Group 1 Automotive - 10-Q quarterly report FY

     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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

     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 31, 2007, the Company had 24,039,112 shares of common stock, par value $.01, outstanding.

(in thousands)

The accompanying notes are an integral part of these consolidated financial statements.

(in thousands, except per share amounts)

The accompanying notes are an integral part of these consolidated financial statements.

(in thousands)

The accompanying notes are an integral part of these consolidated financial statements.

The accompanying notes are an integral part of these consolidated financial statements.

     Group 1 Automotive, Inc., a Delaware corporation, through its subsidiaries, is a leading operator in the automotive retailing industry with operations in the states of Alabama, California, Florida, Georgia, Kansas, Louisiana, Massachusetts, Mississippi, New Hampshire, New Jersey, New Mexico, New York, Oklahoma and Texas in the United States of America and in the towns of Brighton, Hailsham and Worthing in the United Kingdom. Through their dealerships, these subsidiaries sell new and used cars and light trucks; arrange related financing, vehicle service and insurance contracts; provide maintenance and repair services; and sell replacement parts. Group 1 Automotive, Inc. and its subsidiaries are herein collectively referred to as the “Company” or “Group 1.”

     As of June 30, 2007, the Company’s retail network consisted of the following four regions (with the number of dealerships they comprised): (i) the Northeast (23 dealerships in Massachusetts, New Hampshire, New Jersey and New York), (ii) the Southeast (15 dealerships in Alabama, Florida, Georgia, Louisiana and Mississippi), (iii) the Central (51 dealerships in Kansas, New Mexico, Oklahoma and Texas), and (iv) the West (12 dealerships in California). Each region is managed by a regional vice president reporting directly to the Company’s Chief Executive Officer and a regional chief financial officer reporting directly to the Company’s Chief Financial Officer. In addition, our international operations consists of three dealerships in the United Kingdom also managed locally with direct reporting responsibilities to the Company’s corporate management team.

     Basis of Presentation

     All acquisitions of dealerships completed during the periods presented have been accounted for using the purchase method of accounting and their results of operations are included from the effective dates of the closings of the acquisitions. The allocations of purchase price to the assets acquired and liabilities assumed are assigned and recorded based on estimates of fair value. All intercompany balances and transactions have been eliminated in consolidation.

     Interim Financial Information

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments of a normal and recurring nature considered necessary for a fair presentation have been included. Due to seasonality and other factors, the results of operations for the interim period are not necessarily indicative of the results that will be realized for the entire fiscal year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

     Statements of Cash Flows

     With respect to all new vehicle floorplan borrowings, the manufacturers of the vehicles draft the Company’s credit facilities directly with no cash flow to or from the Company. With respect to borrowings for used vehicle financing, the Company chooses which vehicles to finance and the funds flow directly to the Company from the lender. All borrowings from, and repayments to, lenders affiliated with the vehicle manufacturers (excluding the cash flows from or to affiliated lenders participating in our syndicated lending group) are presented within cash flows from operating activities on the Consolidated Statements of Cash Flows and all borrowings from, and repayments to, the syndicated lending group under the revolving credit facility (including the cash flows from or to affiliated lenders participating in the facility) are presented within cash flows from financing activities.

     Income Taxes

     Currently, the Company operates in 14 different states in the U.S. and one other country, each of which has unique tax rates and payment calculations. As the amount of income generated in each jurisdiction varies from period to period, the Company’s estimated effective tax rate can vary based on the proportion of taxable income generated in each jurisdiction.

     The effective income tax rate of 34.7% and 34.8% of pretax income for the three and six months ended June 30, 2007, respectively, differed from the federal statutory rate of 35%, and the Company’s effective income tax rate of 36.3% and 37.1% for the three and six months ended June 30, 2006, due primarily to increases attributable to the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment,” and the impact of a change in the mix of the Company’s pretax income from taxable state jurisdictions, offset in 2007 primarily by the benefit received from tax-deductible goodwill related to dealership dispositions.

     The Company’s option grants include options that qualify as incentive stock options for income tax purposes. The treatment of the potential tax deduction, if any, related to incentive stock options may cause variability in the Company’s effective tax rate in future periods. In the period the compensation cost related to incentive stock options is recorded in accordance with

SFAS 123(R), a corresponding tax benefit is not recorded, as based on the design of these incentive stock options, the Company is not expected to receive a tax deduction related to such incentive stock options when exercised. However, if upon exercise such incentive stock options fail to continue to meet the qualifications for treatment as incentive stock options, the Company may be eligible for certain tax deductions in subsequent periods. In such cases, the Company would record a tax benefit for the lower of the actual income tax deduction or the amount of the corresponding cumulative stock compensation cost recorded in the financial statements for the particular options multiplied by the statutory tax rate.

