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

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

Commission file number 1-12297

Penske Automotive Group, Inc.

(Exact name of registrant as specified in its charter)

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

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

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

Indicate by check mark whether the registrant 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 þ 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 þ		Accelerated filer o		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 July 20, 2011, there were 92,062,166 shares of voting common stock outstanding.

 

 

TABLE OF CONTENTS

		Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of June 30, 2011 and December 31, 2010			3
Consolidated Condensed Statements of Income for the three and six months ended June 30, 2011 and 2010			4
Consolidated Condensed Statements of Cash Flows for the six months ended June 30, 2011 and 2010			5
Consolidated Condensed Statement of Equity for the six months ended June 30, 2011			6
Notes to Consolidated Condensed Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
Item 3. Quantitative & Qualitative Disclosures About Market Risk			43
Item 4. Controls and Procedures			43
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			44
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			44
Item 5. Other Information			44
Item 6. Exhibits			45
Exhibit 10.1
Exhibit 10.2
Exhibit 12
Exhibit 31.1
Exhibit 31.2
Exhibit 32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PENSKE AUTOMOTIVE GROUP, INC.

		June 30,				December 31,
		2011				2010
		(Unaudited)
		(In thousands, except
		per share amounts)
ASSETS
Cash and cash equivalents		$	3,346			$	17,868
Accounts receivable, net of allowance for doubtful accounts of $2,180 and $1,902			365,794				383,675
Inventories			1,456,409				1,453,546
Other current assets			91,772				68,457
Assets held for sale			56,826				110,485
Total current assets			1,974,147				2,034,031
Property and equipment, net			776,386				720,834
Goodwill			826,969				808,488
Franchise value			205,945				203,401
Equity method investments			288,028				288,406
Other long-term assets			15,404				14,672
Total assets		$	4,086,879			$	4,069,832
LIABILITIES AND EQUITY
Floor plan notes payable		$	854,224			$	922,295
Floor plan notes payable — non-trade			562,906				492,595
Accounts payable			215,923				253,424
Accrued expenses			232,431				202,644
Current portion of long-term debt			10,285				10,593
Liabilities held for sale			52,480				79,455
Total current liabilities			1,928,249				1,961,006
Long-term debt			706,522				769,285
Deferred tax liabilities			169,993				178,406
Other long-term liabilities			161,884				115,282
Total liabilities			2,966,648				3,023,979
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; 92,062 shares issued and outstanding at June 30, 2011; 92,100 shares issued and outstanding at December 31, 2010			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			731,397				738,728
Retained earnings			371,480				304,486
Accumulated other comprehensive income (loss)			13,372				(1,673	)
Total Penske Automotive Group stockholders’ equity			1,116,258				1,041,550
Non-controlling interest			3,973				4,303
Total equity			1,120,231				1,045,853
Total liabilities and equity		$	4,086,879			$	4,069,832

See Notes to Consolidated Condensed Financial Statements

PENSKE AUTOMOTIVE GROUP, INC.

