes (which is equal to a conversion price of approximately $23.38 per share), subject to adjustment, only under the following circumstances: (1) in any quarterly period, if the closing price of the common stock for twenty of the last thirty trading days in the prior quarter exceeds $28.43 (subject to adjustment), (2) for specified periods, if the trading price of the Convertible Notes falls below specific thresholds, (3) if the Convertible Notes are called for redemption, (4) if specified distributions to holders of common stock are made or specified corporate transactions occur, (5) if a fundamental change (as defined) occurs, or (6) during the ten trading days prior to, but excluding, the maturity date.

PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Upon conversion of the Convertible Notes, for each $1,000 principal amount of the Convertible Notes, a holder will receive an amount in cash, in lieu of shares of the Company’s common stock, equal to the lesser of (i) $1,000 or (ii) the conversion value, determined in the manner set forth in the related indenture covering the Convertible Notes, of the number of shares of common stock equal to the conversion rate. If the conversion value exceeds $1,000, the Company will also deliver, at its election, cash, common stock or a combination of cash and common stock with respect to the remaining value deliverable upon conversion.

In the event of a change of control on or before April 6, 2011, the Company will, in certain circumstances, pay a make-whole premium by increasing the conversion rate used in that conversion. In addition, the Company will pay additional cash interest, commencing with six-month periods beginning on April 1, 2011, if the average trading price of a Convertible Note for certain periods in the prior six-month period equals 120% or more of the principal amount of the Convertible Notes. On or after April 6, 2011, the Company may redeem the Convertible Notes, in whole at any time or in part from time to time, for cash at a redemption price of 100% of the principal amount of the Convertible Notes to be redeemed, plus any accrued and unpaid interest to the applicable redemption date.

Holders of the Convertible Notes may require the Company to purchase all or a portion of their Convertible Notes for cash on each of April 1, 2011, April 1, 2016 or April 1, 2021 at a purchase price equal to 100% of the principal amount of the Convertible Notes to be purchased, plus accrued and unpaid interest, if any, to the applicable purchase date.

In March 2009, the Company repurchased $68,740 principal amount of its outstanding Convertible Notes, which had a book value of $62,831 net of debt discount, for $51,425. The Company recorded a $10,429 pre-tax gain in connection with the repurchase. In addition to the write-off of $5,909 of unamortized debt discount, the Company also wrote off $672 of unamortized deferred financing costs and incurred $305 of transaction costs. No cash was allocated to the reacquisition of the equity component because the cash paid was less than the fair value of the liability component prior to extinguishment.

The liability and equity components related to the Convertible Notes consist of the following:

		March 31,				December 31,
		2009				2008
Carrying amount of the equity component		$	43,093			$	43,093
Principal amount of the liability component		$	306,260			$	375,000
Unamortized debt discount			26,325				35,872
Net carrying amount of the liability component		$	279,935			$	339,128

The unamortized debt discount will be amortized as additional interest expense through April 1, 2011, the date the Company expects to be required to redeem the Convertible Notes. Approximately $12,765 of the unamortized debt discount will be recognized as an increase of interest expense over the next twelve months. The effective interest rate on the liability component is based on an annual rate of 8.25%.

Mortgage Facilities

The Company is party to a $42,400 mortgage facility with respect to certain of our dealership properties that matures on October 1, 2015. The facility bears interest at a defined rate, requires monthly principal and interest payments, and includes the option to extend the term for successive periods of five years up to a maximum term of twenty-five years. In the event the Company exercises its options to extend the term, the interest rate will be renegotiated at each renewal period. The mortgage facility also contains typical events of default, including non-payment of obligations, cross-defaults to the Company’s other material indebtedness, certain change of control events, and the loss or sale of certain franchises operated at the property. Substantially all of the buildings, improvements, fixtures and personal property of the properties under the mortgage facility are subject to security interests granted to the lender. As of March 31, 2009, $42,022 was outstanding under this facility.