     Effective January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement 109” (“FIN 48”). This statement clarifies the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company’s financial statements. FIN 48 prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order to be recognized in the financial statements (See Note 5 for additional information).

     Recent Accounting Pronouncements

     In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 expands the use of fair value accounting but does not affect existing standards which require assets or liabilities to be carried at fair value. Under SFAS 159, a company may elect to use fair value to measure accounts and loans receivable, available-for-sale and held-to-maturity securities, equity method investments, accounts payable, guarantees and issued debt. Other eligible items include firm commitments for financial instruments that otherwise would not be recognized at inception and non-cash warranty obligations where a warrantor is permitted to pay a third party to provide the warranty goods or services. If the use of fair value is elected, any upfront costs and fees related to the item must be recognized in earnings and cannot be deferred, e.g., debt issue costs. The fair value election is irrevocable and generally made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to measure based on fair value. At the adoption date, unrealized gains and losses on existing items for which fair value has been elected are reported as a cumulative adjustment to beginning retained earnings. Subsequent to the adoption of SFAS 159, changes in fair value are recognized in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently determining whether fair value accounting is appropriate for any of its eligible items and cannot estimate the impact, if any, which SFAS 159 will have on its consolidated results of operations and financial condition.

     The Company provides compensation benefits to employees and non-employee directors pursuant to its 2007 Long Term Incentive Plan, as amended, and 1998 Employee Stock Purchase Plan, as amended.

     2007 Long Term Incentive Plan

     In March 2007, the Company’s Board of Directors adopted an amendment and restatement of the 1996 Stock Incentive Plan to, among other things, rename the plan as “Group 1 Automotive, Inc. 2007 Long Term Incentive Plan,” increase the number of shares of common stock available for issuance under the plan from 5.5 million to 6.5 million shares and extend the duration of the plan from March 9, 2014, to March 8, 2017. The 2007 Long Term Incentive Plan, as amended, reserves shares of common stock for grants of options (including options qualified as incentive stock options under the Internal Revenue Code of 1986 and options which are non-qualified), stock appreciation rights, restricted stock and phantom stock awards to directors, officers and other employees of the Company and its subsidiaries at the market price at the date of grant. As of June 30, 2007, there were 2,111,263 shares available under the 2007 Long Term Incentive Plan for future grants of options, stock appreciation rights, restricted stock and phantom stock awards.

     Stock Option Awards

     The fair value of each stock option award is estimated as of the date of grant using the Black-Scholes option-pricing model. The Company has not issued stock option awards since November 2005. The following summary presents information regarding outstanding options as of June 30, 2007, and the changes during the six months then ended:

     Restricted Stock Awards

     Beginning in 2005, the Company began granting directors and certain employees, at no cost to the recipient, restricted stock awards or, at their election, phantom stock awards, pursuant to the Company’s 2007 Long Term Incentive Plan, as amended. Restricted stock awards are considered outstanding at the date of grant, but are restricted from disposition for periods ranging from six months to five years. The phantom stock awards will settle in shares of common stock upon the termination of the grantees’ employment or directorship and have vesting periods also ranging from six months to five years. In the event the employee or director terminates his or her employment or directorship with the Company prior to the lapse of the restrictions, the shares, in most cases, will be forfeited to the Company.

     A summary of these awards as of June 30, 2007, and the changes during the six months then ended is as follows:

     Employee Stock Purchase Plan

     In September 1997, the Company adopted the Group 1 Automotive, Inc. 1998 Employee Stock Purchase Plan, as amended (the “Purchase Plan”). The Purchase Plan authorizes the issuance of up to 2.5 million shares of common stock and provides that no options to purchase shares may be granted under the Purchase Plan after March 6, 2016. As of June 30, 2007, there were 568,590 shares remaining in reserve for future issuance under the Purchase Plan. During the six months ended June 30, 2007 and 2006, the Company issued 69,462 and 71,140 shares, respectively, of common stock to employees participating in the Purchase Plan.

     All Stock-Based Payment Arrangements

     Total stock-based compensation cost was $1.3 million and $1.0 million for the three months ended June 30, 2007 and 2006, respectively, and $2.3 million for both the six months ended June 30, 2007 and 2006. Total income tax benefit recognized for stock-based compensation arrangements was $0.3 million and $0.2 million for the three months ended June 30, 2007 and 2006, respectively, and $0.4 million for both the six months ended June 30, 2007 and 2006.