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
		(Unaudited)
		(In thousands, except per share amounts)
Revenue:
New vehicle		$	1,422,267			$	1,314,904			$	2,823,614			$	2,516,795
Used vehicle			879,907				736,336				1,692,501				1,421,466
Finance and insurance, net			69,202				61,666				135,676				119,550
Service and parts			348,018				323,824				696,209				649,606
Fleet and wholesale vehicle			169,026				177,872				335,907				331,372
Total revenues			2,888,420				2,614,602				5,683,907				5,038,789
Cost of sales:
New vehicle			1,301,352				1,206,216				2,591,388				2,308,806
Used vehicle			807,425				677,382				1,554,114				1,306,620
Service and parts			149,040				138,558				299,014				281,113
Fleet and wholesale			166,963				175,640				330,674				325,392
Total cost of sales			2,424,780				2,197,796				4,775,190				4,221,931
Gross profit			463,640				416,806				908,717				816,858
Selling, general and administrative expenses			380,350				339,676				738,462				666,039
Depreciation			12,093				11,516				24,031				23,374
Operating income			71,197				65,614				146,224				127,445
Floor plan interest expense			(7,113	)			(7,983	)			(14,131	)			(16,125	)
Other interest expense			(10,575	)			(12,542	)			(21,976	)			(25,262	)
Debt discount amortization			—				(2,428	)			(1,718	)			(5,343	)
Equity in earnings of affiliates			7,882				4,784				7,904				4,355
Gain on debt repurchase			—				422				—				1,027
Income from continuing operations before income taxes			61,391				47,867				116,303				86,097
Income taxes			(20,996	)			(16,628	)			(37,784	)			(30,878	)
Income from continuing operations			40,395				31,239				78,519				55,219
Loss from discontinued operations, net of tax			(336	)			(1,555	)			(4,463	)			(5,203	)
Net income			40,059				29,684				74,056				50,016
Less: Income attributable to non-controlling interests			499				243				569				221
Net income attributable to Penske Automotive Group common stockholders		$	39,560			$	29,441			$	73,487			$	49,795
Basic earnings per share attributable to Penske Automotive Group common stockholders:
Continuing operations		$	0.43			$	0.34			$	0.84			$	0.60
Discontinued operations			(0.00	)			(0.02	)			(0.05	)			(0.06	)
Net income attributable to Penske Automotive Group common stockholders		$	0.43			$	0.32			$	0.79			$	0.54
Shares used in determining basic earnings per share			92,514				92,142				92,444				92,016
Diluted earnings per share attributable to Penske Automotive Group common stockholders:
Continuing operations		$	0.43			$	0.34			$	0.84			$	0.60
Discontinued operations			(0.00	)			(0.02	)			(0.05	)			(0.06	)
Net income attributable to Penske Automotive Group common stockholders		$	0.43			$	0.32			$	0.79			$	0.54
Shares used in determining diluted earnings per share			92,570				92,206				92,514				92,086
Amounts attributable to Penske Automotive Group common stockholders:
Income from continuing operations		$	40,395			$	31,239			$	78,519			$	55,219
Less: Income attributable to non-controlling interests			499				243				569				221
Income from continuing operations, net of tax			39,896				30,996				77,950				54,998
Loss from discontinued operations, net of tax			(336	)			(1,555	)			(4,463	)			(5,203	)
Net income attributable to Penske Automotive Group common stockholders		$	39,560			$	29,441			$	73,487			$	49,795
Cash dividends per share		$	0.07			$	—			$	0.07			$	—

See Notes to Consolidated Condensed Financial Statements

PENSKE AUTOMOTIVE GROUP, INC.

		Six Months Ended
		June 30,
		2011				2010
		(Unaudited)
		(In thousands)
Operating Activities:
Net income		$	74,056			$	50,016
Adjustments to reconcile net income to net cash from continuing operating activities:
Depreciation			24,031				23,374
Debt discount amortization			1,718				5,343
Earnings of equity method investments			(7,904	)			(4,355	)
Loss from discontinued operations, net of tax			4,463				5,203
Deferred income taxes			12,888				11,398
Gain on debt repurchase			—				(1,027	)
Changes in operating assets and liabilities:
Accounts receivable			20,290				(25,757	)
Inventories			5,060				(47,111	)
Floor plan notes payable			(68,071	)			20,438
Accounts payable and accrued expenses			(10,691	)			16,876
Other			(11,850	)			3,128
Net cash from continuing operating activities			43,990				57,526
Investing Activities:
Purchase of equipment and improvements			(51,784	)			(35,989	)
Dealership acquisitions, net, including repayment of sellers’ floor plan notes payable of $5,862 and $5,683, respectively			(14,011	)			(9,362	)
Other			2,865				—
Net cash from continuing investing activities			(62,930	)			(45,351	)
Financing Activities:
Proceeds from borrowings under U.S. credit agreement revolving credit line			156,000				320,600
Repayments under U.S. credit agreement revolving credit line			(156,000	)			(292,600	)
Repurchase of 3.5% senior subordinated convertible notes			(87,278	)			(113,604	)
Net borrowings (repayments) of other long-term debt			15,372				(9,497	)
Net borrowings of floor plan notes payable — non-trade			70,311				73,592
Proceeds from exercises of options, including excess tax benefit			2,698				211
Repurchases of common stock			(12,413	)			—
Dividends			(6,493	)			—
Net cash from continuing financing activities			(17,803	)			(21,298	)
Discontinued operations:
Net cash from discontinued operating activities			(20,466	)			5,627
Net cash from discontinued investing activities			47,915				4,796
Net cash from discontinued financing activities			(5,228	)			2,294
Net cash from discontinued operations			22,221				12,717
Net change in cash and cash equivalents			(14,522	)			3,594
Cash and cash equivalents, beginning of period			17,868				14,584
Cash and cash equivalents, end of period		$	3,346			$	18,178
Supplemental disclosures of cash flow information:
Cash paid for:
Interest		$	37,752			$	43,876
Income taxes			23,442				14,121
Seller financed/assumed debt			4,865				—