8. Interest Rate Swaps

The Company uses interest rate swaps to manage interest rate risk associated with the Company’s variable rate floor plan debt. The Company is party to interest rate swap agreements through January 7, 2011 pursuant to which the LIBOR portion of $300,000 of the Company’s floating rate floor plan debt was fixed at 3.67%. We may terminate these arrangements at any time subject to the settlement of the then current fair value of the swap arrangements. The swaps are designated as cash flow hedges of future interest payments of LIBOR based U.S. floor plan borrowings. The effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings when the hedged transaction affects earnings. As of March 31, 2009, the Company used Level 2 inputs as described under SFAS No. 157 to estimate the fair value of these contracts to be a liability of $15,100, of which $9,026 and $6,074 are recorded in accrued expenses and other long-term liabilities, respectively, in the Condensed Consolidated Balance Sheet. During the three months ended March 31, 2009, the Company recognized a net gain of $167 related to the interest rate swaps in accumulated other comprehensive loss and reclassified $2,413 of existing derivative losses from accumulated other comprehensive loss into floor plan interest expense in the Condensed Consolidated Statement of Income. The Company expects approximately $9,026 associated with the swaps to be recognized as an increase of interest expense over the next twelve months as the interest payments become due. During the three months ended March 31, 2009, the swaps increased the weighted average interest rate on the Company’s floor plan borrowings by approximately 0.2%.

PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

The Company was party to an interest rate swap agreement which expired in January 2008, pursuant to which a notional $200,000 of its U.S. floating rate debt was exchanged for fixed rate debt. The swap was designated as a cash flow hedge of future interest payments of the LIBOR based U.S. floor plan borrowings.

9. Commitments and Contingent Liabilities

The Company is involved in litigation which may relate to claims brought by governmental authorities, issues with customers and employment related matters, including class action claims and purported class action claims. As of March 31, 2009, the Company is not party to any legal proceedings, including class action lawsuits, that individually or in the aggregate, are reasonably expected to have a material adverse effect on the Company’s results of operations, financial condition or cash flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material adverse effect on the Company’s results of operations, financial condition or cash flows. See MD&A -“Forward Looking Statements”.

The Company has historically structured its operations so as to minimize ownership of real property. As a result, the Company leases or subleases substantially all of its dealership properties and other facilities. These leases are generally for a period between five and 20 years, and are typically structured to include renewal options at the Company’s election. Pursuant to the leases for some of the Company’s larger facilities, the Company is required to comply with specified financial ratios, including a “rent coverage” ratio and a debt to EBITDA ratio, each as defined. For these leases, non-compliance with the ratios may require the Company to post collateral in the form of a letter of credit. A breach of the other lease covenants give rise to certain remedies by the landlord, the most severe of which include the termination of the applicable lease and acceleration of the total rent payments due under the lease, as defined.

Since 1999, the Company has sold a number of dealerships to third parties. The Company has at times, as a condition to the sale, remained liable for the lease payments relating to the properties on which those franchises operate, although the buyer of the franchise is required to pay the rent and maintain the property. In the event the buyer does not perform as expected (due to the buyer’s financial condition or other factors such as the market performance of the underlying vehicle manufacturer), the Company may not be able to recover amounts owed to it by the buyer. In this event, the Company could be required to fulfill these obligations, which could materially adversely affect its results of operations, financial condition or cash flows.

10. Equity

Comprehensive income

Other comprehensive income includes foreign currency translation gains and losses, as well as changes relating to certain other immaterial items, including: certain defined benefit plans in the U.K., changes in the fair value of interest rate swap agreements, and valuation adjustments relating to certain available for sale securities, each of which has been excluded from net income and reflected in equity. Total comprehensive income is summarized as follows:

		Three Months Ended March 31,
		2009				2008
Attributable to Penske Automotive Group:
Net income		$	16,282			$	31,896
Other comprehensive income:
Foreign currency translation			2,208				4,060
Other			163				(5,272	)
Total attributable to Penske Automotive Group			18,653				30,684
Attributable to the non-controlling interest:
Net (loss) income			(80	)			435
Total comprehensive income		$	18,573			$	31,119

PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

11. Segment Information

The Company’s operations are organized by management into operating segments by line of business and geography. The Company has determined it has three reportable operating segments as defined in SFAS No. 131: (i) Retail, consisting of our automotive retail operations, (ii) Distribution, consisting of our distribution of the smart fortwo vehicle, parts and accessories in the U.S. and Puerto Rico and (iii) PAG Investments, consisting of our investments in non-automotive retail operations. The Retail reportable segment includes all automotive dealerships and all departments relevant to the operation of the dealerships. The individual dealership operations included in the Retail segment have been grouped into five geographic operating segments which are aggregated into one reportable segment as their operations (A) have similar economic characteristics (all are automotive dealerships having similar margins), (B) offer similar products and services (all sell new and used vehicles, service, parts and third-party finance and insurance products), (C) have similar target markets and customers (generally individuals) and (D) have similar distribution and marketing practices (all distribute products and services through dealership facilities that market to customers in similar fashions). In connection with the addition of PAG Investments, we have reclassified historical amounts to conform to our current segment presentation.

The following table summarizes revenues and income from continuing operations before certain non-recurring items and income taxes, which is the measure by which management allocates resources to its segments and which we refer to as adjusted segment income, for each of our reportable segments. Adjusted segment income excludes the item discussed below in order to enhance the comparability of segment income from period to period.

Three Months Ended March 31

										PAG				Intersegment
		Retail				Distribution				Investments				Elimination				Total
Revenues —
2009		$	2,077,763			$	88,631			$	—			$	(8,518	)		$	2,157,876
2008			3,111,567				75,480				—				(11,710	)			3,175,337
Adjusted segment income —
2009		$	8,737			$	6,305			$	605			$	(163	)		$	15,484
2008			46,478				3,947				245				(587	)			50,083

The following table reconciles total adjusted segment income to consolidated income from continuing operations before income taxes.

		Three Months Ended March 31,
		2009				2008
Adjusted segment income		$	15,484			$	50,083
Gain on debt repurchase			10,429				—
Income from continuing operations before income taxes		$	25,913			$	50,083

PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

12. Consolidating Condensed Financial Information

The following tables include consolidating condensed financial information as of March 31, 2009 and December 31, 2008 and for the three month periods ended March 31, 2009 and 2008 for Penske Automotive Group, Inc. (as the issuer of the Convertible Notes and the 7.75% Notes), guarantor subsidiaries and non-guarantor subsidiaries (primarily representing foreign entities). The condensed consolidating financial information includes certain allocations of balance sheet, income statement and cash flow items which are not necessarily indicative of the financial position, results of operations or cash flows of these entities on a stand-alone basis.

CONSOLIDATING CONDENSED BALANCE SHEET
March 31, 2009

										Penske
		Total								Automotive				Guarantor				Non-Guarantor
		Company				Eliminations				Group, Inc.				Subsidiaries				Subsidiaries
		(In thousands)
Cash and cash equivalents		$	11,458			$	—			$	—			$	5,946			$	5,512
Accounts receivable, net			312,039				(203,729	)			203,729				170,466				141,573
Inventories			1,360,239				—				—				883,637				476,602
Other current assets			91,193				—				722				56,097				34,374
Assets held for sale			8,411				—				—				252				8,159
Total current assets			1,783,340				(203,729	)			204,451				1,116,398				666,220
Property and equipment, net			666,602				—				6,503				416,407				243,692
Intangible assets			970,681				—				—				571,194				399,487
Equity method investments			285,338				—				219,307				—				66,031
Other long-term assets			19,154				(1,316,962	)			1,324,724				9,959				1,433
Total assets		$	3,725,115			$	(1,520,691	)		$	1,754,985			$	2,113,958			$	1,376,863
Floor plan notes payable		$	847,711			$	—			$	—			$	522,567			$	325,144
Floor plan notes payable — non-trade			389,491				—				—				225,375				164,116
Accounts payable			201,798				—				2,124				76,095				123,579
Accrued expenses			199,085				(203,729	)			456				106,139				296,219
Current portion of long-term debt			11,132				—				—				979				10,153
Liabilities held for sale			10,592				—				—				188				10,404
Total current liabilities			1,659,809				(203,729	)			2,580				931,343				929,615
Long-term debt			1,008,093				(113,152	)			923,935				43,871				153,439
Other long-term liabilities			228,743				—				—				209,418				19,325
Total liabilities			2,896,645				(316,881	)			926,515				1,184,632				1,102,379
Total equity			828,470				(1,203,810	)			828,470				929,326				274,484
Total liabilities and equity		$	3,725,115			$	(1,520,691	)		$	1,754,985			$	2,113,958			$	1,376,863

PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

CONSOLIDATING CONDENSED BALANCE SHEET
December 31, 2008

										Penske
		Total								Automotive				Guarantor				Non-Guarantor
		Company				Eliminations				Group, Inc.				Subsidiaries				Subsidiaries
		(In thousands)
Cash and cash equivalents		$	20,109			$	—			$	—			$	14,060			$	6,049
Accounts receivable, net			294,567				(196,465	)			196,465				182,582				111,985
Inventories			1,593,267				—				—				1,001,571				591,696
Other current assets			88,378				—				2,711				59,931				25,736
Assets held for sale			9,739				—				—				1,700				8,039
Total current assets			2,006,060				(196,465	)			199,176				1,259,844				743,505
Property and equipment, net			662,493				—				6,927				416,277				239,289
Intangible assets			974,649				—				—				542,128				432,521
Equity method investments			296,487				—				227,451				—				69,036
Other long-term assets			22,460				(1,293,431	)			1,300,546				12,169				3,176
Total assets		$	3,962,149			$	(1,489,896	)		$	1,734,100			$	2,230,418			$	1,487,527
Floor plan notes payable		$	968,873			$	—			$	—			$	659,532			$	309,341
Floor plan notes payable — non-trade			511,357				—				—				268,987				242,370
Accounts payable			178,811				—				2,183				80,000				96,628
Accrued expenses			196,274				(196,465	)			368				94,927				297,444
Current portion of long-term debt			11,305				—				—				978				10,327
Liabilities held for sale			13,492				—				—				1,460				12,032
Total current liabilities			1,880,112				(196,465	)			2,551				1,105,884				968,142
Long-term debt			1,052,060				(138,341	)			923,128				44,117				223,156
Other long-term liabilities			221,556				—				—				201,691				19,865
Total liabilities			3,153,728				(334,806	)			925,679				1,351,692				1,211,163
Total equity			808,421				(1,155,090	)			808,421				878,726				276,364
Total liabilities and equity		$	3,962,149			$	(1,489,896	)		$	1,734,100			$	2,230,418			$	1,487,527

PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

CONSOLIDATING CONDENSED STATEMENT OF INCOME
Three Months Ended March 31, 2009

										Penske
		Total								Automotive				Guarantor				Non-Guarantor
		Company				Eliminations				Group, Inc.				Subsidiaries				Subsidiaries
		(In thousands)
Revenues		$	2,157,876			$	—			$	—			$	1,277,186			$	880,690
Cost of sales			1,789,585				—				—				1,051,191				738,394
Gross profit			368,291				—				—				225,995				142,296
Selling, general, and administrative expenses			313,002				—				3,318				198,147				111,537
Depreciation and amortization			12,872				—				290				8,303				4,279
Operating income			42,417				—				(3,608	)			19,545				26,480
Floor plan interest expense			(9,515	)			—				—				(6,271	)			(3,244	)
Other interest expense			(14,494	)			—				(11,472	)			(31	)			(2,991	)
Debt discount amortization			(3,638	)			—				(3,638	)			—				—
Equity in income of affiliates			714				—				583				—				131
Gain on debt repurchase			10,429				—				10,429				—				—
Equity in earnings of subsidiaries			—				(33,699	)			33,699				—				—
Income from continuing operations before income taxes			25,913				(33,699	)			25,993				13,243				20,376
Income taxes			(9,717	)			12,598				(9,717	)			(6,974	)			(5,624	)
Income from continuing operations			16,196				(21,101	)			16,276				6,269				14,752
Income (loss) from discontinued operations, net of tax			6				(6	)			6				(129	)			135
Net income			16,202				(21,107	)			16,282				6,140				14,887
Less: Loss attributable to the non-controlling interest			(80	)			—				—				—				(80	)
Net income attributable to Penske Automotive Group common stockholders		$	16,282			$	(21,107	)		$	16,282			$	6,140			$	14,967