     Cash received from option exercises and Purchase Plan purchases was $2.9 million and $19.6 million for the six months

ended June 30, 2007 and 2006, respectively. The actual tax benefit realized for the tax deductions from option exercises and Purchase Plan purchases totaled $0.2 million and $6.9 million for the six months ended June 30, 2007 and 2006, respectively.

     Basic earnings per share is computed based on weighted average shares outstanding and excludes dilutive securities. Diluted earnings per share is computed including the impact of all potentially dilutive securities. The following table sets forth the calculation of earnings per share for the three and six months ended June 30, 2007 and 2006:

     Any options with an exercise price in excess of the average market price of the Company’s common stock, during the periods presented, are not considered when calculating the dilutive effect of stock options for diluted earnings per share calculations. The weighted average number of stock-based awards not included in the calculation of the dilutive effect of stock-based awards was 226,842 and 10,600 for the three months ended June 30, 2007 and 2006, respectively, and 193,110 and 169,633 for the six months ended June 30, 2007 and 2006, respectively.

     The Company will be required to include the dilutive effect, if applicable, of the net shares issuable under its 2.25% Convertible Notes and the warrants sold in connection with the Convertible Notes. Since the average price of the Company’s common stock for the three and six months ended June 30, 2007, was less than $59.43, no net shares were issuable under the Convertible Notes or the warrants.

     As discussed in Note 2, the Company adopted FIN 48 on January 1, 2007. No cumulative adjustment was required to effect the adoption of FIN 48. As of June 30, 2007, approximately $0.6 million of unrecognized tax benefits, including $0.1 million of interest, remained unrecognized. All of the unrecognized tax benefits could potentially be recognized in the next 12 months based upon resolution of these with the relevant tax authorities.

     The Company is subject to U.S. federal income tax as well as income tax in multiple state jurisdictions. In addition, the Company is subject to income tax in the United Kingdom as a result of its dealership acquisitions in March 2007. Taxable years 2002-2006 remain open for examination by the Company’s major taxing jurisdictions.

     Consistent with prior practices, the Company recognizes interest and penalties related to uncertain tax positions in income tax expense.

     Revolving Credit Facility

     Effective March 19, 2007, the Company entered into an amended and restated five-year revolving syndicated credit arrangement with 22 financial institutions, including three manufacturer-affiliated finance companies (the “Revolving Credit Facility”). The facility matures in March 2012 and provides a total of $1.35 billion of financing. The Company can expand the facility to its maximum commitment of $1.85 billion, subject to participating lender approval. This facility consists of two tranches: $1.0 billion for vehicle inventory floorplan financing, which we refer to as the Floorplan Line, and $350.0 million for working capital, including acquisitions, which we refer to as the Acquisition Line. Up to half of the Acquisition Line can be borrowed in either Euros or Pounds Sterling. The Acquisition Line bears interest at LIBOR plus a margin that ranges from 150 to 225 basis points, depending on the Company’s leverage ratio. The Floorplan Line bears interest at rates equal to LIBOR plus 87.5

basis points for new vehicle inventory and LIBOR plus 97.5 basis points for used vehicle inventory. In conjunction with the amendment to the Revolving Credit Facility, the Company capitalized $2.3 million of related costs that will be amortized over the term of the facility.

     All of the Company’s dealership-owning subsidiaries are co-borrowers under the Revolving Credit Facility. The Revolving Credit Facility contains a number of significant covenants that, among other things, restrict the Company’s ability to make disbursements outside of the ordinary course of business, dispose of assets, incur additional indebtedness, create liens on assets, make investments and engage in mergers or consolidations. The Company is also required to comply with specified financial tests and ratios defined in the Revolving Credit Facility, such as fixed-charge coverage, current ratio, leverage, and a minimum net worth requirement, among others. Additionally, under the terms of the Revolving Credit Facility, the Company is limited in its ability to make cash dividend payments to its stockholders and to repurchase shares of its outstanding stock, based primarily on the quarterly net income of the Company.

     The Company’s obligations under the Revolving Credit Facility are secured by essentially all of the Company’s personal property (other than equity interests in dealership-owning subsidiaries) including all motor vehicle inventory and proceeds from the disposition of dealership-owning subsidiaries.