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				Income (Loss)				Automotive Group				Interest				Equity
		(Unaudited)
		(Dollars in thousands)
Balance, January 1, 2011			92,099,552			$	9			$	738,728			$	304,486			$	(1,673	)		$	1,041,550			$	4,303			$	1,045,853
Equity compensation			389,155				—				3,012				—				—				3,012				—				3,012
Repurchases of common stock			(618,209	)			—				(12,413	)			—				—				(12,413	)			—				(12,413	)
Dividends			—				—				—				(6,493	)			—				(6,493	)			—				(6,493	)
Exercise of options, including tax benefit of $856			191,668				—				2,698				—				—				2,698				—				2,698
Distributions to non-controlling interests			—				—				—				—				—				—				(1,059	)			(1,059	)
Purchase of subsidiary shares from non-controlling interest			—				—				(853	)			—				—				(853	)			3				(850	)
Sale of subsidiary shares to non-controlling interest			—				—				225				—				—				225				157				382
Foreign currency translation			—				—				—				—				19,734				19,734				—				19,734
Other			—				—				—				—				(4,689	)			(4,689	)			—				(4,689	)
Net income			—				—				—				73,487				—				73,487				569				74,056
Balance, June 30, 2011			92,062,166			$	9			$	731,397			$	371,480			$	13,372			$	1,116,258			$	3,973			$	1,120,231

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

Business Overview

Penske Automotive Group, Inc. (the “Company”) is the second largest automotive retailer headquartered in the U.S. as measured by total revenue. As of June 30, 2011, the Company operated 323 retail franchises, of which 168 franchises are located in the U.S. and 155 franchises are located outside of the U.S. The franchises outside the U.S. are located primarily in the U.K. Each of the Company’s dealerships offers a wide selection of new and used vehicles for sale. In addition to selling new and used vehicles, the Company generates higher-margin revenue at each of its dealerships through maintenance and repair services and the sale and placement of higher-margin products, such as third-party finance and insurance products, third-party extended service contracts and replacement and aftermarket automotive products. The Company also holds a 9.0% limited partnership interest in Penske Truck Leasing Co., L.P. (“PTL”), a leading global transportation services provider.

During the six months ended June 30, 2011, the Company was awarded four franchises, acquired three franchises, and disposed of seven franchises.

On June 30, 2011, smart USA Distributor, LLC, the Company’s wholly owned subsidiary, completed the sale of certain assets and the transfer of certain liabilities relating to the distribution rights, management, sales and marketing activities of smart USA to Daimler Vehicle Innovations LLC (“DVI”), a wholly owned subsidiary of Mercedes-Benz USA. The aggregate cash purchase price for the assets, which included certain vehicles, parts, signage and other items valued at fair market value, was $44,462, of which $688 is to be paid in the third quarter of 2011 subject to a final reconciliation of the assets delivered at closing. This amount also includes reimbursement of certain operating and wind-down costs of smart USA. As a result, smart USA has been treated as a discontinued operation for all periods presented in the accompanying financial statements.

Basis of Presentation

The unaudited consolidated condensed financial statements of 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 June 30, 2011 and December 31, 2010 and for the three and six month periods ended June 30, 2011 and 2010 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 June 30, 2011, 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, 2010, which are included as part of the Company’s Annual Report on Form 10-K.

Results for three and six months ended June 30, 2010 include a $422 and $1,027 pre-tax gain relating to the repurchase of $41,548 and $112,658 aggregate principal amount of the Company’s 3.5% senior subordinated convertible notes (“Convertible Notes”).