     On February 28, 2007, the Company’s floorplan facility with DaimlerChrysler matured and was not renewed. The facility provided for up to $300.0 million of financing for Chrysler, Dodge, Jeep and Mercedes-Benz new vehicle inventory. The Company used available funds from our Revolving Credit Facility to pay off the outstanding balance on the maturity date. Consistent with its accounting policies, the Company has presented the payment of the $112.1 million of outstanding floorplan borrowings with DaimlerChrysler as of February 28, 2007, as an operating cash outflow and the corresponding borrowing from the Revolving Credit Facility as a financing cash inflow in the accompanying consolidated statement of cash flows.

     The Company will continue to use the Revolving Credit Facility to finance our Chrysler, Dodge, Jeep and Mercedes-Benz new vehicle inventory. The Company’s Ford and Lincoln-Mercury dealerships will continue to obtain new vehicle floorplan financing from Ford Motor Credit Company under its $300 million floorplan credit facility.

     As of June 30, 2007, borrowings outstanding under the Floorplan Line and the Acquisition Line totaled $595.1 million and $18.0 million, respectively. The $18.0 million of borrowings outstanding under the Acquisition Line represents letters of credit issued and outstanding. Borrowings available under the Floorplan Line and the Acquisition Line totaled $404.9 million and $332.0 million, respectively, for an aggregate available under the Revolving Credit Facility of $736.9 million. Included in the $404.9 million available balance under the Floorplan Line is $124.1 million of immediately available funds, resulting from payments made on our floorplan notes payable with excess cash.

     Real Estate Credit Facility

     On March 30, 2007, the Company entered into a five-year term real estate credit facility with Bank of America, N.A. (the “Mortgage Facility”), initially providing $75.0 million of financing for real estate expansion. In April 2007, the Company amended the Mortgage Facility expanding its maximum commitment to $235.0 million and syndicating the facility with nine financial institutions. The proceeds of the Mortgage Facility will be used primarily for acquisitions of real property and vehicle dealerships. The facility matures in March 2012. At the Company’s option, any loan under the Mortgage Facility will bear interest at a rate equal to (i) one month LIBOR plus 1.05% or (ii) the Base Rate plus 0.50%. Quarterly principal payments are required of each loan outstanding under the facility at an amount equal to one eightieth of the original principal amount. As of June 30, 2007, borrowings under the facility totaled $75.1 million, with $3.8 million recorded as a current payable. The Company capitalized $1.2 million of related debt financing costs that will be amortized over the term of the facility.

     The Mortgage Facility is guaranteed by the Company and essentially all of the existing and future direct and indirect domestic subsidiaries of the Company which guarantee or are required to guarantee the Company’s Revolving Credit Facility. So long as no default exists, the Company is entitled to sell any property subject to the facility on fair and reasonable terms in an arm’s length transaction, remove it from the facility, repay in full the entire outstanding balance of the loan relating to such sold property, and then increase the available borrowings under the Mortgage Facility by the amount of such loan repayment. Each loan is secured by real property (and improvements related thereto) specified by the Company and located at or near a vehicle dealership operated by a subsidiary of the Company or otherwise used or to be used by a vehicle dealership operated by a subsidiary of the Company. As of June 30, 2007, available borrowings from the Mortgage Facility totaled $160.0 million.

     The Mortgage Facility contains certain covenants, including financial ratios that must be complied with: fixed charge coverage ratio; senior secured leverage ratio; dispositions of financed properties; ownership of equity interests in a lessor subsidiary; and occupancy or sublease of any financed property. As of June 30, 2007, the Company was in compliance with all such covenants.

     The Company’s property and equipment consists of the following:

     During the six months ended June 30, 2007, the Company acquired $48.9 million of fixed assets associated with dealership acquisitions, including $15.2 million for land and $28.0 million for buildings. In addition to these acquisitions, the Company incurred $55.8 million of capital expenditures, including $9.5 million for land and $37.1 million for construction of new or expanded facilities, of which a portion can be drawn against our Mortgage Facility based upon the applicable loan to value ratio.

     Legal Proceedings

     From time to time, the Company’s dealerships are named in claims involving the manufacture of automobiles, contractual disputes and other matters arising in the ordinary course of business. Due to the nature of the automotive retailing business, the Company may be involved in legal proceedings or suffer losses that could have a material adverse effect on the Company’s business. In the normal course of business, the Company is required to respond to customer, employee and other third-party complaints. In addition, the manufacturers of the vehicles the Company sells and services have audit rights allowing them to review the validity of amounts claimed for incentive, rebate or warranty-related items and charge back the Company for amounts determined to be invalid rewards under the manufacturers’ programs, subject to the Company’s right to appeal any such decision.

     In August 2006, a manufacturer notified the Company of the results of a recently completed incentive and rebate-related audit at one of the Company’s dealerships. The manufacturer initially assessed a $3.1 million claim against the dealership for chargeback of alleged non-qualifying incentive and rebate awards. The dealership contested the alleged audit chargeback, and provided formal written notice to the manufacturer of the facts and circumstances surrounding such incentive and rebate programs. During the second quarter of 2007, the Company settled this claim with the manufacturer for the amount estimated and accrued as of March 31, 2007.

     Through relationships with insurance companies, the Company’s dealerships sell credit life insurance policies to its vehicle customers and receives payments for these services. Recently, allegations have been made against insurance companies with which the Company does business for failing to remit to credit life insurance policyholders the appropriate amount of unearned premiums when the policy was cancelled in conjunction with early payoffs of the associated loan balance. Some of the Company’s Texas dealerships have received notice from one such insurance company indicating that the insurance company expects the dealerships to pay a portion of a settlement reached by the insurance company as a result of the allegations. The Company believes that it has meritorious defenses, which it will pursue.

     There are currently no legal or other proceedings pending against or involving the Company that, in management’s opinion, based on current known facts and circumstances, are expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows.

     Vehicle Service Contract Obligations

     While the Company is not an obligor under the vehicle service contracts it currently sells, it is an obligor under vehicle service contracts previously sold in two states. The contracts were sold to retail vehicle customers with terms, typically, ranging from two to seven years. The purchase price paid by the customer, net of the fee the Company received, was remitted to an administrator. The administrator set the pricing at a level adequate to fund expected future claims and their profit. Additionally, the administrator purchased insurance to further secure its ability to pay the claims under the contracts. The Company can become liable if the administrator and the insurance company are unable to fund future claims. Though the Company has never had to fund any claims related to these contracts, and reviews the credit worthiness of the administrator and the insurance company, it is unable to estimate the maximum potential claim exposure, but believes that it is unlikely that there will be any future obligation to fund claims on the contracts. The Company’s revenues related to these contracts were deferred at the time of sale and are being recognized over the life of the contracts. The amounts deferred are presented on the face of the balance sheets as deferred revenues.

     Other Matters

     The Company, acting through its subsidiaries, is the lessee under many real estate leases that provide for the use by the Company’s subsidiaries of their respective dealership premises. Pursuant to these leases, the Company’s subsidiaries generally agree to indemnify the lessor and other parties from certain liabilities arising as a result of the use of the leased premises, including environmental liabilities, or a breach of the lease by the lessee. Additionally, from time to time, the Company enters into agreements in connection with the sale of assets or businesses in which it agrees to indemnify the purchaser, or other parties, from certain liabilities or costs arising in connection with the assets or business. Also, in the ordinary course of business in connection with purchases or sales of goods and services, the Company enters into agreements that may contain indemnification provisions. In the event that an indemnification claim is asserted, liability would be limited by the terms of the applicable agreement.

     From time to time, primarily in connection with dealership dispositions, the Company’s subsidiaries assign or sublease to the dealership purchaser the subsidiaries’ interests in any real property leases associated with such stores. In general, the Company’s subsidiaries retain responsibility for the performance of certain obligations under such leases to the extent that the assignee or sublessee does not perform, whether such performance is required prior to or following the assignment or subletting of the lease. Additionally, the Company and its subsidiaries generally remain subject to the terms of any guarantees made by the Company and its subsidiaries in connection with such leases. Although the Company generally has indemnification rights against the assignee or sublessee in the event of non-performance under these leases, as well as certain defenses, and the Company presently has no reason to believe that it or its subsidiaries will be called on to perform under any such assigned leases or subleases, the Company estimates that lessee rental payment obligations during the remaining terms of these leases are approximately $24.3 million at June 30, 2007. The Company and its subsidiaries also may be called on to perform other obligations under these leases, such as environmental remediation of the leased premises or repair of the leased premises upon termination of the lease, although the Company presently has no reason to believe that it or its subsidiaries will be called on to so perform and such obligations cannot be quantified at this time. The Company’s exposure under these leases is difficult to estimate and there can be no assurance that any performance of the Company or its subsidiaries required under these leases would not have a material adverse effect on the Company’s business, financial condition and cash flows.