Discontinued Operations

The Company accounts for dispositions in its retail operations as discontinued operations when it is evident that the operations and cash flows of a franchise being disposed of will be eliminated from on-going operations and that the Company will not have any significant continuing involvement in its operations. As noted above, the Company has accounted for the disposition of its smart USA distribution operation as a discontinued operation.

In evaluating whether the cash flows of a dealership in its Retail reportable segment will be eliminated from ongoing operations, the Company considers whether it is likely that customers will migrate to similar franchises that it owns in the same geographic market. The Company’s consideration includes an evaluation of the brands sold at 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 it believes that the cash flows previously generated by the disposed franchise will be replaced by expanded operations of the remaining or replacement franchises.

PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

The distribution segment has been presented as a discontinued operation due to the transition of the distribution rights of the smart fortwo from smart USA to DVI that was completed in June 2011. The Company does not have any continuing role in the distribution of the smart fortwo, and as a result, no longer has any significant operations or cash flows relating to distribution activities.

Combined financial information regarding entities accounted for as discontinued operations follows:

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
Revenues		$	73,943			$	97,824			$	158,954			$	171,411
Pre-tax (loss) income			(1,153	)			(2,138	)			(9,061	)			(7,831	)
Gain (loss) on disposal			695				(235	)			1,765				(261	)

		June 30,				December 31,
		2011				2010
Inventories		$	28,515			$	70,680
Other assets			28,311				39,805
Total assets		$	56,826			$	110,485
Floor plan notes payable (including non-trade)		$	26,519			$	63,825
Other liabilities			25,961				15,630
Total liabilities		$	52,480			$	79,455

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.

Fair Value of Financial Instruments

Financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, debt, floor plan notes payable, and interest rate swaps used to hedge future cash flows. Other than our subordinated notes, the carrying amount of all significant financial instruments approximates fair value due either to length of maturity, the existence of variable interest rates that approximate prevailing market rates, or as a result of mark to market accounting. A summary of the fair value of the subordinated notes, based on quoted, level one market data, follows:

		June 30, 2011
		Carrying Value				Fair Value
7.75% senior subordinated notes due 2016		$	375,000			$	382,969
3.5% senior subordinated convertible notes due 2026			63,324				64,970

PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

2. Inventories

Inventories consisted of the following:

		June 30,				December 31,
		2011				2010
New vehicles		$	954,077			$	1,011,299
Used vehicles			426,751				367,350
Parts, accessories and other			75,581				74,897
Total inventories		$	1,456,409			$	1,453,546

The Company receives non-refundable credits from certain vehicle manufacturers that reduce cost of sales when the vehicles are sold. Such credits amounted to $16,267 and $12,108 during the six months ended June 30, 2011 and 2010, respectively.

3. Business Combinations

The Company acquired three franchises during both the six months ended June 30, 2011 and 2010 in its retail operations (not including the German operations noted below). The Company’s financial statements include the results of operations of the acquired dealerships from the date of acquisition. The fair value of the assets acquired and liabilities assumed have been recorded in the Company’s consolidated condensed financial statements, and may be subject to adjustment pending completion of the final valuation. A summary of the aggregate consideration paid and the aggregate amounts of the assets acquired and liabilities assumed for the six months ended June 30, 2011 and 2010 follows:

		June 30,
		2011				2010
Accounts receivable		$	953			$	—
Inventory			7,923				6,336
Other current assets			—				17
Property and equipment			1,671				—
Goodwill			7,038				3,014
Other assets			628				—
Current liabilities			(2,491	)			(5	)
Total consideration			15,722				9,362
Seller financed/assumed debt			(1,711	)			—
Cash used in dealership acquisitions		$	14,011			$	9,362

In the first quarter of 2010, the Company exited one of its German joint ventures by exchanging its 50% interest in the joint venture for 100% ownership in three BMW franchises previously held by the joint venture. The Company recorded $13,331 of intangible assets in connection with this transaction.

Subsequent to June 30, 2011, the Company acquired four franchises, including BMW and MINI in Santa Ana, California, and Mercedes-Benz and Maybach in Greenwich, Connecticut, for an aggregate of $170,000, which includes goodwill, net assets, and real estate. The Company subsequently entered into $28,240 in mortgages with respect to the real estate at its newly acquired Santa Ana, California properties. The Company is still in the process of completing final purchase accounting which is estimated to be completed during the third quarter of 2011.

PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

4. Intangible Assets

Following is a summary of the changes in the carrying amount of goodwill and franchise value during the six months ended June 30, 2011:

						Franchise
		Goodwill				Value
Balance, January 1, 2011		$	808,488			$	203,401
Additions			7,120				—
Foreign currency translation			11,361				2,544
Balance, June 30, 2011		$	826,969			$	205,945

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, including the captive finance companies associated with automotive manufacturers. In the U.S., substantially all of our 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 of 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.

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. Interest rates under the floor plan arrangements are variable and increase or decrease based on changes in the prime rate, defined London Interbank Offered Rate (“LIBOR”), the Finance House Bank Rate, or the 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.

6. Earnings Per Share

Basic earnings per share is computed using net income attributable to Penske Automotive Group common stockholders and the number of weighted average shares of voting common stock outstanding, including outstanding unvested restricted stock awards which contain rights to non-forfeitable dividends. Diluted earnings per share is computed using net income attributable to Penske Automotive Group common stockholders and the number of 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 and six months ended June 30, 2011 and 2010 follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Weighted average number of common shares outstanding			92,514				92,142				92,444				92,016
Effect of non-participatory equity compensation			56				64				70				70
Weighted average number of common shares outstanding, including effect of dilutive securities			92,570				92,206				92,514				92,086

There were no anti-dilutive stock options outstanding during the three and six months ended June 30, 2011 or 2010. 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 June 30, 2011 and 2010, 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 anti-dilutive.

PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

7. Long-Term Debt

Long-term debt consisted of the following:

		June 30,				December 31,
		2011				2010
U.S. credit agreement — revolving credit line		$	—			$	—
U.S. credit agreement — term loan			134,000				134,000
U.K. credit agreement — revolving credit line			77,050				54,597
U.K. credit agreement — term loan			—				5,505
U.K. credit agreement — overdraft line of credit			6,421				7,116
7.75% senior subordinated notes due 2016			375,000				375,000
3.5% senior subordinated convertible notes due 2026, net of debt discount			63,324				148,884
Mortgage facilities			50,249				46,052
Other			10,763				8,724
Total long-term debt			716,807				779,878
Less: current portion			(10,285	)			(10,593	)
Net long-term debt		$	706,522			$	769,285

U.S. Credit Agreement

The Company is party to a credit agreement with Mercedes-Benz Financial Services USA LLC and Toyota Motor Credit Corporation, as amended (the “U.S. Credit Agreement”), which provides for up to $300,000 in revolving loans for working capital, acquisitions, capital expenditures, investments and other general corporate purposes, a non-amortizing term loan with a remaining balance of $134,000, and for an additional $10,000 of availability for letters of credit, through September 30, 2013. The revolving loans bear interest at a defined LIBOR plus 2.75%, subject to an incremental 0.75% 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 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 defined financial and other tests and ratios, 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 earnings before interest, taxes, depreciation and amortization (“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 June 30, 2011, the Company was in compliance with all covenants under the U.S. Credit Agreement.

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 June 30, 2011, $134,000 of term loans and $1,250 of letters of credit were outstanding under the U.S. Credit Agreement.

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, which provides for a funded term loan, a revolving credit agreement and a demand overdraft line of credit (collectively, the “U.K. Credit Agreement”) to be used for working capital, acquisitions, capital expenditures, investments and general corporate purposes. The U.K. Credit Agreement provides for (1) up to £92,000 in revolving loans through August 31, 2013, which bear interest between a defined LIBOR plus 1.1% and defined LIBOR plus 3.0%, and (2) a demand overdraft line of credit for up to £10,000 that bears interest at the Bank of England Base Rate plus 1.75%. A term loan component to the credit agreement which bore interest between 6.39% and 8.29% and was payable ratably in quarterly intervals was fully repaid on June 30, 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 defined ratios and tests, including: a ratio of earnings before interest, taxes, amortization, and rental payments (“EBITAR”) to interest plus rental payments, a measurement of maximum capital expenditures, and a debt to EBITDA ratio. A breach of these requirements would give rise to certain remedies under the agreement, the most severe of which is the termination of the agreement and acceleration of the amounts owed. As of June 30, 2011, the U.K. Subsidiaries were in compliance with all covenants under the U.K. Credit Agreement.

PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

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 June 30, 2011, outstanding loans under the U.K. Credit Agreement amounted to £52,000 ($83,471).

7.75% Senior Subordinated Notes

In December 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 a defined “make-whole” premium. 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 June 30, 2011, the Company was in compliance with all negative covenants and there were no events of default.

Senior Subordinated Convertible Notes

Holders of the Convertible Notes had the right to require the Company to purchase their Convertible Notes on April 1, 2011. Of the Convertible Notes outstanding on April 1, 2011, $87,278 were validly tendered to the Company. As a result, $63,324 of the Convertible Notes remained outstanding as of June 30, 2011. Remaining 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, 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.

The remaining 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. The guarantees are full and unconditional and joint and several. The Convertible Notes also contain customary negative covenants and events of default. As of June 30, 2011, 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 the Company’s 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 our common stock for twenty of the last thirty trading days in the prior quarter exceeds $28.05 (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 our 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.

Upon conversion of the Convertible Notes, for each $1,000 principal amount of the Convertible Notes, a holder will receive an amount in cash, equal to the lesser of (i) $1,000 or (ii) the conversion value, determined in the manner set forth in the 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. 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.

PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

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, plus any applicable conversion premium.

On issuance of the Convertible Notes, the Company recorded a debt discount which was amortized as additional interest expense through March 31, 2011. The annual effective interest rate on the liability component was 8.25% through March 31, 2011. Beginning April 1, 2011, the annual effective interest rate was 3.5%.

Mortgage Facilities

The Company is party to several mortgages which bear interest at defined rates and require monthly principal and interest payments. These mortgage facilities also contain 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 properties. Substantially all of the buildings and improvements on the properties financed pursuant to the mortgage facilities are subject to security interests granted to the lender. As of June 30, 2011, we owed $50,249 of principal under our mortgage facilities.

8. Interest Rate Swaps

The Company periodically uses interest rate swaps to manage interest rate risk associated with the Company’s variable rate floor plan debt. The Company is party to forward-starting interest rate swap agreements beginning January 2012 and maturing December 2014 pursuant to which the LIBOR portion of $300,000 of the Company’s floating rate floor plan debt is fixed at a rate of 2.135% and $100,000 of the Company’s floating rate floor plan debt is fixed at a rate of 1.55%. The Company may terminate these agreements at any time, subject to the settlement of the then current fair value of the swap arrangements.

The Company used Level 2 inputs to estimate the fair value of the interest rate swap agreements. As of June 30, 2011, the fair value of the swaps designated as hedging instruments was estimated to be a net liability of $6,259.

During 2010 and through January 2011, the Company was party to interest rate swap agreements pursuant to which the LIBOR portion of $300,000 of the Company’s floating rate floor plan debt was fixed at 3.67%. During the six months ended June 30, 2011, there was no hedge ineffectiveness recorded in the Company’s income statement and the impact of the swaps on the weighted average interest rate of the Company’s floor plan borrowings was insignificant. During the six months ended June 30, 2010, the Company recognized a net gain in accumulated other comprehensive income (loss) of $1,328 related to the effective portion of the interest rate swap agreements designated as hedging instruments, and reclassified $2,207 of the existing derivative losses from accumulated other comprehensive income (loss) into floor plan interest expense. Additionally, during the six months ended June 30, 2010, the swaps increased the weighted average interest rate on the Company’s floor plan borrowings by approximately 0.4%.

PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

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 June 30, 2011, 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.

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 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 defined financial ratios, including a “rent coverage” ratio and a debt to EBITDA ratio. 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 gives 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 of June 30, 2011, the Company was in compliance with all covenants under these leases.

The Company has sold a number of dealerships to third parties and, as a condition to certain of those sales, remains liable for the lease payments relating to the properties on which those businesses operate in the event of non-payment by the buyer. The Company is also party to lease agreements on properties that it no longer uses in its retail operations that it has sublet to third parties. The Company relies on subtenants to pay the rent and maintain the property at these locations. In the event the subtenant does not perform as expected, the Company may not be able to recover amounts owed to it and the Company could be required to fulfill these obligations.

The Company has $20,066 of letters of credit outstanding as of June 30, 2011, and has posted $14,263 of surety bonds in the ordinary course of business.

10. Equity

Comprehensive income (loss)

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Attributable to Penske Automotive Group:
Net income		$	39,560			$	29,441			$	73,487			$	49,795
Other comprehensive income (loss):
Foreign currency translation			2,883				(15,123	)			19,734				(42,831	)
Other			(4,359	)			4,029				(4,689	)			7,215
Total attributable to Penske Automotive Group			38,084				18,347				88,532				14,179
Attributable to the non-controlling interest:
Income			499				243				569				221
Total comprehensive income		$	38,583			$	18,590			$	89,101			$	14,400

During the second quarter of 2011, the Company acquired 618 shares at an average price of $20.08 for a total of $12,413.

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 two reportable segments as defined in generally accepted accounting principles for segment reporting, including: (i) Retail, consisting of our automotive retail operations and (ii) PAG Investments, consisting of our investments in businesses other than automotive retail operations. The Retail reportable segment includes all automotive dealerships and all departments relevant to the operation of the dealerships and the retail automotive joint ventures. The individual dealership operations included in the Retail reportable segment have been grouped into four geographic operating segments, which have been 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). The Company previously presented its smart USA distribution operation as a third reportable segment. That operation was transitioned to DVI on June 30, 2011 and is presented in discontinued operations.

The following table summarizes revenues and income from continuing operations before certain 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 in the table below in order to enhance the comparability of segment income from period to period.

Three Months Ended June 30

						PAG
		Retail				Investments				Total
Revenues
2011		$	2,888,420			$	—			$	2,888,420
2010			2,614,602				—				2,614,602
Adjusted segment income
2011			55,123				6,268				61,391
2010			43,343				4,102				47,445

Six Months Ended June 30

						PAG
		Retail				Investments				Total
Revenues
2011		$	5,683,907			$	—			$	5,683,907
2010			5,038,789				—				5,038,789
Adjusted segment income
2011			108,911				7,392				116,303
2010			81,473				3,597				85,070

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Adjusted segment income		$	61,391			$	47,445			$	116,303			$	85,070
Gain on debt repurchase			—				422				—				1,027
Income from continuing operations before income taxes		$	61,391			$	47,867			$	116,303			$	86,097

PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

12. Consolidating Condensed Financial Information

The following tables include condensed consolidating financial information as of June 30, 2011 and December 31, 2010 and for the three and six month periods ended June 30, 2011 and 2010 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 and cash flows of these entities on a stand-alone basis.

CONDENSED CONSOLIDATING BALANCE SHEET
June 30, 2011

										Penske
		Total								Automotive				Guarantor				Non-Guarantor
		Company				Eliminations				Group				Subsidiaries				Subsidiaries
		(In thousands)
Cash and cash equivalents		$	3,346			$	—			$	—			$	1,455			$	1,891
Accounts receivable, net			365,794				(287,636	)			287,635				191,091				174,704
Inventories			1,456,409				—				—				784,818				671,591
Other current assets			91,772				—				3,529				40,711				47,532
Assets held for sale			56,826				—				—				56,826				—
Total current assets			1,974,147				(287,636	)			291,164				1,074,901				895,718
Property and equipment, net			776,386				—				4,941				475,265				296,180
Intangible assets			1,032,914				—				—				578,196				454,718
Equity method investments			288,028				—				232,836				—				55,192
Other long-term assets			15,404				(1,206,290	)			1,214,041				6,024				1,629
Total assets		$	4,086,879			$	(1,493,926	)		$	1,742,982			$	2,134,386			$	1,703,437
Floor plan notes payable		$	854,224			$	—			$	—			$	428,753			$	425,471
Floor plan notes payable — non-trade			562,906				—				45,200				265,768				251,938
Accounts payable			215,923				—				2,440				76,059				137,424
Accrued expenses			232,431				(287,636	)			2,787				134,202				383,078
Current portion of long-term debt			10,285				—				—				4,366				5,919
Liabilities held for sale			52,480				—				—				52,480				—
Total current liabilities			1,928,249				(287,636	)			50,427				961,628				1,203,830
Long-term debt			706,522				(40,311	)			572,324				53,016				121,493
Deferred tax liabilities			169,993				—				—				156,787				13,206
Other long-term liabilities			161,884				—				—				115,452				46,432
Total liabilities			2,966,648				(327,947	)			622,751				1,286,883				1,384,961
Total equity			1,120,231				(1,165,979	)			1,120,231				847,503				318,476
Total liabilities and equity		$	4,086,879			$	(1,493,926	)		$	1,742,982			$	2,134,386			$	1,703,437

PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2010

										Penske
		Total								Automotive				Guarantor				Non-Guarantor
		Company				Eliminations				Group				Subsidiaries				Subsidiaries
		(In thousands)
Cash and cash equivalents		$	17,868			$	—			$	—			$	15,497			$	2,371
Accounts receivable, net			383,675				(269,021	)			269,021				228,274				155,401
Inventories			1,453,546				—				—				878,571				574,975
Other current assets			68,457				—				1,127				32,371				34,959
Assets held for sale			110,485				—				—				110,485				—
Total current assets			2,034,031				(269,021	)			270,148				1,265,198				767,706
Property and equipment, net			720,834				—				4,957				448,116				267,761
Intangible assets			1,011,889				—				—				489,301				522,588
Equity method investments			288,406				—				234,214				—				54,192
Other long-term assets			14,672				(1,212,538	)			1,222,168				3,088				1,954
Total assets		$	4,069,832			$	(1,481,559	)		$	1,731,487			$	2,205,703			$	1,614,201
Floor plan notes payable		$	922,295			$	—			$	—			$	570,282			$	352,013
Floor plan notes payable — non-trade			492,595				—				25,000				288,274				179,321
Accounts payable			253,424				—				2,186				85,926				165,312
Accrued expenses			202,644				(269,021	)			564				95,970				375,131
Current portion of long-term debt			10,593				—				—				1,264				9,329
Liabilities held for sale			79,455				—				—				79,455				—
Total current liabilities			1,961,006				(269,021	)			27,750				1,121,171				1,081,106
Long-term debt			769,285				(77,593	)			657,884				49,689				139,305
Deferred tax liabilities			178,406				—				—				165,666				12,740
Other long-term liabilities			115,282				—				—				99,238				16,044
Total liabilities			3,023,979				(346,614	)			685,634				1,435,764				1,249,195
Total equity			1,045,853				(1,134,945	)			1,045,853				769,939				365,006
Total liabilities and equity		$	4,069,832			$	(1,481,559	)		$	1,731,487			$	2,205,703			$	1,614,201

PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATING STATEMENT OF INCOME
Three Months Ended June 30, 2011

										Penske
		Total								Automotive				Guarantor				Non-Guarantor
		Company				Eliminations				Group				Subsidiaries				Subsidiaries
		(In thousands)
Revenues		$	2,888,420			$	—			$	—			$	1,659,489			$	1,228,931
Cost of sales			2,424,780				—				—				1,372,419				1,052,361
Gross profit			463,640				—				—				287,070				176,570
Selling, general and administrative expenses			380,350				—				4,790				232,097				143,463
Depreciation			12,093				—				257				6,538				5,298
Operating income (loss)			71,197				—				(5,047	)			48,435				27,809
Floor plan interest expense			(7,113	)			—				(329	)			(3,458	)			(3,326	)
Other interest expense			(10,575	)			—				(5,818	)			(638	)			(4,119	)
Debt discount amortization			—				—				—				—				—
Equity in earnings of affiliates			7,882				—				6,121				—				1,761
Equity in earnings of subsidiaries			—				(65,965	)			65,965				—				—
Income (loss) from continuing operations before income taxes			61,391				(65,965	)			60,892				44,339				22,125
Income taxes			(20,996	)			22,745				(20,996	)			(16,296	)			(6,449	)
Income (loss) from continuing operations			40,395				(43,220	)			39,896				28,043				15,676
(Loss) income from discontinued operations, net of tax			(336	)			336				(336	)			(336	)			—
Net income (loss)			40,059				(42,884	)			39,560				27,707				15,676
Less: Income attributable to non- controlling interests			499				—				—				—				499
Net income (loss) attributable to Penske Automotive Group common stockholders		$	39,560			$	(42,884	)		$	39,560			$	27,707			$	15,177