     During the six months ended June 30, 2007, the Company acquired three automobile dealership franchises located in Kansas and six franchises located in the United Kingdom. Total consideration paid of $111.1 million consisted of $78.5 million to the sellers and $32.6 million to the sellers’ financing sources to pay off outstanding floorplan borrowings, which we replaced with borrowings from our Revolving Credit Facility. Of the $78.5 million paid to the sellers, $43.2 million was for land and buildings. The accompanying consolidated balance sheet as of June 30, 2007, includes preliminary allocations of the purchase price for all of the acquired assets and liabilities assumed based on their estimated fair market values at the dates of acquisition and, are subject to final adjustment.

     Also during the six months ended June 30, 2007, the Company disposed of seven automobile dealership franchises for total consideration of $8.8 million. In January 2007, the Company terminated a franchise agreement with Ford for one of its dealerships located on the East Bank of New Orleans, Louisiana. Also in January 2007, the Company sold its Maxwell Chrysler store in Austin, Texas. In February 2007, the Company sold its Sandy Springs Ford store in Atlanta, Georgia and terminated the related facilities and dealer management system software leases with the respective lessors resulting in a $3.3 million charge. In March 2007, the Company terminated a Lotus franchise in Houston, Texas. In April 2007, the Company terminated a Lincoln and a Mercury franchise located in Atlanta, Georgia. In June 2007, the Company sold its Cadillac franchise in Lubbock, Texas.

     This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements because of various factors. See “Cautionary Statement about Forward Looking Statements.”

     We are a leading operator in the $1.0 trillion automotive retailing industry. We own and operate 101 automotive dealerships, 139 franchises, and 28 collision service centers in the United States and three dealerships, six franchises and two collision centers in the United Kingdom as of June 30, 2007. We market and sell an extensive range of automotive products and services including new and used vehicles and related financing, vehicle maintenance and repair services, replacement parts, and warranty, insurance and extended service contracts. Our operations are primarily located in major metropolitan areas in the states of Alabama, California, Florida, Georgia, Kansas, Louisiana, Massachusetts, Mississippi, New Hampshire, New Jersey, New Mexico, New York, Oklahoma and Texas in the United States of America and in the towns of Brighton, Hailsham and Worthing in the United Kingdom.

     As of June 30, 2007, the Company’s retail network consisted of the following four regions (with the number of dealerships they comprised): (i) the Northeast (23 dealerships in Massachusetts, New Hampshire, New Jersey and New York), (ii) the Southeast (15 dealerships in Alabama, Florida, Georgia, Louisiana and Mississippi), (iii) the Central (51 dealerships in Kansas, New Mexico, Oklahoma and Texas), and (iv) the West (12 dealerships in California). Each region is managed by a regional vice president reporting directly to the Company’s Chief Executive Officer and a regional chief financial officer reporting directly to the Company’s Chief Financial Officer. In addition, our international operations consists of three dealerships in the United Kingdom also managed locally with direct reporting responsibilities to the Company’s corporate management team.

     Our operating results reflect the combined performance of each of our interrelated business activities, which include the sale of new vehicles, used vehicles, finance and insurance products, and parts, service and collision repair services. Historically, each of these activities has been directly or indirectly impacted by a variety of supply/demand factors, including vehicle inventories, consumer confidence, discretionary spending, availability and affordability of consumer credit, manufacturer incentives, weather patterns, fuel prices and interest rates. For example, during periods of sustained economic downturn or significant supply/demand imbalances, new vehicle sales may be negatively impacted as consumers tend to shift their purchases to used vehicles. Some consumers may even delay their purchasing decisions altogether, electing instead to repair their existing vehicles. In such cases, however, we believe the impact on our overall business is mitigated by our ability to offer other products and services, such as used vehicles and parts, service and collision repair services.

     Our operations are also subject to seasonal variations as demand for automobiles is generally lower during the winter months than in other seasons. A greater amount of vehicle sales generally occurs in the second and third quarters of each year due in part to weather-related factors, consumer buying patterns, the historical timing of major manufacturer incentive programs, and the introduction of new vehicle models. Accordingly, we expect our operating results to be higher in the second and third quarters as compared to the first and fourth quarters.

     For the three and six months ended June 30, 2007, we reported net income of $24.2 million and $41.7 million and diluted earnings per share of $1.01 and $1.74, respectively, compared to net income of $24.9 million and $47.2 million and diluted earnings per share of $1.00 and $1.91, respectively, during the comparable periods of 2006. Our 2007 results were negatively impacted by a $2.8 million after-tax charge for payments made during the first and second quarters in conjunction with the sale and lease termination of two of our domestic brand stores and a $0.2 million after-tax charge for the impairment of assets associated with one of the two stores.

     The following table highlights certain of the key performance indicators we use to manage our business:

     Consolidated Statistical Data

     Our new vehicle retail unit sales increased for the three and six month periods ending June 30, 2007, as compared to the comparable periods of 2006, primarily impacted by recent acquisitions. We believe our results are generally consistent with the national retail performance of the brands we represent and the overall markets in which we operate, specifically reflecting strong performance from our Northeast region and Houston market area and weaker performance in our West region, reflective of market conditions. Our 2007 comparable unit sales were also negatively impacted by the New Orleans market, which bolstered our 2006 results following the post-Hurricane Katrina recovery efforts. New vehicle gross margin decreased from 7.3% for the three months ended June 30, 2006, to 6.7% for 2007, resulting in consolidated gross profit per new vehicle unit sold decreasing from $2,103 per unit in 2006, to $1,994 per unit in 2007. For the six months ended June 30, 2007, new vehicle gross margin declined 60 basis points to 6.8%, and gross profit per retail unit decreased 6.2% to $2,027. Contributing to our new vehicle gross margin decline, we continued to experience pressure on margins of all brands in our West region, as well as in our predominantly domestic markets. In addition, import margins were also lower, reflecting normal product aging and wider product availability.

     With respect to used vehicles, our used retail unit sales and revenues increased 0.8% and 5.9%, respectively, for the three months ended June 30, 2007, primarily impacted by recent acquisitions and offset, primarily, by volume declines in our predominantly domestic brand markets. Used retail gross profit declined 2.1% as a result of a 2.8% decrease in profit per used retail unit, primarily due to margin pressures on used trucks. Our used wholesale revenues declined 4.2% on 6.0% more units, while our loss per wholesale unit improved 16.1%. Despite the shift in used vehicle revenue mix to more retail business, the decline in retail profit per unit resulted in a 4.7% decrease in total gross profit per used vehicle unit sold for the quarter ended June 30, 2007, compared to 2006, and a 50 basis point decline in total used vehicle margins. Used retail units and sales were up for the six-month period ending June 30, 2007, 3.6% and 7.3%, respectively. Despite a 2.1% decline in gross profit per retail unit in first half of 2007, retail gross profit improved 1.3% primarily on the volume increase. Total used vehicle gross margin for the six months of 2007 declined 20 basis points from the prior year.

     Our consolidated parts and service gross margin improved 30 basis points between the second quarter of 2006 and 2007, as margins were positively impacted by the mix of our recent acquisitions and by recent pricing initiatives. For the first half of 2007, our consolidated parts and service margin decreased 20 basis points as our parts business grew at a faster rate than our service and collision businesses.

     Our consolidated finance and insurance (F&I) revenues improved from $926 per retail unit sold in the second quarter of 2006 to $1,009 in 2007, and from $989 in the first half of 2006 to $1,023 in 2007, due in large part to improvements in finance income, our cost structure for vehicle service contracts and other F&I products, and our chargeback experience.

     Our consolidated selling, general and administrative expenses (SG&A), as a percentage of gross profit, increased from 75.1% during the second three months of 2006, to 76.3% in 2007. This increase from 2006 to 2007 is primarily the combination of the decreases in gross margin noted above, $1.0 million in lease termination costs during the second quarter of 2007, as well as the benefit realized in the second quarter of 2006 from hurricane-related insurance proceeds, partially offset by a legal settlement. For the six months ended June 30, 2007, SG&A increased from 75.6% in 2006 to 78.2%. This increase is attributable to $4.9 million in lease termination costs during the first half of 2007, as well as accrued expenses associated with the standardization of our employee vacation policies as of January 1, 2007, and the net benefit in 2006 from the hurricane-related insurance proceeds and from gains on the sale of a franchises during the first half of 2006.

     The combination of all of these factors contributed to a 30 and 50 basis points decline in our operating margin in the second quarter and first half of 2007, respectively. Improvements in floorplan interest expense were offset by increases in other interest costs for both the three and six-month periods ended June 30, 2007, and, as a result, our pretax margin declined 30 and 50 basis points, respectively.

     We address these items, and other variances between the periods presented, in the results of operations section below.

     Our consolidated financial statements are impacted by the accounting policies we use and the estimates and assumptions we make during their preparation. We disclosed our critical accounting policies and estimates in our 2006 Annual Report on Form 10-K. No significant changes have occurred since that time.

     The following tables present comparative financial and non-financial data for the three and six months ended June 30, 2007 and 2006, of (a) our “Same Store” locations, (b) those locations acquired or disposed of (“Transactions”) during the periods, and (c) the total company. Same Store amounts include the results of dealerships for the identical months in each period presented in the comparison, commencing with the first month in which we owned the dealership and, in the case of dispositions, ending with the last month it was owned. Same Store results also include the activities of the corporate office.

     The following table summarizes our combined Same Store results for the three and six months ended June 30, 2007, as compared to 2006.

     The discussion that follows provides explanation for the variances noted above. Each table presents, by primary income statement line item, comparative financial and non-financial data for our Same Store locations, Transactions and the consolidated company for the three and six months ended June 30, 2007 and 2006.

     For the three months ended June 30, 2007, as compared to 2006, new vehicle unit sales and sales revenue increased 5.6% and 9.1%, respectively, as Same Store declines were offset by the net contribution from units sold at dealerships acquired and disposed. Same Store comparisons continued to be challenging as post-Hurricane Katrina recovery efforts in the New Orleans market bolstered our comparable 2006 results. Further, economic trends in the California market continued to negatively affect our results in that region. On a Same Store basis, our new vehicle units decreased by 1,495 units, or 4.6%, reflecting continued weakness in the domestic brands and declines in import and domestic truck volume. Overall, our Same Store domestic and import nameplates experienced a 12.1% and 1.9% decrease in unit sales, respectively, partially offset by a 1.1% increase in luxury unit sales. Same Store revenues declined $17.2 million, or 1.8%, driven by the lower truck volumes and price pressure in many of our predominantly domestic markets. Same Store gross profit and gross margin declined 10.9% and 70 basis points, respectively, primarily reflecting margin pressures in our import brands, including Toyota and Honda, as a result of normal product aging and wider product availability.

     For the six months ended June 30, 2007, new vehicle unit sales and sales revenues increased 6.6% and 8.8%, respectively, as Same Store declines were again offset by the net contribution from units sold at dealerships acquired and disposed. With respect to Same Store new vehicle unit sales, we experienced a 12.5% and 0.7% decrease in our domestic and import nameplates, respectively, partially offset by a 2.0% increase in luxury unit sales. Truck volume was the primary driver of the decline in both domestic and import volume declines, while decreases in domestic car volume further contributed to the decline. Revenues and gross profit decreased 2.0% and 10.6%, respectively, as volume declines were amplified by price pressure in several of our import and domestic car brands. We believe our results are generally consistent with the national retail performance of the brands we represent and the overall markets in which we operate.

     The following table sets forth our top ten Same Store brands, based on retail unit sales volume:

     Same Store New Vehicle Unit Sales

     Although certain of our Same Store brand sales experienced year-over-year declines, others exceeded prior year sales highlighting the cyclical nature of our business and the need to have a well-balanced portfolio of new vehicle brands of which we sell. We anticipate that total industrywide sales of new vehicles throughout 2007 will be lower than 2006 and remain highly competitive. The level of retail sales, as well as our own ability to retain or grow market share during future periods, is difficult to predict.

     Most manufacturers offer interest assistance to offset floorplan interest charges incurred in connection with inventory purchases. This assistance varies by manufacturer, but generally provides for a defined amount regardless of our actual floorplan interest rate or the length of time for which the inventory is financed. The amount of interest assistance we recognize in a given period is primarily a function of the specific terms of the respective manufacturers’ interest assistance programs and wholesale interest rates, the average wholesale price of inventory sold, and our rate of inventory turn. For these reasons, this assistance has ranged from approximately 71.5% to 139.4% of our total floorplan interest expense over the past three years, with the current quarter’s assistance totaling 84.3%. We record these incentives as a reduction of new vehicle cost of sales as the vehicles are sold, which therefore impact the gross profit and gross margin detailed above. The total assistance recognized in cost of goods sold during the three months ended June 30, 2007 and 2006, was $9.9 million and $9.7 million, respectively, while the assistance for the six months ended June 30, 2007 and 2006, was $19.0 million and $18.2 million, respectively.

     Finally, our days’ supply of new vehicle inventory decreased from 62 days’ supply at June 30, 2006, and 63 days’ supply at December 31, 2006, to 58 days’ supply at June 30, 2007, primarily reflecting planned reductions in domestic nameplates. Our domestic inventory was reduced to 82 days’ supply at June 30, 2007, while our import and luxury brands were at 52 days’ and 41 days’ supply, respectively. The following table sets forth the inventory days’ supply for our top ten brands, based on retail unit sales volume:

     Inventory Days’ Supply